NOTES TO FINANCIAL STATEMENTS
NOTE
1
—
Description of Business
Ellie Mae, Inc. (“Ellie Mae” and the “Company”) is the leading cloud-based platform provider for the mortgage finance industry. The Company’s technology solutions enable lenders to originate and close residential mortgage loans. Banks, credit unions, and mortgage lenders use the Company’s Encompass® all-in-one mortgage management solution (“Encompass”) to originate and fund mortgages and improve compliance, loan quality, and efficiency.
NOTE
2
—
Basis of Presentation and Significant Accounting Policies
Principles of Consolidation
The presentation of the financial statements in this Annual Report on Form 10-K reflects the merger of all wholly-owned subsidiaries of the Company with and into the Company effective December 31, 2017. The Balance Sheet as of December 31, 2017, and the related Statements of Comprehensive Income, Stockholders’ Equity, and Cash Flows for the years ended December 31, 2017 and 2016 are consolidated with Ellie Mae’s then-subsidiaries Velocify, Inc., Mavent Holdings Inc. and Mavent Inc. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
Certain prior period amounts reported in the Company’s financial statements have been reclassified to conform to current period presentation.
Applicable Accounting Guidance
Any reference in these notes to applicable accounting guidance is meant to refer to the authoritative generally accepted accounting principles in the United States (“U.S. GAAP”), as found in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”).
Use of Estimates
The preparation of financial statements in conformity with U.S. 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 revenues and expenses during the reporting period. Management evaluates estimates on a regular basis including those relating to the transaction price of customer contracts, constraints of variable consideration, allowance for doubtful accounts, goodwill, intangible assets, valuation of deferred income taxes, stock-based compensation, and unrecognized tax benefits, among others. Actual results could differ from those estimates and such differences may have a material impact on the Company’s financial statements and footnotes.
Segment Information
The Company operates in one industry—mortgage-related software and services. The Company’s chief operating decision maker is its chief executive officer, who makes decisions about resource allocation and reviews financial information presented as a single segment. Accordingly, the Company has determined that it has a single reporting segment and operating unit structure, specifically, technology-enabled solutions to help streamline and automate the residential mortgage origination process in the United States.
Cash and Cash Equivalents
All highly liquid investments with original maturities of 90 days or less are considered to be cash equivalents. Cash equivalents primarily consist of money market funds, government agency obligations, and guaranteed obligations of the U.S. government.
Fair Value Measurement of Financial Instruments
The Company invests excess cash primarily in money market funds and investment-grade, fixed maturity interest-bearing debt securities, such as certificates of deposit, commercial paper, corporate bonds, municipal and government agency obligations, and guaranteed obligations of the U.S. government. All of the Company’s investments that have maturities of greater than 90 days are classified as available-for-sale and are carried at fair value. The cost of available-for-sale investments sold is based on the specific identification method. Unrealized gains and losses on available-for-sale investments are reported in stockholders’ equity as accumulated other comprehensive income (loss). Realized gains and losses are included in other income (expense), net. Interest and dividends are included in other income (expense), net when they are earned.
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are classified and disclosed in one of the following three categories:
Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities.
Level 2 — Valuations based on other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Valuations based on inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the assets or liabilities.
The Company classifies its money market funds and U.S. government obligations as Level 1 instruments due to the use of observable market prices for identical securities that are traded in active markets.
When the Company uses observable market prices for identical securities that are traded in less active markets, the Company classifies its marketable financial instruments as Level 2. When observable market prices for identical securities are not available, the Company prices its marketable financial instruments using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models with all significant inputs derived from or corroborated with observable market data. Non-binding market consensus prices are based on the proprietary valuation models of pricing providers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs. The Company corroborates non-binding market consensus prices with observable market data as such data exists.
The fair values of the Company’s cash equivalents, accounts receivable, and accounts payable approximate their carrying values due to the short maturities of the instruments. The fair value of the Company’s capital lease obligations approximates the carrying value due to the terms continuing to approximate prevailing market terms.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable consist of amounts billed to customers in connection with sale of services. The Company analyzes individual trade accounts receivable by considering historical bad debts, customer creditworthiness, current economic trends, changes in customer payment terms, and collection trends when evaluating the adequacy of the allowance for doubtful accounts. Allowances for doubtful accounts are recognized in the period in which the associated receivable balance is not considered recoverable. Any change in the assumptions used in analyzing accounts receivable may result in changes to the allowance for doubtful accounts and is recognized in the period in which the change occurs. The Company writes off a receivable when all rights, remedies, and recourse against the account and its principals are exhausted and records a benefit when previously reserved accounts are collected.
Concentration of Credit Risk
The financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments, and accounts receivable. The Company’s cash and cash equivalents are deposited with major financial institutions in the United States. At times, such deposits may be in excess of federally insured limits. Management believes that the Company’s investments in cash equivalents and available-for-sale investments are financially sound. The Company’s accounts receivable are derived from revenue earned from customers located in the United States. The Company had
no
customers that represented
10%
or more of revenues for the
years ended December 31, 2018, 2017, and 2016
.
No
customer represented more than
10%
of accounts receivable
as of December 31,
2018
and
2017
.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and are depreciated on a straight-line basis over their estimated useful lives, which is generally
three
to
seven
years. Leasehold improvements are amortized on a straight-line basis over their estimated useful lives or over the term of the lease, whichever is shorter.
Software and Website Development Costs
The Company capitalizes internal and external costs incurred to develop internal-use software and website applications. Capitalized internal costs include salaries, benefits, and stock-based compensation charges for employees that are directly involved in developing the software or website application, and depreciation of assets used in the development process. Capitalized external costs include third-party consultants involved in the development process, as well as other direct costs incurred therein.
Capitalization of costs begins when the preliminary project stage has been completed, management authorizes and commits to funding a project and it is probable that the project will be completed and the software or website application will be used to perform the function intended. Internal and external costs incurred as part of the preliminary project stage are expensed as incurred.
Capitalization ceases at the point at which the project is substantially complete and ready for its intended use. Internal and external training costs and maintenance costs during the post-implementation operation stage are expensed as incurred.
Internal-developed core software is amortized on a straight-line basis over its estimated useful life of
five
years. Amortization of product related internal-use software and website applications is typically recorded to cost of revenues, and amortization of other internal-use software and website applications is typically recorded to the operating expense line to which it most closely relates. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. The capitalized costs are included in property and equipment, net on the balance sheet.
Business Combinations
The Company recognizes and measures the identifiable assets acquired in a business combination, the liabilities assumed, and any non-controlling interest in the acquiree at their fair values as of the acquisition date. The Company recognizes contingent consideration arrangements at their acquisition-date fair values with subsequent changes in fair value reflected in earnings, recognizes pre-acquisition loss and gain contingencies at their acquisition-date fair values, capitalizes in-process research and development assets, and expenses acquisition-related transaction costs as incurred. Due to the inherent uncertainty in the estimates and assumptions used by the Company in its fair value measurements, recorded amounts may be subject to refinement. During the measurement period, which may be up to
one
year from the acquisition date, the Company may record adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any subsequent adjustments, including changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period, are recognized in current period earnings.
Goodwill
The Company records goodwill in a business combination when the consideration paid exceeds the fair value of the identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at least annually, or whenever changes in circumstances indicate that the fair value of a reporting unit is less than its carrying amount, including goodwill. The annual test is performed at the reporting unit level using a fair-value based approach. The Company’s operations are organized as
one
reporting unit. In testing for a potential impairment of goodwill, the Company first compares the net aggregate carrying value of assets and liabilities to the aggregate estimated fair value of the Company. If estimated fair value is less than carrying value, then potential impairment exists. Impairment is equivalent to any excess of goodwill carrying value over its implied fair value.
The process of evaluating the potential impairment of goodwill requires significant judgment at many points during the analysis, including calculating fair value of the reporting unit based on estimated future cash flows and discount rates to be applied.
Intangible Assets
Intangible assets are stated at cost less accumulated amortization. Intangible assets include developed technology, trade names, customer relationships, and order backlog. Intangible assets with finite lives are amortized on a straight-line basis over the estimated periods of benefit, as follows:
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Developed technology
|
2-8 years
|
Trade names with finite lives
|
2-3 years
|
Customer relationships
|
4-10 years
|
Order backlog
|
1 year
|
The AllRegs tradename is the only intangible asset with an indefinite useful life. The Company evaluates the remaining useful life of indefinite-lived intangible assets each reporting period to determine whether events and circumstances continue to support an indefinite useful life. The Company tests intangible assets with indefinite lives at least annually or if events or circumstances indicate that such assets might be impaired. If potential impairment exists, the amount of any impairment is calculated by using a discounted cash flow model, which is based on the assumptions the Company believes hypothetical marketplace participants would use. For indefinite-lived intangible assets, other than goodwill, if the carrying amount exceeds the fair value, an impairment charge is recognized in an amount equal to that excess.
The Company evaluates its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to future undiscounted net cash flows expected to be generated by the asset or asset group. If such assets or asset groups are considered to be impaired, the impairment loss to be recognized is measured by the amount by which the carrying amounts of the assets or asset groups exceed the fair value of the assets or asset groups. Assets to be disposed of are reported at the lower of the carrying amount and fair value less costs to sell.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets for indications of possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Revenue Recognition
The Company applies the provisions of ASU No. 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”),
as amended
(“Topic 606”) for revenue recognition on contracts with customers. Pursuant to Topic 606, the Company recognizes revenues under the core principle to depict the transfer of control to the Company’s customers in an amount reflecting the consideration to which the Company expects to be entitled. In order to achieve that core principle, the following five step approach is applied:
|
|
•
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Identification of the contract, or contracts, with a customer;
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|
|
•
|
Identification of the performance obligations in the contract;
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|
|
•
|
Determination of the transaction price;
|
|
|
•
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Allocation of the transaction price to the performance obligations in the contract; and
|
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•
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Recognition of revenue when, or as, the Company satisfies a performance obligation.
|
The Company generates revenues primarily from cloud-based subscription services, transaction-based fees, and related services including professional services and its annual user conference, and recognizes revenues as performance obligations are satisfied. For subscription services where the customer simultaneously receives and consumes the benefit from the Company's performance, revenues are recognized over time using an output method based on the passage of time as this provides a faithful depiction of the transfer of control. Under Encompass subscriptions that customers access through the Internet, revenues are comprised of software services sold both as a subscription and on a variable basis. Variable fees include fees billed on a per closed loan, or success basis, subject to monthly base fees, which the Company refers to as Success-Based Pricing. Other cloud-based subscription services consist of policy, guideline, data and analytics, lead management, marketing, and customer relationship management. Transaction-based fees are comprised of Ellie Mae Network fees and transaction fees charged for other services, including fees for loan products and the annual user conference. Fees for professional services include consulting, implementation, and education and training services. Sales taxes assessed by governmental authorities are excluded from the transaction price.
