See accompanying notes to these condensed consolidated financial statements.
See accompanying notes to these condensed consolidated financial statements.
See accompanying notes to these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE A – General
Business Description
We are a leading provider of cloud-based supply chain management solutions, providing network-proven fulfillment, sourcing, and item assortment management solutions, along with comprehensive retail performance analytics to thousands of customers worldwide. We provide our solutions through the SPS Commerce Platform, a cloud-based product suite that improves the way retailers, suppliers, distributors and logistics firms orchestrate the sourcing, set up of new vendors and items and fulfillment of products that consumers buy. We derive the majority of our revenues from thousands of monthly recurring subscriptions from businesses that utilize our solutions.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of SPS Commerce, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in the unaudited condensed consolidated financial statements, which
have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and notes required by GAAP. We have included all normal recurring adjustments considered necessary to provide a fair presentation of our financial position, results of operations and cash flows for the interim periods shown. Operating results for these interim periods are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and accompanying notes for the year ended December 31, 2017 included in our Annual Report on Form 10-K as filed with the SEC on February 26, 2018.
Effective January 1, 2018, we adopted the requirements of Accounting Standards Update ("ASU") No. 2014-09 (“ASU 2014-09”),
Revenue from Contracts with Customers (Topic 606)
, on a retrospective basis as discussed in this Note A. All amounts and disclosures set forth in this Form 10-Q have been updated to comply with the new standards.
Use of Estimates
Preparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09 which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance replaced most existing revenue recognition guidance in GAAP. Topic 606 also includes Subtopic 340-40,
Other Assets and Deferred Costs – Contracts with Customers
, which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, we refer to Topic 606 and Subtopic 340-40 as the “new standard.” These requirements are effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods.
We adopted the new standard effective January 1, 2018, on a retrospective basis. The new standard did not impact our recognition of the recurring revenue received from customers for our cloud-based supply chain solutions; however, the adoption of the new standard impacted our accounting for certain upfront set-up fees, the periods over which the related revenues are recognized and the timing of revenue recognition for these set-up fees. The adoption of the new standard also impacted our accounting for certain costs to obtain our contracts, specifically related to the periods over which commissions are recognized as well as the timing of cost recognition.
6
Selected condensed consolidated balance sheet line items, which reflect the adoption of ASU 2014-09 are as follows (in thousands):
|
|
December 31, 2017
|
|
|
|
As previously
|
|
|
|
|
|
|
|
|
|
|
|
reported
|
|
|
Adjustments
|
|
|
As adjusted
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred costs
|
|
$
|
25,091
|
|
|
$
|
4,875
|
|
|
$
|
29,966
|
|
Deferred costs, non-current
|
|
|
6,770
|
|
|
|
3,197
|
|
|
|
9,967
|
|
Deferred income tax asset
|
|
|
17,551
|
|
|
|
(3,854
|
)
|
|
|
13,697
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation
|
|
|
15,886
|
|
|
|
(658
|
)
|
|
|
15,228
|
|
Deferred revenue
|
|
|
16,407
|
|
|
|
1,456
|
|
|
|
17,863
|
|
Deferred revenue, non-current
|
|
|
10,602
|
|
|
|
(7,871
|
)
|
|
|
2,731
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(19,902
|
)
|
|
|
11,291
|
|
|
|
(8,611
|
)
|
Selected unaudited condensed consolidated statement of operations line items, which reflect the adoption of ASU 2014-09 are as follows (in thousands):
|
|
For the three months ended September 30, 2017
|
|
|
|
As previously
|
|
|
|
|
|
|
|
|
|
|
|
reported
|
|
|
Adjustments
|
|
|
As adjusted
|
|
Revenues
|
|
|
56,150
|
|
|
|
(93
|
)
|
|
|
56,057
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
18,239
|
|
|
|
(601
|
)
|
|
|
17,638
|
|
Income from operations
|
|
|
2,846
|
|
|
|
508
|
|
|
|
3,354
|
|
Income tax expense
|
|
|
1,058
|
|
|
|
197
|
|
|
|
1,255
|
|
Net income
|
|
$
|
1,865
|
|
|
$
|
311
|
|
|
$
|
2,176
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
|
$
|
0.02
|
|
|
$
|
0.13
|
|
Diluted
|
|
$
|
0.11
|
|
|
$
|
0.02
|
|
|
$
|
0.13
|
|
|
|
For the nine months ended September 30, 2017
|
|
|
|
As previously
|
|
|
|
|
|
|
|
|
|
|
|
reported
|
|
|
Adjustments
|
|
|
As adjusted
|
|
Revenues
|
|
|
162,366
|
|
|
|
(338
|
