Quarterly Report (10-q)

Date : 05/03/2019 @ 10:11PM
Source : Edgar (US Regulatory)
Stock : Endurance International Group Holdings Inc (EIGI)
Quote : 4.47  -0.1 (-2.19%) @ 4:20PM

Quarterly Report (10-q)

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-36131
 
Endurance International Group Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
46-3044956
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
10 Corporate Drive, Suite 300
Burlington, Massachusetts
 
01803
(Address of Principal Executive Offices)
 
(Zip Code)
(781) 852-3200
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
  
Accelerated filer
 
¨
Non-accelerated filer
¨
  
Smaller reporting company
 
¨
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

1


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   ý
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value
EIGI
The Nasdaq Global Select Market

As of April 29, 2019 , there were 145,960,619 shares of the issuer’s common stock, $0.0001 par value per share, outstanding.
 

2


TABLE OF CONTENTS
 
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements (unaudited)
 
 


3


Endurance International Group Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)

December 31, 2018
 
March 31, 2019
Assets

 
(unaudited)
Current assets:

 

Cash and cash equivalents
$
88,644

 
$
70,084

Restricted cash
1,932

 
1,931

Accounts receivable
12,205

 
13,556

Prepaid domain name registry fees
56,779

 
59,193

Prepaid commissions
41,458

 
41,686

Prepaid and refundable taxes
7,235

 
7,826

Prepaid expenses and other current assets
27,855

 
29,557

Total current assets
236,108

 
223,833

Property and equipment—net
92,275

 
87,119

Operating lease right-of-use assets

 
109,302

Goodwill
1,849,065

 
1,848,602

Other intangible assets—net
352,516

 
331,409

Deferred financing costs—net
2,656

 
2,441

Investments
15,000

 
15,000

Prepaid domain name registry fees, net of current portion
11,207

 
11,412

Prepaid commissions, net of current portion
42,472

 
44,780

Other assets
5,208

 
2,872

Total assets
$
2,606,507

 
$
2,676,770

Liabilities and stockholders’ equity

 

Current liabilities:

 

Accounts payable
$
12,449

 
$
9,783

Accrued expenses
79,279

 
61,151

Accrued taxes
2,498

 
3,982

Accrued interest
25,259

 
15,018

Deferred revenue
371,758

 
379,181

Operating lease liabilities—short term

 
22,250

Current portion of notes payable
31,606

 
31,606

Current portion of financed equipment
8,379

 
6,502

Deferred consideration—short term
2,425

 
2,464

Other current liabilities
3,147

 
2,408

Total current liabilities
536,800

 
534,345

Long-term deferred revenue
96,140

 
99,037

Operating lease liabilities—long term

 
96,469

Notes payable—long term, net of original issue discounts of $21,349 and $20,263 and deferred financing costs of $31,992 and $30,474, respectively
1,770,055

 
1,747,659

Deferred tax liability
16,457

 
15,228

Deferred consideration—long term
1,364

 
1,386

Other liabilities
11,237

 
4,021

Total liabilities
2,432,053

 
2,498,145

Stockholders’ equity:

 

Preferred Stock—par value $0.0001; 5,000,000 shares authorized; no shares issued or outstanding

 

Common Stock—par value $0.0001; 500,000,000 shares authorized; 143,444,515 and 143,561,595 shares issued at December 31, 2018 and March 31, 2019, respectively; 143,444,178 and 143,561,595 outstanding at December 31, 2018 and March 31, 2019, respectively
14

 
14

Additional paid-in capital
961,235

 
970,256

Accumulated other comprehensive loss
(3,211
)
 
(4,573
)
Accumulated deficit
(783,584
)
 
(787,072
)
Total stockholders’ equity
174,454

 
178,625

Total liabilities and stockholders’ equity
$
2,606,507

 
$
2,676,770

See accompanying notes to consolidated financial statements.

4


Endurance International Group Holdings, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
(in thousands, except share and per share amounts)
 
Three Months Ended March 31,
 
2018

2019
Revenue
$
291,356


$
280,683

Cost of revenue
133,906


123,854

Gross profit
157,450


156,829

Operating expense:
 
 
 
Sales and marketing
67,356


66,588

Engineering and development
19,917


23,694

General and administrative
38,775


31,393

Total operating expense
126,048


121,675

Income from operations
31,402


35,154

Other income (expense):



Interest income
204


291

Interest expense
(36,050
)

(37,214
)
Total other expense—net
(35,846
)

(36,923
)
Loss before income taxes and equity earnings of unconsolidated entities
(4,444
)

(1,769
)
Income tax (benefit) expense
(1,943
)

1,719

Loss before equity earnings of unconsolidated entities
(2,501
)

(3,488
)
Equity loss of unconsolidated entities, net of tax
27



Net loss
$
(2,528
)

$
(3,488
)
Comprehensive income (loss):



Foreign currency translation adjustments
580


(401
)
Unrealized gain (loss) on cash flow hedge, net of taxes of ($325) and $304 for the three months ended March 31, 2018 and 2019, respectively
1,041


(961
)
Total comprehensive loss
$
(907
)

$
(4,850
)
Basic and diluted net loss per share
$
(0.02
)

$
(0.02
)
Weighted-average common shares used in computing net loss per share:
 
 
 
Basic and diluted
140,361,982

 
143,512,293

See accompanying notes to consolidated financial statements.

5


Endurance International Group Holdings, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except share amounts)
(unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
(Loss) Gain
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Number
 
Amount
 
Balance—December 31, 2017
140,190,695

 
$
14

 
$
931,033

 
$
(541
)
 
$
(847,501
)
 
$
83,005

Vesting of restricted shares
262,454

 

 

 

 

 

Exercise of stock options
4,338

 

 
25

 

 

 
25

Other comprehensive gain

 

 

 
1,621

 

 
1,621

Adjustment to beginning retained earnings resulting from adoption of ASC 606, net of tax impact of $7.0 million

 

 

 

 
59,383

 
59,383

Net loss

 

 

 

 
(2,528
)
 
(2,528
)
Reclassification of stock-compensation liability award

 

 
250

 

 

 
250

Stock-based compensation

 

 
6,992

 

 

 
6,992

Balance—March 31, 2018
140,457,487

 
$
14

 
$
938,300

 
$
1,080

 
$
(790,646
)
 
$
148,748

 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
(Loss) Gain
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Number
 
Amount
 
Balance—December 31, 2018
143,444,178

 
$
14

 
$
961,235

 
$
(3,211
)
 
$
(783,584
)
 
$
174,454

Vesting of restricted shares
116,525

 

 

 

 

 

Exercise of stock options
892

 

 
5

 

 

 
5

Other comprehensive loss

 

 

 
(1,362
)
 

 
(1,362
)
Net loss

 

 

 

 
(3,488
)
 
(3,488
)
Stock-based compensation

 

 
9,016

 

 

 
9,016

Balance—March 31, 2019
143,561,595

 
$
14

 
$
970,256

 
$
(4,573
)
 
$
(787,072
)
 
$
178,625


See accompanying notes to consolidated financial statements.

6


Endurance International Group Holdings, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
 
Three Months Ended March 31,
 
 
2018
 
2019
Cash flows from operating activities:
 

 

Net loss
 
$
(2,528
)
 
$
(3,488
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 

Depreciation of property and equipment
 
12,068

 
11,206

Amortization of other intangible assets
 
25,735

 
21,120

Amortization of deferred financing costs
 
1,894

 
1,733

Amortization of net present value of deferred consideration
 
128

 
61

Amortization of original issue discounts
 
1,058

 
1,087

Stock-based compensation
 
6,992

 
9,016

Deferred tax expense (benefit)
 
(4,068
)
 
(906
)
Loss on sale of assets
 
48

 
26

Loss from unconsolidated entities
 
27

 

Changes in operating assets and liabilities, net of acquisitions:
 

 

Accounts receivable
 
2,448

 
(1,383
)
Prepaid expenses and other current assets
 
(2,811
)
 
(2,292
)
Prepaid and refundable taxes
 
359

 
(591
)
Leases right-of-use asset, net
 

 
573

Accounts payable and accrued expenses
 
350

 
(31,512
)
Deferred revenue
 
10,660

 
10,399

Net cash provided by operating activities
 
52,360

 
15,049

Cash flows from investing activities:
 

 

Purchases of property and equipment
 
(5,254
)
 
(5,423
)
Net cash used in investing activities
 
(5,254
)
 
(5,423
)
Cash flows from financing activities:
 

 

Repayments of term loans
 
(25,486
)
 
(25,000
)
Principal payments on financed equipment
 
(2,230
)
 
(2,570
)
Proceeds from exercise of stock options
 
25

 
5

Net cash used in financing activities
 
(27,691
)
 
(27,565
)
Net effect of exchange rate on cash and cash equivalents and restricted cash
 
(83
)
 
(622
)
Net increase (decrease) in cash and cash equivalents and restricted cash
 
19,332

 
(18,561
)
Cash and cash equivalents and restricted cash:
 

 

Beginning of period
 
69,118

 
90,576

End of period
 
$
88,450

 
$
72,015

Supplemental cash flow information:
 

 

Interest paid
 
$
42,091

 
$
44,259

Income taxes paid
 
$
603

 
$
1,866

See accompanying notes to consolidated financial statements.