In contracts where recognizing variable consideration in the month it is earned does not meet the allocation objective of Topic 606, variable consideration is estimated and included in the transaction price. The Company estimates such amounts at contract inception considering historical trends, industry data, and contract specific factors to determine an expected amount to which the Company expects to be entitled. Estimates are included in the transaction price to the extent that it is considered probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The assessment of whether such an estimate is constrained requires the Company to consider methods, inputs, and assumptions relating to the nature of the underlying products, customer-specific trends, and economic factors including industry data. Other forms of variable consideration such as refunds and penalties, which are recorded in accrued and other current liabilities, are estimated at contract inception and are allocated to the performance obligations to which they relate.
The Company enters into arrangements that generally include multiple subscriptions and professional services. For arrangements with multiple services, the Company evaluates whether the individual services qualify as distinct performance obligations. In its assessment of whether a service is a distinct performance obligation, the Company determines whether the customer can benefit from the service on its own or with other readily available resources and whether the service is separately identifiable from other services in the contract. This evaluation requires the Company to assess the nature of each individual service offering and how the services are provided in the context of the contract, including whether the services are significantly integrated, highly interrelated, or significantly modify each other, which may require judgment based on the facts and circumstances of the contract.
When agreements involve multiple distinct performance obligations, the Company allocates arrangement consideration to all performance obligations at the inception of an arrangement based on the relative standalone selling prices of each performance obligation. Where the Company has standalone sales data for its performance obligations which are indicative of the price at which the Company sells a promised good or service separately to a customer, such data is used to establish standalone selling prices. In instances where standalone sales data is not available for a particular performance obligation, the Company estimates standalone selling prices by maximizing the use of observable market and cost-based inputs.
When estimating standalone selling prices, the Company reviews company-specific factors used to determine list price and makes adjustments as appropriate to reflect current market conditions and pricing behavior. The Company’s process for establishing list price includes assessing the cost to provide a particular product or service, surveying customers to determine market expectations, analyzing customer demographics, and taking into account similar products and services historically sold by the Company. The Company continues to review the factors used to establish list price and will adjust standalone selling price methodologies as necessary on a prospective basis.
Cloud-Based Subscription Revenues.
Cloud-based subscription revenues generally include a combination of the Company’s products delivered as software-as-a-service (“SaaS”) subscriptions that are a performance obligation consisting of a series of distinct services and support services. These arrangements are generally non-cancelable and do not contain refund-type provisions. These revenues typically include the following:
Encompass Revenues.
The Company offers web-based, on-demand access to its cloud-based Encompass platform which has been determined to be a stand-ready obligation. Revenues are recognized over the contract terms as performance obligations are satisfied as this method best depicts the Company’s pattern of performance for such services. Contracts generally range from
one year
to
five years
.
Some Encompass customers elect to pay on a success basis. Success basis contracts are subject to monthly billing calculations whereby customers are obligated to pay the greater of a contractual base fee or variable closed loan fee based on the number of closed loan transactions processed by the customer in the specific month. Under success basis contracts, monthly base fees are recognized ratably over the contract terms as subscription performance obligations are satisfied and any closed loan fees in excess of base fees are considered variable consideration.
For the majority of Encompass contracts that include variable consideration, such fees are recognized in the month in which they are earned because the terms of the variable payments relate specifically to the outcome from transferring the distinct time increment (month) of service and because such amounts reflect the fees to which the Company expects to be entitled for providing access to the Encompass platform for that period, consistent with the allocation objective of Topic 606.
For certain contracts where the allocation objective would not be met by allocating variable consideration in this way, total variable consideration to be received is estimated at contract inception and recognized ratably over the contract term. The estimates of the total variable consideration expected to be received under such agreements is updated at each reporting date. For these contracts, variable consideration is estimated using the expected value method, utilizing forecast data for each contract to determine the expected value.
The Company evaluates its ability to accurately estimate such variable consideration considering all relevant facts and circumstances associated with both the likelihood of a downward adjustment in the estimate of variable consideration and the potential magnitude of a significant revenue reversal relative to the cumulative revenue recognized to-date under the contract. Because the amount of consideration is highly susceptible to broad economic factors outside the Company’s influence, have a broad range of possible consideration amounts, and the uncertainty is not expected to be resolved for a long period of time, the Company’s ability to accurately estimate the variable consideration is limited. Therefore, the amount of variable consideration included in the transactions price is constrained to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the amount of variable consideration is subsequently resolved.
Other Subscription Revenues.
The Company provides a variety of mortgage-related and other business services, including lead management, marketing, compliance services and customer relationship management. Such services include fixed fee subscriptions and are a single performance obligation consisting of a series of distinct services. These fixed fees are recognized ratably over the contract terms as this method best depicts the Company’s pattern of performance for such services. Variable fees are recognized in the month in which they are earned because the terms of the variable payments relate specifically to the outcome from transferring the distinct time increment (month) of service and because such amounts reflect the fees to which the Company expects to be entitled for providing the access to services for that period, consistent with the allocation objective.
Online Research and Data Resources Subscription Revenues.
The Company provides mortgage originators and underwriters with access to online databases of various federal and state laws and regulations and forms as well as investor product guidelines. Fixed fees are recognized over time, using an output method of the passage of time or ratably over the contract terms as this method best depicts the Company’s pattern of performance for such services.
Transactional Revenues.
Transactional revenues include the following:
Ellie Mae Network Revenues.
The Company has entered into agreements with various lenders, service providers and certain government-sponsored entities participating in the mortgage origination process to provide those suppliers with access to, and ability to interoperate with, mortgage originators on the Ellie Mae Network. The services delivered are comprised of a performance obligation consisting of a series of distinct services. The Company acts as an agent when it arranges for services to be provided by the supplier to the customer. Fixed fees are recognized ratably over the contract terms as this method best depicts the Company’s pattern of performance for such services. Variable fees are recognized in the month in which they are earned because the allocation objective is met by allocating the fees to each distinct month in the series.
Other Transactional Revenues.
The Company provides other services delivered on a transactional basis including automated documentation; fraud detection, valuation, validation, and risk analysis; income verification; flood zone certifications; website and electronic document management; compliance reports; and the Company’s annual user conference. Fees are recognized as transactions occur which is the point in time when control is transferred. Variable fees are recognized in the month in which they are earned because the terms of the variable payments relate specifically to the outcome from transferring the distinct time increment (month) of service and because such amounts reflect the fees to which the Company expects to be entitled for providing the access to services for that period, consistent with the allocation objective.
Professional Services Revenues.
Professional services, including implementation services for the Company’s subscription products, are performance obligations which are determined to be distinct from our subscription services and other performance obligations. Such services are generally provided on a time and materials or fixed price basis and the customer simultaneously receives and consumes the benefit from the Company’s performance. The majority of the Company’s professional services are provided on a fixed price basis, and the Company recognizes revenue over time as the performance obligations are satisfied utilizing an input method based on the proportion of hours incurred to total estimated hours. Any changes in the estimate of progress towards completion are accounted for in the period of change using the cumulative catch-up method. Revenues from professional services contracts provided on a time and materials basis are recognized when invoiced under the practical expedient as amounts correspond directly with the value of the services rendered to date.
Contract Liabilities
Contract liabilities represent billings or payments received in advance of revenue recognition and are recognized upon transfer of control. Balances consist primarily of prepaid subscription services and professional and training services not yet provided as of the balance sheet date. Contract liabilities that will be recognized during the succeeding 12-month period are recorded as current contract liabilities, and the remaining portion is recorded as other long-term liabilities.
Contract Assets
Contract assets represent amounts recognized as revenues for which the Company does not have the unconditional right to consideration. Amounts related to invoices expected to be issued during the succeeding 12-month period are recorded as prepaid expenses and other current assets, and the remaining portion is recorded as deposits and other long-term assets.
Deferred Contract Costs
Deferred contract costs mainly consist of sales commissions and related fringe benefits that are incremental costs of obtaining contracts with customers, as well as partners’ referral fees. The Company amortizes the costs incurred on initial contracts on a straight-line basis over a period of benefit determined to be approximately
five
years. The period of benefit is determined based on a review of customer churn rates and technological lifecycles of the underlying product offerings. All deferred contract costs on renewal contracts are amortized on a straight-line basis over the applicable renewal period. Additionally, the Company exercises the practical expedient to expense commissions on arrangements in which the amortization period is expected to be one year or less. Deferred contract costs that will be recognized during the succeeding 12-month period are recorded as prepaid expenses and other current assets, and the remaining portion is recorded as deposits and other long-term assets.
Warranties and Indemnification
The Company provides a warranty for its software products and services to its customers and accounts for its warranties as a contingent liability. The Company’s software is generally warranted to perform substantially as described in the associated product documentation and to satisfy defined levels of uptime reliability. The Company’s services are generally warranted to be performed consistent with industry standards. The Company has not provided for a warranty accrual as of December 31,
2018
or
2017
. To date, the Company’s product warranty expense has not been significant.
