Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth in Part I, Item 1A. “Risk Factors” of this Annual Report on Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We are a leading provider of cloud-based platform solutions designed to help small- and medium-sized businesses, or SMBs, succeed online. We serve approximately
5.37 million
subscribers globally with a comprehensive suite of products and services that help SMBs get online, get found and grow their businesses. Historically, our products focused largely on web hosting and other basic web presence solutions such as domains, but over time we have expanded to offer security, site backup, premium domains, SEO and SEM, Google Adwords, mobile solutions, social media enablement, website analytics, email marketing and productivity and e-commerce tools, among others. More recently, we have launched additional products and services, including website builders, mobile site builders and new hosting brands, both to satisfy existing subscriber needs and to expand the product gateways through which new subscribers initially reach us. We refer to these newer products and services as “gateway products”.
On February 9, 2016, we acquired Constant Contact, Inc., or Constant Contact, a leading provider of online marketing tools that are designed for small organizations, for a total purchase price of approximately $1.1 billion.
Beginning with the fourth quarter and full year 2016, we are reporting our financial results in two reportable segments, web presence and email marketing. The web presence segment generally consists of the products we historically sold prior to the acquisition of Constant Contact, including web hosting, domains, and related web presence products and services, and the email marketing segment consists of the products and services historically offered by Constant Contact, principally email marketing solutions, but also including event marketing, survey tools and our SinglePlatform digital storefront product.
Our 2016 financial results reflected solid free cash flow and better than expected cost synergies from the Constant Contact acquisition, resulting in healthy performance by our email marketing segment, but were below our expectations as of the beginning of 2016 due to the underperformance of our web presence segment. Our web presence segment financial results for 2016 were negatively affected by new gateway products we introduced early in the year, which had higher subscriber acquisition costs and subscriber churn than we originally anticipated. In response to these results, we significantly reduced our marketing investments on gateway products during the second half of the year and have now stopped marketing most of these products altogether. Our web presence segment was also negatively impacted by relatively flat revenue and subscriber growth within our core hosting business, which resulted from several factors, including: flat marketing expenditures relative to 2015 in the first half of 2016 as a result of our focus on gateway products during that period; operational challenges that negatively impacted product, customer support and user experience for some of our key web hosting brands; and trends in the competitive landscape, including an increasing trend among consumers to search for web presence and marketing solutions using brand-related search terms rather than generic search terms such as “shared hosting” or “website builder”, which we believe has benefited competitors who have invested more heavily than we have on building consumer awareness of their brands.
In order to address the challenges we encountered in 2016, we plan to focus on the following areas for 2017:
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•
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strengthening our brands that generally attract subscribers with high long-term revenue potential, specifically Constant Contact, HostGator, iPage and Bluehost;
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•
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upgrading the product, customer support and user experience for our key web hosting brands and our website builder product, which we believe will improve customer satisfaction and retention;
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•
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consolidating and improving customer support, including by moving customer support for Bluehost from Utah to our customer support center in Tempe, Arizona;
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•
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growing our brand awareness for key brands, including through radio, podcasts and television marketing; and
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•
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various initiatives to expand revenue streams through expansion of our international business, cross-selling products between our two segments and other product initiatives.
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The success of these initiatives depends on a number of factors, including our ability to: successfully improve customer satisfaction and retention in our web presence segment by upgrading our products, customer support and user experience; transfer our Bluehost customer support operations to Tempe in a way that minimizes disruption to subscribers during the transition and positions us to provide a high level of service going forward; and make the engineering and product development changes necessary to facilitate increased cross-selling and other product initiatives. If we are unable to make the necessary upgrades and changes on our currently anticipated timeframe, if these upgrades and changes do not result in the anticipated improvements in customer satisfaction or retention, or if we encounter difficulties or delays in the transfer of Bluehost support to Tempe or in our efforts to consolidate and improve customer support generally, we may not see the results we expect from these initiatives or we may incur greater than expected costs or disruption to our subscribers, which could adversely affect our financial and operating results for the year. See “
Risk Factors
” for further discussion of the risks facing our business.
Summary of 2016 Results
The acquisition of Constant Contact, our increase in debt service related to the Constant Contact acquisition, our investments in our gateway products, and increases in stock-based compensation and impairment charges have had a material effect on our recent financial results. Changes in several key financial metrics are summarized below (in thousands):
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|
Year Ended December 31, 2015
|
|
Year Ended December 31, 2016
|
Revenue
|
$
|
741,315
|
|
|
$
|
1,111,142
|
|
Net loss
|
$
|
(25,770
|
)
|
|
$
|
(81,229
|
)
|
Net cash provided by operating activities
|
$
|
177,228
|
|
|
$
|
154,961
|
|
Our revenue grew from
$741.3 million
for the year ended
December 31, 2015
to
$1.1 billion
for the year ended
December 31, 2016
. Substantially all of this this revenue growth was due to the Constant Contact acquisition and to other acquisitions that closed after
December 31, 2015
. Revenue attributable to our business, excluding the effect of Constant Contact and other acquisitions, was negatively impacted by a number of factors, including those discussed in the "
Overview
" section above.
Our net loss grew from
$25.8 million
for the year ended
December 31, 2015
to
$81.2 million
for the year ended
December 31, 2016
. This increase was primarily the result of increased costs incurred in connection with the acquisition of Constant Contact, including interest expense, transaction costs, amortization of intangible assets, and restructuring costs; increased stock-based compensation expense, including expense related to performance based grants of restricted stock; and increased marketing expenses, primarily related to new gateway product launches.
On July 13, 2016, we completed a restructuring of several of our majority-owned entities that were formed to promote our gateway products. The restructuring significantly reduced the potential redemption amount that would be payable to the minority shareholders of these entities in order for us to obtain 100% control of the entities, and gave us the flexibility to reduce investments in our gateway products. Based on these reduced investments, the estimated value of the non-controlling interest held by the minority shareholders is below the expected redemption amount of $25.0 million, which will result in $14.2 million of excess accretion that will reduce income available to common shareholders for the period starting on the date of the restructuring through the redemption date of July 1, 2017. We recognized excess accretion of $6.8 million for the year ended December 31, 2016, which is reflected in net income (loss) attributable to accretion of non-controlling interest in our consolidated statements of operations and comprehensive loss.
Cash provided by operations decreased by
$22.3 million
for the year ended
December 31, 2016
compared to the year ended December 31, 2015. The decrease for the year is primarily due to transaction and restructuring costs incurred to acquire Constant Contact, higher marketing costs to promote gateway products and increased interest expense due to the debt incurred in connection with the acquisition of Constant Contact, which exceeded the operating cash flows contributed by Constant Contact.
Recent Developments
In January 2017, we announced plans to close certain facilities as part of a plan to consolidate web presence customer support operations, principally our Orem, Utah customer support center, which will be closed due to our planned transfer of
customer support operations for our Bluehost brand from Utah to our consolidated Tempe, Arizona customer support facility. As a result of this plan, we expect to incur approximately $8.0 million in charges during fiscal year 2017, mostly related to severance. This action is intended to result in an improved customer support experience. We do not expect a meaningful reduction in support costs from this move.
On January 30, 2017, we completed a registered exchange offer for our 10.875% senior notes due 2024, as required under the registration rights agreement we entered into in connection with our initial issuance of the notes in February 2016 as part of the financing arrangements for our acquisition of Constant Contact. All of the $350.0 million aggregate principal amount of the original notes was validly tendered for exchange.
Key Metrics
We use a number of metrics, including the following key metrics, to evaluate the operating and financial performance of our business, identify trends affecting our business, develop projections and make strategic business decisions:
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•
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average revenue per subscriber ("ARPS");
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Adjusted EBITDA and free cash flow are non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flow that includes or excludes amounts that are included or excluded from the most directly comparable measure calculated and presented in accordance with GAAP. Our non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently. In addition, there are limitations in using non-GAAP financial measures because they are not prepared in accordance with GAAP and exclude expenses that may have a material impact on our reported financial results. For example, adjusted EBITDA excludes interest expense, which has been and will continue to be for the foreseeable future a significant recurring expense in our business. The presentation of non-GAAP financial information is not meant to be considered in isolation from, or as a substitute for, the directly comparable financial measures prepared in accordance with GAAP. We urge you to review the additional information about adjusted EBITDA and free cash flow shown below, including the reconciliations of these non-GAAP financial measures to their comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business.
The following table summarizes these key metrics by segment for the periods presented (in thousands, except ARPS):
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Year Ended December 31,
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|
2014
|
|
2015
|
|
2016
|
Consolidated metrics:
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|
|
|
|
Total subscribers
|
4,087
|
|
|
4,669
|
|
|
5,371
|
|
Average subscribers
|
3,753
|
|
|
4,358
|
|
|
5,283
|
|
Average revenue per subscriber
|
$
|
13.98
|
|
|
$
|
14.18
|
|
|
$
|
17.53
|
|
Adjusted EBITDA
|
$
|
171,447
|
|
|
$
|
219,249
|
|
|
$
|
288,396
|
|
|
|
|
|
|
|
Web presence segment metrics:
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|
|
|
|
Total subscribers
|
|
|
|
|
4,827
|
|
Average subscribers
|
|
|
|
|
4,789
|
|
Average revenue per subscriber
|
|
|
|
|
$
|
13.65
|
|
Adjusted EBITDA
|
|
|
|
|
$
|
172,135
|
|
|
|
|
|
|
|
Email marketing segment metrics:
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|
|
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|
Total subscribers
|
|
|
|
|
544
|
|
Average subscribers
|
|
|
|
|
494
|
|
Average revenue per subscriber
|
|
|
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|
$
|
55.11
|
|
Adjusted EBITDA
|
|
|
|
|
$
|
116,261
|
|
Figures for the year ended
December 31, 2016
include the impact of Constant Contact since February 10, 2016, the day after the closing of the acquisition.
Total Subscribers
We define total subscribers as the approximate number of subscribers that, as of the end of a period, are identified as subscribing directly to our products on a paid basis, excluding accounts that access our solutions via resellers or that purchase only domain names from us. Subscribers of more than one brand, and subscribers with more than one distinct billing relationship or subscription with us, are counted as separate subscribers. Total subscribers for a period reflects adjustments to add or subtract subscribers as we integrate acquisitions and/or are otherwise able to identify subscribers that meet, or do not meet, this definition of total subscribers. We refer to these adjustments in this discussion of total subscribers as “Adjustments”. For the fourth quarter of 2016, Adjustments had a net negative impact on our total subscriber count of approximately 33,000 subscribers. For 2016 as a whole, Adjustments had a net positive impact of approximately 59,000 subscribers, as shown in the table below.
Over time, we have expanded our marketing strategy globally to better target customers who are primarily seeking domain names, but who may have the potential to purchase a wider range of additional products and services from us once they are on our platform. As part of this effort, we offer to domain name customers a bundle that includes email, basic hosting, or other products and services in addition to a domain name. We include these customers in our total subscriber count as "light web presence" subscribers, which are further discussed below. As is customary in the industry, these packages are often significantly discounted for the initial term, with price increases applying on renewal. Although our goal with programs designed to attract domain focused subscribers is to expand our marketing funnel and achieve positive marketing yields through renewal at full price and sales of additional products, we may not be successful in achieving these outcomes. We continue to evaluate the results of these programs.
Our subscriber base also includes customers who subscribe to email service, domain privacy or certain other non-hosting subscription services which are generally lower-priced than our hosting packages. In the discussion below, we refer to these subscribers and subscribers on-boarded through the domain-focused programs described above as “light web presence” subscribers. As of December 31, 2016, light web presence subscribers accounted for approximately 506,000 of our total subscribers.
The table below shows the approximate sources of our subscriber growth by segment during 2015 and 2016 (all numbers in thousands). “Acquisitions” refers to the number of total subscribers we acquired due to acquisitions that we completed during the relevant year, as measured at the time of the acquisition.
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|
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|
|
Web Presence
|
Email Marketing
|
Total
|
|
# subscribers
|
% of growth (1)
|
# subscribers
|
% of growth (1)
|
# subscribers
|
% of growth (1)
|
Total Subscribers - December 31, 2014
|
4,087
|
|
—
|
%
|
—
|
|
—
|
%
|
4,087
|
|
—
|
%
|
Acquisitions
|
158
|
|
27.1
|
%
|
—
|
|
—
|
%
|
158
|
|
27.1
|
%
|
Light web presence subscribers
|
279
|
|
47.9
|
%
|
—
|
|
—
|
%
|
279
|
|
47.9
|
%
|
Adjustments
|
90
|
|
15.5
|
%
|
—
|
|
—
|
%
|
90
|
|
15.5
|
%
|
Core subscriber growth
|
55
|
|
9.5
|
%
|
—
|
|
—
|
%
|
55
|
|
9.5
|
%
|
Total Subscribers - December 31, 2015
|
4,669
|
|
100.0
|
%
|
—
|
|
—
|
%
|
4,669
|
|
100.0
|
%
|
Acquisitions
|
86
|
|
54.4
|
%
|
566
|
|
104.0
|
%
|
652
|
|
92.9
|
%
|
Light web presence subscribers
|
62
|
|
39.2
|
%
|
—
|
|
—
|
%
|
62
|
|
8.8
|
%
|
Adjustments
|
59
|
|
37.3
|
%
|
—
|
|
—
|
%
|
59
|
|
8.4
|
%
|
Core subscriber growth
|
(49
|
)
|
(31.0
|
)%
|
(22
|
)
|
(4.0
|
)%
|
(71
|
)
|
(10.1
|
)%
|
Total Subscribers - December 31, 2016
|
4,827
|
|
100.0
|
%
|
544
|
|
100
|
%
|
5,371
|
|
100.0
|
%
|
(1) Figures in this column show the approximate percentage contribution of each source of subscriber growth shown in the far left column (Acquisitions; Light web presence subscribers; Adjustments; and Core subscriber growth) to aggregate year over year growth in total subscribers.
2016 total subscriber growth was impacted by the factors noted in the "
Overview
" section above. Taken together, the portfolio of key brands that we plan to target for investment during 2017 (including, among others, Constant Contact,
HostGator, iPage, Bluehost, and our site builder brand) showed positive net subscriber adds in the aggregate during 2016, but these positive net adds were outweighed by the negative impact of subscriber losses in non-strategic hosting brands, our cloud storage and backup solution, and discontinued gateway products such as our VPN product. We expect total subscribers to decrease overall and in our web presence segment during 2017, due primarily to the impact of subscriber churn in these non-strategic and discontinued brands. We expect total subscribers to remain flat to slightly down in our email marketing segment.
If we are not successful in addressing the factors that have contributed to our low growth in total subscribers during 2016 and our expected decrease in total subscribers during 2017, we may not be able to return to or maintain positive subscriber growth in the future, which could result in a material adverse effect on our business and financial results.
Average Revenue per Subscriber
Average revenue per subscriber, or ARPS, is a non-GAAP financial measure that we calculate as the amount of revenue we recognize in a period, including marketing development funds and other revenue not received from subscribers, divided by the average of the number of total subscribers at the beginning of the period and at the end of the period, which we refer to as average subscribers for the period, divided by the number of months in the period. We believe ARPS is an indicator of our ability to optimize our mix of products and services and pricing and sell products and services to new and existing subscribers.
The following table reflects the calculation of ARPS (all data in thousands, except ARPS data):
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|
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|
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|
|
Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
Consolidated revenue
|
$
|
629,845
|
|
|
$
|
741,315
|
|
|
$
|
1,111,142
|
|
Consolidated total subscribers
|
4,087
|
|
|
4,669
|
|
|
5,371
|
|
Consolidated average subscribers for the period
|
3,753
|
|
|
4,358
|
|
|
5,283
|
|
Consolidated average revenue per subscriber (ARPS)
|
$
|
13.98
|
|
|
$
|
14.18
|
|
|
$
|
17.53
|
|
|
|
|
|
|
|
Web presence revenue
|
|
|
|
|
$
|
784,334
|
|
Web presence subscribers
|
|
|
|
|
4,827
|
|
Web presence average subscribers
|
|
|
|
|
4,789
|
|
Web presence ARPS
|
|
|
|
|
$
|
13.65
|
|
|
|
|
|
|
|
Email marketing revenue
|
|
|
|
|
$
|
326,808
|
|
Email marketing subscribers
|
|
|
|
|
544
|
|
Email marketing average subscribers
|
|
|
|
|
494
|
|
Email marketing ARPS
|
|
|
|
|
$
|
55.11
|
|
ARPS does not represent an exact measure of the average amount a subscriber spends with us each month, because our calculation of ARPS includes all of our revenue, including revenue generated by non-subscribers, in the numerator. We have three principal sources of non-subscriber revenue:
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|
•
|
Revenue from domain-only customers
. We cannot separately quantify revenue attributable to domain-only customers, who are customers that only purchase a domain name from us. Our subscriber definition does not include domain-only customers, which results in generally higher overall ARPS as our revenue used to compute ARPS includes revenue from domain-only customers. Although we cannot separately quantify revenue attributable to domain-only customers, we can measure the total amount of our revenue from domains. Our total revenue from domains, all of which was in our web presence segment, was $91.3 million, $125.2 million, and $127.4 million for the years ended December 31, 2014, 2015 and 2016, respectively.
|
|
|
•
|
Domain monetization revenue
. This consists principally of revenue from our BuyDomains brand, which provides premium domain name products and services, and, to a lesser extent, revenue from advertisements placed on unused domains (often referred to as “parked” pages) owned by us or our customers.
|
|
|
•
|
Revenue from marketing development funds
. Marketing development funds are the amounts that certain of our partners pay us to assist in and incentivize our marketing of their products.
|
A portion of our revenue is generated from customers that resell our services. We refer to these customers as “resellers.” We consider these resellers (rather than the end user customers of these resellers) to be subscribers under our total subscribers definition, because we do not have a billing relationship with the end users and cannot determine the number of end users acquiring our services through a reseller. A majority of our reseller revenues is for the purchase of domains and is included in the figures shown above for total revenue from domains. Our reseller revenues, excluding the portion included in total revenue from domains, were $23.5 million, $25.4 million and $28.1 million for 2014, 2015 and 2016, respectively. All of our reseller revenues are in our web presence segment.
The table below quantifies, on a consolidated basis and by segment, 2016 domain monetization and marketing development fund revenue (all data in thousands, except ARPS data):
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|
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|
|
|
Year Ended December 31,
|
|
|
2014
|
|
2015
|
|
2016
|
Consolidated
|
|
|
|
|
|
|
Marketing development fund revenue
|
|
$
|
9,112
|
|
|
$
|
12,958
|
|
|
$
|
10,150
|
|
Marketing development funds - contribution to ARPS
|
|
$
|
0.20
|
|
|
$
|
0.25
|
|
|
$
|
0.16
|
|
Domain monetization revenue
|
|
$
|
19,147
|
|
|
$
|
39,588
|
|
|
$
|
29,282
|
|
Domain monetization revenue - contribution to ARPS
|
|
$
|
0.43
|
|
|
$
|
0.76
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
Web presence
|
|
|
|
|
|
|
Marketing development fund revenue
|
|
|
|
|
|
$
|
9,901
|
|
Marketing development funds - contribution to ARPS
|
|
|
|
|
|
$
|
0.17
|
|
Domain monetization revenue
|
|
|
|
|
|
$
|
29,282
|
|
Domain monetization revenue - contribution to ARPS
|
|
|
|
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
Email marketing
|
|
|
|
|
|
|
Marketing development fund revenue
|
|
|
|
|
|
$
|
249
|
|
Marketing development funds - contribution to ARPS
|
|
|
|
|
|
$
|
0.04
|
|
For the years ended
December 31, 2015
and
2016
, consolidated ARPS increased from
$14.18
to
$17.53
, respectively. This increase in ARPS was driven by our email marketing segment due to the acquisition of Constant Contact, which has higher ARPS than the rest of our business, partially offset by lower ARPS from our web presence segment.