7


Endurance International Group Holdings, Inc.
Notes to Consolidated Financial Statements
(unaudited)
1. Nature of Business
Formation and Nature of Business
Endurance International Group Holdings, Inc. (“Holdings”) is a Delaware corporation, which, together with its wholly owned subsidiary, EIG Investors Corp. (“EIG Investors”), its primary operating subsidiary, The Endurance International Group, Inc. (“EIG”), and other subsidiaries of EIG, collectively form the “Company.” The Company is a leading provider of cloud-based platform solutions designed to help small- and medium-sized businesses succeed online.
EIG and EIG Investors were incorporated in April 1997 and May 2007, respectively, and Holdings was originally formed as a limited liability company in October 2011 in connection with the acquisition of a controlling interest in EIG Investors, EIG and EIG's subsidiaries by investment funds and entities affiliated with Warburg Pincus and Goldman, Sachs & Co. ("Goldman") on December 22, 2011. On November 7, 2012, Holdings reorganized as a Delaware limited partnership and on June 25, 2013, Holdings converted into a Delaware C-corporation and changed its name to Endurance International Group Holdings, Inc.
2 . Summary of Significant Accounting Policies
Basis of Preparation
The accompanying consolidated financial statements, which include the accounts of the Company and its subsidiaries, have been prepared using accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany transactions were eliminated on consolidation.
Although we believe the disclosures included herein are adequate to ensure that the consolidated financial statements are fairly presented, certain information and footnote disclosures to the financial statements have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, the consolidated financial statements and the footnotes included herein should be read in conjunction with the audited financial statements and the footnotes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Segment Information
Operating segments are defined as components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker ("CODM"). The Company has determined that its chief executive officer is the Company's CODM.
The Company has identified three reportable segments, web presence, domains and email marketing. The Company has determined that it does not satisfy aggregation criteria for these operating segments, and that each segment meets the quantitative threshold of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 280, Segment Reporting . Therefore, all three operating segments are reportable segments.
The Company's segments share certain resources, primarily related to sales and marketing, engineering and general and administrative functions. Management allocates these costs to each respective segment based on a consistently applied methodology, primarily based on a percentage of revenue.
Use of Estimates
U.S. GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates, judgments and assumptions used in preparing the accompanying consolidated financial statements are based on the relevant facts and circumstances as of the date of the consolidated financial statements. Although the Company regularly assesses these estimates, judgments and assumptions used in preparing the consolidated financial statements, actual results could differ from those estimates. Changes in estimates are recorded in the period in which they become known. The more significant estimates reflected in these consolidated financial statements include estimates of fair value of assets acquired and liabilities assumed under purchase accounting related to the Company’s acquisitions and when evaluating goodwill and long-lived assets for potential impairment, the estimated useful lives of intangible and depreciable assets, revenue recognition for multiple-element arrangements, stock-based compensation, contingent consideration, derivative instruments, certain accruals, reserves and deferred taxes.

8


Unaudited Interim Financial Information
The accompanying interim consolidated balance sheet as of March 31, 2019 , and the related consolidated statements of operations and comprehensive loss for the three months ended March 31, 2018 and 2019 , cash flows for the three months ended March 31, 2018 and 2019 , statement of changes in stockholders' equity for the three months ended March 31, 2018 and 2019 , and the notes to consolidated financial statements are unaudited. These unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements. The unaudited consolidated financial statements include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments that are necessary for a fair presentation of the Company’s financial position at March 31, 2019 , results of operations for the three months ended March 31, 2018 and 2019 , cash flows for the three months ended March 31, 2018 and 2019 , and statement of changes in stockholders' equity for the three months ended March 31, 2018 and 2019 . The consolidated results in the consolidated statements of operations and comprehensive loss are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2019 .
Cash Equivalents
Cash and cash equivalents include all highly liquid investments with remaining maturities of three months or less at the date of purchase.
Restricted Cash
Restricted cash is composed of certificates of deposit and cash held by merchant banks and payment processors, which provide collateral against any chargebacks, fees, or other items that may be charged back to the Company by credit card companies and other merchants, and collateral for certain facility leases.
Accounts Receivable
Accounts receivable is primarily composed of cash due from credit card companies for unsettled transactions charged to subscribers’ credit cards. As these amounts reflect authenticated transactions that are fully collectible, the Company does not maintain an allowance for doubtful accounts. The Company also accrues for earned referral fees and commissions, which are governed by reseller or affiliate agreements, when the amount is reasonably estimable.
Prepaid Domain Name Registry Fees
Prepaid domain name registry fees represent amounts that are paid in full at the time a domain is registered by one of the Company’s registrars on behalf of a customer. The registry fees are recognized on a straight-line basis over the term of the domain registration period.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include cash equivalents, accounts receivable, accounts payable and certain accrued expenses, approximate their fair values due to their short maturities. The fair value of the Company's notes payable is based on the borrowing rates currently available to the Company for debt with similar terms and average maturities and approximates their carrying value.
Derivative Instruments and Hedging Activities
FASB ASC 815, Derivatives and Hedging , provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to

9


economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
In accordance with the FASB’s fair value measurement guidance in FASB Accounting Standards Update ("ASU") No. 2011-4, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Property and Equipment
Property and equipment is recorded at cost or fair value if acquired in an acquisition. The Company also capitalizes the direct costs of constructing additional computer equipment for internal use, as well as upgrades to existing computer equipment which extend the useful life, capacity or operating efficiency of the equipment. Capitalized costs include the cost of materials, shipping and taxes. Materials used for repairs and maintenance of computer equipment are expensed and recorded as a cost of revenue. Materials on hand and construction-in-process are recorded as property and equipment. Assets recorded under equipment financing are depreciated over the lease term. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets as follows: 
Building
 
Thirty-five years
Software
 
Two to three years
Computers and office equipment
 
Three years
Furniture and fixtures
 
Five years
Leasehold improvements
 
Shorter of useful life or remaining term of the lease
Software Development Costs
The Company accounts for software development costs for internal-use software under the provisions of FASB ASC 350-40, Internal-Use Software. Accordingly, certain costs to develop internal-use computer software are capitalized, provided these costs are expected to be recoverable. During the three months ended March 31, 2018 , the Company capitalized internal-use software development costs of $1.6 million . During the three months ended March 31, 2019 , the Company capitalized internal-use software costs of $3.2 million .
Goodwill
Goodwill relates to amounts that arose in connection with the Company’s various business combinations and represents the difference between the purchase price and the fair value of the identifiable intangible and tangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized, but is subject to periodic review for impairment. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, including a decline in the equity value of the Company's business, a significant adverse change in agreements that would materially affect reported operating results, business climate or operational performance of the business and an adverse action or assessment by a regulator. Additionally, a reorganization or change in the number of reporting units could result in the reassignment of goodwill between reporting units and may trigger an impairment assessment.
In accordance with ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350) , the Company is required to review goodwill by reporting unit for impairment at least annually or more often if there are indicators of impairment present. Under U.S. GAAP, a reporting unit is either the equivalent of, or one level below, an operating segment. The Company performs its annual goodwill test as of October 31 of each fiscal year. The Company has identified a total of ten reporting units, and goodwill has been allocated to six of these reporting units. The Company also early adopted the provisions of ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350) , which eliminates the second step of the goodwill impairment test. As a result, the Company's goodwill impairment test includes only one step, which is a comparison of the carrying value of each reporting unit to its fair value, and any excess carrying value, up to the amount of goodwill allocated, is impaired. Goodwill has been allocated to each reporting unit in accordance with ASC 350-20-40, which requires that goodwill be allocated based on the relative fair values of each reporting unit.
The carrying value of each reporting unit is based on the assignment of the appropriate assets and liabilities to each reporting unit. Assets and liabilities are assigned to each reporting unit if the assets or liabilities are employed in the operations of the reporting unit and the asset and liability is considered in the determination of the reporting unit's fair value. Certain assets and liabilities are shared by multiple reporting units, and are allocated to each reporting unit based on the relative size of a reporting unit, primarily based on revenue.