The Company generally agrees to indemnify its customers against legal claims that the Company’s software products infringe certain third-party intellectual property rights and accounts for its indemnification obligations as a contingent liability. In addition, the Company may also incur a liability under its contracts if it breaches its warranties, as well as under certain data security and/or confidentiality obligations. To date, the Company has not been required to make any payment resulting from either infringement claims asserted against its customers or from claims in connection with a breach of the data security and/or confidentiality obligations in the Company’s contracts. The Company has not recorded a liability for related costs as of December 31,
2018
or
2017
.
The Company has obligations under certain circumstances to indemnify each executive officer and member of the Company’s board of directors against judgments, fines, settlements, and expenses related to claims against such executive officer or director and otherwise to the fullest extent permitted under Delaware law and the Company’s bylaws and certificate of incorporation.
Cost of Revenues
The Company’s cost of revenues consists primarily of: salaries and benefits, including stock-based compensation expense; data center operating costs; depreciation on data center computer equipment; amortization of internal-use software and acquired intangible assets such as developed technology; customer support; professional services associated with implementation of the Company’s software; third-party royalty expenses; and allocated facilities costs.
Research and Development Costs
The Company’s research and development expenses consist primarily of: salaries and benefits, including bonuses and stock-based compensation expense; fees to contractors engaged in the development and support of the Ellie Mae Network, Encompass software and other products; and allocated facilities costs. Research and development costs that are not capitalized as internal-use software are expensed as they are incurred.
Advertising Expenses
The Company expenses advertising costs as incurred. Advertising expenses for the
years ended December 31, 2018, 2017, and 2016
were
$1.6 million
,
$1.3 million
, and
$1.0 million
, respectively.
Stock-Based Compensation
The Company recognizes compensation expense related to restricted stock units (“RSUs”), performance shares, and performance-vesting restricted stock units based on the fair market value of the underlying shares of common stock as of the date of grant. Expense related to the RSUs is recognized on a straight-line basis over the requisite service period of the award, which generally equals the vesting period. Expense related to the performance shares and performance-vesting RSUs is recognized under the graded vesting method over the requisite service period of the award, which results in the recognition of a larger portion of the expense during the beginning of the vesting period than in the end of the vesting period. Management evaluates the probability of performance attainment, estimates the number of shares of common stock that will be granted, and records the expense accordingly.
The Company recognizes compensation expense related to stock option grants that are ultimately expected to vest and shares issued under the Employee Stock Purchase Plan (“ESPP”) based on estimated fair values on the date of grant using the Black-Scholes option-pricing model. Expense related to stock options is recognized on a straight-line basis over the requisite service period, which generally equals the vesting period. Expense related to shares issued under the ESPP is recognized on a straight-line basis over the offering period.
The date of grant is the date at which the Company and the employee reach a mutual understanding of the key terms and conditions of the award, appropriate approvals are received by the equity incentive committee of the board of directors and the Company becomes contingently obligated to issue equity instruments to the employee who renders the requisite service.
The Company estimates potential forfeitures of stock grants and adjusts recorded compensation cost accordingly. The estimate of forfeitures is based on historical experience and is adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from the prior estimates. Changes in estimated forfeitures will be recognized in the period of change and will impact the amount of stock-based compensation expense to be recognized in future periods.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of taxes payable or refundable for the current year, and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law.
The Company operates in various tax jurisdictions and is subject to audit by various tax authorities. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than 50 percent likely to be realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax provision.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on estimates of future sources of taxable income for the jurisdictions in which the Company operates and the periods over which the deferred tax assets will be realizable. To the extent the Company establishes a valuation allowance or changes the valuation allowance in a period, the Company reflects the change with a corresponding increase or decrease to the tax provision in the statement of comprehensive income.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes certain changes in equity that are excluded from net income, specifically unrealized gains (losses) on marketable securities. Except for net realized gain (loss) on investments, which was not significant, there were no reclassifications out of accumulated other comprehensive income that affected net income during the
years ended December 31, 2018, 2017, and 2016
.
Geographical Information
The Company is domiciled in the United States, had no international operations, and had minimal sales to customers outside of the United States for the
years ended December 31, 2018, 2017, and 2016
.
Recent Accounting Pronouncements
ASU No. 2016-02
In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”), as subsequently amended, which requires lessees to put most leases on their balance sheets, but recognize the expenses on their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a right-of-use (“ROU”) asset for the right to use the underlying asset for the lease term and a lease liability for the obligation to make lease payments.
The standard is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company plans to adopt this new standard on January 1, 2019 and use the effective date as its date of initial application. Consequently, the Company will not restate comparative periods.
While the Company is finalizing all of the effects of adoption including changes to its processes, the most significant effects of the standard are expected to be related to (1) recognition of new ROU assets of approximately
$60.6 million
and lease liabilities of approximately
$75.0 million
on its balance sheet for its operating leases, and (2) providing significant new disclosures about its leasing activities. The Company does not expect the adoption to have a significant impact to its results of operations or cash flows.
ASU No. 2018-07
In June 2018, the FASB issued ASU No. 2018-07,
Compensation—Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting
(“ASU 2018-07”), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU 2018-07 supersedes the guidance in ASC 505-50, Equity-Based Payments to Non-Employees, which previously included the accounting for non-employee awards. The standard is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The Company does not believe the adoption of this standard will have a material impact on its financial statements and related disclosures.
ASU No. 2018-13
In August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
(“ASU 2018-13”), which modifies the disclosure requirements on fair value measurements. This standard removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The standard is effective for interim and annual periods beginning after December 15, 2019, and early adoption is permitted. The Company does not believe the adoption of this standard will have a material impact on its financial statements and related disclosures.
ASU No. 2018-15
I
n August 2018, the FASB issued ASU No. 2018-15,
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
(“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for interim and annual reporting periods beginning after December 15, 2019, and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. Early adoption is permitted. The Company is currently gathering information and evaluating the impact of this accounting standard update on its financial statements and related disclosures.
Standards Adopted
ASU No. 2014-09
On January 1, 2018, the Company adopted ASU No. 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09),
as amended
(Topic 606) using the modified retrospective method and applied Topic 606 to those contracts which were not completed as of January 1, 2018.
On January 1, 2018, the Company recognized the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of retained earnings and the corresponding balance sheet accounts. The impact on the Company’s opening balances is primarily related to the Company’s straight-line calculations for subscription revenue, the estimation of variable consideration associated with certain of its contracts and the capitalization of additional commission costs under Topic 606. Prior to the adoption of Topic 606, billings that were contingent upon future performance were deferred, variable consideration was not estimated and the capitalization of contract acquisition costs was more limited. The comparative information has not been restated and continues to be reported under the accounting standards in effect in those prior periods. Refer to the tables below and Note
3
“
Revenue Recognition
” for additional accounting policy and transition disclosures.
The Company recognized the cumulative effect of initially applying Topic 606 as an adjustment to retained earnings in the balance sheet as of January 1, 2018 as follows:
Selected Balance Sheet Line Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
Adjustments
|
|
Balance at January 1, 2018
|
|
(in thousands)
|
Current assets:
|
|
|
|
|
|
Prepaid expenses and other current assets
|
$
|
18,474
|
|
|
$
|
8,900
|
|
|
$
|
27,374
|
|
Non-current assets:
|
|
|
|
|
|
Deposits and other long-term assets
|
$
|
9,290
|
|
|
$
|
22,013
|
|
|
$
|
31,303
|
|
Current liabilities:
|
|
|
|
|
|
Accrued and other current liabilities
|
$
|
26,188
|
|
|
$
|
3,138
|
|
|
$
|
29,326
|
|
Contract liabilities