)
|
|
|
162,028
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
54,059
|
|
|
|
(1,078
|
)
|
|
|
52,981
|
|
Income from operations
|
|
|
8,949
|
|
|
|
740
|
|
|
|
9,689
|
|
Income tax expense
|
|
|
2,636
|
|
|
|
272
|
|
|
|
2,908
|
|
Net income
|
|
$
|
6,661
|
|
|
$
|
468
|
|
|
$
|
7,129
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.39
|
|
|
$
|
0.03
|
|
|
$
|
0.42
|
|
Diluted
|
|
$
|
0.38
|
|
|
$
|
0.03
|
|
|
$
|
0.41
|
|
7
Selected unaudited condensed consolidated statement of cash flows line items, which reflect the adoption of ASU 2014-09 are as follows (in thousands):
|
|
For the nine months ended September 30, 2017
|
|
|
|
As previously
|
|
|
|
|
|
|
|
|
|
|
|
reported
|
|
|
Adjustments
|
|
|
As adjusted
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,661
|
|
|
$
|
468
|
|
|
$
|
7,129
|
|
Reconciliation of net income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
1,968
|
|
|
|
272
|
|
|
|
2,240
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred costs
|
|
|
(4,487
|
)
|
|
|
(701
|
)
|
|
|
(5,188
|
)
|
Accrued compensation
|
|
|
(1,140
|
)
|
|
|
(377
|
)
|
|
|
(1,517
|
)
|
Deferred revenue
|
|
|
4,932
|
|
|
|
338
|
|
|
|
5,270
|
|
Net cash provided by operating activities
|
|
|
21,972
|
|
|
|
—
|
|
|
|
21,972
|
|
In March 2018, we adopted FASB ASU 2018-05,
Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
, which updates the income tax accounting in U.S. GAAP to reflect the SEC interpretive guidance released on December 22, 2017, when the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. Additional information regarding the adoption of this standard is contained in Note F.
Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02,
Leases
, which will supersede existing lease guidance and will require all leases with a term greater than 12 months to be recognized in the statements of financial position and eliminate current real estate-specific lease guidance, while maintaining substantially similar classification criteria for distinguishing between finance leases and operating leases. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.
We will adopt the new standard on January 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The new standard provides several optional practical expedients in transition. We expect to elect the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We do not expect to elect the use-of hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. The new standard also provides practical expedients for an entity’s ongoing accounting. We currently expect to elect the short-term lease recognition exemption for all leases that qualify which means we will not recognize right-of-use (“ROU”) assets or lease liabilities for these leases, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also currently expect to elect the practical expedient to not separate lease and non-lease components for all leases.
We expect that this standard will have a material effect on our financial statements. While we continue to assess all of the effects of adoption, we currently believe the most significant effects relate to the recognition of new ROU assets and lease liabilities on our balance sheet for our existing operating leases. We are in the process of determining the financial statement impact and are currently unable to estimate the extent of the impact on our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02,
Income Statement – Reporting Comprehensive Income (Topic 220)
, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act and requires certain disclosures regarding stranded tax effects in accumulated other comprehensive income. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted during interim or annual periods. We believe the adoption of this standard will not have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350)
, which simplifies the test for goodwill impairment by eliminating step two from the goodwill impairment test. Under the new guidance, an entity should recognize an impairment charge for the amount based on the excess of a reporting unit’s carrying amount over its fair value. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. This guidance is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019 on a prospective basis, and earlier adoption is permitted for
8
goodwill impairment tests performed on testing dates after January 1, 2017. We believe the adoption of this standard will not have a material impact on our consolidated financial statements.
Significant Accounting Policies
Except for the accounting policies for revenue recognition and deferred commissions that were updated as a result of adopting ASU 2014-09, there were no material changes in our significant accounting policies during the nine months ended September 30, 2018. See Note A to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 26, 2018, for additional information regarding our significant accounting policies.