10


The fair value of each reporting unit is determined by the income approach and the market approach. For the income approach, fair value is determined based on the present value of estimated future after-tax cash flows, discounted at an appropriate risk adjusted rate. The Company derives its discount rates using a capital asset pricing model and analyzing published rates for industries relevant to the reporting units to estimate the weighted-average cost of capital. The Company uses discount rates that are commensurate with the risks and uncertainty inherent in the business and in internally developed forecasts. For fiscal year 2018, the Company used a discount rate of 10.0% for all but one of its reporting units. The Company also performed sensitivity analysis on its discount rates. The Company uses internal forecasts to estimate future after-tax cash flows, which include an estimate of long-term future growth rates based on the Company's view of the long-term outlook for each reporting unit. Actual results may differ from those assumed in the Company's forecasts.
For the market approach, the Company utilizes two different approaches: market multiples for publicly traded companies, and market multiples based on the acquisition value of comparable companies that were sold.
For the fiscal year 2018 goodwill impairment analysis, the Company compared the fair value from the income approach to the two market approaches. For three of the Company's reporting units, which represent approximately 95% of the Company's goodwill, the fair value derived from the income approach was consistent with the fair value derived from the two market approaches. The Company established the fair value for these reporting units based on the average fair value from all three valuation approaches. For two of the Company's reporting units, which represent approximately 3% of the Company's goodwill, the Company based their fair value entirely upon the income approach, as these two reporting units are experiencing declining cash flows and are expected to continue to experience declines over time. The fair values from the income approach for these two reporting units were materially below the fair values derived from both market approaches. The goodwill allocated to these two reporting units is approximately $64.2 million as of December 31, 2018. Although the Company does not expect an impairment of goodwill for these two reporting units in the near term, the Company expects that cash flows will continue to decline which could result in goodwill impairment charges for these two reporting units at some point in the future. For one of the reporting units, which represents approximately 2% of the Company's goodwill, the fair values derived from the market approaches were much lower than the income approach using a discount rate of 10% . The Company determined that more risk was present in the projected future cash flows of this reporting unit as compared to the Company's other reporting units and determined that a discount rate of 17% was appropriate. The fair value of this reporting unit under the income approach at a discount rate of 17% was consistent with the fair values determined under the two market approaches. The Company established fair value for this reporting unit based on the average fair value from all three valuation approaches.
As of the test date of October 31, 2018, the fair value for all reporting units was higher than their respective carrying values, and no impairment has been recorded. No triggering events were identified between the October 31, 2018 test and December 31, 2018 .
Goodwill as of December 31, 2018 was $1,849.1 million . The carrying value of goodwill that was allocated to the domain, email marketing and web presence reporting segments was $29.9 million , $604.3 million and $1,214.9 million , respectively. The fair value of all reporting units with goodwill at December 31, 2018 exceeds each reporting unit's carrying value by at least 20% .
Goodwill as of March 31, 2019 is $1,848.6 million . The carrying value of goodwill that was allocated to the domain, email marketing and web presence reporting segments was $ 29.9 million , $604.3 million and $1,214.4 million , respectively. For the three months ended March 31, 2019 , no impairment triggering events were identified and no impairment has been recorded.
Long-Lived Assets
The Company’s long-lived assets consist primarily of intangible assets, including acquired subscriber relationships, trade names, intellectual property, developed technology and domain names available for sale. The Company also has long-lived tangible assets, primarily consisting of property and equipment. The majority of the Company’s intangible assets are recorded in connection with its various acquisitions. The Company’s intangible assets are recorded at fair value at the time of their acquisition. The Company amortizes intangible assets over their estimated useful lives.
Determination of the estimated useful lives of the individual categories of intangible assets is based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with finite lives other than developed technology is recognized in accordance with their estimated projected cash flows.
The Company evaluates long-lived intangible and tangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indicators of impairment are present and undiscounted future cash flows are less than the carrying amount, the fair value of the assets is determined and compared to the carrying value. If the fair value is less than the carrying value, then the carrying value of the asset is reduced to the estimated fair value and an

11


impairment loss is charged to expense in the period the impairment is identified. No such impairment losses have been identified in the three months ended March 31, 2018 and 2019 .
Indefinite life intangible assets include domain names that are available for sale which are recorded at the cost to acquire. These assets are not being amortized and are being tested for impairment annually and whenever events or changes in circumstance indicate that their carrying value may not be recoverable. When a domain name is sold, the Company records the cost of the domain in cost of revenue.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) , or ASC 606, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. Since then, the FASB has also issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606), Principals versus Agent Considerations, ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing, and ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606) , Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments, which further elaborate on the original ASU No. 2014-09. The Company adopted the guidance in ASC 606 on January 1, 2018. Revenue is recognized when control of the promised products or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to for those products and services. In general, the Company determines revenue recognition through the following steps:
Identification of the contract, or contracts, with the customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, the Company satisfies a performance obligation.
The Company provides cloud-based subscription services, which include web hosting and related add-ons, search engine optimization (SEO) services, domain registration services and email marketing.
Web hosting gives subscribers access to an environment where the Company hosts a customer’s website. The related contract terms are generally for one year , but can range from 30 days to 3 years . Web hosting services are typically sold in bundled offerings that include web hosting, domain registration services and various add-ons. The Company recognizes revenue for web hosting and domain registration services over the term of the contract.
The main add-on services related to web hosting are domain privacy, secure sockets layer (SSL) security, site backup and restoration, and web builder tools. These services may be included in web hosting bundles, or they may be purchased on a standalone basis. Certain add-on services are provided by third parties. In cases where the Company is acting as an agent for the sale of third-party add-on services, the Company recognizes revenue on a net basis at the time of sale. In cases where the Company is acting as a principal for the sale of third-party add-on services (i.e., the Company has the primary responsibility to provide specific goods or services, it has discretion to establish prices and it may assume inventory risk), the Company recognizes revenue on a gross basis over the term of the contract. The revenue for Company-provided add-on services is primarily recognized over the term of the contract.
SEO services are monthly subscriptions that provide a customer with increased traffic to their website over the term of the subscription. Revenue from SEO services is recognized over the monthly term of the contract.
In the case of domain registration services, the Company is an accredited registrar and can provide registration services to the customer, or it can select an accredited third-party registrar to perform these duties. Domain registration services are generally annual subscriptions, but can cover multiple years. Revenue for these services is recognized over time.
Email marketing services provide subscribers with a cloud-based platform that can send broadcast emails to a customer list managed by the subscriber. Pricing is based on contract list volume from the prior monthly period, which determines the contractual billing price for the upcoming month. Revenue for this service is recognized over the monthly term of the contract.
Non-subscription based services include certain professional services, primarily website design or re-design services, marketing development fund revenue ("MDF"), premium domain names and domain parking services.
Website design and re-design services are recognized when the service is complete.
Marketing development funds consist of commissions earned by the Company when a third party sells its products or services directly to the Company’s subscribers, and advertising revenue for third-party ads placed on Company websites. The Company records revenue when the service is provided and calculates it based on the contractual revenue share arrangement or over the term of the advertisement.

12


Domain parking allows the Company to monetize certain of its premium domain names by loaning them to specialized third parties that generate advertising revenue from these parked domains on a pay per click ("PPC") basis. Revenue is recognized when earned and calculated based on the revenue share arrangement with the third party.
Revenue from the sale of premium domains is recognized when persuasive evidence of an arrangement to sell such domains exists and delivery of an authorization key to access the domain name has occurred. Premium domain names are paid for in advance prior to the delivery of the domain name.
For most of the Company’s performance obligations, the customer simultaneously receives and consumes the service over a period of time as the Company performs the service, resulting in the recognition of revenue over the subscription period. This method provides an appropriate depiction of the timing of the transfer of services to the customer. In limited instances, the customer obtains control of the promised service at a point in time, with no future obligations on the part of the Company. In these instances, the Company recognizes revenue at the point in time control is transferred. The contracts that the Company enters into typically do not contain any variable or non-cash considerations.
The Company maintains a reserve for refunds and chargebacks related to revenue that has been recognized and is expected to be refunded, as calculated based on observed historical trends. The Company had a refund and chargeback reserve of $0.4 million and $0.3 million as of December 31, 2018 and March 31, 2019 , respectively. The portion of deferred revenue that was expected to be refunded at December 31, 2018 and March 31, 2019 was $2.2 million and $1.9 million , respectively. Based on refund history, approximately 83% of all refunds happen in the same fiscal month that the contract starts or renews, and approximately 95% of all refunds happen within 45 days of the contract start or renewal date.
The Company did not apply any practical expedients during its adoption of ASC 606. The Company elected to use the portfolio method in the calculation of the deferred contract assets.
Contracts with Multiple Performance Obligations
A considerable amount of the Company’s revenue is generated from transactions that are contracts with customers that may include web hosting plans, domain name registrations, and other cloud-based products and services. In these cases, the Company determines whether the products and services are distinct performance obligations that should be accounted for separately versus together. The Company allocates revenue to each performance obligation based on its relative standalone selling price, generally based on the price charged to customers. Web hosting services, domain name registrations, and other cloud-based products and services have distinct performance obligations and are often sold separately. If the promise is not distinct and therefore not a performance obligation, then the total transaction amount is allocated to the identified performance obligation based on a relative selling price hierarchy. When multiple performance obligations are included in a contract, the total transaction amount for the contract is allocated to the performance obligations based on a relative selling price hierarchy. The Company determines the relative selling price for a performance obligation based on standalone selling price (“SSP”). The Company determines SSP by considering its observed standalone selling prices, competitive prices in the marketplace and management judgment; these standalone selling prices may vary depending upon the particular facts and circumstances related to each deliverable. The Company analyzes the standalone selling prices used in its allocation of transaction amount, at a minimum, on a quarterly basis.
Deferred Revenue
The Company records deferred revenue when cash payments are received or are due in advance of the Company’s performance, including amounts that are refundable. The change in the deferred revenue balance for the three months ended March 31, 2019 is primarily driven by cash payments received or due in advance of the Company satisfying its performance obligations, offset by $159.0 million of revenue recognized that was included in the deferred revenue balance at the beginning of the period.