|
$
|
26,287
|
|
|
$
|
(1,706
|
)
|
|
$
|
24,581
|
|
Non-current liabilities:
|
|
|
|
|
|
Other long-term liabilities
|
$
|
18,880
|
|
|
$
|
16,546
|
|
|
$
|
35,426
|
|
Stockholders' equity:
|
|
|
|
|
|
Retained earnings
|
$
|
86,399
|
|
|
$
|
12,935
|
|
|
$
|
99,334
|
|
The following tables summarize the impacts of Topic 606 adoption on the Company's financial statements for the periods ended
December 31, 2018
:
Selected Balance Sheet Line Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
(in thousands)
|
|
As Reported
|
|
Adjustments
|
|
Balances without adoption of Topic 606
|
Current assets:
|
|
|
|
|
|
Accounts receivable, net
|
$
|
43,876
|
|
|
$
|
(140
|
)
|
|
$
|
43,736
|
|
Prepaid expenses and other current assets
|
$
|
32,905
|
|
|
$
|
(10,716
|
)
|
|
$
|
22,189
|
|
Non-current assets:
|
|
|
|
|
|
Deposits and other long-term assets
|
$
|
36,031
|
|
|
$
|
(15,526
|
)
|
|
$
|
20,505
|
|
Current liabilities:
|
|
|
|
|
|
Accrued and other current liabilities
|
$
|
39,247
|
|
|
$
|
(2,584
|
)
|
|
$
|
36,663
|
|
Contract liabilities
|
$
|
24,357
|
|
|
$
|
233
|
|
|
$
|
24,590
|
|
Non-current liabilities:
|
|
|
|
|
|
Other long-term liabilities
|
$
|
25,398
|
|
|
$
|
(8,365
|
)
|
|
$
|
17,033
|
|
Stockholders' equity:
|
|
|
|
|
|
Retained earnings
|
$
|
110,205
|
|
|
$
|
(15,666
|
)
|
|
$
|
94,539
|
|
Selected Statement of Comprehensive Income Line Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
(in thousands, except per share amounts)
|
|
As Reported
|
|
Adjustments
|
|
Balances without adoption of Topic 606
|
Revenues
|
$
|
480,266
|
|
|
$
|
(2,064
|
)
|
|
$
|
478,202
|
|
Gross profit
|
$
|
280,341
|
|
|
$
|
(2,064
|
)
|
|
$
|
278,277
|
|
Operating expenses:
|
|
|
|
|
|
Sales and marketing
|
$
|
84,234
|
|
|
$
|
1,548
|
|
|
$
|
85,782
|
|
Income from operations
|
$
|
10,880
|
|
|
$
|
(3,612
|
)
|
|
$
|
7,268
|
|
Income tax benefit
|
$
|
(7,775
|
)
|
|
$
|
(882
|
)
|
|
$
|
(8,657
|
)
|
Net income
|
$
|
22,575
|
|
|
$
|
(2,730
|
)
|
|
$
|
19,845
|
|
Basic net income per share of common stock
|
$
|
0.66
|
|
|
$
|
(0.08
|
)
|
|
$
|
0.58
|
|
Diluted net income per share of common stock
|
$
|
0.63
|
|
|
$
|
(0.08
|
)
|
|
$
|
0.55
|
|
Selected Statement of Cash Flows Line Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
(in thousands)
|
|
As Reported
|
|
Adjustments
|
|
Balances without adoption of Topic 606
|
Net income
|
$
|
22,575
|
|
|
$
|
(2,730
|
)
|
|
$
|
19,845
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Amortization of deferred contract costs
|
$
|
8,927
|
|
|
$
|
(4,733
|
)
|
|
$
|
4,194
|
|
Deferred income taxes
|
$
|
(8,238
|
)
|
|
$
|
(881
|
)
|
|
$
|
(9,119
|
)
|
Other
|
$
|
504
|
|
|
$
|
(114
|
)
|
|
$
|
390
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable, net
|
$
|
(755
|
)
|
|
$
|
140
|
|
|
$
|
(615
|
)
|
Prepaid expenses, other current assets, and other long-term assets
|
$
|
(7,503
|
)
|
|
$
|
1,088
|
|
|
$
|
(6,415
|
)
|
Deferred contract costs
|
$
|
(9,107
|
)
|
|
$
|
6,114
|
|
|
$
|
(2,993
|
)
|
Accrued liabilities, other current liabilities, and other long-term liabilities
|
$
|
8,779
|
|
|
$
|
1,093
|
|
|
$
|
9,872
|
|
Contract liabilities
|
$
|
(1,897
|
)
|
|
$
|
23
|
|
|
$
|
(1,874
|
)
|
Net cash provided by operating activities
|
123,673
|
|
|
$
|
—
|
|
|
$
|
123,673
|
|
ASU No. 2018-05
In March 2018, the FASB issued ASU No. 2018-05,
Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
(“ASU 2018-05”). ASU 2018-05 addresses certain circumstances arising in accounting for the income tax effects of the Tax Cuts and Jobs Act (the “Tax Act”) in conformity with the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 118 (“SAB 118”) including provisional estimates of those effects. The Company adopted SAB 118 in the fourth quarter of 2017. In December 2018, the Company finalized the accounting for the Tax Act which resulted in an additional
$1.2 million
tax expense for the remeasurement of deferred tax assets.
NOTE
3
—
Revenue Recognition
Disaggregation of Revenue
The following table provides information about disaggregated revenue from customers:
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
(in thousands)
|
Cloud-based subscription revenues
|
$
|
349,149
|
|
Transactional revenues
|
97,399
|
|
Professional services revenues
|
33,718
|
|
Revenues
|
$
|
480,266
|
|
Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:
|
|
|
|
|
|
|
Balance Sheet Line Reference
|
December 31, 2018
|
|
|
(in thousands)
|
Unbilled receivables
|
Accounts receivables, net
|
$
|
25,753
|
|
Contract assets - current
|
Prepaid expenses and other current assets
|
$
|
5,089
|
|
Contract assets - noncurrent
|
Deposits and other long-term assets
|
$
|
9,432
|
|
Contract liabilities - current
|
Contract liabilities
|
$
|
24,357
|
|
Contract liabilities - noncurrent
|
Other long-term liabilities
|
$
|
3,440
|
|
Changes in the contract assets and the contract liabilities balances during the year ended
December 31, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2018
|
|
December 31, 2018
|
|
$ Change
|
|
(in thousands)
|
Contract assets
|
$
|
13,428
|
|
|
$
|
14,521
|
|
|
$
|
1,093
|
|
Contract liabilities
|
$
|
29,694
|
|
|
$
|
27,797
|
|
|
$
|
(1,897
|
)
|
Net contract assets (liabilities)
|
$
|
(16,266
|
)
|
|
$
|
(13,276
|
)
|
|
$
|
2,990
|
|
The decrease in net contract liabilities from
$(16.3) million
as of January 1, 2018 to
$(13.3) million
as of December 31, 2018 was primarily the result of a
$4.3 million
increase in estimated transaction price including changes in the constraint of variable consideration,
$1.3 million
of fixed consideration recognized as revenues from subscription and other services in excess of billings, offset by
$2.6 million
of variable consideration billed for subscription services in excess of revenues recognized.
Revenues of
$23.3 million
recognized during the year ended December 31, 2018 were included in the contract liabilities balance at January 1, 2018.
Revenues Allocated to Remaining Performance Obligations
Remaining performance obligations represent amounts included in the contractual transaction price that have not yet been recognized, which includes contract liabilities and amounts that will be invoiced and recognized as revenues in future periods.
The Company expects to recognize revenues on the remaining performance obligations as follows:
|
|
|
|
|
|
December 31, 2018
|
|
(in thousands)
|
Within 1 year
|
$
|
278,103
|
|
2-3 years
|
257,461
|
|
Thereafter
|
61,241
|
|
|
$
|
596,805
|
|
Remaining performance obligations exclude variable consideration allocated entirely to future distinct services as well as variable consideration in most arrangements that involve services revenues priced on a transactional basis and professional services invoiced on a time and materials basis as these arrangements include revenues recognized under the as invoiced expedient. Additionally, in instances where an estimate of variable consideration is constrained, the amount of such constraint is not included in revenues allocated to remaining performance obligations.
Deferred Contract Costs
Deferred contract costs, which consist of deferred sales commissions as well as partners’ referral fees, were
$23.3 million
and
$8.5 million
as of December 31,
2018
and
2017
, respectively. For the years ended December 31,
2018
,
2017
, and
2016
, amortization expense for deferred contract costs was
$8.9 million
,
$3.5 million
, and
$2.5 million
, respectively. Impairment loss related to the costs capitalized was
$0.2 million
for the year ended December 31,
2018
. There was no impairment loss related to the costs capitalized for the years ended December 31,
2017
and
2016
.
NOTE
4
—
Net Income Per Share of Common Stock
Basic net income per share of common stock is computed by dividing net income by the weighted average shares of common stock outstanding during the period. Diluted net income per share of common stock is computed by dividing net income by the weighted average shares of common stock outstanding plus the additional shares of common stock that would have been outstanding if potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, unvested RSUs, unvested performance shares, unvested performance-vesting RSUs, and shares to be purchased under the ESPP. The dilutive effect of potentially dilutive securities is reflected in diluted net income per share of common stock by application of the treasury stock method.
The components of net income per share of common stock were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands, except per share amounts)
|
Net income
|
$
|
22,575
|
|
|
$
|
52,850
|
|
|
$
|
37,776
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used to compute basic net income per share
|
34,441
|
|
|
34,057
|
|
|
31,180
|
|
Effect of potentially dilutive securities:
|
|
|
|
|
|
Employee stock options, RSUs, performance shares, performance-vesting RSUs, and ESPP shares
|
1,346
|
|
|
1,749
|
|
|
1,620
|
|
Weighted average common shares outstanding used to compute diluted net income per share
|
35,787
|
|
|
35,806
|
|
|
32,800
|
|
Net income per share of common stock:
|
|
|
|
|
|
Basic
|
$
|
0.66
|
|
|
$
|
1.55
|
|
|
$
|
1.21
|
|
Diluted
|
$
|
0.63
|
|
|
$
|
1.48
|
|
|
$
|
1.15
|
|
The following potential weighted average common shares were excluded from the computation of diluted net income per share of common stock, as their effect would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Employee stock options and awards
|
302
|
|
|
212
|
|
|
48
|
|
Performance shares and performance-vesting RSUs are included in the diluted shares outstanding for each period if the established performance criteria have been met at the end of the respective periods. However, if none of the required performance criteria have been met for such awards, the Company includes the number of shares that would be issuable if the end of the reporting period were the end of the contingency period. Accordingly, in addition to the employee stock options and awards noted above,
16 thousand
and
20 thousand
shares underlying performance shares and performance-vesting RSUs were excluded from the dilutive shares outstanding for the years ended December 31, 2017 and 2016, respectively. No shares underlying performance shares or performance-vesting RSUs were excluded from the dilutive shares outstanding for the year ended December 31, 2018.
NOTE
5
—
Financial Instruments and Fair Value Measurement
As of
December 31, 2018
and
2017
, the Company’s cash, cash equivalents, and investments were primarily comprised of cash, money market funds, and investment-grade, fixed maturity interest-bearing debt securities, such as certificates of deposit, commercial paper, corporate bonds, municipal and government agency obligations, and guaranteed obligations of the United States government.