Revenue Recognition
We derive our revenues primarily from the following revenue streams (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Recurring revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fulfillment
|
|
$
|
48,482
|
|
|
$
|
41,962
|
|
|
$
|
140,326
|
|
|
$
|
120,754
|
|
Analytics
|
|
|
8,750
|
|
|
|
8,679
|
|
|
|
25,639
|
|
|
|
25,517
|
|
Other
|
|
|
1,412
|
|
|
|
1,257
|
|
|
|
3,969
|
|
|
|
3,721
|
|
Recurring Revenues
|
|
|
58,644
|
|
|
|
51,898
|
|
|
|
169,934
|
|
|
|
149,992
|
|
One-time revenues
|
|
|
4,224
|
|
|
|
4,159
|
|
|
|
13,117
|
|
|
|
12,036
|
|
|
|
$
|
62,868
|
|
|
$
|
56,057
|
|
|
$
|
183,051
|
|
|
$
|
162,028
|
|
Revenues are recognized when our services are made available to our customers, in an amount that reflects the consideration we are contractually and legally entitled to in exchange for those services.
We determine revenue recognition through the following steps:
|
-
|
Identification of the contract, or contracts, with a customer
|
|
-
|
Identification of the performance obligations in the contract
|
|
-
|
Determination of the transaction price
|
|
-
|
Allocation of the transaction price to the performance obligations in the contract
|
|
-
|
Recognition of revenue when, or as, we satisfy a performance obligation
|
Recurring Revenues
Recurring revenues consists of recurring subscriptions from customers that utilize our Fulfillment, Analytics and Other cloud-based supply chain management solutions. Revenue for these solutions is generally recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our contracts with our recurring revenue customers are recurring in nature, ranging from monthly to annual, and generally allow the customer to cancel the contract for any reason with 30 to 90 days’ notice. Timing of billings varies by customer and by contract type and are either in advance or within 30 days of the service being performed.
The deferred revenue liabilities for recurring revenue contracts are for one year or less and recognized on a ratable basis over the contract term. We have applied the optional exemption under ASC 606-10-50-14(a) and will not disclose information about the remaining performance obligations for contracts which have original durations of one year or less.
One-time Revenues
One-time revenues consist of set-up fees from customers and miscellaneous one-time fees.
Set-up fees are specific for each connection a customer has with a trading partner and many of our customers have connections with numerous trading partners. Set-up fees related to our cloud-based supply chain management solutions are nonrefundable upfront fees that are necessary for our customers to utilize our cloud-based services. These set-up fees do not provide any standalone value to our customers. Except for our Analytics platform, we have determined the set-up fees represent a material renewal option right to our customers as they will not be incurred again upon renewal. These set-up fees and related costs are deferred and recognized ratably
9
over two years, which is the estimated connection l
ife between the customer and the trading partner. For our Analytics platform, we have determined the set-up fees do not represent a material customer renewal right and, as such, are deferred and recognized ratably over the estimated initial contract term,
which is one year.
The table below presents the activity of the portion of the deferred revenue liability relating to set-up fees (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Balances, at beginning of period
|
|
$
|
9,886
|
|
|
$
|
10,280
|
|
|
$
|
10,031
|
|
|
$
|
9,995
|
|
Invoiced set-up fees
|
|
|
2,697
|
|
|
|
2,450
|
|
|
|
7,807
|
|
|
|
8,063
|
|
Amortized set-up fees
|
|
|
(2,596
|
)
|
|
|
(2,634
|
)
|
|
|
(7,851
|
)
|
|
|
(7,962
|
)
|
Balances, at end of period
|
|
$
|
9,987
|
|
|
$
|
10,096
|
|
|
$
|
9,987
|
|
|
$
|
10,096
|
|
The entire balance of set-up fees will be recognized within two years and, as such, current amounts will be recognized in the next 1-12 months and long-term amounts will be recognized in the next 13-24 months.
Miscellaneous one-time fees consist of professional services and testing and certification. The deferred revenue liability for these one-time fees are for one year or less and recognized at the time service is provided. We have applied the optional exemption under ASC 606-10-50-14(a) and will not disclose information about the remaining performance obligations for contracts which have original durations of one year or less.