13


The following table provides a reconciliation of the Company's deferred revenue as of March 31, 2019 :
 
Short-term
 
Long-term
 
(in thousands)
Balance at December 31, 2018
$
371,758

 
$
96,140

Recognition of the beginning deferred revenue into revenue, as a result of performance obligations satisfied
(159,048
)
 

Cash received in advance during the period
248,324

 
42,762

Recognition of cash received in the period into revenue, as a result of performance obligations satisfied
(121,634
)
 

Impact of foreign exchange rates
(84
)
 

Reclassification between short-term and long-term
39,865

 
(39,865
)
Balance at March 31, 2019
$
379,181

 
$
99,037

The difference between the opening and closing balances of the Company’s deferred liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment. During the three months ended March 31, 2019 , the Company recognized $159.0 million and $0.0 million , respectively, from beginning deferred revenue current and long-term balances existing at December 31, 2018 . The Company did not recognize any revenue from performance obligations satisfied in prior periods.
The following table provides the remaining performance obligation amounts as of March 31, 2019 . These amounts are equivalent to the ending deferred revenue balance of $478.2 million , which includes both short and long-term amounts:
 
Web presence
 
Email marketing
 
Domain
 
Total
 
(in thousands)
Remaining performance obligation, short-term
$
263,267

 
$
56,084

 
$
59,830

 
$
379,181

Remaining performance obligation, long-term
84,034

 

 
15,003

 
99,037

Total
$
347,301

 
$
56,084

 
$
74,833

 
$
478,218

This backlog of revenue related to future performance obligations is prepaid by customers and supported by executed contracts with customers. The Company has established a reserve of $0.3 million for refunds and chargebacks, 95% of which is expected to materialize in the first 45 days after the contract start date or renewal date. The remainder of the deferred revenue is expected to be recognized in future periods.
Deferred Customer Acquisition Costs
As a result of the implementation of ASC 606, the Company now capitalizes the incremental costs directly related to obtaining and fulfilling a contract (such as sales commissions and certain direct sales and marketing success-based costs), if these costs are expected to be recovered. These costs are amortized over the period the services are transferred to the customer, which is estimated based on customer churn rates for various segments of the business. The Company includes only those incremental costs that would not have been incurred if the contracts had not been entered into:
 
Short-term
 
Long-term
 
(in thousands)
Balance at December 31, 2018
$
41,458

 
$
42,472

Deferred customer acquisition costs incurred in the period
6,412

 
10,060

Amounts recognized as expense in the period
(13,932
)
 

Impact of foreign exchange rates
(35
)
 
31

Reclassification between short-term and long-term
7,783

 
(7,783
)
Balance at March 31, 2019
$
41,686

 
$
44,780

As of March 31, 2019 , the Company had a total of $72.9 million in deferred assets relating to costs incurred to obtain or fulfill contracts in its web presence segment, which consists entirely of recoverable, specific, success-based sales commissions. As of March 31, 2019 , the Company had a total of $12.1 million deferred assets relating to costs incurred to obtain or fulfill contracts in its email marketing segment, which consists entirely of recoverable, specific, success-based sales commissions. As of March 31, 2019 , the Company had a total of $1.4 million deferred assets relating to costs incurred to obtain or fulfill contracts in its domain segment, which consists entirely of recoverable, specific, success-based sales commissions. During the

14


three months ended March 31, 2019 , the Company recognized total amortization costs related to the above items of $12.0 million , $1.5 million , and $0.4 million in its web presence, email marketing and domain segments, respectively.
Significant Judgments
The Company sells a number of third-party cloud-based services to enhance a subscriber’s overall web hosting experience. The Company exercises considerable judgment to determine if it is the principal or agent in each of these arrangements, and in some instances, has concluded that it is an agent of the third party and recognizes revenue at time of subscriber purchase in an amount that is net of the revenue share payable to the third party.
The Company exercises judgment to determine the standalone selling price for each distinct performance obligation. In instances where the standalone selling price is not directly observable, such as when the Company does not sell the product or service separately, the Company determines the standalone selling price using information that may include a competitive market assessment approach and other observable inputs. The Company typically has more than one standalone selling price for individual products and services.
Judgment is required to determine whether particular types of sales and marketing costs incurred, including commissions, are incremental and recoverable costs incurred to obtain and fulfill the customer contract. In addition, judgment is required to determine the life of the customer over which deferred customer acquisition costs are amortized.
Income Taxes
Income taxes are accounted for in accordance with FASB ASC 740,  Accounting for Income Taxes . Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is more likely than not to be realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company had unrecognized tax benefits at December 31, 2018 and March 31, 2019 of $4.4 million and $4.7 million , respectively.
The Company records interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the three months ended March 31, 2018 , the Company did not incur any interest and penalties related to unrecognized tax benefits. During the three months ended March 31, 2019 , the Company recognized an immaterial amount of interest and penalties related to unrecognized tax benefits.
Stock-Based Compensation
The Company may issue restricted stock units, restricted stock awards and stock options which vest upon the satisfaction of a performance condition and/or a service condition. The Company follows the provisions of FASB ASC 718, Compensation—Stock Compensation , which requires employee stock-based payments to be accounted for under the fair value method. Under this method, the Company is required to record compensation cost based on the estimated fair value for stock-based awards granted over the requisite service periods for the individual awards, which generally equals the vesting periods, net of estimated forfeitures. The Company uses the straight-line amortization method for recognizing stock-based compensation expense. In addition, for stock-based awards where vesting is dependent upon achieving certain performance goals, the Company estimates the likelihood of achieving the performance goals against established performance targets.
The Company estimates the fair value of employee stock options on the date of grant using the Black-Scholes option-pricing model, which requires the use of highly subjective estimates and assumptions. For restricted stock awards and restricted stock units granted, the Company estimates the fair value of each restricted stock award or restricted stock unit based on the closing trading price of its common stock on the date of grant.
Net Loss per Share
The Company considered FASB ASC 260-10, Earnings per Share , which requires the presentation of both basic and diluted earnings per share in the consolidated statements of operations and comprehensive loss. The Company’s basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period, and, if there are dilutive securities, diluted income per share is computed by including common stock equivalents which includes shares issuable upon the exercise of stock options, net of shares assumed to have been purchased with the proceeds, using the treasury stock method.

15


 
Three Months Ended
March 31,
 
2018

2019
 
(unaudited)
(in thousands, except share amounts and per share data)
Net loss
$
(2,528
)
 
$
(3,488
)
Net loss per share:
 
 
 
Basic and diluted
$
(0.02
)
 
$
(0.02
)
Weighted-average common shares used in computing net loss per share:
 
 
 
Basic and diluted
140,361,982

 
143,512,293

The following number of weighted average potentially dilutive shares were excluded from the calculation of diluted loss per share because the effect of including such potentially dilutive shares would have been anti-dilutive:
 
Three Months Ended
March 31,
 
2018
 
2019
 
(unaudited)
Restricted stock awards and units
5,876,438

 
8,934,769

Options
8,969,760

 
8,729,091

Total
14,846,198

 
17,663,860

Recent Accounting Pronouncements - Recently Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases, or ASC 842. Since then, the FASB has also issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases , which further clarifies ASU No. 2016-02 and corrects unintended application of guidance. The new standard establishes a right-of-use ("ROU") model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company adopted the new standard on January 1, 2019. The Company elected to utilize the available practical expedients and implemented internal controls and reporting systems to enable the preparation of the financial information on adoption and on an ongoing basis subsequent to adoption. Upon adoption, the Company recorded an ROU asset of $114.9 million , and a lease liability of $124.5 million , and reduced accrued facility exit costs by $1.7 million and deferred rent liabilities by $7.9 million . There was no impact to opening retained earnings as a result of the adoption of the new guidance. The adoption of Topic 842 will have a minimal impact on results of operations, and may impact presentation of amounts in the statement of cash flows. The impact of applying Topic 842 on the results for reporting periods and balance sheet beginning after January 1, 2019 is presented under Topic 842, while prior amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 840. The Company's accounting for finance leases remained substantially unchanged. See Note 6, Leases , for further details.
Recent Accounting Pronouncements - Recently Issued
In 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. The new guidance provides for the deferral of implementation costs for cloud computing arrangements and expensing those costs over the term of the cloud services arrangement. The Company is currently evaluating the timing of adoption and the expected impact of the new guidance.
3 . Correction of Income Tax Expense - Fiscal Year 2018

The Company revised its deferred income tax provision for the first and second quarter of 2018 to reflect a revision that favorably impacted net income (loss) for these periods.
During fiscal year 2017, the Company began a process to reorganize, and in some instances, eliminate legal entities associated with certain products introduced in 2015 and 2016. This reorganization is expected to provide tax benefits, as the Company can deduct losses on the investments in these entities in its U.S. income tax filings. After further review of these

16


losses, the Company determined that a significant portion of these losses should have been reflected in its 2017 income tax provision calculations. The Company increased its net operating loss ("NOL") carry-forwards available to offset future U.S. federal taxable income from $157.6 million as of December 31, 2017, to $236.3 million . Additionally, NOL carry-forwards available to offset future state taxable income were increased from $128.6 million as of December 31, 2017, to $168.3 million . These changes in NOL carry-forwards did not impact the actual income tax provision recorded in 2017; however, due to the changes enacted in the 2017 Tax Cuts and Jobs Act, the manner in which net operating loss carry-forwards are handled does impact the Company's 2018 provision for non-cash deferred income taxes. The impact of this revision on the Company’s financial statements as originally filed for the first quarter of fiscal year 2018 is detailed below.
The following table represents the impact of the income statement revision to the first quarter of 2018 due to the revised deferred income tax provision (in thousands, except per share data):
 
Three Months Ended March 31, 2018
 
Originally Filed
Adjustment
Revised
Loss before income taxes and equity earnings of unconsolidated subsidiaries
$
(4,444
)
$

$
(4,444
)
Income tax expense (benefit)
2,617

(4,560
)
(1,943
)
Loss before equity earnings of unconsolidated subsidiaries
(7,061
)
4,560

(2,501
)
Equity (income) loss of unconsolidated subsidiaries
27


27

Net income (loss)
$
(7,088
)
$
4,560

$
(2,528
)
Comprehensive income (loss)
 
 
 