The following table summarizes cash and investments in financial instruments that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy by investment type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Amortized Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Carrying or Fair Value
|
|
Amortized Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Carrying or Fair Value
|
|
(in thousands)
|
|
(in thousands)
|
Cash
|
$
|
131,075
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
131,075
|
|
|
$
|
119,035
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
119,035
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
10,503
|
|
|
—
|
|
|
—
|
|
|
10,503
|
|
|
3,623
|
|
|
—
|
|
|
—
|
|
|
3,623
|
|
U.S. government and government agency obligations
|
68,090
|
|
|
96
|
|
|
(327
|
)
|
|
67,859
|
|
|
52,255
|
|
|
—
|
|
|
(266
|
)
|
|
51,989
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes and obligations
|
67,652
|
|
|
10
|
|
|
(372
|
)
|
|
67,290
|
|
|
81,062
|
|
|
—
|
|
|
(304
|
)
|
|
80,758
|
|
Certificates of deposit
|
3,146
|
|
|
—
|
|
|
—
|
|
|
3,146
|
|
|
6,527
|
|
|
2
|
|
|
—
|
|
|
6,529
|
|
Municipal obligations
|
4,668
|
|
|
—
|
|
|
(11
|
)
|
|
4,657
|
|
|
10,274
|
|
|
—
|
|
|
(46
|
)
|
|
10,228
|
|
U.S. government and government agency obligations
|
80,167
|
|
|
5
|
|
|
(148
|
)
|
|
80,024
|
|
|
76,510
|
|
|
—
|
|
|
(266
|
)
|
|
76,244
|
|
Total cash and financial instruments
|
$
|
365,301
|
|
|
$
|
111
|
|
|
$
|
(858
|
)
|
|
$
|
364,554
|
|
|
$
|
349,286
|
|
|
$
|
2
|
|
|
$
|
(882
|
)
|
|
$
|
348,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents
|
$
|
181,697
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
181,697
|
|
|
$
|
137,698
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
137,698
|
|
Included in investments
|
$
|
183,604
|
|
|
$
|
111
|
|
|
$
|
(858
|
)
|
|
$
|
182,857
|
|
|
$
|
211,588
|
|
|
$
|
2
|
|
|
$
|
(882
|
)
|
|
$
|
210,708
|
|
As of
December 31, 2018
and
2017
, the Company did not have any assets or liabilities that were valued using Level 3 inputs. For the
years ended December 31, 2018, 2017, and 2016
, there were no transfers of financial instruments between the levels.
For the
years ended December 31, 2018, 2017, and 2016
, the Company recognized interest income from financial instruments of
$4.1 million
,
$3.3 million
and
$1.1 million
, respectively. Gross realized gains and gross realized losses from the sale of investments were not significant during the
years ended December 31, 2018, 2017, and 2016
.
The following table shows the gross unrealized losses and the related fair values of the Company’s investments in a continuous unrealized loss position. The Company did not identify any investments as other-than-temporarily impaired at
December 31, 2018
or
December 31, 2017
based on its evaluation of available evidence, such as whether it is the Company’s intent to hold an investment to its contractual maturity date and whether it is more likely than not that the Company will be required to sell the investment before recovery of the investment’s amortized basis. The Company expects to receive the full principal and interest on these investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
|
(in thousands)
|
Corporate notes and obligations
|
$
|
8,683
|
|
|
$
|
(9
|
)
|
|
$
|
41,134
|
|
|
$
|
(363
|
)
|
|
$
|
49,817
|
|
|
$
|
(372
|
)
|
Certificates of deposit
|
—
|
|
|
—
|
|
|
250
|
|
|
—
|
|
|
250
|
|
|
—
|
|
U.S. government, government agency, and municipal obligations
|
41,243
|
|
|
(57
|
)
|
|
56,623
|
|
|
(429
|
)
|
|
97,866
|
|
|
(486
|
)
|
|
$
|
49,926
|
|
|
$
|
(66
|
)
|
|
$
|
98,007
|
|
|
$
|
(792
|
)
|
|
$
|
147,933
|
|
|
$
|
(858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
|
(in thousands)
|
Corporate notes and obligations
|
$
|
62,099
|
|
|
$
|
(253
|
)
|
|
$
|
7,574
|
|
|
$
|
(51
|
)
|
|
$
|
69,673
|
|
|
$
|
(304
|
)
|
Certificates of deposit
|
482
|
|
|
—
|
|
|
1,348
|
|
|
—
|
|
|
1,830
|
|
|
—
|
|
U.S. government, government agency, and municipal obligations
|
119,456
|
|
|
(492
|
)
|
|
13,070
|
|
|
(86
|
)
|
|
132,526
|
|
|
(578
|
)
|
|
$
|
182,037
|
|
|
$
|
(745
|
)
|
|
$
|
21,992
|
|
|
$
|
(137
|
)
|
|
$
|
204,029
|
|
|
$
|
(882
|
)
|
The following table summarizes the contractual maturities of the Company’s investments at
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Carrying or
Fair Value
|
|
(in thousands)
|
Due within one year
|
$
|
121,301
|
|
|
$
|
120,898
|
|
Due after one year through three years
(1)
|
62,303
|
|
|
61,959
|
|
Total
|
$
|
183,604
|
|
|
$
|
182,857
|
|
________________
(1)
Maximum maturity of individual investments is
three
years.
Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.
NOTE
6
—
Acquisitions
Velocify, Inc.
On
October 2, 2017
, the Company acquired the outstanding stock of Velocify, Inc. (“Velocify”), a leading cloud-based sales engagement platform that provides customers the capabilities to generate and manage leads and customer relationships. The Company acquired the Velocify business in order to add functionality to its product offerings, including lead management, engagement and distribution capabilities. The transaction was accounted for as a business combination and, accordingly, the total purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values.
The total purchase consideration was approximately
$130.0 million
in cash. The Company allocated the purchase consideration to the identifiable tangible and intangible assets acquired and liabilities assumed under the purchase method of accounting based on their estimated fair values as of the acquisition date. The final determination of the fair values was completed within the measurement period of up to one year from the acquisition date, and adjustments to provisional amounts that were identified during the measurement period were recorded in the reporting period in which the adjustment was determined. Post close adjustments made during the measurement period are reflected in the following table. Refer to Note
8
Goodwill and Intangible Assets, Net
for additional detail related to these adjustments.
The following table summarizes the allocation of the purchase price as of the acquisition date (in thousands):
|
|
|
|
|
Cash and cash equivalents
|
10,858
|
|
Other assets
|
3,510
|
|
Property and equipment
|
843
|
|
Identifiable intangible assets
|
73,100
|
|
Current liabilities
|
(5,280
|
)
|
Deferred tax liability
|
(17,924
|
)
|
Contract liabilities
|
(1,600
|
)
|
Goodwill
|
66,450
|
|
Total purchase consideration
|
$
|
129,957
|
|
The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible assets acquired, liabilities assumed and identifiable intangible assets are based on management’s estimates and assumptions. The deferred tax liability was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets.
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition:
|
|
|
|
|
|
|
|
Fair Value
|
|
Useful Life
|
|
(in thousands)
|
|
(in years)
|
Developed technology
|
$
|
42,000
|
|
|
8.0
|
Customer relationships
|
15,500
|
|
|
10.0
|
Order backlog
|
14,000
|
|
|
1.0
|
Trade name
|
1,600
|
|
|
3.0
|
Identifiable intangible assets
|
$
|
73,100
|
|
|
|
Developed technology consists of the technology underlying Velocify’s existing products, and the Company expects to incorporate it into the Encompass product in the future. Customer relationships represents the fair values of the underlying relationships with Velocify’s customers. Order backlog represents estimated net discounted future cash flows associated with service contracts that were outstanding as of the acquisition date and expected to be completed within one year. Trade name represents the right to use the Velocify trade name over a useful life of
three
years. The goodwill balance is not deductible for tax purposes.
NOTE
7
—
Other Balance Sheet Components
Property and Equipment, Net
Property and equipment, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
|
(in thousands)
|
Computer equipment and software
|
$
|
95,532
|
|
|
$
|
67,068
|
|
Internal-use software
|
175,228
|
|
|
108,710
|
|
Furniture and fixtures
|
9,857
|
|
|
8,311
|
|
Leasehold improvements
|
34,458
|
|
|
27,356
|
|
Internal-use software and other assets not placed in service
|
44,901
|
|
|
52,659
|
|
Property and equipment, gross
|
359,976
|
|
|
264,104
|
|
Accumulated depreciation and amortization
|
(126,386
|
)
|
|
(77,113
|
)
|
Property and equipment, net
|
$
|
233,590
|
|
|
$
|
186,991
|
|
At
December 31, 2018
and
2017
, the Company had unamortized internal-use software costs of
$171.8 million
and
$124.4 million
, respectively. Amortization of internal-use software for the
years ended December 31, 2018, 2017, and 2016
was
$25.8 million
,
$17.7 million
, and
$8.3 million
, respectively.
Depreciation expense for the
years ended December 31, 2018, 2017, and 2016
was
$50.3 million
,
$36.5 million
, and
$20.5 million
, respectively. These amounts include amortization of assets under capital leases of
$1.2 million
,
$2.8 million
, and
$3.2 million
for the
years ended December 31, 2018, 2017, and 2016
, respectively.
Accrued and Other Current Liabilities
Accrued and other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
|
(in thousands)
|
Accrued bonus
|
$
|
16,091
|
|
|
$
|
11,140
|
|
Accrued payroll and related expenses
|
10,163
|
|
|
6,878
|
|
Accrued royalties
|
3,774
|
|
|
1,630
|
|
Sales and other taxes
|
2,710
|
|
|
1,737
|
|
Accrued commissions
|
1,895
|
|
|
1,480
|
|
Other accrued expenses
|
4,614
|
|
|
3,323
|
|
|
$
|
39,247
|
|
|
$
|
26,188
|
|
Other Long-Term Liabilities
Other long-term liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
|
(in thousands)
|
Deferred rent
|
$
|
14,088
|
|
|
$
|
13,443
|
|
Deferred tax liability
|
3,207
|
|
|
4,963
|
|
Other long-term liabilities
|
8,103
|
|
|
474
|
|
|
$
|
25,398
|
|
|
$
|
18,880
|
|
NOTE
8
—
Goodwill and Intangible Assets, Net
Goodwill
The Company completed its annual goodwill impairment analysis during the fourth quarter of
2018
,
2017
, and
2016
and determined that goodwill was not impaired.