Web presence ARPS decreased from
$14.18
to
$13.65
for the year ended December 31, 2016, due to decreases in domain monetization and marketing development fund revenue, light web presence subscribers and subscribers coming to our platform through lower priced gateway products. Domain monetization revenue decreased in 2016 primarily because there were fewer high-value domains available for sale in our BuyDomains portfolio as compared to 2015.
Email marketing APRS was
$55.11
for the period ended December 31, 2016, and was adversely impacted by the application of purchase accounting, which reduced revenue and negatively impacted recognized revenue for this segment by $15.2 million during the year ended December 31, 2016, resulting in a reduction in ARPS of $2.56. Our definition of total subscribers is different from the pre-acquisition subscriber definition previously used by Constant Contact because our definition only counts customers who have a direct billing relationship with us. As a result, the total subscriber count for the email marketing segment is approximately 15% lower than the count that would have resulted from using Constant Contact's pre-acquisition subscriber definition, which resulted in a corresponding increase in ARPS.
Consolidated ARPS increased from
$13.98
for the year ended December 31, 2014 to
$14.18
for the year ended December 31, 2015. The primarily factors in this increase were increased revenue from non-subscribers, which added $0.38 to ARPS, and the impact of purchase accounting on deferred revenues related to acquisitions. Purchase accounting contributed $0.39 to the year over year increase in ARPS because it reduced ARPS more significantly in 2014 than it did in 2015. These increases in ARPS were partially offset by an increase in light web presence subscribers.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss), excluding the impact of
interest expense (net), income tax expense (benefit), depreciation, amortization of other intangible assets, stock-based compensation, restructuring expenses, transaction expenses and charges, (gain) loss of unconsolidated entities, and impairment of other long-lived assets. We view adjusted EBITDA as a performance measure and believe it helps investors evaluate and compare our core operating performance from period to period.
The following table reflects the reconciliation of adjusted EBITDA to net loss calculated in accordance with GAAP for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
Consolidated
|
(in thousands)
|
Net loss
|
$
|
(50,852
|
)
|
|
$
|
(25,770
|
)
|
|
$
|
(81,229
|
)
|
Interest expense, net (including impact of amortization of deferred financing costs and original issuance discount)
|
57,083
|
|
|
58,414
|
|
|
152,312
|
|
Income tax expense (benefit)
|
6,186
|
|
|
11,342
|
|
|
(109,858
|
)
|
Depreciation
|
30,956
|
|
|
34,010
|
|
|
60,360
|
|
Amortization of other intangible assets
|
102,723
|
|
|
91,057
|
|
|
143,562
|
|
Stock-based compensation
|
16,043
|
|
|
29,925
|
|
|
58,267
|
|
Restructuring expenses
|
4,460
|
|
|
1,489
|
|
|
24,224
|
|
Transaction expenses and charges
|
4,787
|
|
|
9,582
|
|
|
32,284
|
|
(Gain) loss of unconsolidated entities(1)
|
61
|
|
|
9,200
|
|
|
(565
|
)
|
Impairment of other long lived assets
|
—
|
|
|
—
|
|
|
9,039
|
|
Adjusted EBITDA
|
$
|
171,447
|
|
|
$
|
219,249
|
|
|
$
|
288,396
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2016
|
Web presence
|
|
|
|
|
(in thousands)
|
Net loss
|
|
|
|
|
$
|
(25,372
|
)
|
Interest expense, net (including impact of amortization of deferred financing costs and original issuance discount)
|
|
|
|
|
70,843
|
|
Income tax expense (benefit)
|
|
|
|
|
(76,315
|
)
|
Depreciation
|
|
|
|
|
36,613
|
|
Amortization of other intangible assets
|
|
|
|
|
78,883
|
|
Stock-based compensation
|
|
|
|
|
45,864
|
|
Restructuring expenses
|
|
|
|
|
1,845
|
|
Transaction expenses and charges
|
|
|
|
|
31,300
|
|
(Gain) loss of unconsolidated entities(1)
|
|
|
|
|
(565
|
)
|
Impairment of other long lived assets
|
|
|
|
|
9,039
|
|
Adjusted EBITDA
|
|
|
|
|
|
|
$
|
172,135
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2016
|
|
|
|
|
|
(in thousands)
|
Email marketing
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
$
|
(55,857
|
)
|
Interest expense, net (including impact of amortization of deferred financing costs and original issuance discount)
|
|
|
|
|
|
|
81,469
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
(33,543
|
)
|
Depreciation
|
|
|
|
|
|
|
23,747
|
|
Amortization of other intangible assets
|
|
|
|
|
|
|
64,679
|
|
Stock-based compensation
|
|
|
|
|
|
|
12,403
|
|
Restructuring expenses
|
|
|
|
|
|
|
22,379
|
|
Transaction expenses and charges
|
|
|
|
|
|
|
984
|
|
Adjusted EBITDA
|
|
|
|
|
|
|
$
|
116,261
|
|
|
|
(1)
|
The (gain) loss of unconsolidated entities is reported on a net basis for the years ended
December 31, 2015
and
2016
. The year ended December 31, 2015 includes our proportionate share of net losses from unconsolidated entities of $14.6 million, partially offset by the $5.4 million gain for the redemption of our equity interest in World Wide Web Hosting (Site5). The year ended
December 31, 2016
includes a loss of $4.8 million on our investment in AppMachine. This loss was generated on July 27, 2016, when we increased our ownership stake in AppMachine from 40% to 100%, which required a revaluation of our existing investment to its implied fair value. The year ended
December 31, 2016
also includes an $11.4 million gain on our investment in WZ UK. This gain was generated on January 6, 2016, when we increased our ownership stake in WZ UK from 49% to 57.5%, which required a revaluation of our existing investment to its implied fair value. The year ended December 31, 2016 also includes a loss of $4.7 million on the impairment of our 33% equity investment in Fortifico Limited. Finally, the year ended
December 31, 2016
also includes a net loss of $1.3 million from our proportionate share of net losses from unconsolidated entities.
|
Net loss on a consolidated basis, and from the web presence segment, decreased from
$50.9 million
for the year ended
December 31, 2014
to
$25.8 million
for the year ended
December 31, 2015
primarily as a result of our revenue growth, including revenue growth associated with acquisitions and a reduction in amortization of intangible assets. The impact of these factors was partially offset by increased investments in engineering and development and higher stock-based compensation expense, which primarily impacted general and administrative expenses.
Net loss on a consolidated basis increased from
$25.8 million
for the year ended
December 31, 2015
to
$81.2 million
for the year ended
December 31, 2016
. Most of this increase was the result of increased costs incurred primarily in connection with our acquisition of Constant Contact, including increased interest expense of
$93.9 million
, increased transaction costs of
$22.7 million
, increased amortization of intangible assets of
$52.5 million
and restructuring expenses of
$22.7 million
to integrate operations. Additionally, we incurred higher stock-based compensation expenses of
$28.3 million
due to increased equity awards, including a $5.1 million increase related to grants of performance-based restricted stock to executive officers, and new awards due to our Constant Contact acquisition of
$12.4 million
. We also increased our marketing expenses to launch our new gateway products, which increased net loss by $59.0 million, and incurred impairment charges totaling
$9.0 million
. These increases in our costs were partially offset by an income tax benefit of
$109.9 million
and by increased operating profit due primarily to the acquisition of Constant Contact, and to a lesser extent to growth in other parts of our business.
Net loss for our web presence segment decreased slightly from
$25.8 million
for the year ended
December 31, 2015
to
$25.4 million
for the year ended
December 31, 2016
. This decrease was primarily due an income tax benefit of
$76.3 million
, lower amortization expense of
$12.2 million
, reduced losses from unconsolidated entities of $9.8 million and improved profitability from certain web presence products, which was partially offset by $59.0 million in net losses incurred to launch our new gateway products,
$21.7 million
of higher transaction costs to acquire Constant Contact, higher stock-based compensation expense of
$15.9 million
, mainly due to increased grants of awards, increased interest expense of
$12.4 million
and impairment charges of
$9.0 million
.
Net loss for our email marketing segment for the year ended December 31, 2016 was
$55.9 million
, all of which pertained to the acquisition of Constant Contact.
Adjusted EBITDA on a consolidated basis, and for the web presence segment, increased from
$171.4 million
for the year ended
December 31, 2014
to
$219.2 million
for the year ended
December 31, 2015
. This increase in adjusted EBITDA was primarily a result of the factors resulting in our reduced net loss during this period, as described above.
Adjusted EBITDA on a consolidated basis increased from
$219.2 million
for the year ended
December 31, 2015
to
$288.4 million
for the year ended
December 31, 2016
. Substantially all of this increase is attributable to our email marketing segment due to the acquisition of Constant Contact, which was partially offset by losses incurred by our web presence segment to launch new gateway products.
Adjusted EBITDA for our email marketing segment for the year ended December 31, 2016 was
$116.3 million
, and is entirely attributable to our acquisition of Constant Contact. Email marketing adjusted EBITDA was adversely impacted by the purchase accounting write-down of acquired deferred revenues, which decreased revenue by $15.2 million for the year ended December 31, 2016. Email marketing adjusted EBITDA for the pre-acquisition period from January 1, 2016 through February 9, 2016 was
$7.9 million
. Email marketing adjusted EBITDA separately reported by Constant Contact (adjusted to conform to our definition of adjusted EBITDA) for the year ended December 31, 2015 was
$72.4 million
. The increase in email marketing adjusted EBITDA is primarily the result of cost reduction actions undertaken following the acquisition. The following table reflects the reconciliation of adjusted EBITDA to net loss calculated in accordance with GAAP for the periods presented for Constant Contact for the pre-acquisition periods from January 1, 2016 through February 9, 2016 and for the year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
Email marketing segment
|
|
For the pre-acquisition period from January 1, 2016 through February 9, 2016
|
|
For the pre-acquisition year ended December 31, 2015
|
|
|
(in thousands)
|
Net income (loss)
|
$
|
(8,038
|
)
|
|
$
|
19,190
|
|
|
Interest expense (income), net
|
—
|
|
|
(317
|
)
|
|
Income tax expense (benefit)
|
(6,023
|
)
|
|
7,998
|
|
|
Depreciation
|
2,721
|
|
|
23,313
|
|
|
Amortization of other intangible assets
|
138
|
|
|
1,583
|
|
|
Stock-based compensation
|
1,809
|
|
|
18,040
|
|
|
Transaction expenses and charges
|
17,281
|
|
|
2,561
|
|
|
Adjusted EBITDA
|
$
|
7,888
|
|
|
$
|
72,368
|
|
|
Adjusted EBITDA for our web presence segment decreased from
$219.2 million
for the year ended December 31, 2015 to
$172.1 million
for the year ended December 31, 2016. This decrease is the result of higher marketing investments in our gateway products, which negatively impacted adjusted EBITDA by $55.8 million, and lower non-subscriber revenues of $13.1 million, primarily because there were fewer high-value domains available for sale in our BuyDomains portfolio as compared to 2015. These decreases were partially offset by increased adjusted EBITDA from our other web presence brands.
Free Cash Flow
For a discussion of free cash flow, see "
Liquidity and Capital Resources
".
Components of Operating Results
Revenue
We generate revenue primarily from selling subscriptions for our cloud-based products and services. The subscriptions we offer are similar across all of our brands and are provided under contracts pursuant to which we have ongoing obligations to support the subscriber. These contracts are generally for service periods of up to 36 months and typically require payment in advance at the time of initiating the subscription for the entire subscription period. Typically, we also have arrangements in place to auto renew a subscription at the end of the subscription period. Due to factors such as introductory pricing, our renewal fees may be higher than our initial subscription. Our web presence segment sells more subscriptions with 12 month terms than with any other term length, while our email marketing segment sells subscriptions that are mostly one-month terms. We also earn revenue from the sale of domain name registrations, premium domains and non-term based products and services, such as certain online security products and professional technical services as well as through referral fees and commissions. We expect our revenue to increase modestly in future periods.
Cost of Revenue
Cost of revenue includes costs of operating our subscriber support organization, fees we pay to register domain names for our subscribers, costs of operating our data center infrastructure, such as technical personnel costs associated with monitoring and maintaining our network operations, fees we pay to third-party product and service providers, and merchant fees we pay as part of our billing processes. We also allocate to cost of revenue the depreciation and amortization related to these activities and the intangible assets we have acquired, as well as a portion of our overhead costs attributable to our employees engaged in subscriber support activities. In addition, cost of revenue includes stock-based compensation expense for employees engaged in support and network operations. We expect cost of revenue to increase in absolute dollars in future periods as we increase our revenue, particularly in the near term during 2017, since we will incur overlapping customer support costs as we transition our Utah customer support location to Tempe, Arizona. We generally expect cost of revenue to decrease as a percentage of revenue due to decreasing amortization expense on our intangible assets.
Gross Profit
Gross profit is the difference between revenue and cost of revenue. Gross profit has fluctuated from period to period in large part as a result of revenue and cost of revenue adjustments from purchase accounting impacts related to acquisitions, as
well as revenue and cost of revenue impacts from growth in our business. With respect to revenue, the application of purchase accounting requires us to record purchase accounting adjustments for acquired deferred revenue, which reduces the revenue recorded from acquisitions for a period of time after the acquisition. The impact generally normalizes within a year following the acquisition. With respect to cost of revenue, the application of purchase accounting requires us to defer domain registration costs, which reduces cost of revenue, and record long-lived assets at fair value, which increases cost of revenue through an increase in amortization expense over the estimated useful life of the long-lived assets. In addition, our revenue and our cost of revenue have increased in recent years as our subscriber base has expanded. For a new subscriber that we bring on to our platform, we typically recognize revenue over the term of the subscription, even though we collect the subscription fee at the initial billing. As a result, our gross profit may be affected by the prices we charge for our subscriptions, as well as by the number of new subscribers and the terms of their subscriptions. We expect our gross profit to increase in absolute dollars in future periods, and that our gross profit margin will also increase as amortization expense related to our intangible assets declines.
Operating Expense
We classify our operating expense into three categories: sales and marketing, engineering and development, and general and administrative. In 2016, we started breaking out transaction expenses due to the significance of the costs incurred to acquire Constant Contact. Although our operating expenses will increase as a result of the Constant Contact acquisition, we achieved approximately $70.0 million in cost synergies for the combined business, with a majority of those cost reductions impacting operating expenses. In connection with these cost reduction plans, we incurred approximately $22.2 million of restructuring charges through the year ended
December 31, 2016
, consisting of severance and facility exit related charges.
Sales and Marketing
Sales and marketing expense primarily consists of costs associated with bounty payments to our network of online partners, SEM and SEO, general awareness and brand building activities, as well as the cost of employees engaged in sales and marketing activities. Sales and marketing expense also includes costs associated with sales of products as well as stock-based compensation expense for employees engaged in sales and marketing activities. Sales and marketing expense as a percentage of revenue may increase or decrease in a given period, depending on the cost of attracting new subscribers to our solutions, changes in how we invest in different subscriber acquisition channels, changes in how we approach SEM and SEO and the extent of general awareness and brand building activities we may undertake, as well as the efficiency of our sales and support personnel and our ability to sell more products and services to our subscribers and drive favorable returns on invested marketing dollars. We expect our sales and marketing in 2017 to remain relatively flat relative to 2016 as we decrease our spend on our gateway products and incur a full year of sales and marketing expense from Constant Contact.
Engineering and Development
Engineering and development expense includes the cost of employees engaged in enhancing our technology platform and our systems, developing and expanding product and service offerings, and integrating technology capabilities from our acquisitions. Engineering and development expense includes stock-based compensation expense for employees engaged in engineering and development activities. Our engineering and development expense does not include costs of leasing and operating our data center infrastructure, such as technical personnel costs associated with monitoring and maintaining our network operations and fees we pay to third-party product and service providers, which are included in cost of revenue. We expect that our engineering and development spend will grow moderately in 2017 in absolute dollars relative to 2016 as we incur a full year of engineering and development expense from Constant Contact.
General and Administrative
General and administrative expense includes the cost of employees engaged in corporate functions, such as finance and accounting, human resources, legal and executive management. General and administrative expense also includes all facility and related overhead costs not allocated to cost of revenue, as well as insurance premiums, professional service fees, and costs incurred related to regulatory and litigation matters. General and administrative expense also includes stock-based compensation expense for employees engaged in general and administrative activities. We expect that our general and administrative expenses will grow moderately in 2017 relative to 2016 because we will have a full year of general and administrative expenses from Constant Contact.
Other Income (Expense)
Other income (expense) consists primarily of costs related to, and interest paid on, our indebtedness. We include in our calculation of interest expense the cash cost of interest payments and loan financing fees, the amortization of deferred financing
costs and the amortization of the net present value adjustment which we may apply to some deferred consideration payments related to our acquisitions. Interest income consists primarily of interest income earned on our cash and cash equivalents balances. We expect our interest expense to increase in 2017 as we will have a full year of the new debt that we incurred in connection with our acquisition of Constant Contact. Other income (expense) also includes gains or losses recognized on investments in unconsolidated entities.
Income Tax Expense (Benefit)
We estimate our income taxes in accordance with the asset and liability method, under which deferred tax assets and liabilities are recognized based on temporary differences between the assets and liabilities in our consolidated financial statements and the financial statements that are prepared in accordance with tax regulations for the purpose of filing our income tax returns, using statutory tax rates. This methodology requires us to record a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reported periods. We base our estimates, judgments and assumptions on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from the estimates, judgments and assumptions made by our management. To the extent that there are differences between our estimates, judgments and assumptions and our actual results, our future financial statement presentation, financial condition, results of operations and cash flows may be affected.
We believe that the following significant accounting policies, which are more fully described in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. We believe that our critical accounting policies and estimates are the assumptions and estimates associated with the following:
|
|
•
|
derivative instruments,
|
|
|
•
|
depreciation and amortization,
|
|
|
•
|
stock-based compensation arrangements, and
|
Revenue Recognition
We generate revenue primarily from selling subscriptions to our cloud-based products and services. The subscriptions we offer are similar across all of our brands and are provided under contracts pursuant to which we have ongoing obligations to support the subscriber. These contracts are generally for service periods of up to 36 months and typically require payment in advance. We recognize the associated revenue ratably over the service period, whether the associated revenue is derived from a direct subscriber or through a reseller. Deferred revenue represents the liability to subscribers for advance billings for services not yet provided and the fair value of the assumed liability outstanding for subscriber relationships purchased in an acquisition.