  Foreign currency translation
580


580

  Unrealized gain on cash flow hedge, net of tax
1,041


1,041

Total comprehensive loss
$
(5,467
)
$
4,560

$
(907
)
Basic net income (loss) per share
$
(0.05
)
$
0.03

$
(0.02
)
Diluted net income (loss) per share
$
(0.05
)
$
0.03

$
(0.02
)
Weighted-average common shares used in computing net income (loss) per share
 
 
 
Basic
140,361,982


140,361,982

Diluted
140,361,982


140,361,982

The following table represents the impact of the revised deferred income tax provision on the impacted balance sheet accounts as of the dates shown (in thousands):
 
March 31, 2018
 
Originally Filed
Adjustment
Revised
Deferred tax liability
$
27,679

$
(4,560
)
$
23,119

Total liabilities
2,533,619

(4,560
)
2,529,059

Accumulated deficit
(795,206
)
4,560

(790,646
)
Total stockholders' equity
144,189

4,560

148,749

Total liabilities and stockholders' equity
2,677,808


2,677,808

The following table represents the impact of the revised deferred income tax provision on the impacted lines of the statement of cash flows for the periods shown (in thousands):
 
Three Months Ended March 31, 2018
 
Originally Filed
Adjustment
Revised
Net income (loss)
$
(7,088
)
$
4,560

$
(2,528
)
Deferred tax expense
492

(4,560
)
(4,068
)
Net cash provided by operating activities
52,360


52,360

4 . Acquisitions
The Company did not make any acquisitions during the three months ended March 31, 2019 . The Company has a remaining deferred consideration liability related to its acquisition of AppMachine B.V., which took place in 2016. Deferred consideration at December 31, 2018 related to AppMachine was $3.8 million , of which $2.4 million was classified as short-

17


term. Deferred consideration at March 31, 2019 related to AppMachine was $3.9 million , of which $2.4 million was classified as short-term.
5. Property and Equipment and Property, Plant and Equipment Financing Obligations
Components of property and equipment consisted of the following:
 
December 31, 2018
 
March 31, 2019
 
(in thousands)
Land
$
790

 
$
790

Building
7,819

 
8,041

Software
102,259

 
103,015

Computers and office equipment
157,396

 
163,878

Furniture and fixtures
19,258

 
19,184

Leasehold improvements
20,215

 
20,754

Construction in process
12,314

 
10,123

Property and equipment—at cost
320,051

 
325,785

Less: accumulated depreciation
(227,776
)
 
(238,666
)
Property and equipment—net
$
92,275

 
$
87,119

Depreciation expense related to property and equipment for the three months ended March 31, 2018 and 2019 was $12.1 million and $11.2 million , respectively.
Financed equipment with a cost basis of $ 16.7 million was included in software as of March 31, 2019 . The net carrying value of financed equipment as of March 31, 2019 was $9.0 million .
6. Leases
The Company has operating leases for data centers, corporate offices, data center equipment, and office equipment. The Company's leases have remaining lease terms of 1 year to 8 years , some of which include options to extend.
The Company's lease expense for the three months ended March 31, 2019 was entirely comprised of operating leases and amounted to $7.3 million . Operating lease payments, which reduced operating cash flows for the three months ended March 31, 2019 amounted to $6.7 million .
Supplemental balance sheet information related to leases was as follows:
 
March 31, 2019
 
(in thousands)
Operating lease right-of-use assets
$
109,302

 
 
Operating lease liabilities—short term
22,250

Operating lease liabilities—long term
96,469

Total operating lease liabilities
$
118,719

As of March 31, 2019, the weighted average remaining lease term was 5.71 years and the discount rates for the Company's leases was 6.76% .
Maturities for leases were as follows:

18


 
Operating Leases
 
(in thousands)
Remainder of 2019
$
22,068

2020
28,635

2021
22,140

2022
18,914

2023
17,669

Thereafter
34,523

Total lease payments
$
143,949

Less: imputed interest
25,230

Total
$
118,719

7 . Fair Value Measurements
The following valuation hierarchy is used for disclosure of the valuation inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
As of December 31, 2018 , the Company’s financial assets required to be measured on a recurring basis consist of the 2015 interest rate cap, the 2018 interest rate cap and certain cash equivalents, which include money market instruments and bank time deposits. As of March 31, 2019 , the Company’s financial assets required to be measured on a recurring basis consist of the 2018 interest rate cap and certain cash equivalents, which include money market instruments and bank time deposits. The Company has classified the interest rate caps, which are discussed in Note 8 , Derivatives and Hedging Activities below, within Level 2 of the fair value hierarchy. The Company has also classified these cash equivalents within Level 2 of the fair value hierarchy. The 2015 interest rate cap matured during the three months ended March 31, 2019 .
Basis of Fair Value Measurements
 
Balance
 
Quoted Prices
in Active Markets
for Identical Items
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in thousands)
Balance at December 31, 2018
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Cash equivalents (included in cash and cash equivalents)
$
7,874

 
$

 
$
7,874

 
$

Interest rate cap (included in other assets)
2,583

 

 
2,583

 

Total financial assets
$
10,457

 
$

 
$
10,457

 
$

Balance at March 31, 2019
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Cash equivalents (included in cash and cash equivalents)
$
5,114

 
$

 
$
5,114

 
$

Interest rate cap (included in other assets)
455

 

 
455

 

Total financial assets
$
5,569

 
$

 
$
5,569

 
$

The carrying amounts of the Company's other financial assets and liabilities including cash, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values because of the relatively short period of time between their origination and their expected realization or settlement.

19


8 . Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company has entered into two three -year interest rate caps as part of its risk management strategy, of which the first one matured in the three months ended March 31, 2019 . The interest rate caps, designated as cash flow hedges of interest rate risk, provide for the payment to the Company of variable amounts if interest rates rise above the strike rate on the contract in exchange for an upfront premium. Therefore, these derivatives limit the Company’s exposure if the interest rate rises, but also allow the Company to benefit when the interest rate falls.
In December 2015, the Company entered into a three -year interest rate cap with $500.0 million notional value outstanding. This interest rate cap was effective beginning on February 29, 2016 and matured on February 27, 2019. The fair value of this interest rate contract included in other assets on the consolidated balance sheet as of March 31, 2019 was $0.0 million , and the Company recognized $0.4 million of interest expense in the Company’s consolidated statement of operations for the three months ended March 31, 2019 . The Company recognized a $0.1 million loss in Accumulated Other Comprehensive Income ("AOCI") for the three months ended March 31, 2019 .
In June 2018, the Company entered into a three -year interest rate cap with $800.0 million notional value outstanding. This interest rate cap was effective beginning on August 28, 2018. The fair value of this interest rate contract included in other assets on the consolidated balance sheet as of March 31, 2019 was $0.5 million , and the Company recognized $0.4 million of interest expense in the Company’s consolidated statement of operations for the three months ended March 31, 2019 . The Company recognized a $1.1 million loss, net of a tax benefit of $0.3 million , in AOCI for the three months ended March 31, 2019 . The Company estimates that $1.8 million will be reclassified from AOCI to interest expense (as an increase to interest expense) in the next twelve months.
The changes in the fair value of derivatives that qualify as cash flow hedges is recorded in AOCI, and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
9. Goodwill and Other Intangible Assets
The following table summarizes the changes in the Company’s goodwill balances from December 31, 2018 to March 31, 2019 :
 
Web Presence
 
Email Marketing
 
Domain
 
Total
 
(in thousands)
Goodwill balance at December 31, 2018
$
1,214,902

 
$
604,305

 
$
29,858

 
$
1,849,065

Foreign translation impact
(463
)
 

 

 
(463
)
Goodwill balance at March 31, 2019
$
1,214,439

 
$
604,305

 
$
29,858

 
$
1,848,602

In accordance with ASC 350, the Company reviews goodwill and other indefinite-lived intangible assets for indicators of impairment on an annual basis and between tests if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill below its carrying amount.

20


At December 31, 2018 , other intangible assets consisted of the following:
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Weighted
Average
Useful Life
 
(dollars in thousands)
Developed technology
$
284,266

 
$
180,914

 
$
103,352

 
7 years
Subscriber relationships
659,515

 
486,518

 
172,997

 
7 years
Trade-names
134,048

 
84,617

 
49,431

 
8 years
Intellectual property
34,263

 
28,954

 
5,309

 
5 years
Domain names available for sale
30,981

 
9,554

 
21,427

 
Indefinite
Total December 31, 2018
$
1,143,073

 
$
790,557

 
$
352,516

 
 
At March 31, 2019 , other intangible assets consisted of the following:
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Weighted
Average
Useful Life
 
(dollars in thousands)
Developed technology
$
284,203

 
$
188,136

 
$
96,067

 
7 years
Subscriber relationships
659,501

 
497,062

 
162,439

 
7 years
Trade-names
134,047

 
86,998

 
47,049

 
8 years
Intellectual property
34,263

 
29,336

 
4,927

 
5 years
Domain names available for sale
31,062

 
10,135

 
20,927

 
Indefinite
Total March 31, 2019
$
1,143,076

 
$
811,667

 
$
331,409

 
 
During the three months ended March 31, 2018 and 2019 , there were no impairment charges of intangible assets.
The estimated useful lives of the individual categories of other intangible assets are based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with finite lives is recognized over the period of time the assets are expected to contribute to future cash flows. The Company amortizes finite-lived intangible assets over the period in which the economic benefits are expected to be realized based upon their estimated projected cash flows.
The Company’s amortization expense is included in cost of revenue in the consolidated statement of operations and comprehensive loss in the aggregate amounts of $25.7 million and $21.1 million for the three months ended March 31, 2018 and 2019 , respectively.
10. Investments
As of December 31, 2018 and March 31, 2019 , the Company’s carrying value of investments in privately-held companies was $15.0 million and $15.0 million , respectively.
In May 2014, the Company made a strategic investment of $ 15.0 million in Automattic, Inc. (“Automattic”), which provides content management systems associated with WordPress. The investment represents less than 5% of the outstanding shares of Automattic and better aligns the Company with an important partner. The investment is accounted for using the measurement alternative under ASU No. 2016-01, Financial Instruments - Overall , as fair value is not readily available.