The change in the carrying value of goodwill was as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2016
|
$
|
74,547
|
|
Velocify acquisition
|
69,904
|
|
Balance at December 31, 2017
|
144,451
|
|
Goodwill adjustments, net
(1)
|
(3,283
|
)
|
Balance at December 31, 2018
|
$
|
141,168
|
|
(1)
Related to an adjustment to Goodwill related to certain acquired deferred tax assets of Velocify. The adjustment was the result of a change in the provisional amounts to the purchase accounting and was made within the measurement period.
Intangible Assets
Intangible assets, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Intangibles
|
|
Weighted Average Remaining Useful Life
|
|
(in thousands)
|
|
(in years)
|
Assets subject to amortization:
|
|
|
|
|
|
|
|
Developed technology
|
$
|
53,535
|
|
|
$
|
(17,184
|
)
|
|
$
|
36,351
|
|
|
6.6
|
Trade names
|
1,931
|
|
|
(997
|
)
|
|
934
|
|
|
1.8
|
Customer relationships
|
34,900
|
|
|
(16,813
|
)
|
|
18,087
|
|
|
7.1
|
Order backlog
|
14,370
|
|
|
(14,295
|
)
|
|
75
|
|
|
0.8
|
Total assets subject to amortization
|
104,736
|
|
|
(49,289
|
)
|
|
55,447
|
|
|
6.7
|
Assets not subject to amortization:
|
|
|
|
|
|
|
|
Trade name
|
4,039
|
|
|
—
|
|
|
4,039
|
|
|
|
|
$
|
108,775
|
|
|
$
|
(49,289
|
)
|
|
$
|
59,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Intangibles
|
|
Weighted Average Remaining Useful Life
|
|
(in thousands)
|
|
(in years)
|
Assets subject to amortization:
|
|
|
|
|
|
|
|
Developed technology
|
$
|
53,535
|
|
|
$
|
(10,810
|
)
|
|
$
|
42,725
|
|
|
7.5
|
Trade names
|
1,931
|
|
|
(464
|
)
|
|
1,467
|
|
|
2.8
|
Customer relationships
|
34,900
|
|
|
(13,050
|
)
|
|
21,850
|
|
|
7.7
|
Order backlog
|
14,370
|
|
|
(3,577
|
)
|
|
10,793
|
|
|
0.8
|
Total assets subject to amortization
|
104,736
|
|
|
(27,901
|
)
|
|
76,835
|
|
|
6.5
|
Assets not subject to amortization:
|
|
|
|
|
|
|
|
Trade name
|
4,039
|
|
|
—
|
|
|
4,039
|
|
|
|
|
$
|
108,775
|
|
|
$
|
(27,901
|
)
|
|
$
|
80,874
|
|
|
|
Amortization expense associated with intangible assets was
$21.4 million
,
$9.5 million
and
$5.5 million
for the
years ended December 31, 2018, 2017, and 2016
, respectively.
Future amortization expense for intangible assets at
December 31, 2018
was as follows (in thousands):
|
|
|
|
|
2019
|
$
|
10,499
|
|
2020
|
8,978
|
|
2021
|
7,114
|
|
2022
|
7,055
|
|
2023
|
6,800
|
|
Thereafter
|
15,001
|
|
|
$
|
55,447
|
|
NOTE
9
—
Income Taxes
The components of the provision for income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Current
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
156
|
|
|
$
|
9,428
|
|
State
|
343
|
|
|
305
|
|
|
1,664
|
|
|
343
|
|
|
461
|
|
|
11,092
|
|
Deferred
|
|
|
|
|
|
Federal
|
(5,845
|
)
|
|
(11,793
|
)
|
|
7,124
|
|
State
|
(2,273
|
)
|
|
3,876
|
|
|
614
|
|
|
(8,118
|
)
|
|
(7,917
|
)
|
|
7,738
|
|
Income tax provision (benefit)
|
$
|
(7,775
|
)
|
|
$
|
(7,456
|
)
|
|
$
|
18,830
|
|
The provision for income taxes differed from the amount of income taxes determined by applying the U.S. statutory federal income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Tax at federal statutory rate
|
21
|
%
|
|
35
|
%
|
|
35
|
%
|
State taxes, net of federal benefit
|
(8
|
)
|
|
7
|
|
|
4
|
|
Excess tax benefits related to stock-based compensation
|
(49
|
)
|
|
(35
|
)
|
|
1
|
|
Research and development tax credits
|
(38
|
)
|
|
(12
|
)
|
|
(6
|
)
|
Remeasurement of net deferred tax liabilities arising from the Tax Act
|
8
|
|
|
(19
|
)
|
|
—
|
|
Non-deductible items
|
15
|
|
|
4
|
|
|
—
|
|
Other
|
(2
|
)
|
|
4
|
|
|
(1
|
)
|
Income tax provision (benefit)
|
(53
|
)%
|
|
(16
|
)%
|
|
33
|
%
|
The components of net deferred tax assets (liabilities) were as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
|
(in thousands)
|
Deferred tax assets
|
|
|
|
Research and development credits
|
$
|
39,877
|
|
|
$
|
29,461
|
|
Stock-based compensation
|
7,170
|
|
|
8,765
|
|
Reserves and accruals
|
(798
|
)
|
|
5,894
|
|
Net operating loss carryforwards
|
27,257
|
|
|
16,422
|
|
Total deferred tax assets
|
73,506
|
|
|
60,542
|
|
Valuation allowance
|
(16,335
|
)
|
|
(11,908
|
)
|
Total deferred tax assets, net of valuation allowance
|
57,171
|
|
|
48,634
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
Depreciation and amortization
|
(51,318
|
)
|
|
(50,360
|
)
|
Book/tax basis in acquired assets
|
(1,685
|
)
|
|
(1,360
|
)
|
Total deferred tax liabilities
|
(53,003
|
)
|
|
(51,720
|
)
|
Net deferred tax assets (liabilities)
|
$
|
4,168
|
|
|
$
|
(3,086
|
)
|
The Company continues to maintain a valuation allowance against the deferred tax assets related to certain state research and development tax credits, the realization of which is uncertain as the Company expects to generate additional credits at a faster rate than the ability to utilize them. The valuation allowance
increased by
$4.4 million
,
$6.8 million
, and
$1.2 million
in
2018
,
2017
, and
2016
, respectively.
As of
December 31, 2018
, the Company had a gross federal net operating loss (“NOL”) carryforwards of
$110.7 million
, available to reduce future taxable income, and
$69.2 million
of state NOL carryforwards. These federal and state NOL carryforwards will begin to expire commencing
2029
and
2020
, respectively.
As of
December 31, 2018
, the Company also had federal and state research and development tax credit carryforwards of
$29.6 million
and
$27.4 million
, respectively. The federal tax credit carryforwards begin to expire commencing in
2020
. The state tax credit carryforwards may be carried forward indefinitely.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period, that should not extend beyond one year from the Tax Act enactment date, for companies to complete the accounting for the Tax Act under ASC 740,
Income Taxes
. In December 2018, the Company finalized its accounting for the Tax Act. Adjustments included an additional
$1.2 million
tax expenses recorded in September, 2018 for the remeasurement of our deferred tax assets related to Velocify acquisition.
Unrecognized Tax Benefits
At
December 31, 2018
, the Company had
$12.7 million
of cumulative unrecognized tax benefits. If the benefits were to be recognized,
$6.8 million
would affect the effective tax rate and
$5.9 million
would reverse the valuation allowance against the deferred tax assets. The Company does not expect a significant change to its unrecognized tax benefits over the next twelve months.
A reconciliation of the beginning and ending balance of gross unrecognized tax benefits is as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Beginning balance
|
$
|
10,028
|
|
|
$
|
4,634
|
|
|
$
|
3,440
|
|
Additions based on tax positions related to the current year
|
2,440
|
|
|
5,420
|
|
|
1,334
|
|
Additions (reductions) based on tax positions related to prior years including acquisitions
|
236
|
|
|
(26
|
)
|
|
(140
|
)
|
Ending balance
|
$
|
12,704
|
|
|
$
|
10,028
|
|
|
$
|
4,634
|
|
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company’s tax years for
2000
and forward are subject to examination by the U.S. tax authorities and for
2000
and forward are subject to examination by the California tax authorities due to the carryforward of unutilized net operating losses and research and development credits.
The Company believes that it has provided adequate reserves for its income tax uncertainties in all open tax years, and that it does not have any tax positions that it is reasonably possible would materially increase or decrease the gross unrecognized tax benefits within the next twelve months.
The Company has a policy to classify accrued interest and penalties associated with uncertain tax positions together with the related liability. The expenses incurred related to such accruals are included in the provision for income taxes. The Company did not incur any interest expense or penalties associated with unrecognized tax benefits during the
years ended December 31, 2018, 2017, and 2016
.
NOTE
10
—
Commitments and Contingencies
Leases
The Company leases facilities space, which includes offices and data centers, under non-cancelable operating lease agreements with expiration dates ranging from 2019 to 2025. The agreements contain escalation clauses calling for increased rents, which could increase future minimum lease payments if exercised. The Company recognizes rent expense on a straight-line basis over the lease period and has recorded deferred rent for the difference between rent payments and rent expense recognized. Rent expense was
$14.7 million
,
$10.6 million
, and
$7.8 million
for the
years ended December 31, 2018, 2017, and 2016
, respectively.
Future minimum lease payments under non-cancelable operating and capital leases at
December 31, 2018
consisted of the following:
|
|
|
|
|
|
|
|
|
|
Capital Leases
|
|
Operating Leases
|
|
(in thousands)
|
2019
|
$
|
141
|
|
|
$
|
14,553
|
|
2020
|
97
|
|
|
14,066
|
|
2021
|
57
|
|
|
11,306
|
|
2022
|
13
|
|
|
11,484
|
|
2023
|
—
|
|
|
11,123
|
|
Thereafter
|
—
|
|
|
23,240
|
|
Total minimum lease payments
|
308
|
|
|
85,772
|
|
Less amount representing interest
|
(20
|
)
|
|
|
Present value of minimum lease payments
|
288
|
|
|
|
Less current portion
|
(129
|
)
|
|
|
Long-term portion of lease obligations
|
$
|
159
|
|
|
|
Purchase Commitments
Commitments for the purchase of services, licenses of third-party software, and construction commitments totaled
$57.9 million
at
December 31, 2018
and are to be paid as follows:
$32.3 million
in
2019
,
$25.5 million
in
2020
, and less than
$0.1 million
in
2021
.