We sell domain name registrations that provide a subscriber with the exclusive use of a domain name. These domains are obtained either by one of our registrars on the subscriber’s behalf, or by us from third-party registrars on the subscriber’s behalf. Domain registration fees are non-refundable.
Revenue from the sale of a domain name registration by one of our registrars is recognized ratably over the subscriber’s service period as we have the obligation to provide support over the domain term. Revenue from the sale of a domain name registration purchased by us from a third-party registrar is recognized when the subscriber is billed on a gross basis as we have no remaining obligations once the sale to the subscriber occurs, and we have full discretion on the sales price and bear all credit risk.
Revenue from the sale of premium domains is recognized when persuasive evidence of an arrangement to sell such domains exists, delivery of an authorization key to access the domain name has occurred, the fee for the sale of the premium domain is fixed or determinable, and collection of the fee for the sale of the premium domain is deemed probable.
We also earn revenue from the sale of non-term based products and services, such as online security products and professional technical services, referral fees and commissions. We recognize such revenue when the product is purchased, the service is provided or the referral fee or commission is earned.
A substantial amount of our revenue is generated from transactions that are multiple-element service arrangements that may include hosting plans, domain name registrations, and other cloud-based products and services.
We follow the provisions of the Financial Accounting Standards Board, or FASB, Accounting Standards Update No. 2009-13, or ASU 2009-13,
Revenue Recognition (Topic 605), Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force,
and allocate revenue to each deliverable in a multiple- element service arrangement based on its respective relative selling price.
Under ASU 2009-13, to treat deliverables in a multiple-element service arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have standalone value upon delivery, we account for each deliverable separately. Hosting services, domain name registrations, cloud-based products and services have standalone value and are often sold separately.
When multiple deliverables included in a multiple-element service arrangement are separated into different units of accounting, the total transaction amount is allocated to the identified separate units based on a relative selling price hierarchy. We determine the relative selling price for a deliverable based on vendor specific objective evidence, or VSOE, of fair value, if available, or best estimate of selling price, or BESP, if VSOE is not available. We have determined that third-party evidence of selling price, or TPE, is not a practical alternative due to differences in our multi-brand offerings compared to competitors and the availability of relevant third-party pricing information. We have not established VSOE for our offerings due to lack of pricing consistency, the introduction of new products, services and other factors. Accordingly, we generally allocate revenue to the deliverables in the arrangement based on the BESP. We determine BESP by considering our relative selling prices, competitive prices in the marketplace and management judgment; these selling prices, however, may vary depending upon the particular facts and circumstances related to each deliverable. We analyze the selling prices used in our allocation of transaction amount, at a minimum, on a quarterly basis. Selling prices will be analyzed on a more frequent basis if a significant change in our business necessitates a more timely analysis.
We maintain a reserve for refunds and chargebacks related to revenue that has been recognized and is expected to be refunded. We had a refund and chargeback reserve of $0.5 million and $0.6 million as of December 31, 2015 and 2016, respectively. The portion of deferred revenue that is expected to be refunded at December 31, 2015 and 2016 was $1.8 million and $2.1 million, respectively. Based on refund history, approximately 81% of all refunds happen in the same fiscal month that the customer contract starts or renews, and approximately 94% of all refunds happen within 45 days of the contract start or renewal date.
Goodwill
Goodwill relates to amounts that arose in connection with our various acquisitions 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, a decline in the equity value of the business, a significant adverse change in certain 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.
In accordance with Accounting Standards Update No. 2011-08, or ASU 2011-08,
Intangibles—Goodwill and Other (Topic 350) Testing Goodwill for Impairment
, we are 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. During 2016, we determined that we have two reporting units, and each unit is its own reporting segment. Changes in operations may cause us to evaluate our conclusion on operating segments and reporting units. We perform our annual impairment analysis as of December 31 each year. The provisions of ASU 2011-08 require us to perform a two-step impairment test for goodwill. In the first step, we compare the fair value of each reporting unit to which goodwill has been allocated to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is considered not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference. We have assessed fair value based on current market capitalization. As of December 31, 2015 and 2016, the fair value of both of our reporting units exceeded the carrying value of the reporting unit’s net assets and, therefore, no impairment existed as of these dates.
As of December 31, 2016, we had goodwill of
$1.3 billion
in our web presence reporting unit and
$604.3 million
in our email marketing unit, for a total goodwill of
$1.9 billion
. We did not recognize any impairment of goodwill in either of our reporting units for the years ended December 31, 2014, 2015 or 2016.
Long-Lived Assets
Our long-lived assets consist primarily of intangible assets, including acquired subscriber relationships, trade names, intellectual property, developed technology, domain names available for sale and in-process research and development ("IPR&D"). We also have long-lived tangible assets, primarily consisting of property and equipment. The majority of our intangible assets have been recorded in connection with our acquisitions, including the acquisition of a controlling interest in our company by investment funds and entities affiliated with Warburg Pincus and Goldman, Sachs & Co, which we refer to as the Sponsor Acquisition. We record intangible assets at fair value at the time of their acquisition. We amortize intangible assets over their estimated useful lives.
Our 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 flow to be derived from the intangible asset. We amortize intangible assets with finite lives in accordance with their estimated projected cash flows.
We evaluate 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 is less than the carrying amount, then we determine the fair value of the assets and compare it to the carrying value. If the fair value is less than the carrying value, then we reduce the carrying value to the estimated fair value and record an impairment loss in the period it is identified.
We did not recognize any impairments of long-lived intangible and tangible assets in the years ended December 31, 2014 and 2015.
During the year ended December 31, 2016, we determined that a portion of an internally developed software tool would not meet our needs following the acquisition of Constant Contact, resulting in an impairment charge of
$2.0 million
which was recorded in engineering and development expense in the consolidated statements of operations and comprehensive loss in our web presence segment.
Additionally, we recognized an impairment charge of
$4.9 million
for technology assets related to Webzai, which was recorded in engineering and development expense in the consolidated statements of operations and comprehensive loss in our web presence segment.
Indefinite life intangibles include domain names that are available for sale which are recorded at 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, we record the cost of the domain in cost of revenue.
Acquired IPR&D represents the fair value assigned to research and development that we acquire that has not been completed at the date of acquisition. Acquired IPR&D is capitalized as an intangible asset and reviewed on a quarterly basis to determine future use. Any impairment loss of acquired IPR&D is charged to expense in the period the impairment is identified.
Upon commercialization, the acquired fair value of the IPR&D will be reclassified to developed technology and amortized over its useful life. No such impairment losses were identified during the years ended December 31, 2014 or 2015.
During the year ended December 31, 2016, we incurred total charges of $2.2 million to impair certain acquired IPR&D relating to projects that were abandoned in favor of other projects. This consisted of a charge of
$1.4 million
and $0.8 million to impair certain acquired IPR&D projects from the Webzai and AppMachine acquisitions, respectively.
Derivative Instruments
Accounting Standards Codification 815, or 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 our 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, we record 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 we have 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. We may enter into derivative contracts that are intended to economically hedge certain of our risks, even though hedge accounting does not apply or we elect not to apply hedge accounting.
In accordance with the FASB’s fair value measurement guidance in Accounting Standards Update No. 2011-04, or ASU 2011-04,
Fair Value Measurement (Topic 820),
we made an accounting policy election to measure the credit risk of our derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Business Combinations
We account for business acquisitions using the purchase method of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date. The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed based on their respective fair values. Goodwill represents excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed.
Significant judgments are used in determining fair values of assets acquired and liabilities assumed, as well as intangibles and their estimated useful lives. Fair value and useful life determinations are based on, among other factors, estimates of future expected cash flows, royalty cost savings and appropriate discount rates used in computing present values. These judgments may materially impact the estimates used in allocating acquisition date fair values to assets acquired and liabilities assumed, as well as our current and future operating results. Actual results may vary from these estimates which may result in adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever occurs first. Adjustments to fair values of assets and liabilities made after the end of the measurement period are recorded within our operating results.
Changes in the fair value of a contingent consideration resulting from a change in the underlying inputs are recognized in results of operations until the arrangement is settled.
Depreciation and Amortization
We purchase or build the servers we place in our data centers, one of which we own and the remainder of which we occupy pursuant to various lease or co-location arrangements. We also purchase the computer equipment that is used by our support and sales teams and employees in our offices. We capitalize the build-out of our facilities as leasehold improvements.
Cost of revenue includes depreciation on data center equipment and support infrastructure. We also include depreciation in general and administrative expense, which includes depreciation on office equipment and leasehold improvements.
Amortization expense consists of expense related to the amortization of intangible long-lived assets. In connection with our acquisitions, we allocate fair value to acquired long-lived intangible assets, which include subscriber relationships, trade names and developed technology. We use estimates and valuation techniques to determine the estimated useful lives of our intangible assets and amortize them to cost of revenue.
Income Taxes
We provide for income taxes in accordance with Accounting Standards Codification 740, or ASC 740,
Accounting for Income Taxes
. We recognize deferred tax assets and liabilities for the 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. We measure deferred tax assets and liabilities using enacted tax rates that we expect to apply to taxable income in the years in which we expect those temporary differences to be recovered or settled. We recognize the effect of changes in tax rates on deferred tax assets and liabilities 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. We recognize the effect of income tax positions only if those positions are more likely than not to be sustained. We measure recognized income tax positions at the largest amount that is more likely than not to be realized. We reflect changes in recognition or measurement in the period in which the change in judgment occurs. There were no unrecognized tax benefits in the years ended December 31, 2014, 2015 or 2016.
We record interest related to unrecognized tax benefits in interest expense and penalties in operating expense. We did not recognize any interest or penalties related to unrecognized tax benefits during the years ended December 31, 2014, 2015 or 2016.
In 2014, a significant amount of our GAAP foreign losses were generated by our subsidiaries organized in the United Kingdom and the United Arab Emirates (the "U.A.E."). In 2014, the foreign rate differential predominantly relates to these jurisdictions. Our foreign rate differential in 2014 has a negative impact on our expected benefit since the majority of the foreign losses are generated in jurisdictions where the statutory tax rate is lower than the U.S. statutory rate – specifically the United Kingdom, which had a statutory tax rate of 20% and represents $22.5 million of our foreign losses, and the U.A.E., which has a statutory tax rate of 0% and represents $6.2 million of our foreign losses.
In 2015, a significant amount of our GAAP foreign losses were generated by our subsidiaries in the U.A.E. and Israel. The foreign rate differential in 2015 predominantly related to these jurisdictions. Our foreign rate differential in 2015 had a negative impact on our expected tax expense since the majority of the foreign losses are generated in jurisdictions where the statutory tax rate is lower than the U.S. statutory rate – specifically the U.A.E., which has a statutory tax rate of 0% and represents $2.4 million of our foreign losses, and Israel, which had a statutory tax rate of 26.5% and represents $2.5 million of our foreign losses.
In 2016, a significant amount of our GAAP foreign losses were generated by our subsidiaries in the United Kingdom, U.A.E. and Israel. The foreign rate differential in 2016 predominantly related to these jurisdictions. Our foreign rate differential in 2016 had a negative impact on our expected tax expense since the majority of the foreign losses are generated in jurisdictions where the statutory tax rate is lower than the U.S. statutory rate – specifically the United Kingdom, which has a statutory tax rate of 18% and represents $43.8 million of our foreign losses, the U.A.E., which has a statutory tax rate of 0% and represents $2.1 million of our foreign losses, and Israel, which has a statutory tax rate of 25% and represents $8.3 million of our foreign losses.
We describe our accounting treatment of taxes more fully in Note 14 of the notes to the consolidated financial statements in this Annual Report on Form 10-K.
Stock-Based Compensation Arrangements
Accounting Standards Codification 718, or ASC 718,
Compensation—Stock Compensation,
requires employee stock-based payments to be accounted for under the fair value method. Under this method, we are 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. We use the straight-line amortization method for recognizing stock-based compensation expense.
We estimate 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 granted by us we estimate the fair value of each restricted stock award based on the closing trading price of our common stock as reported on the NASDAQ Global Select Market on the date of grant. There was no public market for our common stock prior to October 25, 2013, the date our common stock began trading on the NASDAQ Global Select Market, and as a result, the trading history of our common stock was limited through December 31, 2016. Therefore, we determined the volatility for options granted by us based on an analysis of reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility of options granted by us has been determined using an average of the historical volatility measures of this peer group of companies. The expected life assumption is based on the “simplified method” for estimating expected term as we do not have sufficient historical option exercises to support a reasonable estimate of the expected term. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. We use an expected dividend rate of zero as we currently have no history or expectation of paying dividends on our common stock.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09,
Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting
. The guidance simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of excess tax benefits in the consolidated statements of cash flows. This amendment is effective for annual periods beginning after December 15, 2016, and early adoption is permitted.
We elected to early adopt the new guidance in the fourth quarter of fiscal year 2016 which requires us to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. We elected to eliminate the forfeiture rate estimate and adopted the new policy to account for forfeitures in the period that they are incurred, and applied this policy on a modified retrospective basis. The impact of eliminating the forfeiture rate estimate increased stock compensation expense recorded in 2016 by
$0.9 million
, which included an immaterial adjustment to beginning retained earnings that we recorded through the consolidated statement of operations and comprehensive loss.
Prior to January 1, 2016, we recognized the excess tax benefits of stock-based compensation expense as additional paid-in capital (“APIC”), and tax deficiencies of stock-based compensation expense in the income tax provision or as APIC to the extent that there were sufficient recognized excess tax benefits previously recognized. As a result of the prior guidance that excess tax benefits reduce taxes payable prior to being recognized as an increase in paid in capital, we had not recognized certain deferred tax assets (all tax attributes such as loss or credit carryforwards) that could be attributed to tax deductions related to equity compensation in excess of compensation recognized for financial reporting.
Effective as of January 1, 2016, we early adopted a change in accounting policy in accordance with ASU 2016-09 to account for excess tax benefits and tax deficiencies as income tax expense or benefit, treated as discrete items in the reporting period in which they occur, and to recognize previously unrecognized deferred tax assets that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation in excess of compensation recognized for financial reporting. No prior periods were restated as a result of this change in accounting policy as we previously maintained a valuation allowance against our deferred tax assets that could be attributed to equity compensation in excess of compensation recognized for financial reporting.
Due to our net shortfall position at the time of adoption, the new standard resulted in the recognition of income tax expense in our provision for income taxes of $0.9 million rather than paid-in capital for the year ended December 31, 2016. The adoption of ASU 2016-09 could create volatility in our future effective tax rate.
Segment Information
In February 2016, we acquired Constant Contact. At the time of the acquisition, we anticipated that the gross margins of Constant Contact would become more aligned with our other brands; however, through review of Constant Contact's performance during 2016, we noted that Constant Contact continued to return higher margins than originally anticipated, and therefore determined that Constant Contact should be its own reporting segment. As such, we determined that we have
two
reportable segments: the web presence
segment, which consists primarily of our web hosting brands and related products such as domain names, website security tools, website design tools and services, ecommerce tools and other services designed to grow the online presence of a small business; and the email marketing segment, which consists of the Constant Contact email marketing tools and the SinglePlatform marketing tool, both of which were acquired in the February 2016 acquisition of Constant Contact.
Results of Operations
The following tables set forth our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
|
(in thousands)
|
Revenue
|
$
|
629,845
|
|
|
$
|
741,315
|
|
|
$
|
1,111,142
|
|
Cost of revenue
|
381,488
|
|
|
425,035
|
|
|
583,991
|
|
Gross profit
|
248,357
|
|
|
316,280
|
|
|
527,151
|
|
Operating expense:
|
|
|
|
|
|
Sales and marketing
|
146,797
|
|
|
145,419
|
|
|
303,511
|
|
Engineering and development
|
19,549
|
|
|
26,707
|
|
|
87,601
|
|
General and administrative
|
64,746
|
|
|
81,386
|
|
|
143,095
|
|
Transaction expenses
|
4,787
|
|
|
9,582
|
|
|
32,284
|
|
Total operating expense
|
235,879
|
|
|
263,094
|
|
|
566,491
|
|
Income (loss) from operations
|
12,478
|
|
|
53,186
|
|
|
(39,340
|
)
|
Other income (expense)
|
(57,083
|
)
|
|
(52,974
|
)
|
|
(150,450
|
)
|
Income (loss) before income taxes and equity earnings of unconsolidated entities
|
(44,605
|
)
|
|
212
|
|
|
(189,790
|
)
|
Income tax expense (benefit)
|
6,186
|
|
|
11,342
|
|
|
(109,858
|
)
|
Loss before equity earnings of unconsolidated entities
|
(50,791
|
)
|
|
(11,130
|
)
|
|
(79,932
|
)
|
Equity loss of unconsolidated entities, net of tax
|
61
|
|
|
14,640
|
|
|
1,297
|
|
Net loss
|
$
|
(50,852
|
)
|
|
$
|
(25,770
|
)
|
|
$
|
(81,229
|
)
|
Net loss attributable to non-controlling interest
|
(8,017
|
)
|
|
—
|
|
|
(8,398
|
)
|
Net loss attributable to Endurance International Group Holdings, Inc.
|
$
|
(42,835
|
)
|
|
$
|
(25,770
|
)
|
|
$
|
(72,831
|
)
|
Comparison of the Years Ended
December 31, 2015
and
2016
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Change
|
|
2015
|
|
2016
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Revenue
|
$
|
741,315
|
|
|
$
|
1,111,142
|
|
|
$
|
369,827
|
|
|
50
|
%
|
Revenue increased by
$369.8 million
, or
50%
, from
$741.3 million
for the year ended
December 31, 2015
to
$1.1 billion
for the year ended
December 31, 2016
. Almost all of this increase, or $359.9 million, is attributable to revenues, including growth and synergies, from the acquisitions of businesses that were not part of our business for all or most of the year ended
December 31, 2015
, principally Constant Contact. The remaining balance of the increase is attributable primarily to revenue generated from our gateway products.
Our revenues are generated primarily from our products and services delivered on a subscription basis, which include web hosting, domains, website builders, search engine marketing and other similar services. We also generate non-subscription revenues through domain monetization and marketing development funds. Non-subscription revenues decreased from $52.5 million, or 7% of total revenue for the year ended
December 31, 2015
to $39.4 million, or 4% of revenue for the year ended
December 31, 2016
, primarily because there were fewer high-value domains available for sale in our BuyDomains portfolio as compared to 2015.
Our web presence segment revenue increased by
$43.0 million
, or
6%
, from
$741.3 million
for the year ended December 31, 2015 to
$784.3 million
for the year ended December 31, 2016. This increase includes $33.1 million from the acquisitions of
businesses that were not part of our business for all or most of the year ended December 31, 2015, and the balance of $9.9 million is attributable to other growth within this segment.