21


11 . Notes Payable
At December 31, 2018 and March 31, 2019 , notes payable, net of original issuance discounts (sometimes referred to as "OID") and deferred financing costs, consisted of the following:
 
At December 31, 2018
 
At March 31, 2019
 
(in thousands)
First Lien Term Loan
$
1,470,085

 
$
1,447,019

Notes
331,576

 
332,246

Revolving credit facilities

 

Total notes payable
1,801,661

 
1,779,265

Current portion of notes payable
31,606

 
31,606

Notes payable - long term
$
1,770,055

 
$
1,747,659

First Lien Term Loan Facility
The First Lien Term Loan (the "Term Loan") was issued at par and automatically bears interest at an alternate base rate unless the Company gives notice to opt for the LIBOR-based interest rate. The LIBOR-based interest rate for the Term Loan is 3.75% per annum plus the greater of an adjusted LIBOR and 1.00% . The alternate base rate for the Term Loan is 2.75% per annum plus the greatest of the prime rate, the federal funds effective rate plus 0.50% , an adjusted LIBOR for a one-month interest period plus 1.00% , and 2.00% .
The Term Loan requires quarterly mandatory repayments of principal. During the three months ended March 31, 2019 , the Company made one mandatory repayment of $7.9 million and one voluntary prepayment of $17.1 million .
Interest is payable on maturity of the elected interest period for a term loan with a LIBOR-based interest rate, which interest period can be one, two, three or six months. Interest is payable at the end of each fiscal quarter for a term loan with an alternate base rate.
As of December 31, 2018 and March 31, 2019 , the Term Loan had an outstanding balance of:
 
At December 31, 2018
 
At March 31, 2019
 
 
First Lien Term Loan
$
1,505,002

 
$
1,480,002

Unamortized deferred financing costs
(18,556
)
 
(17,528
)
Unamortized original issue discount
(16,361
)
 
(15,455
)
Net First Lien Term Loan
1,470,085

 
1,447,019

Current portion of First Lien Term Loan
31,606

 
31,606

First Lien Term Loan - long term
$
1,438,479

 
$
1,415,413


Revolving Credit Facility
The Company has a revolving credit facility (the “Revolver”) which has an aggregate available amount of $165.0 million . As of December 31, 2018 and March 31, 2019 , the Company did not have any balances outstanding under the Revolver and the full amount of the facility was unused and available.
The Revolver consists of a non-extended tranche of approximately $58.8 million and an extended tranche of approximately $106.2 million . The non-extended tranche has a maturity date of February 9, 2021. The extended tranche has a maturity date of June 20, 2023, with a "springing" maturity date of November 10, 2022 if the Term Loan has not been repaid in full or otherwise extended to September 19, 2023 or later prior to November 10, 2022.
The Company has the ability to draw down against the Revolver using a LIBOR-based interest rate or an alternate base rate. The LIBOR-based interest rate for a non-extended revolving loan is 4.0% per annum (subject to a leverage-based step-down) and for an extended revolving loan is 3.25% per annum (subject to a leverage-based step-down), in each case plus an adjusted LIBOR for a selected interest period. The alternate base rate for a non-extended revolving loan is 3.0% per annum (subject to a leverage-based step-down) and for an extended revolving loan is 2.25% per annum (subject to a leverage-based step-down), in each case plus the greatest of the prime rate, the federal funds rate plus 0.50% and an adjusted LIBOR or a one-month interest period plus 1.00% . There is also a non-refundable commitment fee, equal to 0.50% per annum (subject to a leverage-based step-down) of the daily unused principal amount of the Revolver, which is payable in arrears on the last day of

22


each fiscal quarter. Interest is payable on maturity of the elected interest period for a revolver loan with a LIBOR-based interest rate, which interest period can be one, two, three or six months. Interest is payable at the end of each fiscal quarter for a revolver loan with an alternate base rate.
Senior Notes
In connection with the acquisition of Constant Contact, Inc. ("Constant Contact") in February 2016, EIG Investors issued $350.0 million aggregate principal amount of senior notes (the "Senior Notes") with a maturity date of February 1, 2024. The Senior Notes were issued at a price of 98.065% of par and bear interest at the rate of 10.875%  per annum. The Senior Notes have been fully and unconditionally guaranteed, on a senior unsecured basis, by the Company and its subsidiaries that guarantee the Term Loan and the Revolver (including Constant Contact and certain of its subsidiaries). The Company has the right to redeem all or a part of the Senior Notes at any time for a premium which is based on the applicable redemption date. As of December 31, 2018 and March 31, 2019 , the Senior Notes had an outstanding balance of:
 
At December 31, 2018
 
At March 31, 2019
 
(in thousands)
Senior Notes
$
350,000

 
$
350,000

Unamortized deferred financing costs
(13,436
)
 
(12,946
)
Unamortized original issuance discount
(4,988
)
 
(4,808
)
Net Senior Notes
331,576

 
332,246

Current portion of Senior Notes

 

Senior Notes - long term
$
331,576

 
$
332,246

Interest on the Senior Notes is payable twice a year, on August 1 and February 1.
Maturity of Notes Payable
The maturity of the notes payable at March 31, 2019 is as follows:
Amounts maturing in:
(in thousands)
Remainder of 2019
$
23,705

2020
31,606

2021
31,606

2022
31,606

2023
1,361,479

Thereafter
350,000

Total
$
1,830,002

Interest
The Company recorded $36.1 million and $37.2 million in interest expense for the three months ended March 31, 2018 and 2019 , respectively.
The following table provides a summary of interest rates and interest expense for the three months ended March 31, 2018 and 2019 :

23


 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2019
 
(percentage per annum)
Interest rate—LIBOR
5.46%-5.96%

 
6.23%-6.44%

Interest rate—reference
*

 
*

Interest rate—Senior Notes
10.875
%
 
10.875
%
Non-refundable fee—unused facility
0.50
%
 
0.50
%
 
(dollars in thousands)
Interest expense and service fees
$
32,757

 
$
34,224

Amortization of deferred financing fees
1,894

 
1,733

Amortization of original issue discounts
1,058

 
1,087

Amortization of net present value of deferred consideration
128

 
61

Other interest expense
213

 
109

Total interest expense
$
36,050

 
$
37,214

* The Company did not have debt bearing interest based on the alternate base rate for the three months ended March 31, 2018 and 2019 .
Debt Covenants
The Term Loan and Revolver (together, the "Senior Credit Facilities") require that the Company complies with a financial covenant to maintain a maximum ratio of consolidated senior secured net indebtedness to an adjusted consolidated EBITDA measure.
The Senior Credit Facilities also contain covenants that limit the Company's ability to, among other things, incur additional debt or issue certain preferred shares; pay dividends on or make other distributions in respect of capital stock; make other restricted payments; make certain investments; sell or transfer certain assets; create liens on certain assets to secure debt; consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; and enter into certain transactions with affiliates. These covenants are subject to a number of important limitations and exceptions.
Additionally, the Senior Credit Facilities require the Company to comply with certain negative covenants and specify certain events of default that could result in amounts becoming payable, in whole or in part, prior to their maturity dates.
With the exception of certain equity interests and other excluded assets under the terms of the Senior Credit Facilities, substantially all of the Company's assets are pledged as collateral for the obligations under the Senior Credit Facilities. The indenture with respect to the Senior Notes contains covenants that limit the Company's ability to, among other things, incur additional debt or issue certain preferred shares; pay dividends on or make other distributions in respect of capital stock; make other restricted payments; make certain investments; sell or transfer certain assets; create liens on certain assets to secure debt; consolidate, merge sell or otherwise dispose of all or substantially all of its assets; and enter into certain transactions with affiliates. Upon a change of control as defined in the indenture, the Company must offer to repurchase the Senior Notes at 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, up to, but not including, the repurchase date. These covenants are subject to a number of important limitations and exceptions.
The indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately.
The Company was in compliance with all covenants at March 31, 2019 .
12. Stockholders’ Equity
Voting Rights
All holders of common stock are entitled to one vote per share.
13 . Stock-Based Compensation
2013 Stock Incentive Plan
The Amended and Restated 2013 Stock Incentive Plan (the “2013 Plan”) of the Company became effective upon the closing of its initial public offering ("IPO"). The 2013 Plan provides for the grant of options, stock appreciation rights,