Deferred Costs
Deferred costs consist of costs to obtain customer contracts, such as commissions paid to sales personnel and to third-party partners for customer referrals, and costs to fulfill customer contracts, such as customer implementation costs.
Sales commissions relating to recurring revenues are considered incremental and recoverable costs of obtaining a contract with our customer. These commissions are calculated based on estimated annual recurring revenue to be generated over the customer’s initial contract year. These costs are deferred and amortized over the expected period of benefit which we have determined to be two years. Amortization expense is included in sales and marketing expenses in the accompanying condensed consolidated statements of operations.
The table below presents the activity of deferred costs and amortization of set-up fees (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Balances, at beginning of period
|
|
$
|
42,544
|
|
|
$
|
35,332
|
|
|
$
|
39,933
|
|
|
$
|
32,117
|
|
Incurred deferred costs
|
|
|
12,391
|
|
|
|
11,294
|
|
|
|
36,807
|
|
|
|
32,142
|
|
Amortized deferred costs
|
|
|
(11,204
|
)
|
|
|
(9,316
|
)
|
|
|
(33,009
|
)
|
|
|
(26,949
|
)
|
Balances, at end of period
|
|
$
|
43,731
|
|
|
$
|
37,310
|
|
|
$
|
43,731
|
|
|
$
|
37,310
|
|
There was no impairment loss in relation to the costs capitalized for the periods presented.
NOTE B – Financial Instruments
We invest primarily in money market funds, certificates of deposit, highly liquid debt instruments of the U.S. government and U.S. corporate debt securities. All highly liquid investments with original maturities of 90 days or less are classified as cash equivalents. All investments with original maturities greater than 90 days and remaining maturities less than one year from the balance sheet date are classified as short-term investments. Investments with remaining maturities of more than one year from the balance sheet date are classified as long-term investments.
Our short- and long-term marketable securities are classified as available-for-sale. We intend to hold marketable securities until maturity; however, we may sell these securities at any time for use in current operations or for other purposes. Consequently, we may or may not keep securities with stated holding periods to maturity.
10
Our marketable securities are carried at fair value and unrealized gains and losses on these investments, net of taxes, are included in accumulated other comprehensive loss in the condensed consolidated balance sheets. Realized gains or losses are include
d in other income (expense), net, in the condensed consolidated statements of comprehensive income. When a determination has been made that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit l
oss is realized and is included in other income (expense), net, in the condensed consolidated statements of comprehensive income.
Cash equivalents and short- and long-term investments consisted of the following (in thousands):
|
|
September 30, 2018
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains (Losses)
|
|
|
Value
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
121,594
|
|
|
$
|
—
|
|
|
$
|
121,594
|
|
Certificate of deposit
|
|
|
7,224
|
|
|
|
—
|
|
|
|
7,224
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
12,642
|
|
|
|
51
|
|
|
|
12,693
|
|
Commercial paper
|
|
|
17,323
|
|
|
|
57
|
|
|
|
17,380
|
|
U.S. treasury securities
|
|
|
12,300
|
|
|
|
(22
|
)
|
|
|
12,278
|
|
|
|
$
|
171,083
|
|
|
$
|
86
|
|
|
$
|
171,169
|
|
Due within one year
|
|
|
$
|
166,248
|
|
Due within two years
|
|
|
|
4,921
|
|
Total
|
|
|
$
|
171,169
|
|
|
|
December 31, 2017
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains (Losses)
|
|
|
Value
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
104,544
|
|
|
$
|
—
|
|
|
$
|
104,544
|
|
Certificate of deposit
|
|
|
7,814
|
|
|
|
—
|
|
|
|
7,814
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
17,758
|
|
|
|
(57
|
)
|
|
|
17,701
|
|
Commercial paper
|
|
|
7,456
|
|
|
|
20
|
|
|
|
7,476
|
|
U.S. treasury securities
|
|
|
12,381
|
|
|
|
26
|
|
|
|
12,407
|
|
|
|
$
|
149,953
|
|
|
$
|
(11
|
)
|
|
$
|
149,942
|
|
Due within one year
|
|
|
|
|
|
|
|
|
|
$
|
144,736
|
|
Due within two years
|
|
|
|
|
|
|
|
|
|
|
5,206
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
149,942
|
|
We do not believe any of the unrealized losses represent an other-than-temporary impairment based on our valuation of available evidence as of September 30, 2018. We expect to receive the full principal and interest on all of these cash equivalents, certificate of deposit and marketable securities.