Our email marketing segment revenue was
$326.8 million
for the year ended December 31, 2016 and is entirely attributable to the acquisition of Constant Contact. Email marketing revenues were adversely impacted by the purchase accounting write-down of acquired deferred revenues, which decreased revenue by $15.2 million for the year ended December 31, 2016. Revenues earned by this segment for the pre-acquisition period from January 1, 2016 up to the acquisition date of February 9, 2016 were $41.1 million and are not included in our results of operations. Revenues separately reported by Constant Contact (as a standalone company) for the year ended December 31, 2015 were $367.4 million. Including the $41.1 million in revenues for the 2016 pre-acquisition period and disregarding the negative $15.2 million impact of purchase accounting, the Constant Contact business grew by
$15.7 million
, or 4%, for the year ended December 2016 as compared to the prior year.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2015
|
|
2016
|
|
Change
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Cost of revenue
|
$
|
425,035
|
|
|
57
|
%
|
|
$
|
583,991
|
|
|
53
|
%
|
|
$
|
158,956
|
|
|
37
|
%
|
Cost of revenue increased by
$159.0 million
, or
37%
, from
$425.0 million
for the year ended
December 31, 2015
to
$584.0 million
for the year ended
December 31, 2016
. Of this increase, $153.6 million was due to increased cost of revenue attributable to Constant Contact, including amortization expense of $64.7 million. The remaining increase was primarily due to increases in costs of $25.6 million associated with other acquisitions that were not part of the business for the year ended
December 31, 2015
and expansion of our gateway products, and $3.9 million in additional stock based compensation. These increases were partially offset by a $12.2 million net decrease in amortization expense related primarily to acquisitions before January 1, 2016, and a decrease of $5.4 million in integration costs for acquisitions that were migrated in 2016.
Our cost of revenue contains a significant portion of non-cash expenses, in particular amortization expense for the intangible assets we have acquired through our acquisitions and the Sponsor Acquisition. The following table sets forth the significant non-cash components of cost of revenue.
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2015
|
|
2016
|
|
(in thousands)
|
Amortization expense
|
$
|
91,057
|
|
|
$
|
143,562
|
|
Depreciation expense
|
31,170
|
|
|
48,120
|
|
Stock-based compensation expense
|
1,975
|
|
|
5,855
|
|
Cost of revenue for our web presence segment increased by $5.3 million, or 1%, from
$425.0 million
for the year ended December 31, 2015 to $430.3 million for the year ended December 31, 2016. The increase is primarily due to acquisitions and the expansion of our gateway products, which has been partially offset by lower amortization of intangible assets.
Cost of revenue for our email marketing segment was $153.6 million for the year ended December 31, 2016, and is entirely attributable to our acquisition of Constant Contact. Cost of revenue incurred by this segment for the pre-acquisition period from January 1, 2016 up to the acquisition date of February 9, 2016 was $11.6 million, and was not included in our results of operations. Cost of revenue separately reported by Constant Contact (as a standalone company) for this segment were $98.5 million for the year ended December 31, 2015. The increase in cost of revenues for the email marketing segment from the year ended December 31, 2015 to the 2016 period is primarily due to increased amortization expense of $63.1 million.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2015
|
|
2016
|
|
Change
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Gross profit
|
$
|
316,280
|
|
|
43
|
%
|
|
$
|
527,151
|
|
|
47
|
%
|
|
$
|
210,871
|
|
|
67
|
%
|
Gross profit increased by
$210.9 million
, or
67%
, from
$316.3 million
for the year ended
December 31, 2015
to
$527.2 million
for the year ended
December 31, 2016
. Approximately $173.2 million of this increase was due to gross profit contribution attributable to Constant Contact. Of the remaining $37.7 million increase, $17.3 million is primarily attributable to increases in our subscriber base from acquisitions other than Constant Contact and increased revenue from our gateway products. An additional $12.2 million is attributable to a net decrease in amortization expense primarily related to acquisitions before January 1, 2016, and a decrease of $5.4 million in integration costs for acquisitions that were migrated in 2016. Our gross profit as a percentage of revenue increased by 4 percentage points from
43%
for the year ended
December 31, 2015
to
47%
for the year ended
December 31, 2016
, mainly due to the acquisition of Constant Contact, since Constant Contact products generally have a higher gross profit percentage as compared to our other products.
The following table sets forth gross profit and the significant non-cash components of cost of revenue as a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2015
|
|
2016
|
|
(dollars in thousands)
|
Revenue
|
$
|
741,315
|
|
|
$
|
1,111,142
|
|
Gross profit
|
316,280
|
|
|
527,151
|
|
Gross profit % of revenue
|
43
|
%
|
|
47
|
%
|
Amortization expense % of revenue
|
12
|
%
|
|
13
|
%
|
Depreciation expense % of revenue
|
4
|
%
|
|
4
|
%
|
Stock-based compensation expense % of revenue
|
*
|
|
|
*
|
|
Our web presence segment gross profit increased by $37.7 million from
$316.3 million
for the year ended December 31, 2015 to $354.0 million for the year ended December 31, 2016. The increase was primarily due to acquisitions and gateway products, and lower amortization of intangible assets, as mentioned above. Our web presence gross profit as a percentage of revenue was 45% for the year ended December 31, 2016 as compared to 43% in the prior year. Lower amortization of intangible assets was the primary reason for the increase.
Our email marketing segment gross profit was $173.2 million and is entirely attributable to the acquisition of Constant Contact. Gross profit for this segment for the pre-acquisition period from January 1, 2016 up to the acquisition date of February 9, 2016 was $29.4 million, and is not included in our results of operations. Gross profit for the period ended December 31, 2016 was adversely impacted by the write down of deferred revenues as of the acquisition date, which reduced gross profit by $15.2 million for the 2016 period. Our email marketing gross profit as a percentage of revenue was 53% for the year ended December 31, 2016. Gross profit as a percentage of revenue separately reported by Constant Contact (as a standalone company) for this segment for the year ended December 31, 2015 was 73%. The decrease in gross profit percentage was the result of increased amortization of intangible assets, which amounted to 20% of revenues for this segment for the period ended December 31, 2016.
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2015
|
|
2016
|
|
Change
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Sales and marketing
|
$
|
145,419
|
|
|
20
|
%
|
|
$
|
303,511
|
|
|
27
|
%
|
|
$
|
158,092
|
|
|
109
|
%
|
Engineering and development
|
26,707
|
|
|
4
|
%
|
|
87,601
|
|
|
8
|
%
|
|
$
|
60,894
|
|
|
228
|
%
|
General and administrative
|
81,386
|
|
|
11
|
%
|
|
143,095
|
|
|
13
|
%
|
|
$
|
61,709
|
|
|
76
|
%
|
Transaction expenses
|
9,582
|
|
|
1
|
%
|
|
32,284
|
|
|
3
|
%
|
|
$
|
22,702
|
|
|
237
|
%
|
Total
|
$
|
263,094
|
|
|
36
|
%
|
|
$
|
566,491
|
|
|
51
|
%
|
|
$
|
303,397
|
|
|
115
|
%
|
Sales and Marketing.
Sales and marketing expense increased by
$158.1 million
, or
109%
, from
$145.4 million
for the year ended
December 31, 2015
to
$303.5 million
for the year ended
December 31, 2016
. Of this increase, $95.1 million was due to increases in sales and marketing expense attributable to Constant Contact and the remaining $63.0 million increase was attributable to increased expense for our web presence segment.
Sales and marketing expense for our web presence segment increased by $63.0 million, or 43%, from $145.4 million for the year ended December 31, 2015 to $208.4 million for the year ended December 31, 2016. This increase was primarily attributable to launches of gateway products of $69.0 million and a $2.2 million increase in stock-based compensation expense, partially offset by lower spending on our legacy products.
Sales and marketing expense for our email marketing segment was $95.1 million and is entirely attributable to our acquisition of Constant Contact. Sales and marketing expense incurred by this segment for the pre-acquisition period from January 1, 2016 up to the acquisition date of February 9, 2016 was $16.4 million, and is not included in our results of operations. Sales and marketing expense separately reported by Constant Contact (as a standalone company) for this segment for the year ended December 31, 2015 was $136.2 million. The decrease in sales and marketing expense for this segment is primarily due to cost reduction actions taken after the acquisition of Constant Contact.
Engineering and Development.
Engineering and development expense increased by
$60.9 million
, or
228%
, from
$26.7 million
for the year ended
December 31, 2015
to
$87.6 million
for the year ended
December 31, 2016
. Of this increase, $46.9 million was due to increases in engineering and development expense attributable to Constant Contact. The remaining increase was attributable to increased expense for our web presence segment.
Engineering and development expenses for our web presence segment increased by $14.0 million, or 52%, from $26.7 million for the year ended December 31, 2015 to $40.7 million for the year ended December 31, 2016. This increase was primarily attributable to $9.0 million of impairment charges and a $1.3 million increase in stock-based compensation. Impairment charges consisted of $2.0 million to write off an internally developed software tool which we determined did not meet our needs following the acquisition of Constant Contact, a $6.3 million charge to write off certain technology assets for Webzai Ltd. and a $0.8 million charge to write off certain intangible technology assets related to the AppMachine acquisition.
Engineering and development expense for our email marketing segment was $46.9 million for the period ended December 31, 2016. Engineering and development expense incurred by this segment for the pre-acquisition period from January 1, 2016 up to the acquisition date of February 9, 2016 was $7.0 million, and is not included in our results of operations. Engineering and development expense separately reported by Constant Contact (as a standalone company) for this segment for the year
ended December 31, 2015 was $57.1 million. The decrease in engineering and development expense for this segment is primarily due to cost reduction actions taken after the acquisition of Constant Contact.
General and Administrative.
General and administrative expense increased by
$61.7 million
, or
76%
, from
$81.4 million
for the year ended
December 31, 2015
to
$143.1 million
for the year ended
December 31, 2016
. Of this increase, $38.1 million was due to increases in general and administrative expense attributable to Constant Contact, and the remaining balance of the increase, or $23.6 million, related to increased expenses for our web presence segment.
General and administrative expense for our web presence segment increased by $23.6 million, or 29%, from $81.4 million for the year ended December 31, 2015 to $105.0 million for the year ended December 31, 2016. This increase is primarily due to increased stock-based compensation of $9.9 million, additional payroll and labor costs of $4.7 million due to an increase in headcount, an additional $3.6 million in audit, tax and insurance costs and additional legal fees of $2.3 million, principally related to expenses for SEC subpoenas and securities class action lawsuits.
General and administrative expense for our email marketing segment was $38.1 million for the period ended December 31, 2016. General and administrative expense incurred by this segment for the pre-acquisition period from January 1, 2016 to February 9, 2016 was $2.8 million. General and administrative expense separately reported by Constant Contact (as a standalone company) for this segment for the year ended December 31, 2015 was $46.2 million. The decrease in general and administrative expense for this segment was primarily due to cost reduction actions taken after the acquisition of Constant Contact.
Transaction Expenses.
Transaction expenses increased by
$22.7 million
, or
237%
, from
$9.6 million
for the year ended
December 31, 2015
to
$32.3 million
for the year ended
December 31, 2016
. The period-over-period increase was primarily
attributable to costs related to our acquisition of Constant Contact in February 2016.
Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Change
|
|
2015
|
|
2016
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Other expense, net
|
$
|
(52,974
|
)
|
|
$
|
(150,450
|
)
|
|
$
|
(97,476
|
)
|
|
184
|
%
|
Other expense, net increased by
$97.5 million
, or
184%
, from
$53.0 million
for the year ended
December 31, 2015
to
$150.5 million
for the year ended
December 31, 2016
. The increase is primarily due to an
$83.7 million
increase in interest expense, including service fees, related to our indebtedness. Additionally, there was an increase of
$6.0 million
in amortization of deferred financing fees and a
$3.0 million
increase in original issue discounts, as well as an increase of
$1.4 million
of accretion of present value for the deferred consideration related to the AppMachine, Webzai, BuyDomains and Ace Data Center acquisitions.
Income Tax Expense (Benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Change
|
|
2015
|
|
2016
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Income tax expense (benefit)
|
$
|
11,342
|
|
|
$
|
(109,858
|
)
|
|
$
|
(121,200
|
)
|
|
(1,069
|
)%
|
For the years ended
December 31, 2015
and 2016, we recognized tax expense of
$11.3 million
and a tax benefit of
$109.9 million
, respectively, in the consolidated statements of operations and comprehensive loss. The income tax benefit for the year ended December 31, 2016 was primarily attributable to a
$52.5 million
change in the valuation allowance, a federal and state deferred tax benefit of
$50.7 million
, which includes the identification and recognition of
$9.2 million
of U.S. federal and state tax credits, and a foreign deferred tax benefit of
$10.0 million
, partially offset by a provision for federal and state current income taxes of
$1.1 million
and foreign current tax expense of
$2.3 million
.
Comparison of the Years Ended December 31, 2014 and 2015
We acquired, and formed, the email marketing segment following the acquisition of Constant Contact on February 9, 2016. All comparisons below for the 2014 and 2015 periods relate to our web presence segment.
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Change
|
|
2014
|
|
2015
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Revenue
|
$
|
629,845
|
|
|
$
|
741,315
|
|
|
$
|
111,470
|
|
|
18
|
%
|
Revenue increased by $111.5 million, or 18%, from $629.8 million for the year ended December 31, 2014 to $741.3 million for the year ended December 31, 2015. Of this increase, $49.4 million is attributable to revenues, including growth and synergies, from the acquisitions of businesses that were not part of our business for all or most of the year ended December 31, 2014. The remaining balance of the increase, or $62.1 million, is attributable primarily to the growth of our business, and to a lesser extent, other factors, including principally the $14.8 million impact of the purchase accounting adjustment for the Directi acquisition.
Our revenues are generated primarily from our products and services delivered on a subscription basis, which include web hosting, domains, website builders, search engine marketing and other similar services. We also generate non-subscription revenues through domain monetization and marketing development funds. Non-subscription revenues increased from $28.3 million, or 4% of total revenue for the year ended December 31, 2014 to $52.6 million, or 7% of revenue for the year ended December 31, 2015. The increase non-subscription revenues is primarily due to the acquisitions of Directi and BuyDomains.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2014
|
|
2015
|
|
Change
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Cost of revenue
|
$
|
381,488
|
|
|
61
|
%
|
|
$
|
425,035
|
|
|
57
|
%
|
|
$
|
43,547
|
|
|
11
|
%
|
Cost of revenue increased by $43.5 million, or 11%, from $381.5 million for the year ended December 31, 2014 to $425.0 million for the year ended December 31, 2015. Of this increase, domain registration costs increased by $32.5 million, partially due to the purchase accounting impact of Directi for the year ended December 31, 2014 and inclusion of domain registration costs related to businesses that we acquired that were not part of our business for most of the year ended December 31, 2014. In addition, support expenses increased by $10.8 million due to acquisitions subsequent to December 31, 2014 and investment in new and existing brands, data center expenses increased by $6.1 million due to acquisitions, subscriber growth and price increases under certain of our data center contracts, depreciation expense increased by $2.0 million, stock-based compensation expense increased by $1.4 million and merchant fees increased by $2.4 million. These increases were partially offset by an $11.7 million decrease in amortization expense.
Our cost of revenue contains a significant portion of non-cash expenses, in particular amortization expense for the intangible assets we have acquired through our acquisitions and the Sponsor Acquisition. The following table sets forth the significant non-cash components of cost of revenue.
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
2015
|
|
(in thousands)
|
Amortization expense
|
$
|
102,723
|
|
|
$
|
91,057
|
|
Depreciation expense
|
29,007
|
|
|
31,170
|
|
Stock-based compensation expense
|
547
|
|
|
1,975
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2014
|
|
2015
|
|
Change
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Gross profit
|
$
|
248,357
|
|
|
39
|
%
|
|
$
|
316,280
|
|
|
43
|
%
|
|
$
|
67,923
|
|
|
27
|
%
|
Gross profit increased by $67.9 million, or 27%, from $248.4 million for the year ended December 31, 2014 to $316.3 million for the year ended December 31, 2015. Approximately $56.2 million of the increase was primarily attributable to increases in our subscriber base, including acquired subscribers. Additionally, $11.7 million of the increase was attributable to a net decrease in amortization expense. Our gross profit as a percentage of revenue increased by four percentage points from 39% for the year ended December 31, 2014 to 43% for the year ended December 31, 2015. This increase was primarily attributable to lower amortization of intangible assets, which decreased to 12% of revenue for the year ended December 31, 2015 as compared to 16% for the year ended December 31, 2014.
The following table sets forth gross profit and the significant non-cash components of cost of revenue as a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
2015
|
|
(dollars in thousands)
|
Revenue
|
$
|
629,845
|
|
|
$
|
741,315
|
|
Gross profit
|
248,357
|
|
|
316,280
|
|
Gross profit % of revenue
|
39
|
%
|
|
43
|
%
|
Amortization expense % of revenue
|
16
|
%
|
|
12
|
%
|
Depreciation expense % of revenue
|
5
|
%
|
|
4
|
%
|
Stock-based compensation expense % of revenue
|
*
|
|
|
*
|
|
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2014
|
|
2015
|
|
Change
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Sales and marketing
|
$
|
146,797
|
|
|
23
|
%
|
|
$
|
145,419
|
|
|
20
|
%
|
|
$
|
(1,378
|
)
|
|
(1
|
)%
|
Engineering and development
|
19,549
|
|
|
3
|
%
|
|
26,707
|
|
|
4
|
%
|
|
7,158
|
|
|
37
|
%
|
General and administrative
|
69,533
|
|
|
11
|
%
|
|
90,968
|
|
|
12
|
%
|
|
21,435
|
|
|
31
|
%
|
Total
|
$
|
235,879
|
|
|
37
|
%
|
|
$
|
263,094
|
|
|
35
|
%
|
|
$
|
27,215
|
|
|
12
|
%
|
Sales and Marketing.
Sales and marketing expense decreased by $1.4 million, or 1%, from $146.8 million for the year ended December 31, 2014 to $145.4 million for the year ended December 31, 2015. The decrease in sales and marketing expense was primarily attributable to lower introductory product marketing spend for certain products, including cloud storage products, as our subscriber base became more familiar with these products.
Engineering and Development.
Engineering and development expense increased by $7.2 million, or 37%, from $19.5 million for the year ended December 31, 2014 to $26.7 million for the year ended December 31, 2015. Of this increase, $5.2 million was due to an increase in payroll and benefits to support the growth in our business, $1.1 million was due to an increase in stock-based compensation expense, $1.2 million was due to consulting costs incurred in connection with our restructuring
activities and $0.5 million was due to an increase in depreciation expense, partially offset by a $0.8 million reduction in integration and restructuring costs.
General and Administrative.
General and administrative expense increased by $21.4 million, or 31%, from $69.5 million for the year ended December 31, 2014 to $90.9 million for the year ended December 31, 2015. The year-over-year increase consisted of a $3.9 million increase in personnel and facilities related costs to support the growth of our business and a $9.7 million increase in stock-based compensation, of which $5.9 million is related to the grant of a performance-based restricted stock award to our chief executive officer. In addition, the increase in general and administrative expense includes $1.3 million of additional legal advisory expense, a $5.5 million increase in transaction expenses primarily due to the acquisition of Constant Contact, $0.7 million of follow-on offering expenses incurred on behalf of the selling stockholders during the March 2015 follow-on offering and a $0.3 million increase in depreciation expense.
Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Change
|
|
2014
|
|
2015
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Other expense, net
|
$
|
(57,083
|
)
|
|
$
|
(52,974
|
)
|
|
$
|
4,109
|
|
|
7
|
%
|
Other expense, net decreased by $4.1 million, or 7%, from $57.1 million for the year ended December 31, 2014 to $53.0 million for the year ended December 31, 2015. This decrease is primarily due to a $5.4 million gain as a result of the redemption of our equity interest in World Wide Web Hosting and a $0.1 million decrease in interest expense related to capital lease obligations. The decrease was partially offset by a $0.5 million increase in interest expense related to amounts drawn down on our revolving credit facility during the year ended December 31, 2015 as compared with the year ended December 31, 2014 and $1.1 million of accretion of present value for the deferred consideration related to the Webzai, BuyDomains and Ace acquisitions.
Income Tax Expense (Benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Change
|
|
2014
|
|
2015
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Income tax expense
|
$
|
6,186
|
|
|
$
|
11,342
|
|
|
$
|
5,156
|
|
|
83
|
%
|
Income tax expense increased by $5.2 million, or 83%, from $6.2 million for the year ended December 31, 2014 to $11.3 million for the year ended December 31, 2015. The increase consisted of a net increase in our deferred tax expense of $3.5 million and a net increase in our current federal, state and foreign income tax expense of $1.7 million. The net increase in our deferred tax expense from December 31, 2014 to December 31, 2015 was primarily attributable to a $9.9 million increase in federal, state and foreign deferred tax expense, partially offset by a $6.4 million decrease in provisions for the valuation allowance. In the year ended December 31, 2015, we had nondeductible expenses primarily related to stock-based compensation, transaction costs, other foreign permanent differences and a nontaxable gain on the redemption of our equity interest in World Wide Web Hosting.
Liquidity and Capital Resources
Sources of Liquidity
We have funded our operations since inception primarily with cash flow generated by operations, borrowings under our credit facilities and public offerings of our securities. Historically, we have used debt primarily to finance our acquisition related activities. During 2014 and 2015, we used borrowings under our revolving credit facility to help meet our funding requirements for our acquisitions and minority investments. During 2016, we used borrowings under the revolving credit facility for temporary working capital needs, including deferred acquisition related payments, and repaid the borrowings by the end of the year. In 2017, we may use the revolving credit facility for similar working capital needs.
Term Loan
In November 2013, we entered into a first lien term loan facility of $1,050.0 million, which matures on November 9, 2019. On February 9, 2016, in connection with our acquisition of Constant Contact, we entered into a $735.0 million incremental first lien term loan facility and a new $165.0 million revolving credit facility, and our wholly owned subsidiary EIG Investors issued $350.0 million aggregate principal amount of 10.875% senior notes due 2024. We refer to the incremental first lien term loan facility and new revolving credit facility, together with our previously existing first lien term loan facility, as the “Senior Credit Facilities” and to the 10.875% senior notes due 2024 as the “Notes”.
As a result of the “most-favored nation” pricing provision in our credit agreement, the interest rate on our November 2013 first lien term loan facility increased to LIBOR plus 5.48% per annum on February 28, 2016, subject to a LIBOR floor of 1.0% per annum. In addition, we are obligated to use commercially reasonable efforts to make voluntary prepayments on the November 2013 first lien term loan facility to effectively double the amount of each scheduled amortization payment under that facility (which is 0.25% per quarter of the principal outstanding as of November 25, 2013).
The incremental first lien term loan facility will mature on February 9, 2023, and bears interest at a rate of LIBOR plus 5.0% per annum, subject to a LIBOR floor of 1.0% per annum, and has scheduled amortization of 0.50% per quarter.
Revolving Credit Facility
Loans under the $165.0 million revolving credit facility bear interest at a rate of LIBOR plus 4.0% per annum (subject to a leverage-based step-down), without a LIBOR floor. This revolving credit facility has a “springing” maturity date of August 10, 2019 unless the November 2013 first lien term loan facility has been repaid in full or otherwise extended to at least 91 days after the maturity of the revolving credit facility.
Loans under the Senior Credit Facilities are also subject to a base rate option, with interest rate spreads of 1.0% per annum less than those applicable to LIBOR-based loans.
The Senior Credit Facilities have been fully and unconditionally guaranteed, and secured, by us and certain of our subsidiaries (including Constant Contact and its subsidiaries).
10.875% Senior Notes due 2024
The Notes will mature in February 2024, were issued at a price of 98.065% of par and will bear interest at the rate of 10.875% per annum. The Notes have been fully and unconditionally guaranteed, on a senior unsecured basis, by us and our subsidiaries that guarantee the Senior Credit Facilities (including Constant Contact and its subsidiaries).
On January 30, 2017, we completed a registered exchange offer for the Notes, as required under the registration rights agreement we entered into with the initial purchasers of the Notes. All of the $350.0 million aggregate principal amount of the original notes was validly tendered for exchange as part of this exchange offer.
As of
December 31, 2016
, we had cash and cash equivalents totaling
$53.6 million
and negative working capital of
$362.7 million
, which included the $21.0 million current portion of the first lien term loan facility and $14.7 million current portion of the incremental first lien term loan facility. There was no balance outstanding on our revolving credit facility as of
December 31, 2016
. In addition, we had approximately $1,994.6 million of long term indebtedness, gross of deferred financing costs, outstanding under our first lien term loan facility, incremental first lien term loan facility and the Notes. We also had
$444.4 million
of short-term and long-term deferred revenue, which is not expected to be payable in cash.
Debt Covenants
Senior Credit Facilities
The Senior Credit Facilities require that we comply with a financial covenant to maintain a maximum ratio of consolidated senior secured indebtedness to Bank Adjusted EBITDA (as defined below).
The Senior Credit Facilities contain covenants that limit our 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 our assets; and enter into certain transactions with affiliates. Additionally, the Senior Credit Facilities require us 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. We were in compliance with all covenants at
December 31, 2016
.
With the exception of certain equity interests and other excluded assets under the terms of the Senior Credit Facilities, substantially all of our assets are pledged as collateral for the obligations under the Senior Credit Facilities.
Notes
The indenture with respect to the Notes contains covenants that limit our 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 our assets; and enter into certain transactions with affiliates. Upon a change of control as defined in the Indenture, we or EIG Investors must offer to repurchase the 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 Notes to be due and payable immediately.
Net Leverage Ratio
The Senior Credit Facilities require that we comply with a financial covenant to maintain a maximum ratio of consolidated net senior secured indebtedness on the date of determination to an adjusted consolidated EBITDA measure, which we refer to as Bank Adjusted EBITDA, for the most recently completed four quarters (which we refer to as trailing twelve months, or TTM). This net leverage ratio may not exceed 6.50 to 1.00 through December 31, 2016, 6.25 to 1.00 from March 31, 2017 through December 31, 2017, and 6.00 to 1.00 from March 31, 2018 and thereafter. As of
December 31, 2016
, we were in compliance with this covenant.
Our credit agreement defines the net consolidated senior secured indebtedness as of any date of determination as the aggregate amount of indebtedness of us and our restricted subsidiaries, determined on a consolidated basis in accordance with GAAP, including indebtedness for borrowed money, unreimbursed obligations under letters of credit, obligations with respect to capital lease obligations and debt obligations evidenced by promissory notes and similar instruments, minus the aggregate amount of cash and permitted investments, excluding cash and permitted investments that are restricted.
Our credit agreement defines Bank Adjusted EBITDA as net income (loss) adjusted to exclude interest expense, income tax expense (benefit), depreciation and amortization. Bank Adjusted EBITDA also adjusts net income (loss) by excluding certain noncash foreign exchange gains (losses), certain gains (losses) from sale of assets, stock-based compensation, unusual and non-recurring expenses (including acquisition related costs, gains or losses on early extinguishment of debt, and loss on impairment of tangible or intangible assets). It also adjusts net income (loss) for revenue on a billed basis, changes in deferred domain costs, share of loss (profit) of unconsolidated entities, and certain integration related costs. Finally, it adjusts net income (loss) for pro forma adjusted EBITDA on a twelve-month lookback period for acquisitions made in any given quarter.
We use Bank Adjusted EBITDA to monitor our net leverage ratio and our ability to undertake key investing and financing functions such as making investments and incurring additional indebtedness, which may be prohibited by the covenants under our credit agreement unless we comply with certain financial ratios and tests.
Bank Adjusted EBITDA is a supplemental measure of our liquidity and is not presented in accordance with GAAP. Bank Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered an alternative to revenue, net income (loss), cash flow, or any other performance measure derived in accordance with GAAP. Our presentation of Bank Adjusted EBITDA may not be comparable with similarly titled measures of other companies.
As of
December 31, 2016
, our net leverage ratio on a TTM basis was
4.56
to 1.00 and was calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended,
|
|
|
|
|
March 31, 2016
|
|
June 30, 2016
|
|
September 30, 2016
|
|
December 31, 2016
|
|
TTM
|
|
|
(in thousands except ratios)
|
Net income (loss)
|
|
$
|
14,081
|
|
|
$
|
(33,430
|
)
|
|
$
|
(29,798
|
)
|
|
$
|
(32,082
|
)
|
|
$
|
(81,229
|
)
|
Interest expense
|
|
30,371
|
|
|
40,994
|
|
|
41,208
|
|
|
40,315
|
|
|
$
|
152,888
|
|
Income tax expense (benefit)
|
|
(99,902
|
)
|
|
(13,931
|
)
|
|
(7,387
|
)
|
|
11,362
|
|
|
$
|
(109,858
|
)
|
Depreciation
|
|
13,172
|
|
|
16,760
|
|
|
17,010
|
|
|
13,418
|
|
|
$
|
60,360
|
|
Amortization of other intangible assets
|
|
29,874
|
|
|
37,823
|
|
|
37,982
|
|
|
37,883
|
|
|
$
|
143,562
|
|
Stock-based compensation
|
|
18,388
|
|
|
15,024
|
|
|
14,806
|
|
|
10,049
|
|
|
$
|
58,267
|
|
Integration and restructuring costs (1)
|
|
15,037
|
|
|
9,627
|
|
|
7,652
|
|
|
(1,750
|
)
|
|
$
|
30,566
|
|
Transaction expenses and charges
|
|
31,120
|
|
|
978
|
|
|
159
|
|
|
27
|
|
|
$
|
32,284
|
|
(Gain) loss of unconsolidated entities
|
|
(10,727
|
)
|
|
341
|
|
|
5,018
|
|
|
4,803
|
|
|
$
|
(565
|
)
|
Impairment of long-lived assets
|
|
1,437
|
|
|
6,847
|
|
|
—
|
|
|
754
|
|
|
$
|
9,039
|
|
(Gain) loss on assets, not ordinary course
|
|
—
|
|
|
—
|
|
|
56
|
|
|
(85
|
)
|
|
$
|
(29
|
)
|
Legal advisory expenses
|
|
1,540
|
|
|
1,458
|
|
|
985
|
|
|
1,062
|
|
|
$
|
5,045
|
|
Billed revenue to GAAP revenue adjustment
|
|
42,573
|
|
|
12,317
|
|
|
3,724
|
|
|
(4,451
|
)
|
|
$
|
54,163
|
|
Domain registration cost cash to GAAP adjustment
|
|
(3,745
|
)
|
|
441
|
|
|
69
|
|
|
(1,005
|
)
|
|
$
|
(4,240
|
)
|
Currency translation
|
|
156
|
|
|
206
|
|
|
209
|
|
|
243
|
|
|
$
|
813
|
|
Adjustment for acquisitions on a pro forma basis (2)
|
|
12,902
|
|
|
(162
|
)
|
|
(42
|
)
|
|
—
|
|
|
$
|
12,698
|
|
Bank Adjusted EBITDA
|
|
$
|
96,277
|
|
|
$
|
95,293
|
|
|
$
|
91,651
|
|
|
$
|
80,543
|
|
|
$
|
363,764
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of notes payable
|
|
|
|
|
|
|
|
|
|
$
|
35,700
|
|
Current portion of capital lease obligations
|
|
|
|
|
|
|
|
|
|
6,690
|
|
Notes payable - long term
|
|
|
|
|
|
|
|
|
|
1,951,280
|
|
Capital lease obligations - long term
|
|
|
|
|
|
|
|
|
|
512
|
|
Original issue discounts and deferred financing costs
|
|
|
|
|
|
|
|
|
|
69,195
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Unsecured notes
|
|
|
|
|
|
|
|
|
|
(350,000
|
)
|
Cash
|
|
|
|
|
|
|
|
|
|
(53,596
|
)
|
Certain permitted restricted cash
|
|
|
|
|
|
|
|
|
|
(429
|
)
|
Net senior secured indebtedness
|
|
|
|
|
|
|
|
|
|
$
|
1,659,352
|
|
Net leverage ratio
|
|
|
|
|
|
|
|
|
|
4.56
|
|
Maximum net leverage ratio
|
|
|
|
|
|
|
|
|
|
6.50
|
|
(1) Integration and restructuring costs incurred for the three months ended December 31, 2016 include the reversal of $2.4 million of integration costs incurred related to the Ecommerce integration due to a revised plan that will reduce the expected savings from this integration.
(2) Consists of pro forma adjusted EBITDA for acquired entities on a TTM basis, as adjusted for projected cost savings arising from decisions undertaken by us on or before the acquisition date of the relevant acquisition. This adjustment is revised each fiscal quarter for new acquisitions.
Cash and Cash Equivalents
As of December 31, 2016, our cash and cash equivalents were primarily held for working capital purposes and for required principal and interest payments under our indebtedness. A majority of our cash and cash equivalents was held in operating accounts. Our cash and cash equivalents increased by
$20.6 million
from
$33.0 million
at December 31, 2015 to
$53.6 million
at December 31, 2016. Of the
$53.6 million
cash and cash equivalents we had at December 31, 2016, $14.1 million was held in foreign countries, and due to tax and accounting reasons, we do not plan to repatriate this cash in the near future. We used cash on hand at December 31, 2015, cash flows from operations and proceeds from our incremental first lien term loan facility and Notes to fund our acquisition and minority investment activity described under financing and investing activities below. Our future capital requirements will depend on many factors including, but not limited to our growth rate, expansion of sales and marketing activities, the introduction of new and enhanced products and services, market acceptance of our solutions, acquisitions, and our gross profits and operating expenses. We believe that our current cash and cash equivalents and operating cash flows will be sufficient to meet our anticipated working capital and capital expenditure requirements, as well as our required principal and interest payments under our indebtedness, for at least the next 12 months.
The following table shows our purchases of property and equipment, principal payments on capital lease obligations, depreciation, amortization and cash flows from operating activities, investing activities and financing activities for the stated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
|
(in thousands)
|
Purchases of property and equipment
|
$
|
(23,904
|
)
|
|
$
|
(31,243
|
)
|
|
$
|
(37,259
|
)
|
Principal payments on capital lease obligations
|
(3,608
|
)
|
|
(4,822
|
)
|
|
(5,892
|
)
|
Depreciation
|
30,956
|
|
|
34,010
|
|
|
60,360
|
|
Amortization
|
102,989
|
|
|
92,403
|
|
|
155,222
|
|
Cash flows provided by operating activities
|
142,893
|
|
|
177,228
|
|
|
154,961
|
|
Cash flows used in investing activities
|
(151,315
|
)
|
|
(133,801
|
)
|
|
(932,401
|
)
|
Cash flows provided by (used in) financing activities
|
(25,936
|
)
|
|
(41,632
|
)
|
|
796,396
|
|
Capital Expenditures
Our capital expenditures on the purchase of property and equipment for the years ended December 31, 2015 and 2016 were
$31.2 million
and
$37.3 million
, respectively. The higher property and equipment expenditures in the year ended December 31, 2016 consisted primarily of an investment in data center and customer infrastructure. In addition, our capital expenditures during the years ended December 31, 2015 and 2016 included
$4.8 million
and
$5.9 million
, respectively, of principal payments under capital leases for software. The remaining balance payable on the capital leases is
$7.2 million
as of December 31, 2016. We expect our capital expenditures to increase over the next twelve months as we enhance our disaster recovery capabilities.
Depreciation
Our depreciation expense for the years ended December 31, 2015 and 2016 increased from
$34.0 million
to
$60.4 million
, respectively. This increase was primarily due to expansion in our business by on-boarding acquisitions, principally Constant Contact, as well as investments in data center infrastructure and leasehold improvements. The leasehold improvements were associated with operating leases as we expanded and revamped our presence in Massachusetts.
Amortization
Our amortization expense, which includes amortization of other intangible assets, amortization of deferred financing costs and amortization of net present value of deferred consideration, increased by
$62.8 million
from
$92.4 million
for the year ended December 31, 2015 to
$155.2 million
for the year ended December 31, 2016. Of this increase in amortization expense, $67.8 million of amortization expense related to intangible assets of businesses that have been acquired since December 31, 2015, principally Constant Contact, partially offset by $12.2 million of lower amortization expense related primarily to acquisitions that occurred prior to December 31, 2015. In addition,
$1.4 million
of the increase is attributable to higher amortization expense of net present value of deferred consideration as a result of our Ace acquisition in September 2015,
$6.0 million
is attributable to increased deferred financing costs and
$3.0 million
is attributable to amortization of original issue discounts related to our incremental first lien term loan facility and Notes.
Operating Activities
Cash provided by operating activities consists primarily of net loss adjusted for certain non-cash items including depreciation, amortization, stock-based compensation expense and changes in deferred taxes, and the effect of changes in
working capital, in particular in deferred revenue. As we add subscribers to our platform, we typically collect subscription fees at the time of initial billing and recognize revenue over the terms of the subscriptions. Accordingly, we generate operating cash flows as we collect cash from our subscribers in advance of delivering the related products and services, and we maintain a significant deferred revenue balance. As we add subscribers and sell additional products and services, our deferred revenue balance increases. Our operating cash flows are net of transaction expenses and charges.
Net cash provided by operating activities was
$155.0 million
for the year ended
December 31, 2016
compared with
$177.2 million
for the year ended
December 31, 2015
. Net cash provided by operating activities for the year ended
December 31, 2016
consisted of net loss of
$81.2 million
, offset by non-cash charges of
$168.9 million
and a net change of
$67.3 million
in our operating assets and liabilities. The net change in our operating assets and liabilities included an increase in deferred revenue of
$54.4 million
, which was
$20.1 million
more than in the same period in 2015. The decrease in net cash provided by operating activities was the result of increased transaction and restructuring charges of $47.5 million, primarily related to the acquisition of Constant Contact, and increased cash paid for interest expense of
$61.7 million
, primarily related to increased debt incurred to acquire Constant Contact. These decreases in cash provided by operations were partially offset by increased cash flow from the operations of Constant Contact.