Legal Proceedings
From time to time, the Company is involved in litigations that it believes are of the type common to companies engaged in its line of business, including commercial and employment disputes. As of the date of this Annual Report on Form 10-K, the Company is not involved in any pending legal proceedings whose outcome the Company expects to have a material adverse effect on its financial position, results of operations, or cash flows.
NOTE
11
—
Equity and Stock Incentive Plans
Stockholders’ Equity
Common Stock
The amended and restated certificate of incorporation of the Company authorizes
140,000 thousand
shares of common stock,
$0.0001
par value per share and
10,000 thousand
shares of undesignated preferred stock,
$0.0001
par value per share.
The following number of shares of common stock were reserved and available for future issuance at
December 31, 2018
:
|
|
|
|
|
Reserved Shares
|
|
(in thousands)
|
Options and awards granted and outstanding under stock incentive plans
|
2,591
|
|
Shares available for future grant under the stock incentive plans
|
6,445
|
|
Shares available under the employee stock purchase plan
|
1,797
|
|
Total
|
10,833
|
|
Stock Offering
In
August 2016
, the Company completed a public offering of common stock and sold a total of
3,163 thousand
shares of its common stock for total cash proceeds of approximately
$271.4 million
, net of underwriting discounts, and offering costs and expenses of approximately
$13.2 million
.
Stock Repurchase Program
In May 2014, the Company’s board of directors approved a repurchase program under which the Company is authorized to repurchase up to
$75.0 million
of its common stock over a
36
-month period. All shares are retired upon repurchase.
This program ended in May 2017.
In August 2017, the Company’s audit committee, under the authority delegated to it by the Company’s board of directors, approved a new stock repurchase program under which the Company is authorized to repurchase up to
$250.0 million
of its common stock. This authorization expires in August
2020
. All shares are retired upon repurchase.
The Company repurchased the following shares of common stock under its repurchase programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Repurchased
|
|
Weighted Average Purchase Price per Share
|
|
Total Amount
|
|
(in thousands)
|
|
|
|
(in thousands)
|
Year Ended 2018
|
159
|
|
|
$
|
92.62
|
|
|
$
|
14,740
|
|
Year Ended 2017
|
401
|
|
|
$
|
87.85
|
|
|
$
|
35,244
|
|
Year Ended 2016
|
8
|
|
|
$
|
79.62
|
|
|
$
|
663
|
|
Share-based Compensation
The Company recognized stock-based compensation expense related to awards granted under the 2009 Plan, the 2011 Plan, and ESPP.
2009 Stock Option and Incentive Plan and 2011 Equity Incentive Award Plan
Stock Options
In March 2011, the Company adopted the 2011 Plan, which was approved by the Company’s stockholders on March 24, 2011. Under the 2011 Plan,
2,667 thousand
shares of the Company’s common stock were initially reserved. Any shares of common stock that were available for issuance under prior plans, including the 2009 Plan, were transferred to the 2011 Plan. As of
December 31, 2018
, the Company had
988 thousand
shares of its common stock previously available for issuance under the 2009 Plan available for issuance under the 2011 Plan. The majority of stock options issued under the plan have a maximum contractual term of ten years, the options generally vest over a four-year period.
The number of common shares reserved for issuance under the 2011 Plan increase automatically in January of each year by the least of (a)
1,667 thousand
shares, (b) five percent (
5%
) of the shares of common stock outstanding on the last day of the immediately preceding fiscal year and (c) such smaller number of shares of common stock as determined by the Company’s board of directors; provided, however that no more than
23,333 thousand
shares of common stock may be issued upon the exercise of incentive stock options.
The following table summarizes the Company’s stock option activity under the 2009 Plan and 2011 Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
Weighted
Average Remaining Contractual Term
|
|
Aggregate Intrinsic Value
|
|
(in thousands)
|
|
|
|
(in years)
|
|
(in thousands)
|
Outstanding at December 31, 2015
|
2,515
|
|
|
$
|
24.40
|
|
|
|
|
|
Granted
|
15
|
|
|
$
|
59.78
|
|
|
|
|
|
Exercised
|
(585
|
)
|
|
$
|
18.08
|
|
|
|
|
|
Forfeited or expired
|
(60
|
)
|
|
$
|
37.94
|
|
|
|
|
|
Outstanding at December 31, 2016
|
1,885
|
|
|
$
|
26.21
|
|
|
|
|
|
Granted
|
7
|
|
|
$
|
94.66
|
|
|
|
|
|
Exercised
|
(432
|
)
|
|
$
|
23.61
|
|
|
|
|
|
Forfeited or expired
|
(24
|
)
|
|
$
|
40.94
|
|
|
|
|
|
Outstanding at December 31, 2017
|
1,436
|
|
|
$
|
27.06
|
|
|
|
|
|
Granted
|
5
|
|
|
$
|
92.28
|
|
|
|
|
|
Exercised
|
(348
|
)
|
|
$
|
21.86
|
|
|
|
|
|
Forfeited or expired
|
(7
|
)
|
|
$
|
48.44
|
|
|
|
|
|
Outstanding at December 31, 2018
|
1,086
|
|
|
$
|
28.87
|
|
|
4.53
|
|
$
|
37,515
|
|
Ending vested and expected to vest at December 31, 2018
|
1,086
|
|
|
$
|
28.86
|
|
|
4.53
|
|
$
|
37,515
|
|
Exercisable at December 31, 2018
|
1,054
|
|
|
$
|
27.68
|
|
|
4.47
|
|
$
|
37,407
|
|
The aggregate intrinsic value of the stock options outstanding at
December 31, 2018
based on the Company’s closing stock price of
$62.83
is presented above. Intrinsic value of an option is the difference between the fair value of the Company’s common stock at the time of exercise and the exercise price to be paid. Options outstanding that are expected to vest are net of estimated future forfeitures. For the majority of stock options outstanding, the options vest over a
four
-year period and have a maximum contractual term of
ten
years.
Following is additional information pertaining to the Company’s stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands, except for per option data)
|
Weighted average fair value per option granted
|
$
|
43.08
|
|
|
$
|
45.44
|
|
|
$
|
27.57
|
|
Grant-date fair value of options vested
|
$
|
3,261
|
|
|
$
|
4,994
|
|
|
$
|
8,577
|
|
Intrinsic value of options exercised
|
$
|
25,837
|
|
|
$
|
31,621
|
|
|
$
|
39,040
|
|
Proceeds received from options exercised
|
$
|
7,600
|
|
|
$
|
10,208
|
|
|
$
|
10,573
|
|
As of
December 31, 2018
, total unrecognized stock-based compensation expense related to unvested stock options, adjusted for estimated forfeitures, was
$0.9 million
and is expected to be recognized over a weighted average period of
1.04
years.
Restricted Stock Units, Performance Shares, and Performance-Vesting Restricted Stock Units
RSUs generally vest over
four
years. Upon vesting, RSUs convert into an equivalent number of shares of common stock.
Performance shares and performance-vesting RSUs are granted to certain executives under the 2011 Plan, which represent common stock potentially issuable in the future. Performance shares and units generally have a one year performance period, and vest over
four
years if the targets are achieved. Vested shares may range from
0 percent
to
200 percent
of the target award amount. During the fiscal
years ended December 31, 2018, 2017, and 2016
, the Company recognized
$5.5 million
,
$5.8 million
, and
$8.3 million
of compensation expense, respectively, related to these performance shares and units.
The following table summarizes the Company’s RSU, performance share, and performance-vesting RSU activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
Performance shares and performance-vesting RSUs
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
Per Share
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
Per Share
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
Outstanding at December 31, 2015
|
749
|
|
|
$
|
45.52
|
|
|
508
|
|
|
$
|
34.68
|
|
Granted
|
598
|
|
|
$
|
78.39
|
|
|
152
|
|
|
$
|
61.69
|
|
Released
|
(240
|
)
|
|
$
|
42.48
|
|
|
(239
|
)
|
|
$
|
29.34
|
|
Forfeited or expired
|
(82
|
)
|
|
$
|
57.50
|
|
|
(13
|
)
|
|
$
|
68.19
|
|
Outstanding at December 31, 2016
|
1,025
|
|
|
$
|
64.47
|
|
|
408
|
|
|
$
|
46.77
|
|
Granted
|
652
|
|
|
$
|
97.73
|
|
|
43
|
|
|
$
|
94.66
|
|
Released
|
(355
|
)
|
|
$
|
57.37
|
|
|
(151
|
)
|
|
$
|
40.73
|
|
Forfeited or expired
|
(143
|
)
|
|
$
|
82.25
|
|
|
(6
|
)
|
|
$
|
84.86
|
|
Outstanding at December 31, 2017
|
1,179
|
|
|
$
|
82.84
|
|
|
294
|
|
|
$
|
56.17
|
|
Granted
|
768
|
|
|
$
|
94.15
|
|
|
94
|
|
|
$
|
92.28
|
|
Released
|
(405
|
)
|
|
$
|
74.14
|
|
|
(161
|
)
|
|
$
|
46.26
|
|
Forfeited or expired
|
(211
|
)
|
|
$
|
89.67
|
|
|
(53
|
)
|
|
$
|
77.52
|
|
Outstanding at December 31, 2018
|
1,331
|
|
|
$
|
90.93
|
|
|
174
|
|
|
$
|
78.32
|
|
Ending vested and expected to vest at December 31, 2018
|
1,178
|
|
|
|
|
174
|
|
|
|
RSUs, performance shares, and performance-vesting RSUs that are expected to vest are presented net of estimated future forfeitures. RSUs released during the
years ended
December 31,
2018
,
2017
, and 2016 had an aggregate intrinsic value of
$38.5 million
,
$36.0 million
, and
$20.1 million
, respectively, and an aggregate grant-date fair value of
$30.1 million
,
$20.4 million
, and
$10.2 million
, respectively. Performance shares and performance-vesting RSUs released during the
years ended
December 31,
2018
,
2017
, and 2016 had an aggregate intrinsic value of
$13.8 million
,
$14.2 million
, and
$21.8 million
, respectively, and an aggregate grant-date fair value of
$7.5 million
,
$6.1 million
, and
$7.0 million
respectively. The number of RSUs released includes shares that the Company withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements.