11
Fair Value Measurements
We measure certain financial assets at fair value on a recurring basis based on a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that may be used to measure fair value are:
|
•
|
Level 1 – quoted prices in active markets for identical assets or liabilities.
|
|
•
|
Level 2 – observable inputs other than Level 1 prices, such as: (a) quoted prices for similar assets or liabilities, (b) quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or (c) model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. We obtain the fair values of our level 2 available-for-sale securities from a professional pricing service.
|
|
•
|
Level 3 – unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
|
The following table presents information about our financial assets that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in thousands):
|
|
September 30, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
121,594
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
121,594
|
|
Certificate of deposit
|
|
|
7,224
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,224
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
—
|
|
|
|
12,693
|
|
|
|
—
|
|
|
|
12,693
|
|
Commercial paper
|
|
|
—
|
|
|
|
17,380
|
|
|
|
—
|
|
|
|
17,380
|
|
U.S. treasury securities
|
|
|
—
|
|
|
|
12,278
|
|
|
|
—
|
|
|
|
12,278
|
|
Total
|
|
$
|
128,818
|
|
|
$
|
42,351
|
|
|
$
|
—
|
|
|
$
|
171,169
|
|
|
|
December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
104,544
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
104,544
|
|
Certificate of deposit
|
|
|
7,814
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,814
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
—
|
|
|
|
17,700
|
|
|
|
—
|
|
|
|
17,700
|
|
Commercial paper
|
|
|
—
|
|
|
|
7,477
|
|
|
|
—
|
|
|
|
7,477
|
|
U.S. treasury securities
|
|
|
—
|
|
|
|
12,407
|
|
|
|
—
|
|
|
|
12,407
|
|
Total
|
|
$
|
112,358
|
|
|
$
|
37,584
|
|
|
$
|
—
|
|
|
$
|
149,942
|
|
NOTE C – Goodwill and Intangible Assets, net
The changes in the net carrying amount of goodwill for the nine months ended September 30, 2018 are as follows (in thousands):
|
|
2018
|
|
Balances, January 1
|
|
$
|
51,613
|
|
Goodwill acquired during the period
|
|
|
—
|
|
Foreign currency translation adjustments
|
|
|
(1,111
|
)
|
Balances, September 30
|
|
$
|
50,502
|
|
12
Intangible assets subject to amortization primarily include subscriber relationships, non-competition agreements and acquired technology and are amortized over their respective useful lives (ranging from 1 to 9 years). Intangible assets, net of amortizati
on, included the following (in thousands):
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Currency
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Translation
|
|
|
Net
|
|
Subscriber relationships
|
|
$
|
35,512
|
|
|
$
|
(22,710
|
)
|
|
$
|
(64
|
)
|
|
$
|
12,738
|
|
Non-competition agreements
|
|
|
2,560
|
|
|
|
(2,204
|
)
|
|
$
|
(13
|
)
|
|
|
343
|
|
Technology and other
|
|
|
2,289
|
|
|
|
(1,859
|
)
|
|
$
|
(20
|
)
|
|
|
410
|
|
|
|
$
|
40,361
|
|
|
$
|
(26,773
|
)
|
|
$
|
(97
|
)
|
|
$
|
13,491
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Currency
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Translation
|
|
|
Net
|
|
Subscriber relationships
|
|
$
|
34,350
|
|
|
$
|
(19,592
|
)
|
|
$
|
614
|
|
|
$
|
15,372
|
|
Non-competition agreements
|
|
|
2,499
|
|
|
|
(2,058
|
)
|
|
|
45
|
|
|
|
486
|
|
Technology and other
|
|
|
2,130
|
|
|
|
(1,518
|
)
|
|
|
59
|
|
|
|
671
|
|
|
|
$
|
38,979
|
|
|
$
|
(23,168
|
)
|
|
$
|
718
|
|
|
$
|
16,529
|
|
Total amortization expense for intangible assets during the three months ended September 30, 2018 and 2017 was $0.9 million and $1.1 million, respectively. Total amortization expense for intangible assets during the nine months ended September 30, 2018 and 2017 was $3.1 million and $3.5 million, respectively.