Net cash provided by operating activities was
$177.2 million
for the year ended
December 31, 2015
compared with
$142.9 million
for the year ended
December 31, 2014
. Net cash provided by operating activities for the year ended
December 31, 2015
consisted of net loss of
$25.8 million
, offset by non-cash charges of $173.7 million and a net change of $29.3 million in our operating assets and liabilities. The net change in our operating assets and liabilities included an increase in deferred revenue of $34.2 million, which was $33.5 million less than in the same period in 2014 and also included an increase in prepaid domain name registry fees of $8.1 million.
Net cash provided by operating activities was
$142.9 million
for the year ended
December 31, 2014
which consisted of a net loss of $50.9 million, offset by non-cash charges of $153.9 million, a cash dividend of $0.2 million from a minority investment and a net change of $39.7 million in our operating assets and liabilities. The net change in our operating assets and liabilities included an increase in deferred revenue of $67.7 million, and an increase in prepaid domain name registry fees of $30.5. In addition, during the year ended
December 31, 2014
, we reduced our interest payments by $43.4 million.
Investing Activities
Cash flows used in investing activities consist primarily of purchase of property and equipment, acquisition consideration payments, and changes in restricted cash balances.
During the year ended December 31, 2016, we used
$889.6 million
of cash, net of cash acquired, for the purchase consideration for our acquisitions of Constant Contact and AppMachine. We also used
$36.6 million
of cash to purchase property and equipment, net of proceeds from disposals of
$0.7 million
, and a net deposit of
$0.6 million
of restricted cash with a payment processor. In addition, we paid $0.6 million for a convertible promissory note from a business that provides web and mobile management solutions, with the potential for subsequent purchases of up to $0.4 million of additional convertible notes, and $5.0 million for a minority interest investment in Fortifico Limited, a company providing a billing, customer support and CRM solution to small and mid-sized businesses.
During the year ended December 31, 2015, we used $97.8 million of cash, net of cash acquired, for the purchase consideration for our Verio, World Wide Web Hosting, Ace and Ecommerce acquisitions. In addition, we used $8.5 million to make an additional investment in our joint venture with WZ UK Ltd. We also used $31.1 million of cash to purchase property and equipment, net of proceeds from disposals of $0.1 million, and purchased intangible assets of $0.1 million. These were partially offset by a net return of $0.1 million of restricted cash held by a payment processor and $0.2 million of proceeds from sale of assets. In addition, during the year ended December 31, 2015 we received a $3.5 million repayment on a note receivable related to our equity ownership in World Wide Web Hosting.
During the year ended December 31, 2014, we used $93.7 million in cash, net of cash acquired, for the purchase consideration for our acquisitions of the web presence business of Directi, Webzai, the assets of BuyDomains, the assets of Arvixe, LLC and our purchase of a domain name business. In addition, we used $15.0 million to acquire a minority interest in Automattic, Inc., $15.2 million to acquire a 40% minority interest in AppMachine, and $3.9 million to invest in a joint venture with WZ UK Ltd. and acquire a 49% interest in that company. We also used $23.9 million of cash to purchase property and equipment and $0.2 million to purchase certain intangible assets and received proceeds from disposals of $0.2 million. These were partially offset by a net return of $0.4 million of restricted cash held by a payment processor.
Financing Activities
Cash flow from financing activities consists primarily of the net change in our overall indebtedness, payment of associated financing costs, payment of deferred consideration for our acquisitions and the issuance or repurchase of equity.
During the year ended December 31, 2016, cash flows provided by financing activities was
$796.4 million
. We received
$1.1 billion
from the issuance of the incremental first lien term loan and Notes to finance the acquisition of Constant Contact. We also received
$2.6 million
of proceeds from the exercise of stock options, and
$2.8 million
as a capital investment from a joint venture minority partner. We made repayments on our revolving credit facility throughout the year, including $66.0 million that was re-financed as part of the debt we incurred to acquire Constant Contact. We also made
$55.2 million
in principal payments on our term loan facility, including $37.4 million of voluntary repayments. In addition, we paid
$52.6 million
in financing costs related to the Constant Contact financing and
$51.0 million
of deferred consideration payments, the largest component of which was $31.4 million related to our 2015 Ace acquisition.
During the year ended December 31, 2015, cash flows used in financing activities was $41.6 million, which included a payment of $30.5 million to increase our investment in JDI Backup Ltd. from 67% to 100%. During the year ended December 31, 2015, we borrowed an aggregate of $147.0 million against our revolving credit facility and repaid an aggregate of $130.0 million, with these net borrowings used to fund short-term working capital needs and acquisition related payments.
During the year ended December 31, 2014, cash flows used in financing activities was $25.9 million, which includes $98.3 million of deferred consideration paid during the period, the majority of which was for our Directi, HostGator and domain name business acquisitions. We received gross proceeds from our follow-on offering of $43.5 million less capitalized issuance costs of $2.2 million. During the year ended December 31, 2014, we borrowed in aggregate $150.0 million against our revolving credit facility and repaid in aggregate $100.0 million of the amount borrowed. These net borrowings were used for both short-term working capital needs and to fund acquisition related payments.
Free Cash Flow
Free cash flow, or FCF, is a non-GAAP financial measure that we calculate as GAAP cash flow from operations less capital expenditures and capital lease obligations. We believe that FCF provides investors with an indicator of our ability to generate positive cash flows after meeting our obligations with regard to capital expenditures (including capital lease obligations). The following table reflects the reconciliation of cash flow from operations to free cash flow (all data in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
Cash flow from operations
|
$
|
142,893
|
|
|
$
|
177,228
|
|
|
$
|
154,961
|
|
Less:
|
|
|
|
|
|
Capital expenditures and capital lease obligations
|
(27,512
|
)
|
|
(36,065
|
)
|
|
(43,151
|
)
|
Free cash flow
|
$
|
115,381
|
|
|
$
|
141,163
|
|
|
$
|
111,810
|
|
Free cash flow declined from
$141.2 million
for the year ended December 31, 2015 to
$111.8 million
for the year ended December 31, 2016, a decrease of
$29.4 million
. This decrease is primarily related to transaction and restructuring related payments of $47.5 million primarily incurred in connection with the acquisition of Constant Contact, and increased interest payments of $61.7 million due to the additional debt we incurred to acquire Constant Contact.
Net Operating Loss (NOL) Carry-Forwards
As of
December 31, 2016
, we had NOL carry-forwards available to offset future U.S. federal taxable income of approximately
$142.7 million
and future state taxable income of approximately
$125.6 million
. These NOL carry-forwards expire on various dates through 2036. As of December 31, 2016, we had NOL carry-forwards in foreign jurisdictions available to offset future foreign taxable income by approximately
$96.8 million
. We have loss carry-forwards that begin to expire in 2021 in India totaling
$2.5 million
and in China totaling $0.3 million. We have loss carry-forwards that begin to expire in 2020 in the Netherlands totaling $10.7 million. We also have loss carry-forwards in the United Kingdom, Israel and Singapore of
$81.1 million
,
$1.9 million
, and
$0.3 million
, respectively, which have an indefinite carry-forward period.
Utilization of the NOL carry-forwards may be subject to an annual limitation due to the ownership percentage change limitations under Section 382 of the Internal Revenue Code (“Section 382 limitation”). 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. In connection with a change in control in 2011, we were subject to Section 382 annual limitations of
$77.1 million
against the balance of NOL carry-forwards generated prior to the change in control in 2011. Through December 31, 2013, we accumulated the unused amount of Section 382 limitations in excess of the amount of NOL carry-forwards that were originally subject to limitation. Therefore, these unused NOL carry-forwards are available for future use to offset taxable income. We have completed an analysis of changes in its ownership from 2011, through our IPO, to December 31, 2013. We concluded that there was not a Section 382 ownership change during this period and therefore any NOLs generated through December 31, 2013, are not subject to any new Section 382 annual limitations on NOL carry-forwards. On November 20, 2014, we completed a follow-on offering of
13,000,000
shares of common stock. The underwriters also exercised their overallotment option to purchase an additional
1,950,000
shares of common stock from the selling stockholders. We performed an analysis of the impact of this offering and determined that no Section 382 change in ownership had occurred.
On March 11, 2015, we closed a follow-on offering of our common stock, in which selling stockholders sold
12,000,000
shares of common stock at a public offering price of
$19.00
per share. The underwriter also exercised its overallotment option to purchase an additional
1,800,000
shares of common stock from the selling stockholders. We completed an analysis of its ownership changes in the first half of 2016, which resulted in no ownership change for tax purposes within the meaning of the Internal Revenue Code Section 382(g).
Backlog and Deferred Revenue
We define our backlog as the total committed value of our contracts which have not been recognized as revenue at the end of a period. Since we require prepayments for all our products and services, our backlog is equal to our deferred revenue balance. Our backlog as of December 31, 2015 and 2016 was
$365.6 million
and
$444.4 million
, respectively. Because revenue for any period is a function of revenue recognized from deferred revenue under contracts in existence at the beginning of a period, as well as contract renewals and new customer contracts during the period, backlog at the beginning of any period is not necessarily indicative of future performance. Our presentation of backlog may differ from other companies in our industry.
Contractual Obligations and Commitments
Our principal commitments consist of obligations under our outstanding debt facilities, which in 2016 included a quarterly principal repayment against our first lien term loan facility of $5.3 million per quarter and quarterly principal repayment against our incremental term loan facility of $3.7 million per quarter, interest payments on our term loan facilities, which are typically three-month LIBOR loans, and interest payments on our Notes; non-cancelable leases for our office space; deferred payment obligations related to acquisitions; and purchase obligations under significant contracts. The following table summarizes these contractual obligations as of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
Total
|
|
Less
than 1 year
|
|
1-3 years
|
|
3-5 years
|
|
More
than 5 years
|
|
(in thousands)
|
Long-term debt obligations:
|
|
|
|
|
|
|
|
|
|
Principal payments on term loan facilities and notes
|
$
|
2,056,175
|
|
|
$
|
35,700
|
|
|
$
|
994,275
|
|
|
$
|
29,400
|
|
|
$
|
996,800
|
|
Interest payments on term loan facilities and notes
(1)
|
702,392
|
|
|
145,795
|
|
|
276,080
|
|
|
156,939
|
|
|
123,578
|
|
Capital lease obligations
|
7,470
|
|
|
6,895
|
|
|
575
|
|
|
—
|
|
|
—
|
|
Operating lease obligations
|
114,855
|
|
|
20,058
|
|
|
35,824
|
|
|
31,194
|
|
|
27,779
|
|
Deferred consideration
(2)
|
12,717
|
|
|
5,273
|
|
|
7,444
|
|
|
—
|
|
|
—
|
|
Non-controlling interest (3)
|
25,000
|
|
|
25,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Purchase commitments
|
48,164
|
|
|
31,805
|
|
|
14,182
|
|
|
2,177
|
|
|
—
|
|
Total
|
$
|
2,966,773
|
|
|
$
|
270,526
|
|
|
$
|
1,328,380
|
|
|
$
|
219,710
|
|
|
$
|
1,148,157
|
|
|
|
(1)
|
Term loan facility interest rate is based on adjusted LIBOR plus 400 basis points for the first lien term loan facility, subject to a LIBOR floor of 1.00%. As of December 31, 2016, the interest rates on our first lien term loan facility, our incremental
|
lien term loan facility, and our notes facility were 6.48%, 6.00%, and 10.88%, respectively. Our first lien term loan facility, our incremental lien term loan facility and our Notes mature on November 9, 2019, February 9, 2023, and February 1, 2024, respectively. Our revolving credit facility, which has no balance outstanding as of December 31, 2016, generally has a maturity date of August 10, 2019.
|
|
(2)
|
Consists of deferred payment obligations related to acquisitions.
|
|
|
(3)
|
We currently have a controlling interest in WZ UK of 86.4%, and are obligated, subject to the terms of our agreement with the WZ UK minority shareholders, to acquire the remaining equity interest of 13.6% for $25.0 million beginning in July 2017. Refer to
Note 13: Redeemable Non-Controlling Interest
, for further details.
|
Recently Issued Accounting Pronouncements - Recently Adopted
In November 2015, the FASB issued ASU No. 2015-17,
Income Taxes: Balance Sheet Classification of Deferred Taxes
, or ASU 2015-17. This new guidance requires that deferred tax liabilities and assets be classified as noncurrent in the balance sheet, in order to simplify the presentation of deferred income taxes. ASU 2015-17 is effective for annual reporting periods beginning after December 15, 2016. We adopted ASU 2015-17 as of the fourth quarter in 2015, on a prospective basis, and it did not have a material impact on our consolidated financial statements.
We adopted ASU No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs,
beginning on January 1, 2016, and retrospectively for all periods presented. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The unamortized value of deferred financing costs associated with our revolving credit facility were not affected by the ASU and continue to be presented as an asset on our consolidated balance sheets.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09,
Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting
. The guidance simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of excess tax benefits in the consolidated statements of cash flows. This amendment is effective for annual periods beginning after December 15, 2016, and early adoption is permitted.
We elected to early adopt the new guidance in the fourth quarter of fiscal year 2016, which requires us to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. The impact of the early adoption resulted in the following:
|
|
•
|
Due to our net shortfall position upon the time of adoption, the new standard resulted in additional tax expense in our provision for income taxes rather than paid-in capital of $0.9 million for the year ended December 31, 2016. Our beginning retained earnings was not impacted by the early adoption as we had a full valuation allowance against the U.S. deferred tax assets as of December 31, 2015.
|
|
|
•
|
As a result of prior guidance that required excess tax benefits to reduce taxes payable prior to recognition as an increase in paid in capital, we had not recognized certain deferred tax assets (loss carryforwards) that could be attributed to tax deductions related to equity compensation in excess of compensation recognized for financial reporting. As of January 1, 2016, we had generated federal and state net operating loss carryforwards due to excess tax benefits of $1.5 million and $0.7 million, respectively.
|
|
|
•
|
We elected to eliminate the forfeiture rate and adopted the new policy to account for forfeitures in the period that they are incurred, and applied this policy on a modified retrospective basis. The impact of eliminating the forfeiture rate increased the stock compensation recorded in 2016 by
$0.9 million
, which included an immaterial prior period adjustment that we recorded through the consolidated statement of operations and comprehensive loss for the year ended December 31, 2016.
|
Recently Issued Accounting Pronouncements - Recently Issued
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
(Topic 606) , or ASU 2014-09, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. Since then, the FASB has also issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principals versus Agent Considerations and ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing, which
further elaborate on the original ASU No. 2014-09. The core principle of these updates is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgments and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. In July 2015, the FASB approved a one-year deferral of the effective date to January 1, 2018, with early adoption to be permitted as of the original effective date of January 1, 2017. Once this standard becomes effective, companies may use either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We have performed an initial assessment of ASU 2014-09, and expect that this new guidance will impact the timing of when certain sales incentive payments, primarily to external parties, are charged to expense as these costs must be deferred over the life the related customer contract. We also expect that a considerable portion of our revenue recognition will not be materially impacted by this new guidance. We are currently calculating the impact of all expected changes from this guidance, and expect to have these calculations complete during the second half of fiscal 2017. After completing these calculations, we will then determine the transition method to be applied upon adoption.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases
. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a 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. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements, but we expect that that this will result in increased assets and liabilities.
In March 2016, the FASB issued Accounting Standards Update No. 2016-07,
Investments—Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting
. This new guidance removes the requirement for retroactive adjustment when an increase or decrease in the level of ownership qualifies an investment for the equity method. This amendment is effective for fiscal years beginning after December 15, 2016. We do not expect a material impact on our financial position or results of operations from adoption of this standard.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
. This new standard clarifies certain statement of cash flow presentation issues. This amendment is effective for annual periods beginning after December 15, 2017, and early adoption is permitted. We are currently evaluating the impact of its pending adoption of the new standard on our consolidated financial statements.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16,
Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory
. This new standard improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This amendment is effective for annual periods beginning after December 15, 2018, and early adoption is permitted. We do not believe the adoption of this ASU will have a material impact on our consolidated Financial Statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-16,
Statement of Cash Flows: Restricted Cash
. This new standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. This amendment is effective for annual periods beginning after December 15, 2017, and early adoption is permitted. We do not believe the adoption of this ASU will have a material impact on our consolidated Financial Statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04,
Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment
. This new standard eliminates Step 2, and instead an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis.
Off-Balance Sheet Arrangements
We do not have any special purpose entities or off-balance sheet arrangements.
|
|
|
Item 8.
|
Financial Statements and Supplementary Data
|
ENDURANCE INTERNATIONAL GROUP HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Endurance International Group Holdings, Inc.
Burlington, Massachusetts
We have audited the accompanying consolidated balance sheets of Endurance International Group Holdings, Inc. as of
December 31, 2015
and
2016
and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity and cash flows for each of the three years in the period ended
December 31, 2016
. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Endurance International Group Holdings, Inc. as of
December 31, 2015
and
2016
, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2016
in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company has elected to change its method to present deferred debt issuance costs as a direct reduction from the carrying amount of that debt liability on its consolidated balance sheet as of December 31, 2015 and 2016 in accordance with Accounting Standards Updates (“ASU”) No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs
.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Endurance International Group Holdings, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control—Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 24, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Boston, Massachusetts
February 24, 2017
Endurance International Group Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
December 31, 2016
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
33,030
|
|
|
$
|
53,596
|
|
Restricted cash
|
1,048
|
|
|
3,302
|
|
Accounts receivable
|
12,040
|
|
|
13,088
|
|
Prepaid domain name registry fees
|
55,793
|
|
|
55,444
|
|
Prepaid expenses and other current assets
|
15,675
|
|
|
28,678
|
|
Total current assets
|
117,586
|
|
|
154,108
|
|
Property and equipment—net
|
75,762
|
|
|
95,272
|
|
Goodwill
|
1,207,255
|
|
|
1,859,909
|
|
Other intangible assets—net
|
359,786
|
|
|
612,057
|
|
Deferred financing costs
|
—
|
|
|
4,932
|
|
Investments
|
27,905
|
|
|
15,857
|
|
Prepaid domain name registry fees, net of current portion
|
9,884
|
|
|
10,429
|
|
Other assets
|
4,322
|
|
|
3,710
|
|
Total assets
|
$
|
1,802,500
|
|
|
$
|
2,756,274
|
|
Liabilities, redeemable non-controlling interest and stockholders’ equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
12,280
|
|
|
$
|
16,074
|
|
Accrued expenses
|
45,779
|
|
|
67,722
|
|
Accrued interest
|
5,090
|
|
|
27,246
|
|
Deferred revenue
|
285,945
|
|
|
355,190
|
|
Current portion of notes payable
|
77,500
|
|
|
35,700
|
|
Current portion of capital lease obligations
|
5,866
|
|
|
6,690
|
|
Deferred consideration—short term
|
51,488
|
|
|
5,273
|
|
Other current liabilities
|
3,973
|
|
|
2,890
|
|
Total current liabilities
|
487,921
|
|
|
516,785
|
|
Long-term deferred revenue
|
79,682
|
|
|
89,200
|
|
Notes payable—long term, net of original issue discounts of $0 and $25,853, and deferred financing costs of $990 and $43,342, respectively
|
1,014,885
|
|
|
1,951,280
|
|
Capital lease obligations—long term
|
7,215
|
|
|
512
|
|
Deferred tax liability—long term
|
28,786
|
|
|
39,943
|
|
Deferred consideration—long term
|
813
|
|
|
7,444
|
|
Other liabilities
|
3,524
|
|
|
8,974
|
|
Total liabilities
|
1,622,826
|
|
|
2,614,138
|
|
Redeemable non-controlling interest
|
—
|
|
|
17,753
|
|
Commitments and contingencies (Note 16)
|
|
|
|
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; 132,024,558 and 134,793,857 shares issued at December 31, 2015 and December 31, 2016, respectively; 131,938,485 and 134,793,857 outstanding at December 31, 2015 and December 31, 2016, respectively
|
14
|
|
|
14
|
|
Additional paid-in capital
|
848,740
|
|
|
868,228
|
|
Accumulated other comprehensive loss
|
(1,718
|
)
|
|
(3,666
|
)
|
Accumulated deficit
|
(667,362
|
)
|
|
(740,193
|
)
|
Total stockholders’ equity
|
179,674
|
|
|
124,383
|
|
Total liabilities, redeemable non-controlling interest and stockholders’ equity
|
$
|
1,802,500
|
|
|
$
|
2,756,274
|
|
See accompanying notes to consolidated financial statements.