As of
December 31, 2018
, total unrecognized compensation expense related to unvested RSUs, performance shares, and performance-vesting RSUs, adjusted for estimated forfeitures, was
$89.4 million
and is expected to be recognized over a weighted average period of
2.58
years.
Executive Incentive Plan
On March 14, 2016, the Compensation Committee adopted the Ellie Mae, Inc. Executive Incentive Plan (the “Executive Incentive Plan”). The Executive Incentive Plan was approved by the Company’s stockholders on May 25, 2016. The Executive Incentive Plan has a term of
five
years from the date of approval by the stockholders, expiring May 25, 2021, and may be terminated, amended or suspended by the Compensation Committee at any prior time, and may also be reinstated. The Company issued cash bonus and performance-based equity awards under the Executive Incentive Plan to the Company’s executive officers in 2017. Shares underlying equity awards from the Executive Incentive Plan are issued from the Company’s 2011 Plan. The equity awards have the following limitations:
Stock Option Limitations.
The maximum number of shares that may be granted as an incentive stock option under the Executive Incentive Plan is
70 million
. No participant will be eligible to receive a stock option covering more than
1 million
shares in any calendar year.
Performance Units/Performance Share Limitations.
No participant will be eligible to receive performance units or performance shares having a grant date value (assuming maximum payout) greater than
$10.0 million
or covering more than
1 million
shares, whichever is greater, in any calendar year; provided, however, that in connection with a participant’s initial service as an employee, during the calendar year in which such participant commences employment with the Company, the preceding limitations shall be doubled.
Due to changes in the deductibility of executive compensation under the Tax Act, the Company ceased granting cash bonus and performance-based equity awards under the Executive Incentive Plan beginning in 2018.
Employee Stock Purchase Plan
Under the ESPP, qualified employees are permitted to purchase the Company’s common stock at
85%
of the fair market value of the common stock as of the commencement date of the offering period or as of the specified purchase date, whichever is lower. The ESPP is deemed compensatory and stock-based compensation is recognized in accordance with ASC 718
, Stock Compensation.
The ESPP is designed to allow eligible employees to purchase shares of common stock, at semi-annual intervals, with their accumulated payroll deductions.
The weighted-average grant-date fair value of awards issued pursuant to the ESPP during the
years ended December 31, 2018, 2017, and 2016
was
$21.96
,
$23.01
, and
$24.11
per share, respectively.
For the
years ended December 31, 2018, 2017, and 2016
, employees purchased
160 thousand
,
121 thousand
, and
102 thousand
shares under the ESPP for a total of
$11.8 million
,
$9.1 million
, and
$6.7 million
, respectively. As of
December 31, 2018
, unrecognized compensation cost related to the current semi-annual ESPP period which ends on
February 28, 2019
was approximately
$0.7 million
and is expected to be recognized over the first
two months
of 2019.
Valuation Information
The fair value of stock options and stock purchase rights granted under the 2009 Plan, the 2011 Plan and the ESPP was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Stock option plans:
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
2.63
|
|
%
|
|
2.04
|
%
|
|
1.38
|
|
%
|
Expected life of options (in years)
|
6.08
|
|
|
|
6.08
|
|
|
6.08
|
|
|
Expected dividend yield
|
—
|
|
%
|
|
—
|
%
|
|
—
|
|
%
|
Volatility
|
45
|
|
%
|
|
48
|
%
|
|
47
|
%
|
%
|
Employee Stock Purchase Plan:
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
1.86-2.27
|
|
%
|
|
0.46-0.69
|
%
|
|
0.46-0.48
|
|
%
|
Expected life of options (in years)
|
0.5
|
|
|
|
0.5
|
|
|
0.5
|
|
|
Expected dividend yield
|
—
|
|
%
|
|
—
|
%
|
|
—
|
|
%
|
Volatility
|
27-28
|
|
%
|
|
33-37
|
%
|
|
33-49
|
|
%
|
The Company uses the simplified method to estimate the expected term of options granted by taking the average of the vesting term and the contractual term of the option. The Company estimated its future stock price volatility considering its historical volatility calculations. The risk-free interest rate used was the Federal Reserve Bank’s constant maturities interest rate commensurate with the expected life of the options. The expected dividend yield was zero, as the Company does not anticipate paying a dividend within the relevant time frame.
Stock-Based Compensation Expense
Total stock-based compensation expense recognized by the Company consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Stock-based compensation by category of expense:
|
|
|
|
|
|
Cost of revenues
|
$
|
8,758
|
|
|
$
|
6,786
|
|
|
$
|
4,835
|
|
Sales and marketing
|
7,396
|
|
|
5,223
|
|
|
4,429
|
|
Research and development
|
8,879
|
|
|
8,281
|
|
|
7,296
|
|
General and administrative
|
14,942
|
|
|
14,177
|
|
|
14,911
|
|
|
$
|
39,975
|
|
|
$
|
34,467
|
|
|
$
|
31,471
|
|
The Company capitalized
$7.5 million
,
$5.3 million
, and
$2.8 million
of stock compensation costs as internal-use software and website development costs for the
years ended December 31, 2018, 2017, and 2016
, respectively.
NOTE
12
—
Employee Benefit Plan
The Company offers a qualified 401(k) defined contribution plan to substantially all of the Company’s employees. Eligible employees may contribute up to the annual amount allowed pursuant to the Internal Revenue Code. In the
years ended December 31, 2018, 2017, and 2016
, the Company matched
50%
of each dollar of employee contribution, up to a maximum match of
three percent
of the employee’s compensation. The Company’s contributions to the 401(k) plan for the
years ended December 31, 2018, 2017, and 2016
were
$5.2 million
,
$3.9 million
, and
$2.8 million
, respectively, which were recognized as expense in the statements of comprehensive income.
NOTE
13
—
Quarterly Results of Operations Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
December 31, 2018
|
|
September 30, 2018
|
|
June 30, 2018
|
|
March 31, 2018
|
|
December 31, 2017
|
|
September 30, 2017
|
|
June 30, 2017
|
|
March 31, 2017
|
|
(in thousands, except per share amounts)
|
Revenues
|
$
|
116,046
|
|
|
$
|
122,965
|
|
|
$
|
125,473
|
|
|
$
|
115,782
|
|
|
$
|
112,886
|
|
|
$
|
107,029
|
|
|
$
|
104,125
|
|
|
$
|
93,002
|
|
Gross profit
|
$
|
66,849
|
|
|
$
|
71,693
|
|
|
$
|
74,664
|
|
|
$
|
67,135
|
|
|
$
|
64,614
|
|
|
$
|
67,426
|
|
|
$
|
65,858
|
|
|
$
|
58,234
|
|
Income before income taxes
|
$
|
414
|
|
|
$
|
12,297
|
|
|
$
|
6,753
|
|
|
$
|
(4,664
|
)
|
|
$
|
3,417
|
|
|
$
|
18,984
|
|
|
$
|
17,987
|
|
|
$
|
5,006
|
|
Net income
|
$
|
84
|
|
|
$
|
12,416
|
|
|
$
|
9,814
|
|
|
$
|
261
|
|
|
$
|
9,909
|
|
|
$
|
14,519
|
|
|
$
|
18,823
|
|
|
$
|
9,599
|
|
Net income per share, basic
|
$
|
—
|
|
|
$
|
0.36
|
|
|
$
|
0.29
|
|
|
$
|
0.01
|
|
|
$
|
0.29
|
|
|
$
|
0.42
|
|
|
$
|
0.55
|
|
|
$
|
0.28
|
|
Net income per share, diluted
|
$
|
—
|
|
|
$
|
0.35
|
|
|
$
|
0.27
|
|
|
$
|
0.01
|
|
|
$
|
0.28
|
|
|
$
|
0.41
|
|
|
$
|
0.52
|
|
|
$
|
0.27
|
|
NOTE
14
—
Subsequent Event
On February 11, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with EM Eagle Purchaser, LLC, a Delaware limited liability corporation (“Parent”) and EM Eagle Merger Sub, a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), which provides for the acquisition of the Company by private equity investment firm Thoma Bravo, LLC (the “Transaction”). Upon the closing of the Transaction, the Company will operate as a privately-held company. Parent and Merger Sub were formed by an affiliate of Thoma Bravo. Capitalized terms used in this Note not otherwise defined have the meanings set forth in the Merger Agreement.
Under the terms of the agreement, the Company’s stockholders will receive
$99.00
per share in cash in a transaction that valued the Company at approximately
$3.7 billion
. The Transaction is currently expected to close in the second or third quarter of 2019, subject to approval by the Company’s stockholders and regulatory authorities and the satisfaction of customary closing conditions. The Transaction is not subject to a financial condition.
The Merger Agreement provides for a “go-shop” period that begins on the date of the Merger Agreement and continues until 12:00 p.m., Pacific time on March 18, 2019. During this period, the Company may solicit alternative acquisition proposals from third parties and provide information to, and participate in discussions and engage in negotiations with, third parties regarding any alternative acquisition proposals. There can be no assurance that this “go-shop” period will result in a superior proposal. The Company does not intend to disclose developments about the “go-shop” process unless and until its Board has made a decision with respect to any potential superior proposal.