The estimated annual amortization expense related to intangible assets subject to amortization for the next five years is as follows (in thousands):
Remainder of 2018
|
|
$
|
930
|
|
2019
|
|
|
3,716
|
|
2020
|
|
|
3,361
|
|
2021
|
|
|
2,521
|
|
2022
|
|
|
1,449
|
|
Thereafter
|
|
|
1,514
|
|
|
|
$
|
13,491
|
|
NOTE D – Commitments and Contingencies
Operating Leases
At September 30, 2018, our future minimum payments under operating leases were as follows (in thousands):
Remainder of 2018
|
|
$
|
1,012
|
|
2019
|
|
|
4,146
|
|
2020
|
|
|
3,476
|
|
2021
|
|
|
4,345
|
|
2022
|
|
|
4,035
|
|
Thereafter
|
|
|
8,671
|
|
|
|
$
|
25,685
|
|
NOTE E – Stock-Based Compensation
Our equity compensation plans provide for the grant of incentive and nonqualified stock options, restricted stock awards, restricted stock units and performance stock units to employees, non-employee directors and other consultants who provide services to us. We also provide an employee stock purchase plan and 401(k) stock match.
Restricted stock awards result in the issuance of new shares when granted. For other stock-based awards, new shares are issued when the award is exercised, vested or released according to the terms of the agreement.
In January 2018, 1,027,620 additional shares
13
were reserved for future issua
nce under our 2010 Equity Incentive Plan. At September 30, 2018, there were approximately 5.3 million shares available for grant under approved equity compensation plans.
We recognize stock-based compensation expense on a straight-line basis over the vesting period, except for expense relating to retirement-eligible employees, which is recognized immediately upon the employee becoming retirement-eligible.
We recorded stock-based compensation expense of $3.3 million and $10.0 million for the three and nine months ended September 30, 2018 and $2.3 million and $6.8 million for the three and nine months ended September 30, 2017, respectively. This expense was allocated in the condensed consolidated statements of comprehensive income as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Cost of revenues
|
|
$
|
535
|
|
|
$
|
494
|
|
|
$
|
1,587
|
|
|
$
|
1,414
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
691
|
|
|
|
565
|
|
|
|
2,054
|
|
|
|
1,656
|
|
Research and development
|
|
|
287
|
|
|
|
241
|
|
|
|
973
|
|
|
|
698
|
|
General and administrative
|
|
|
1,753
|
|
|
|
1,047
|
|
|
|
5,364
|
|
|
|
3,065
|
|
Total stock-based compensation expense
|
|
$
|
3,266
|
|
|
$
|
2,347
|
|
|
$
|
9,978
|
|
|
$
|
6,833
|
|
Stock-based compensation expense by plan type was as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Stock options
|
|
$
|
677
|
|
|
$
|
943
|
|
|
$
|
2,670
|
|
|
$
|
2,817
|
|
Performance share units
|
|
|
74
|
|
|
|
—
|
|
|
|
960
|
|
|
|
—
|
|
Restricted stock units
|
|
|
1,976
|
|
|
|
1,173
|
|
|
|
4,727
|
|
|
|
3,334
|
|
Restricted stock awards
|
|
|
137
|
|
|
|
79
|
|
|
|
352
|
|
|
|
238
|
|
Employee stock purchase plan
|
|
|
109
|
|
|
|
152
|
|
|
|
332
|
|
|
|
444
|
|
401(k) stock match
|
|
|
293
|
|
|
|
—
|
|
|
|
937
|
|
|
|
—
|
|
Total stock-based compensation expense
|
|
$
|
3,266
|
|
|
$
|
2,347
|
|
|
$
|
9,978
|
|
|
$
|
6,833
|
|
As of September 30, 2018, there was approximately $14.3 million of unrecognized stock-based compensation expense under our equity compensation plans, which is expected to be recognized on a straight-line basis over a weighted average period of
2.6
years.