Endurance International Group Holdings, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014
|
|
Year Ended December 31, 2015
|
|
Year Ended December 31, 2016
|
Revenue
|
$
|
629,845
|
|
|
$
|
741,315
|
|
|
$
|
1,111,142
|
|
Cost of revenue
|
381,488
|
|
|
425,035
|
|
|
583,991
|
|
Gross profit
|
248,357
|
|
|
316,280
|
|
|
527,151
|
|
Operating expense:
|
|
|
|
|
|
Sales and marketing
|
146,797
|
|
|
145,419
|
|
|
303,511
|
|
Engineering and development
|
19,549
|
|
|
26,707
|
|
|
87,601
|
|
General and administrative
|
64,746
|
|
|
81,386
|
|
|
143,095
|
|
Transaction costs
|
4,787
|
|
|
9,582
|
|
|
32,284
|
|
Total operating expense
|
235,879
|
|
|
263,094
|
|
|
566,491
|
|
Income (loss) from operations
|
12,478
|
|
|
53,186
|
|
|
(39,340
|
)
|
Other income (expense):
|
|
|
|
|
|
Other income, net
|
—
|
|
|
5,440
|
|
|
1,862
|
|
Interest income
|
331
|
|
|
414
|
|
|
576
|
|
Interest expense
|
(57,414
|
)
|
|
(58,828
|
)
|
|
(152,888
|
)
|
Total other expense—net
|
(57,083
|
)
|
|
(52,974
|
)
|
|
(150,450
|
)
|
Income (loss) before income taxes and equity earnings of unconsolidated entities
|
(44,605
|
)
|
|
212
|
|
|
(189,790
|
)
|
Income tax expense (benefit)
|
6,186
|
|
|
11,342
|
|
|
(109,858
|
)
|
Loss before equity earnings of unconsolidated entities
|
(50,791
|
)
|
|
(11,130
|
)
|
|
(79,932
|
)
|
Equity loss of unconsolidated entities, net of tax
|
61
|
|
|
14,640
|
|
|
1,297
|
|
Net loss
|
$
|
(50,852
|
)
|
|
$
|
(25,770
|
)
|
|
$
|
(81,229
|
)
|
Net loss attributable to non-controlling interest
|
(8,017
|
)
|
|
—
|
|
|
(15,167
|
)
|
Excess accretion of non-controlling interest
|
—
|
|
|
—
|
|
|
6,769
|
|
Total net loss attributable to non-controlling interest
|
(8,017
|
)
|
|
—
|
|
|
(8,398
|
)
|
Net loss attributable to Endurance International Group Holdings, Inc.
|
$
|
(42,835
|
)
|
|
$
|
(25,770
|
)
|
|
$
|
(72,831
|
)
|
Comprehensive loss:
|
|
|
|
|
|
Foreign currency translation adjustments
|
(462
|
)
|
|
(1,281
|
)
|
|
(597
|
)
|
Unrealized gain (loss) on cash flow hedge, net of taxes of $0, $46, and ($792) for the years ended December 31, 2014, 2015 and 2016
|
—
|
|
|
80
|
|
|
(1,351
|
)
|
Total comprehensive loss
|
$
|
(43,297
|
)
|
|
$
|
(26,971
|
)
|
|
$
|
(74,779
|
)
|
Net loss per share attributable to Endurance International Group Holdings, Inc.—basic and diluted
|
$
|
(0.34
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.55
|
)
|
Weighted-average number of common shares used in computing net loss per share attributable to Endurance International Group Holdings, Inc.—basic and diluted
|
127,512,346
|
|
|
131,340,557
|
|
|
133,415,732
|
|
See accompanying notes to consolidated financial statements.
Endurance International Group Holdings, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Accumulated
Deficit
|
|
Total
Stockholders’
Equity
|
|
Number
|
|
Amount
|
|
Balance—December 31, 2013
|
124,766,544
|
|
|
$
|
13
|
|
|
$
|
754,061
|
|
|
$
|
(55
|
)
|
|
$
|
(598,757
|
)
|
|
$
|
155,262
|
|
Vesting of restricted shares
|
866,820
|
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercise of stock options
|
11,390
|
|
|
—
|
|
|
137
|
|
|
—
|
|
|
—
|
|
|
137
|
|
Shares issued in connection with acquisitions
|
2,269,579
|
|
|
—
|
|
|
27,235
|
|
|
—
|
|
|
—
|
|
|
27,235
|
|
Shares issued in follow-on offering, net of issuance costs of $2,405,176
|
3,000,000
|
|
|
—
|
|
|
41,095
|
|
|
—
|
|
|
—
|
|
|
41,095
|
|
Non-controlling interest accretion
|
—
|
|
|
—
|
|
|
(13,962
|
)
|
|
—
|
|
|
—
|
|
|
(13,962
|
)
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(462
|
)
|
|
—
|
|
|
(462
|
)
|
Net loss attributable to non-controlling interest
|
—
|
|
|
—
|
|
|
(8,017
|
)
|
|
—
|
|
|
—
|
|
|
(8,017
|
)
|
Net loss attributable to Endurance International Group Holdings, Inc.
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(42,835
|
)
|
|
(42,835
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
16,043
|
|
|
—
|
|
|
—
|
|
|
16,043
|
|
Balance—December 31, 2014
|
130,914,333
|
|
|
14
|
|
|
816,591
|
|
|
(517
|
)
|
|
(641,592
|
)
|
|
174,496
|
|
Vesting of restricted shares
|
838,809
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercise of stock options
|
185,343
|
|
|
—
|
|
|
2,224
|
|
|
—
|
|
|
—
|
|
|
2,224
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,201
|
)
|
|
—
|
|
|
(1,201
|
)
|
Net loss attributable to Endurance International Group Holdings, Inc.
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(25,770
|
)
|
|
(25,770
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
29,925
|
|
|
—
|
|
|
—
|
|
|
29,925
|
|
Balance—December 31, 2015
|
131,938,485
|
|
|
14
|
|
|
848,740
|
|
|
(1,718
|
)
|
|
(667,362
|
)
|
|
179,674
|
|
Vesting of restricted shares
|
2,458,886
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercise of stock options
|
396,486
|
|
|
—
|
|
|
2,564
|
|
|
—
|
|
|
—
|
|
|
2,564
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,948
|
)
|
|
—
|
|
|
(1,948
|
)
|
Non-controlling interest accretion
|
—
|
|
|
—
|
|
|
(30,844
|
)
|
|
—
|
|
|
—
|
|
|
(30,844
|
)
|
Stock awards issued in connection with acquisition of Constant Contact
|
—
|
|
|
—
|
|
|
5,395
|
|
|
—
|
|
|
—
|
|
|
5,395
|
|
Net loss attributable to non-controlling interest
|
—
|
|
|
—
|
|
|
(15,167
|
)
|
|
—
|
|
|
—
|
|
|
(15,167
|
)
|
Net loss attributable to Endurance International Group Holdings, Inc.
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(72,831
|
)
|
|
(72,831
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
57,540
|
|
|
—
|
|
|
—
|
|
|
57,540
|
|
Balance—December 31, 2016
|
134,793,857
|
|
|
$
|
14
|
|
|
$
|
868,228
|
|
|
$
|
(3,666
|
)
|
|
$
|
(740,193
|
)
|
|
$
|
124,383
|
|
See accompanying notes to consolidated financial statements.
Endurance International Group Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014
|
|
Year Ended December 31, 2015
|
|
Year Ended December 31, 2016
|
Cash flows from operating activities:
|
|
|
|
|
|
Net loss
|
$
|
(50,852
|
)
|
|
$
|
(25,770
|
)
|
|
$
|
(81,229
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation of property and equipment
|
30,956
|
|
|
34,010
|
|
|
60,360
|
|
Amortization of other intangible assets from acquisitions
|
102,723
|
|
|
91,057
|
|
|
143,562
|
|
Amortization of deferred financing costs
|
83
|
|
|
82
|
|
|
6,073
|
|
Amortization of net present value of deferred consideration
|
183
|
|
|
1,264
|
|
|
2,617
|
|
Amortization of original issuance discount
|
—
|
|
|
—
|
|
|
2,970
|
|
Impairment of long lived assets
|
—
|
|
|
—
|
|
|
9,039
|
|
Stock-based compensation
|
16,043
|
|
|
29,925
|
|
|
58,267
|
|
Deferred tax expense (benefit)
|
3,640
|
|
|
7,120
|
|
|
(113,242
|
)
|
Gain on sale of assets
|
(168
|
)
|
|
(155
|
)
|
|
(243
|
)
|
Gain from unconsolidated entities
|
—
|
|
|
(5,440
|
)
|
|
(1,862
|
)
|
Loss of unconsolidated entities
|
61
|
|
|
14,640
|
|
|
1,297
|
|
Dividend from minority interest
|
167
|
|
|
—
|
|
|
100
|
|
(Gain) loss from change in deferred consideration
|
384
|
|
|
1,174
|
|
|
(20
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
(691
|
)
|
|
(1,659
|
)
|
|
(1,620
|
)
|
Prepaid expenses and other current assets
|
(25,675
|
)
|
|
(13,187
|
)
|
|
(4,932
|
)
|
Accounts payable and accrued expenses
|
(1,615
|
)
|
|
9,926
|
|
|
19,458
|
|
Deferred revenue
|
67,654
|
|
|
34,241
|
|
|
54,366
|
|
Net cash provided by operating activities
|
142,893
|
|
|
177,228
|
|
|
154,961
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Businesses acquired in purchase transaction, net of cash acquired
|
(93,698
|
)
|
|
(97,795
|
)
|
|
(889,634
|
)
|
Purchases of property and equipment
|
(23,904
|
)
|
|
(31,243
|
)
|
|
(37,259
|
)
|
Cash paid for minority investment
|
(34,140
|
)
|
|
(8,475
|
)
|
|
(5,600
|
)
|
Proceeds from sale of assets
|
194
|
|
|
284
|
|
|
676
|
|
Proceeds from note receivable
|
—
|
|
|
3,454
|
|
|
—
|
|
Purchases of intangible assets
|
(200
|
)
|
|
(76
|
)
|
|
(27
|
)
|
Net (deposits) and withdrawals of principal balances in restricted cash accounts
|
433
|
|
|
50
|
|
|
(557
|
)
|
Net cash used in investing activities
|
(151,315
|
)
|
|
(133,801
|
)
|
|
(932,401
|
)
|
Endurance International Group Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014
|
|
Year Ended December 31, 2015
|
|
Year Ended December 31, 2016
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from issuance of term loan
|
—
|
|
|
—
|
|
|
1,056,178
|
|
Repayment of term loan
|
(10,500
|
)
|
|
(10,500
|
)
|
|
(55,200
|
)
|
Proceeds from borrowing of revolver
|
150,000
|
|
|
147,000
|
|
|
54,500
|
|
Repayment of revolver
|
(100,000
|
)
|
|
(130,000
|
)
|
|
(121,500
|
)
|
Payment of financing costs
|
(53
|
)
|
|
—
|
|
|
(52,561
|
)
|
Payment of deferred consideration
|
(98,318
|
)
|
|
(14,991
|
)
|
|
(51,044
|
)
|
Payment of redeemable non-controlling interest liability
|
(4,190
|
)
|
|
(30,543
|
)
|
|
(33,425
|
)
|
Principal payments on capital lease obligations
|
(3,608
|
)
|
|
(4,822
|
)
|
|
(5,892
|
)
|
Proceeds from exercise of stock options
|
137
|
|
|
2,224
|
|
|
2,564
|
|
Capital investment from minority interest partner
|
—
|
|
|
—
|
|
|
2,776
|
|
Proceeds from issuance of common stock
|
43,500
|
|
|
—
|
|
|
—
|
|
Issuance costs of common stock
|
(2,904
|
)
|
|
—
|
|
|
—
|
|
Net cash provided by (used in) financing activities
|
(25,936
|
)
|
|
(41,632
|
)
|
|
796,396
|
|
Net effect of exchange rate on cash and cash equivalents
|
(78
|
)
|
|
(1,144
|
)
|
|
1,610
|
|
Net increase (decrease) in cash and cash equivalents
|
(34,436
|
)
|
|
651
|
|
|
20,566
|
|
Cash and cash equivalents:
|
|
|
|
|
|
Beginning of period
|
66,815
|
|
|
32,379
|
|
|
33,030
|
|
End of period
|
$
|
32,379
|
|
|
$
|
33,030
|
|
|
$
|
53,596
|
|
Supplemental cash flow information:
|
|
|
|
|
|
Interest paid
|
$
|
57,418
|
|
|
$
|
57,338
|
|
|
$
|
119,063
|
|
Income taxes paid
|
$
|
2,615
|
|
|
$
|
4,510
|
|
|
$
|
4,278
|
|
Supplemental disclosure of non-cash financing activities:
|
|
|
|
|
|
Shares or awards issued in connection with acquisitions
|
$
|
27,235
|
|
|
$
|
—
|
|
|
$
|
5,395
|
|
Assets acquired under capital lease
|
$
|
11,704
|
|
|
$
|
9,795
|
|
|
$
|
—
|
|
See accompanying notes to consolidated financial statements.
Endurance International Group Holdings, Inc.
Notes to Consolidated Financial Statements
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 company, EIG Investors Corp. (“EIG Investors”), its primary operating subsidiary company, The Endurance International Group, Inc. (“EIG”), and other subsidiary companies 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 by investment funds and entities affiliated with Warburg Pincus and Goldman, Sachs & Co. on December 22, 2011 of a controlling interest in EIG Investors, EIG and EIG’s subsidiary companies. 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.
Common Stock Offerings
On November 26, 2014, the Company closed a follow-on offering of its common stock, in which the Company sold
3,000,000
shares of its common stock at a public offering price of
$14.50
per share and selling stockholders sold
10,000,000
shares of common stock. The underwriters also exercised their overallotment option to purchase an additional
1,950,000
shares of common stock from the selling stockholders. The Company did not receive any proceeds from the sale of shares by the selling stockholders. The follow-on offering resulted in gross proceeds to the Company of
$43.5 million
and net proceeds to the Company of
$41.1 million
after deducting underwriting discounts and commissions of
$1.7 million
and other estimated offering expenses of approximately
$0.7 million
payable by the Company. The Company incurred an additional
$0.3 million
of offering expenses on behalf of the selling stockholders, which was included in general and administrative expense in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2014.
On March 11, 2015, the Company closed a follow-on offering of its common stock, in which selling stockholders sold
12,000,000
shares of common stock at a public offering price of
$19.00
per share. The underwriter also exercised its overallotment option to purchase an additional
1,800,000
shares of common stock from the selling stockholders. The Company did not receive any proceeds from the sale of shares by the selling stockholders. The Company incurred
$0.7 million
of offering expenses on behalf of the selling stockholders, which was included in general and administrative expense in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2015.
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 have been eliminated on consolidation.
Segment Information
The Company has reviewed the criteria of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280-10,
Segment Reporting,
and determined that the Company is comprised of
two
segments for reporting purposes: web presence and email marketing.
In February 2016, the Company acquired Constant Contact. At the time of the acquisition, the Company anticipated that the gross margins of Constant Contact would become more aligned with the Company's other brands; however, through review of Constant Contact's performance during 2016, the Company noted that Constant Contact continued to return higher margins than originally anticipated, and therefore determined that Constant Contact should be its own reporting segment. As such, the Company determined that it has
two
reportable segments. The web presence segment consists predominantly of our web hosting brands and related products such as domain names, website security tools, website design tools and services, ecommerce tools and other services designed to grow the online presence of a small business. The email marketing segment
consists of the Constant Contact email marketing tools and the SinglePlatform marketing tool, both of which were acquired in the February 2016 acquisition of Constant Contact.
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.
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 deposits and cash held by merchant banks and payment processors, which provide collateral against any charge-backs, 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 carrying amount of the Company’s contingent consideration is recorded at fair value. 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 approximate their carrying value.
Derivative Instruments and Hedging Activities
FASB ASC 815,
Derivatives and Hedging
(“ASC 815”), 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 economically hedge certain of its risk, 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 ASU 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.
Concentrations of Credit and Other Risks
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Cash and cash equivalents are maintained at accredited financial institutions, and PayPal balances are at times without and in excess of federally insured limits. The Company has never experienced any losses related to these balances and does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
For the years ended,
December 31, 2014
,
2015
and
2016
, no subscriber represented
10%
or more of the Company’s total revenue. Additionally, as of December 31,
2015
and
2016
, no subscriber represented
10%
or more of the Company’s total accounts receivable.
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 capital lease 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 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 years ended
December 31, 2014
,
2015
and
2016
, the Company capitalized internal-use software development costs of
$5.4 million
,
$5.5 million
and
$11.8 million
, respectively.
Investments
The Company has minority investments in several privately-held companies. Investments in privately-held companies, in which the Company has a voting interest between
20.0%
and
50.0%
and exercises significant influence, are accounted for using the equity method of accounting. Under this method, the investment balance, originally recorded at cost, is adjusted to recognize the Company’s share of net earnings or losses of the investee company as they occur, limited to the extent of the Company’s investment in, advances to and commitments for the investee. The Company’s share of net earnings or losses of the investee are reflected in equity losses of unconsolidated entities, net of tax, in the Company’s accompanying consolidated statements of operations. Investments in which the Company has a voting interest of less than
20.0%
and over which it does not have significant influence are accounted for under the cost method of accounting.
During the year ended December 31, 2016, the Company incurred a charge of
$4.7 million
to impair the Company's
33.0%
equity interest in Fortifico Limited, after determining that there were diminishing projected future cash flows on this investment. This charge was recorded in other income, net in the consolidated statement of operations and comprehensive loss. Refer to
Note 8: Investments
for further details. This impairment was recorded within the web presence segment.