24


restricted stock, restricted stock units and other stock-based awards to employees, officers, directors, consultants and advisers of the Company. Under the 2013 Plan, the Company may issue up to 38,000,000 shares of the Company’s common stock. At March 31, 2019 , there were 11,442,482 shares available for grant under the 2013 Plan.
2011 Stock Incentive Plan
As of February 9, 2016, the effective date of the acquisition of Constant Contact, the Company assumed and converted certain outstanding equity awards granted by Constant Contact under the Constant Contact 2011 Stock Incentive Plan (the “2011 Plan”) prior to the effective date of the acquisition (the “Assumed Awards”) into corresponding equity awards with respect to shares of the Company’s common stock. In addition, the Company assumed certain shares of Constant Contact common stock, par value $0.01 per share, available for issuance under the 2011 Plan (the “Available Shares”), which will be available for future issuance under the 2011 Plan in satisfaction of the vesting, exercise or other settlement of options and other equity awards that may be granted by the Company following the effective date of the acquisition of Constant Contact in reliance on the prior approval of the 2011 Plan by the stockholders of Constant Contact. The Assumed Awards were converted into 2,143,987 stock options and 2,202,846 restricted stock units with respect to the Company’s common stock and the Available Shares were converted into 10,000,000 shares of the Company’s common stock reserved for future awards under the 2011 Plan. At March 31, 2019 , there were 8,516,328 shares available for grant under the 2011 Plan.
All Plans
The following table presents total stock-based compensation expense recorded in the consolidated statement of operations and comprehensive loss for all awards granted under the Company’s 2013 Plan and 2011 Plan:
 
Three Months Ended
March 31,
 
2018
 
2019
 
(in thousands)
Cost of revenue
$
1,543

 
$
915

Sales and marketing
1,097

 
1,754

Engineering and development
1,145

 
1,333

General and administrative
3,207

 
5,014

Total stock-based compensation expense
$
6,992

 
$
9,016

2013 Stock Incentive Plan
The following table provides a summary of the Company’s stock options as of March 31, 2019 and the stock option activity for all stock options granted under the 2013 Plan during the three months ended March 31, 2019 :
 
Stock
Options
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
(in years)
 
Aggregate
Intrinsic
Value(3)
(in thousands)
Outstanding at December 31, 2018
7,322,293

 
$
11.62

 
 
 
 
Granted
1,215,789

 
$
7.99

 
 
 
 
Exercised

 
$

 
 
 
 
Forfeited
(610
)
 
$
13.64

 
 
 
 
Expired
(24,659
)
 
$
12.75

 
 
 
 
Outstanding at March 31, 2019
8,512,813

 
$
11.10

 
5.3
 
$
2

Exercisable at March 31, 2019
5,864,090

 
$
12.31

 
3.7
 
$

Expected to vest after March 31, 2019  (1)
2,648,723

 
$
8.43

 
8.9
 
$
2

Exercisable as of March 31, 2019 and expected to vest  (2)
8,512,813

 
$
11.10

 
5.3
 
$
2

(1)  
This represents the number of unvested options outstanding as of March 31, 2019 that are expected to vest in the future.
(2)  
This represents the number of vested options as of March 31, 2019 plus the number of unvested options outstanding as of March 31, 2019 that are expected to vest in the future.
(3)  
The aggregate intrinsic value was calculated based on the positive difference, if any, between the estimated fair value of the Company’s common stock on March 31, 2019 of $7.25 per share, or the date of exercise, as appropriate, and the exercise price of the underlying options.
Restricted stock units granted under the 2013 Plan generally vest annually over a three -year period, unless otherwise determined by the Company’s board of directors. The following table provides a summary of the Company’s restricted stock

25


unit activity for the 2013 Plan during the three months ended March 31, 2019 :
 
Restricted Stock
Units
 
Weighted
Average
Grant Date
Fair Value
Non-vested at December 31, 2018
5,203,259

 
$
7.69

Granted
4,277,069

 
$
7.97

Vested
(83,466
)
 
$
7.25

Canceled
(98,335
)
 
$
7.83

Non-vested at March 31, 2019
9,298,527

 
$
7.82

Restricted stock awards granted under the 2013 Plan generally vest annually over a four -year period, unless otherwise determined by the Company’s board of directors. Performance-based restricted stock awards are earned based on the achievement of performance criteria established by the Company’s compensation committee and board of directors. The following table provides a summary of the Company’s restricted stock award activity for the 2013 Plan during the three months ended March 31, 2019 :
 
Restricted Stock
Awards
 
Weighted
Average
Grant Date
Fair Value
Non-vested at December 31, 2018
443,247

 
$
11.67

Granted

 
$

Vested
(14,177
)
 
$
8.38

Canceled
(6,562
)
 
$
11.49

Non-vested at March 31, 2019
422,508

 
$
11.78

2011 Stock Incentive Plan
The following table provides a summary of the Company’s stock options as of March 31, 2019 and the stock option activity for all stock options granted under the 2011 Plan during the three months ended March 31, 2019 :
 
Stock
Options
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual Term
(In Years)
 
Aggregate
Intrinsic
Value(3)
(in thousands)
Outstanding at December 31, 2018
715,104

 
$
9.00

 
 
 
 
Granted

 
$

 
 
 
 
Exercised
(892
)
 
$
5.98

 
 
 
 
Forfeited
(1,995
)
 
$
10.34

 
 
 
 
Expired
(32,388
)
 
$
11.00

 
 
 
 
Outstanding at March 31, 2019
679,829

 
$
8.91

 
3.2
 
$
206

Exercisable at March 31, 2019
568,811

 
$
8.78

 
3.0
 
$
204

Expected to vest after March 31, 2019  (1)
111,018

 
$
9.55

 
4.1
 
$
2

Exercisable as of March 31, 2019 and expected to vest  (2)
679,829

 
$
8.91

 
3.2
 
$
206

(1)  
This represents the number of unvested options outstanding as of March 31, 2019 that are expected to vest in the future.
(2)  
This represents the number of vested options as of March 31, 2019 plus the number of unvested options outstanding as of March 31, 2019 that are expected to vest in the future.
(3)  
The aggregate intrinsic value was calculated based on the positive difference, if any, between the estimated fair value of the Company’s common stock on March 31, 2019 of $7.25 per share, or the date of exercise, as appropriate, and the exercise price of the underlying options.
Unless otherwise determined by the Company’s board of directors, restricted stock units granted under the 2011 Plan generally vest annually over a three - or a four -year period. The following table provides a summary of the Company’s restricted

26


stock unit activity for the 2011 Plan during the three months ended March 31, 2019 :
 
Restricted Stock
Units
 
Weighted
Average
Grant Date
Fair Value
Non-vested at December 31, 2018
868,026

 
$
8.26

Granted

 
$

Vested
(18,883
)
 
$
7.28

Canceled
(12,801
)
 
$
8.31

Non-vested at March 31, 2019
836,342

 
$
8.28

Under both the 2011 and 2013 Plans combined, as of March 31, 2019 the Company had approximately $11.1 million of unrecognized stock-based compensation expense related to option awards that will be recognized over 1.8 years and approximately $63.3 million of unrecognized stock-based compensation expense related to restricted stock awards and restricted stock units that will be recognized over 2.3 years.
14. Accumulated Other Comprehensive Loss
The following table presents the components of accumulated other comprehensive loss:
 
 
Foreign Currency Translation Adjustments
 
Unrealized Losses on Cash Flow Hedges
 
Total
 
 
(in thousands)
Balance at December 31, 2018
 
$
(1,537
)
 
$
(1,674
)
 
$
(3,211
)
Other comprehensive loss
 
(401
)
 
(961
)
 
(1,362
)
Balance at March 31, 2019
 
$
(1,938
)
 
$
(2,635
)
 
$
(4,573
)
15. Variable Interest Entity
The Company, through a subsidiary formed in China, entered into various agreements with Shanghai Xiao Lan Network Technology Co., Ltd (“Shanghai Xiao”) and its shareholders that allowed the Company to effectively control Shanghai Xiao, making it a variable interest entity (“VIE”). Shanghai Xiao has a technology license that allows it to provide local hosting services to customers located in China. During fiscal year 2018, the Company ceased operations of the VIE, and has begun the process to liquidate the entity.
From inception and through the period ended March 31, 2019 , the financial position and results of operations of Shanghai Xiao are consolidated within, but are not material to, the Company’s consolidated financial position or results of operations.
16. Revenue
Adoption of FASB ASC 606, Revenue from Contracts with Customers
The Company recorded a net increase to opening retained earnings of $59.4 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to customer acquisition costs.
During the three months ended March 31, 2018 and 2019 , the Company recognized $291.4 million and $280.7 million of revenue, respectively, the majority of which was derived from contracts with customers.
During the three months ended March 31, 2018 and 2019 , the Company did not incur any impairment or credit losses on any receivables or contract assets arising from the Company’s contracts with customers.
In accordance with ASC 606, the Company disaggregates revenue from contracts with customers based on the timing of revenue recognition. The Company determined that disaggregating revenue into these categories depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. As discussed in Note 21 , Segment Information , the Company's business consists of the web presence, domain and email marketing segments. The following table presents disaggregated revenues by category for the three months ended March 31, 2018 and 2019 :

27


 
Three Months Ended March 31, 2018
 
Web presence
 
Email marketing
 
Domain
 
Total
 
(in thousands)
Subscription-based revenue
 
 
 
 
 
 
 
Direct revenue from subscriptions
$
143,813

 
$
101,034

 
$
13,636

 
$
258,483

Professional services
3,383

 
390

 
99

 
3,872

Reseller revenue
5,754

 
859

 
13,381

 
19,994

Total subscription-based revenue
$
152,950

 
$
102,283

 
$
27,116

 
$
282,349

 
 
 
 
 
 
 
 