Stock Options
Stock options generally vest over four years and have a contractual term of seven to ten years from the date of grant. Our stock option activity was as follows:
|
|
|
|
|
|
Weighted Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
|
(#)
|
|
|
($/share)
|
|
Outstanding at December 31, 2017
|
|
|
1,097,331
|
|
|
$
|
47.60
|
|
Granted
|
|
|
181,472
|
|
|
|
59.88
|
|
Exercised
|
|
|
(286,237
|
)
|
|
|
41.23
|
|
Forfeited
|
|
|
(60,270
|
)
|
|
|
56.71
|
|
Outstanding at September 30, 2018
|
|
|
932,296
|
|
|
|
51.35
|
|
Of the total outstanding options at September 30, 2018, 594,300 were exercisable with a weighted average exercise price of $48.92 per share. The total outstanding options had a weighted average remaining contractual life of
3.3
years.
14
The weighted average grant date fair value of options granted during the first nine
months of 2018 was $19.48. This was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
Volatility
|
|
|
34.9
|
%
|
Dividend yield
|
|
|
0
|
%
|
Life (in years)
|
|
|
4.4
|
|
Risk-free interest rate
|
|
|
2.53
|
%
|
Performance Share Units and Restricted Stock Units and Awards
In February 2017, our executive officers were granted performance share unit (“PSU”) awards with vesting contingent on successful attainment of pre-determined revenue targets over the course of a three-year performance period (fiscal years 2017 – 2019). The fair value is measured as the number of performance shares expected to be earned multiplied by the grant date fair value of our shares. The number of performance shares expected to vest during the current service period is estimated and the fair value of those shares is recognized over the remaining service period less any amounts already recognized.
In February 2018, our executive officers were granted PSU awards with vesting contingent on the Company’s total shareholder return as compared to indexed total shareholder return over the course of a three-year performance period (fiscal years 2018 – 2020). The grant date fair value was estimated using a Monte Carlo simulation that utilizes multiple input variables that determine the probability of satisfying the performance conditions stipulated in the award and calculates the fair market value for the performance stock units granted. Expense is recognized on a straight-line basis over the vesting period, regardless of whether the market condition is satisfied.
Restricted stock units vest over four years and, upon vesting, the holder is entitled to receive shares of our common stock. With restricted stock awards, shares of our common stock are issued when the award is granted and the restrictions lapse over one year.
Activity for our performance share units and restricted stock units was as follows:
|
|
Performance Share and
|
|
|
Weighted Average
|
|
|
|
Restricted Stock Units
|
|
|
Grant Date Fair Value
|
|
|
|
(#)
|
|
|
($/share)
|
|
Outstanding at December 31, 2017
|
|
|
321,912
|
|
|
$
|
55.16
|
|
Granted
|
|
|
156,933
|
|
|
|
63.09
|
|
Vested and common stock issued
|
|
|
(81,427
|
)
|
|
|
56.32
|
|
Forfeited
|
|
|
(34,318
|
)
|
|
|
54.91
|
|
Outstanding at September 30, 2018
|
|
|
363,100
|
|
|
|
58.35
|
|
The number of restricted stock units outstanding at September 30, 2018 included 38,321 units that have vested, but for which shares of common stock have not yet been issued pursuant to the terms of the agreement.
With restricted stock awards, shares of our common stock are issued when the award is granted and the restrictions lapse over one year.
Our restricted stock awards activity was as follows:
|
|
Restricted Stock
|
|
|
Weighted Average Grant
|
|
|
|
Awards (#)
|
|
|
Date Fair Value ($/share)
|
|
Outstanding at December 31, 2017
|
|
|
1,368
|
|
|
$
|
58.29
|
|
Restricted common stock issued
|
|
|
7,304
|
|
|
|
74.43
|
|
Restrictions lapsed
|
|
|
(5,016
|
)
|
|
|
70.03
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Outstanding at September 30, 2018
|
|
|
3,656
|
|
|
|
74.43
|
|
15
Employee
Stock Purchase Plan
Our employee stock purchase plan a
llows participating employees to purchase shares of our common stock at a discount through payroll deductions. The plan is available to all employees subject to certain eligibility requirements. Participating employees may purchase common stock, on a voluntary after-tax basis, at a price that is the lower of 85% of the fair market value of one share of common stock at the beginning or end of each stock purchase period. The plan consists of two six-month offering periods, beginning on January 1 and July 1 of each calendar year, respectively. A total of 1.0 million shares of common stock are reserved for issuance under the plan.
For the offering period that began on January 1, 2018 and ended on June 30, 2018, we withheld $0.8 million from employees participating in the plan which were used to purchase 20,243 shares. For the offering period that began on July 1, 2018 and will end on December 31, 2018, we have withheld $0.5 million as of September 30, 2018 from employees participating in the plan.
The fair value was estimated based on the market price of our common stock at the beginning of the offering period using the Black-Scholes option pricing model with the following assumptions:
Volatility
|
|
|
26.5
|
%
|
Dividend yield
|
|
|
0
|
%
|
Life (in years)
|
|
|
0.5
|
|
Risk-free interest rate
|
|
|
1.50
|
%
|
401(k) Stock Match
We sponsor a 401(k) retirement savings plan for our U.S. employees where employees can contribute up to 100% of their compensation, subject to the limits established by law. In 2018, we increased our match to 50% of the employee’s elective deferrals, up to the first 6% of the employee’s pre-tax compensation for each pay period. A portion of our match is in company stock, which is purchased from the open market by our plan provider and immediately deposited into the employee’s 401(k) account.
NOTE F – Income Taxes
We record our interim provision for income taxes by applying our estimated annual effective tax rate to our year-to-date pretax income and adjust the provision for discrete tax items recorded in the period. Differences between our effective tax rate and statutory tax rates are primarily due to the impact of permanently non-deductible expenses partially offset by the federal research and development credits. Additionally, excess tax benefits generated upon settlement or exercise of stock awards are recognized as a reduction to income tax expense as a discrete tax item in the quarter that the event occurs creating potentially significant fluctuation in tax expense by quarter and by year. Our provisions for income taxes include current foreign and state income tax expense, as well as deferred tax expense.
As of September 30, 2018 we do not have any unrecognized tax benefits nor any accrued interest or tax penalties.
Tax Act
The Tax Act, which was enacted on December 22, 2017, included broad and complex changes to the U.S tax code. The Tax Act reduced the corporate federal income tax rate to 21.0% effective January 1, 2018 and established a mandatory tax on previously untaxed foreign earnings and profits (“E&P”). The Tax Act expanded the deduction limits on executive compensation under Section 162(m) and included transition rules for previously awarded compensation.
We have completed our evaluation of the impact of the Tax Act on previously untaxed foreign E&P and the deferred tax liability for withholding taxes on dividends. We have also completed our evaluation of the impact of the expanded Section 162(m) limitations and related transition rules on our deferred tax assets related to stock compensation. As a result of our evaluation, there was no material adjustment to our previously calculated discrete income tax expense relating to the Tax Act.
NOTE G – Net Income Per Share
Basic net income per share has been computed using the weighted average number of shares of common stock outstanding during each period. Diluted net income per share also includes the impact of our outstanding potential common shares, including options and restricted stock units. Potential common shares that are anti-dilutive are excluded from the calculation of diluted net income per share.
16
The followi
ng table presents the components of the computation of basic and diluted net income per share for the periods indicated (in thousands, except per share amounts):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,061
|
|
|
$
|
2,176
|
|
|
$
|
16,731
|
|
|
$
|
7,129
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic
|
|
|
17,219
|
|
|
|
17,223
|
|
|
|
17,167
|
|
|
|
17,192
|
|
Options to purchase common stock
|
|
|
395
|
|
|
|
152
|
|
|
|
293
|
|
|
|
169
|
|
Restricted stock units
|
|
|
127
|
|
|
|
35
|
|
|
|
97
|
|
|
|
33
|
|
Weighted average common shares outstanding, diluted
|
|
|
17,741
|
|
|
|
17,410
|
|
|
|
17,557
|
|
|
|
17,394
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.47
|
|
|
$
|
0.13
|
|
|
$
|
0.97
|
|
|
$
|
0.42
|
|
Diluted
|
|
$
|
0.45
|
|
|
$
|
0.13
|
|
|
$
|
0.95
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive shares (in thousands)
|
|
|
—
|
|
|
|
267
|
|
|
|
27
|
|
|
|
267
|
|
17