Non-subscription revenue
 
 
 
 
 
 
 
MDF
$
1,838

 
$
164

 
$
29

 
$
2,031

Premium domains
31

 

 
5,189

 
5,220

Domain parking
198

 

 
1,558

 
1,756

Total non-subscription-based revenue
$
2,067

 
$
164

 
$
6,776

 
$
9,007

 
 
 
 
 
 
 
 
Total revenue
$
155,017

 
$
102,447

 
$
33,892

 
$
291,356


 
Three Months Ended March 31, 2019
 
Web presence
 
Email marketing
 
Domain
 
Total
 
(in thousands)
Subscription-based revenue
 
 
 
 
 
 
 
Direct revenue from subscriptions
$
136,042

 
$
101,310

 
$
12,873

 
$
250,225

Professional services
3,222

 
390

 
106

 
3,718

Reseller revenue
4,922

 
878

 
12,744

 
18,544

Total subscription-based revenue
$
144,186

 
$
102,578

 
$
25,723

 
$
272,487

 
 
 
 
 
 
 
 
Non-subscription-based revenue
 
 
 
 
 
 
 
MDF
$
1,619

 
$
162

 
$
267

 
$
2,048

Premium domains
22

 

 
4,845

 
4,867

Domain parking
133

 

 
1,148

 
1,281

Total non-subscription-based revenue
$
1,774

 
$
162

 
$
6,260

 
$
8,196

 
 
 
 
 
 
 
 
Total revenue
$
145,960

 
$
102,740

 
$
31,983

 
$
280,683

Subscription-based revenue is primarily recognized over time, when the services are performed, except for third-party products for which the Company acts as an agent. Revenue from third-party products for which the Company acts as an agent is recognized at a point in time, when the revenue is earned.
Revenue, classified by the major geographic areas in which the Company’s customers are located, was as follows for the three months ended March 31, 2018 and 2019 :

28


 
Three Months Ended March 31, 2018
 
Web presence
 
Email marketing
 
Domain
 
Total
 
(in thousands)
Domestic
$
104,016

 
$
93,980

 
$
12,934

 
$
210,930

International
51,001

 
8,467

 
20,958

 
80,426

Total
$
155,017

 
$
102,447

 
$
33,892

 
$
291,356

 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 
Web presence
 
Email marketing
 
Domain
 
Total
 
(in thousands)
Domestic
$
97,847

 
$
94,813

 
$
13,282

 
$
205,942

International
48,113

 
7,927

 
18,701

 
74,741

Total
$
145,960

 
$
102,740

 
$
31,983

 
$
280,683

17. Income Taxes
For the three months ended March 31, 2018 and 2019 , the Company recognized a tax benefit of $1.9 million and expense of $1.7 million , respectively, in the consolidated statements of operations and comprehensive loss. The income tax expense for the three months ended March 31, 2019 was primarily attributable to a federal and state current income tax expense of $2.2 million and a foreign current tax expense $0.4 million , partially offset by a federal and state deferred tax benefit of $0.9 million . The income tax benefit for the three months ended March 31, 2018 was primarily attributable to a federal and state deferred tax benefit of $3.7 million and a foreign deferred tax benefit of $0.1 million , partially offset by federal and state current income taxes of $0.7 million and a foreign current tax expense of $1.2 million .
As described in Note 3 , Correction of Income Tax Expense - Fiscal Year 2018 , the Company has revised its deferred income tax provision for the first and second quarter of 2018 to reflect an increase in NOL carry-forwards resulting from the reorganization and liquidation of certain affiliated entities which resulted in the recognition of a worthless stock loss of approximately $78.0 million during fiscal year 2017. This revision did not impact the previously reported income tax provision for fiscal year 2017; however, due to the changes enacted in the Tax Cuts and Jobs Act, the manner in which net operating loss carry-forwards are handled did impact the Company's 2018 provision for deferred income taxes previously recorded for the three months ended March 31, 2018 and for the three and six months ended June 30, 2018. The Company revised its provision (benefit) for income taxes for the three months ended March 31, 2018 from an expense of $2.6 million to a benefit of $1.9 million . All of these changes are attributable to changes in deferred tax expense (benefit).
The Company regularly assesses its ability to realize its deferred tax assets. Assessing the realization of deferred tax assets requires significant management judgment. In determining whether its deferred tax assets are more likely than not realizable, the Company evaluated all available positive and negative evidence, and weighted the evidence based on its objectivity. Evidence the Company considered included:
 
NOLs incurred from the Company’s inception to March 31, 2019 ;
Expiration of various federal, state and foreign tax attributes;
Reversals of existing temporary differences;
Composition and cumulative amounts of existing temporary differences; and
Forecasted profit before tax.
The Company updates the scheduling of the reversal of the consolidated U.S. deferred tax assets and liabilities each quarter, as the deferred tax liabilities have continued to decrease and the Company generated pre-tax losses. Based on the analysis of the above evidence, the Company recorded an increase of $2.2 million to its valuation allowance during the three months ended March 31, 2019 .
The Company recognizes, in its consolidated financial statements, the effect of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. During the quarter ended September 30, 2017, management concluded that the Company’s material tax positions require the recording of an ASC 740-10 reserve, with interest and penalties, for uncertain income tax positions as of September 30, 2017. The Company has unrecognized tax positions at December 31, 2018 and March 31, 2019 of $4.4 million and $4.7 million , respectively, that would affect its effective tax rate. The Company does not expect a significant change in the liability for unrecognized tax benefits in the next 12 months.

29


As of December 31, 2018 , the Company had NOL carry-forwards available to offset future U.S. federal taxable income of approximately $108.9 million and future state taxable income of approximately $115.5 million . These NOL carry-forwards expire on various dates through 2038 .
As of December 31, 2018, the Company had NOL carry-forwards in foreign jurisdictions available to offset future foreign taxable income by approximately  $13.8 million . The Company has loss carry-forwards that begin to expire in 2021 in in China totaling  $0.9 million . The Company has loss carry-forwards that begin to expire in 2020 in the Netherlands totaling  $12.1 million . The Company has loss carry-forwards that begin to expire in 2020 in India totaling $0.6 million . The Company also has loss carry-forwards in Singapore of  $0.3 million which has an indefinite carry-forward period.
In addition, the Company has  $29.2 million  of U.S. federal capital loss carry-forwards and  $12.9 million  in state capital loss carry-forwards, generally expiring through 2023. As of December 31, 2018, the Company had U.S. tax credit carry-forwards available to offset future U.S. federal and state taxes of approximately  $23.7 million  and  $12.4 million , respectively. These credit carry-forwards expire on various dates through 2038. Due to provisions of the Tax Cuts and Jobs Act of 2017, the Company has a carry-forward of disallowed interest expense of $61.2 million , which has an indefinite carry-forward period.
Utilization of the NOL carry-forwards may be subject to an annual limitation due to the ownership change rules under Section 382 of the Internal Revenue Code (“Section 382 Limitations”). Ownership changes can limit the amount of net operating loss and other tax attributes that a company can use each year to offset future taxable income and taxes payable. Although the Company has experienced a number of ownership changes over time, it currently does not have any Section 382 Limitation on its ability to utilize NOL carry-forwards.
The Company files income tax returns in the United States for federal income taxes and in various state jurisdictions. The Company also files in several foreign jurisdictions. In the normal course of business, the Company is subject to examination by tax authorities throughout the world. Since the Company is in a loss carry-forward position, it is generally subject to U.S. federal and state income tax examinations by tax authorities for all years for which a loss carry-forward is utilized. One of the Company’s subsidiaries, Constant Contact, is under audit by the U.S. Internal Revenue Service and the New York City Department of Finance for periods ended December 31, 2015 and February 9, 2016. The Company is also currently under audit in India for fiscal years ended March 31, 2014, 2015 and 2016 and Israel for the fiscal years ended December 31, 2012, 2013, 2014 and 2015.
18. Severance and Other Exit Costs
The Company continues to evaluate its data center, sales and marketing, support and engineering operations and the general and administrative function in an effort to optimize its cost structure. As a result, the Company may incur charges for employee severance, exiting facilities and restructuring data center commitments and other related costs.
2019 Restructuring Plan
In January 2019, the Company announced plans to eliminate approximately 40 positions located primarily in the southwest United States, and further consolidate a Massachusetts facility, in order to streamline operations and create operational efficiencies (the "2019 Restructuring Plan"). During the three months ended March 31, 2019 , the Company incurred severance costs of $0.7 million and paid $0.1 million and incurred facility exit costs of $1.4 million . The Company had a remaining accrued severance liability of $0.6 million and a facility exit cost accrual of $1.4 million as of March 31, 2019 in connection with the 2019 Restructuring Plan.
The Company expects to complete severance charges related to the 2019 Restructuring Plan during the year ending December 31, 2019.
2018 Restructuring Plan
In January 2018, the Company announced plans to eliminate approximately 71 positions, later increased to approximately 95 positions, primarily in the Asia Pacific region and to a lesser extent in the U.S., in order to streamline operations and create operational efficiencies (the "2018 Restructuring Plan"). During the three months ended March 31, 2019 , the Company incurred severance costs of $0.0 million and paid $0.2 million . The Company had a remaining accrued severance liability of $0.0 million as of March 31, 2019 in connection with the 2018 Restructuring Plan.
In connection with the 2018 Restructuring plan, the Company closed offices in Ohio. During the three months ended March 31, 2019 , the Company recorded a reduction to facility charges of