Business Combinations
The Company accounts for business acquisitions using the purchase method of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date. The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed based on their respective fair values. Goodwill represents excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed.
Significant judgments are used in determining fair values of assets acquired and liabilities assumed, as well as intangibles and their estimated useful lives. Fair value and useful life determinations are based on, among other factors, estimates of future expected cash flows, royalty cost savings and appropriate discount rates used in computing present values. These judgments may materially impact the estimates used in allocating acquisition date fair values to assets acquired and liabilities assumed, as well as the Company's current and future operating results. Actual results may vary from these estimates which may result in adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever occurs first. Adjustments to fair values of assets and liabilities made after the end of the measurement period are recorded within the Company's operating results.
Changes in the fair value of a contingent consideration resulting from a change in the underlying inputs are recognized in results of operations until the arrangement is settled.
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 business, a significant adverse change in certain 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, the 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 ASC 350,
Intangibles—Goodwill and Other
, or ASC 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 has determined it operates in
two
segments and that each segment is its own reporting unit, and as such, the Company has
two
reporting units, email marketing and web presence as of December 31, 2016. The provisions of ASC 350 require that a two-step impairment test be performed for goodwill. In the first step, the Company compares the fair value of its reporting unit to which goodwill has been allocated to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is considered not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then the Company would record an impairment loss equal to the difference.
The Company's annual assessment date is December 31 of each fiscal year.
As of December 31, 2016, the Company determined fair values for each of the reporting units based on consideration of the income approach, the market comparable approach and the market transaction approach. For purposes of 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 uses its internal forecasts to estimate future after-tax cash flows and include an estimate of long-term future growth rates based on its most recent views of the long-term outlook for each reporting unit. Actual results may differ from those assumed in our forecasts. The Company derived its discount rates using the weighted average cost of capital, using betas observed in its industry and published rates for industries relevant to our reporting units. The Company uses discount rates that are commensurate with the risks and uncertainty inherent in the respective business and its internally developed forecasts. Discount rates used in the Company's reporting unit valuations ranged from
11.0%
to
12.0%
. For purposes of the market approach, the Company uses a valuation technique in which values are derived based on market prices of comparable publicly traded companies. The Company also uses a market based valuation technique in which values are determined based on relevant observable information generated by market transactions involving comparable businesses. The Company assesses each valuation methodology based upon the relevance and availability of the data at the time it performs the valuation and weight the methodologies appropriately.
The carrying values of the reporting units were determined through specific allocation of assets and liabilities to the reporting units, and an apportionment method relating to our debt, whereby debt that was incurred in order to finance the acquisition of assets or businesses of a reporting unit was allocated to that reporting unit. In prior years, the Company had only
one
reporting unit. Subsequent to the acquisition of Constant Contact, and as described in
Note 20: Segment Information
, the Company determined that there is a second reporting unit relating to email marketing. The Company has allocated the fair value of the goodwill acquired through its acquisitions to the applicable reporting unit, and allocated the fair value of the goodwill acquired through its acquisition of Constant Contact to its email marketing reporting unit.
As of the Company's assessment date for 2016, the estimated fair values of its reporting units exceeded their carrying values and the Company concluded, based on the first step of the process, that
no
impairment existed as of that date in either of its reporting units.
As of December 31, 2016, the carrying value of goodwill that was allocated to the email marketing reporting unit and the web presence reporting unit was
$604.3 million
and
$1,255.6 million
, respectively. As of December 31, 2016, the fair value of the web presence segment exceeded the carrying value of its net assets by
67%
and the fair value of the email marketing segment exceeded the carrying value of its net assets by
35%
.
Goodwill amounted in aggregate to
$1,207.3 million
and
$1,859.9 million
as of
December 31, 2015
and
2016
, respectively, and
no
impairment charges have 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, domain names available for sale and in-process research and development (“IPR&D”). 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 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 impairment loss is charged to expense in the period the impairment is identified.
No
impairment losses were identified for the years ended December 31, 2014 and December 31, 2015.
During the year ended December 31, 2016, the Company determined that a portion of an internally developed software tool would not meet its needs following the acquisition of Constant Contact, resulting in an impairment charge of
$2.0 million
which was recorded in engineering and development expense in the consolidated statements of operations and comprehensive
loss. Additionally, the Company recognized an impairment charge of
$0.5 million
relating to internally developed software relating to Webzai Ltd. (“Webzai”), and another impairment charge of
$4.4 million
relating to developed technology acquired in the Webzai acquisition, for a total impairment charge of
$4.9 million
, which was recorded in engineering and development expense in the consolidated statements of operations and comprehensive loss. Refer to
Note 6: Property and Equipment and Capital Lease Obligations
and
Note 7: Goodwill and Other Intangible Assets
for further details.
Also during the year ended December 31, 2016, the Company incurred total impairment charges of IPR&D of
$2.2 million
, consisting of
$1.4 million
to impair certain acquired IPR&D projects from the Webzai acquisition that were abandoned during the three months ended March 31, 2016 and a charge of
$0.8 million
to impair certain acquired IPR&D projects from the AppMachine acquisition. Refer to
Note 7: Goodwill and Other Intangible Assets
, and
Acquired In- Process Research and Development (IPR&D)
below for further details.
All of the impairments described above were recognized in the web presence segment.
Indefinite life intangible assets include domain names that are available for sale which are recorded at 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.
Acquired In-Process Research and Development (IPR&D)
Acquired IPR&D represents the fair value assigned to research and development assets that the Company acquires that have not been completed at the date of acquisition. The acquired IPR&D is capitalized as an intangible asset and reviewed on a quarterly basis to determine future use. Any impairment loss of the acquired IPR&D is charged to expense in the period the impairment is identified. Upon commercialization, the acquired fair value of the IPR&D will be reclassified to developed technology and amortized over its estimated useful life.
No such impairment losses were identified for the years ended
December 31, 2014
and
2015
.
During the year ended December 31, 2016, the Company identified that the acquired fair value of the remaining IPR&D acquired in connection with its acquisition of Webzai was impaired as these IPR&D projects were abandoned in favor of other projects. At that time, and as mentioned above, the Company recorded a
$1.4 million
impairment charge, which is reflected in engineering and development expense during the year ended December 31, 2016 in the Company’s consolidated statements of operations and comprehensive loss. Additionally, during the year-ended December 31, 2016, the Company identified that the acquired fair value of the remaining IPR&D acquired in connection with its acquisition of AppMachine B.V. was impaired as these projects were abandoned in favor of other projects, and as such, the Company recorded a
$0.8 million
impairment charge, which is also reflected in engineering and development expense during the year ended December 31, 2016 in the Company’s consolidated statements of operations and comprehensive loss.
During 2014, the Company capitalized
$4.6 million
of IPR&D in connection with its acquisition of Webzai. During the year ended December 31, 2015,
$3.2 million
was reclassified to developed technology and is being amortized over the estimated useful life of
4.0 years
. During 2015, the Company did not capitalize any IPR&D in connection with its acquisitions of the assets of the U.S. retail portion of the Verio business of NTT America, Inc. (“Verio”), the assets of World Wide Web Hosting, LLC (“WWWH”), the assets of Ace Data Centers, Inc. (“Ace DC”) and the ownership interests in Ace Holdings, LLC (“Ace Holdings”) (these acquired assets and ownership interests, collectively, “Ace”) and the assets of Ecommerce, LLC, (“Ecommerce”). During 2016, in addition to the impairment of the Webzai IPR&D mentioned above, the Company also capitalized
$1.7 million
of IPR&D in connection with its acquisition of AppMachine B.V. ("AppMachine"), of which approximately
$0.9 million
was reclassified to developed technology and is being amortized over the estimated useful life of
4.0
years, and the remaining
$0.8 million
was impaired, as previously mentioned. The Company did not capitalize any other IPR&D in connection with its other 2016 acquisitions of WZ (UK) Ltd and Constant Contact.
Revenue Recognition
The Company generates revenue primarily from selling subscriptions for cloud-based products and services. The subscriptions are similar across all of the Company’s brands and are provided under contracts pursuant to which the Company has ongoing obligations to support the subscriber. These contracts are generally for service periods of up to
36 months
and typically require payment in advance. The Company recognizes the associated revenue ratably over the service period
,
whether the associated revenue is derived from a direct subscriber or through a reseller. Deferred revenue represents the liability to subscribers for advance billings for services not yet provided and the fair value of the assumed liability outstanding for subscriber relationships purchased in an acquisition.
The Company sells domain name registrations that provide a subscriber with the exclusive use of a domain name. These domains are primarily obtained by one of the Company’s registrars on the subscriber’s behalf, or to a lesser extent by the Company from third-party registrars on the subscriber’s behalf. Domain registration fees are non-refundable.
Revenue from the sale of a domain name registration by a registrar within the Company is recognized ratably over the subscriber’s service period as the Company has the obligation to provide support over the domain term. Revenue from the sale of a domain name registration purchased by the Company from a third-party registrar is recognized when the subscriber is billed on a gross basis as there are no remaining Company obligations once the sale to the subscriber occurs, and the Company has full discretion on the sales price and bears all credit risk.
Revenue from the sale of premium domains is recognized when persuasive evidence of an arrangement to sell such domains exists, delivery of an authorization key to access the domain name has occurred, the fee for the sale of the premium domain is fixed or determinable, and collection of the fee for the sale of the premium domain is deemed probable.
Revenue from the sale of non-term based applications and services, such as certain online security products and professional technical services, referral fees and commissions, is recognized when the product is purchased, the service is provided or the referral fee or commission is earned, respectively.
A substantial amount of the Company’s revenue is generated from transactions that are multiple-element service arrangements that may include hosting plans, domain name registrations, and other cloud-based products and services.
The Company follows the provisions of the FASB, Accounting Standards Update (“ASU”) No. 2009-13 (“ASU 2009-13”),
Revenue Recognition (Topic 605), Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force
and allocates revenue to each deliverable in a multiple-element service arrangement based on its respective relative selling price.
Under ASU 2009-13, to treat deliverables in a multiple-element service arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have standalone value upon delivery, the Company accounts for each deliverable separately. Hosting services, domain name registrations, cloud-based products and services have standalone value and are often sold separately.
When multiple deliverables included in a multiple-element service arrangement are separated into different units of accounting, the total transaction amount is allocated to the identified separate units based on a relative selling price hierarchy. The Company determines the relative selling price for a deliverable based on vendor specific objective evidence (“VSOE”) of fair value, if available, or best estimate of selling price (“BESP”), if VSOE is not available. The Company has determined that third-party evidence of selling price (“TPE”) is not a practical alternative due to differences in its multi-brand offerings compared to competitors and the lack of availability of relevant third-party pricing information. The Company has not established VSOE for its offerings due to lack of pricing consistency, the introduction of new products, services and other factors. Accordingly, the Company generally allocates revenue to the deliverables in the arrangement based on the BESP. The Company determines BESP by considering its relative selling prices, competitive prices in the marketplace and management judgment; these selling prices, however, may vary depending upon the particular facts and circumstances related to each deliverable. The Company analyzes the selling prices used in its allocation of transaction amount, at a minimum, on a quarterly basis. Selling prices are analyzed on a more frequent basis if a significant change in our business necessitates a more timely analysis.
The Company maintains a reserve for refunds and chargebacks related to revenue that has been recognized and is expected to be refunded. The Company had a refund and chargeback reserve of
$0.5 million
and
$0.6 million
as of
December 31, 2015
and
2016
, respectively. The portion of deferred revenue that is expected to be refunded at
December 31, 2015
and
2016
was
$1.8 million
and
$2.1 million
, respectively. Based on refund history, a significant majority of refunds happen in the same fiscal month that the customer contract starts or renews. Approximately
81%
of all refunds happen in the same fiscal month that the contract starts or renews, and approximately
94%
of all refunds happen within
45 days
of the contract start or renewal date.
Direct Costs of Revenue
The Company’s direct costs of revenue include only those costs directly incurred in connection with the provision of its cloud-based products and services. The direct costs of registering domain names with registries are spread over the terms of the arrangement and the cost of reselling domains of other third-party registrars are expensed as incurred. Cost of revenue includes
depreciation on data center equipment and support infrastructure and amortization expense related to the amortization of long-lived intangible assets.
Engineering and Development Costs
Engineering and development costs incurred in the development and maintenance of the Company’s technology infrastructure are expensed as incurred.
Sales and Marketing Costs
The Company engages in sales and marketing through various online marketing channels, which include affiliate and search marketing as well as online partnerships. The Company expenses sales and marketing costs as incurred. For the years ended
December 31, 2014
,
2015
and
2016
, the Company’s sales and marketing costs were
$146.8 million
,
$145.4 million
and
$303.5 million
, respectively.
Foreign Currency
The Company has sales in a number of foreign currencies. In 2013, the Company commenced operations in foreign locations which report in the local currency. The assets and liabilities of the Company’s foreign locations are translated into U.S. dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average monthly exchange rates. The resulting translation adjustments are recorded as a separate component of stockholders’ equity and have not been material. Foreign currency transaction gains and losses relate to the settlement of assets or liabilities in another currency.
Foreign currency transaction losses were
$0.8 million
,
$1.9 million
, and
$1.8 million
during the years ended
December 31, 2014
,
2015
and
2016
, respectively. These amounts are recorded in general and administrative expense in the Company’s consolidated statements of operations and comprehensive loss.
Income Taxes
Income taxes are accounted for in accordance with ASC 740,
Accounting for Income Taxes
, or ASC 740. 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.
In addition, 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. There were
no
unrecognized tax benefits in the years ended
December 31, 2014
,
2015
and
2016
.
The Company records interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the years ended
December 31, 2014
,
2015
and
2016
, the Company did not recognize any 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 ASC 718,
Compensation—Stock Compensation
, or ASC 718, 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 granted, the Company estimates the fair value of each restricted stock award based on the closing trading price of its common stock on the date of grant.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09,
Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting
. The guidance simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of excess tax benefits in the consolidated statements of cash flows. This amendment is effective for annual periods beginning after December 15, 2016, and early adoption is permitted.
The Company elected to early adopt the new guidance in the fourth quarter of fiscal year 2016 which requires it to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. The impact of the early adoption resulted in the following:
|
|
•
|
Due to the Company's net shortfall position upon the time of adoption, the new standard resulted in additional tax expense in our provision for income taxes rather than paid-in capital of
$0.9 million
for the year ended December 31, 2016. The Company's beginning retained earnings was not impacted by the early adoption as the Company had a full valuation allowance against the U.S. deferred tax assets as of December 31, 2015.
|
|
|
•
|
As a result of prior guidance that required excess tax benefits reduce taxes payable prior to recognition as an increase in paid in capital, the Company had not recognized certain deferred tax assets (loss carryforwards) that could be attributed to tax deductions related to equity compensation in excess of compensation recognized for financial reporting. As of January 1, 2016, the Company had generated federal and state net operating loss carryforwards due to excess tax benefits of
$1.5 million
and
$0.7 million
, respectively.
|
|
|
•
|
The Company elected to eliminate the forfeiture rate and adopted the new policy to account for forfeitures in the period that they are incurred, and applied this policy on a modified retrospective basis. The impact of eliminating the forfeiture rate increased the stock compensation recorded in 2016 by
$0.9 million
, which included an immaterial prior period adjustment that the Company recorded through the consolidated statement of operations and comprehensive loss for the year ended December 31, 2016.
|
Net Loss per Share
The Company considered ASC 260-10,
Earnings per Share
, or ASC 260-10, 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.
The Company’s potentially dilutive shares of common stock are excluded from the diluted weighted-average number of shares of common stock outstanding as their inclusion in the computation would be anti-dilutive due to net losses. For the years ended
December 31, 2014
,
2015
and
2016
, all non-vested shares granted prior to the Company’s IPO in October 2013, stock options, restricted stock awards and restricted stock units were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive as a result of the net losses for these periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
|
(in thousands, except share amounts
and per share data)
|
Computation of basic and diluted net loss per share:
|
|
|
|
|
|
Net loss attributable to Endurance International Group Holdings, Inc.
|
$
|
(42,835
|
)
|
|
$
|
(25,770
|
)
|
|
$
|
(72,831
|
)
|
Net loss per share attributable to Endurance International Group Holdings, Inc.:
|
|
|
|
|
|
Basic and diluted
|
$
|
(0.34
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.55
|
)
|
Weighted average number of common shares used in computing net loss per share attributable to Endurance International Group Holdings, Inc.:
|
|
|
|
|
|
Basic and diluted
|
127,512,346
|
|
|
131,340,557
|
|
|
133,415,732
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2014
|
|
2015
|
|
2016
|
Restricted Stock Awards
|
|
2,512,755
|
|
|
3,019,349
|
|
|
8,019,241
|
|
Options
|
|
5,436,298
|
|
|
6,723,589
|
|
|
10,380,991
|
|
Total
|
|
7,949,053
|
|
|
9,742,938
|
|
|
18,400,232
|
|
Guarantees
The Company has the following guarantees and indemnifications:
In connection with its acquisitions of companies and assets from third parties, the Company may provide indemnification or guarantees to the sellers in the event of damages for breaches or other claims covered by such agreements.
In connection with various vendor contracts, including those by which a product or service of a third party is offered to subscribers of the Company, the Company may guarantee the obligations of its subsidiaries or provide indemnification to the vendors in the event of damages for breaches or other claims covered by the contracts.
As permitted under Delaware and other applicable law, the Company’s charter and by-laws and those of its subsidiary companies provide that the Company shall indemnify its officers and directors for certain liabilities, including those incurred by reason of the fact that the officer or director is, was, or has agreed to serve as an officer or director of the Company. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited.
The Company leases office space and equipment under various operating leases. The Company has standard indemnification arrangements under these leases that require the Company to indemnify the lessor against losses, liabilities and claims incurred in connection with the premises or equipment covered by the Company’s lease agreements, the Company’s use of the premises, property damage or personal injury and breach of the agreement.
Through December 31, 2016, the Company had not experienced any losses related to these indemnification obligations and
no
claims with respect thereto were outstanding. The Company does not expect significant claims related to these indemnification obligations and consequently concluded that the fair value of these obligations is negligible and no related liabilities were established.
Recent Accounting Pronouncements - Recently Adopted
The Company adopted ASU No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs,
beginning on January 1, 2016, and retrospectively for all periods presented. ASU 2015-03 requires that debt issuance costs related to a recognized debt
liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The unamortized value of deferred financing costs associated with our revolving credit facility were not affected by the ASU and continue to be presented as an asset on the Company’s consolidated balance sheets.
In September 2015, the FASB issued ASU No. 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
. This new guidance requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer needs to record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the provisional amounts, calculated as if the accounting had been completed as of the acquisition date. ASU 2015-16 is effective for annual reporting periods beginning after December 15, 2015. The Company adopted ASU 2015-16 which did not have a material effect on its accounting processes, adjustments made during the period were immaterial.
In November 2015, the FASB issued ASU No. 2015-17,
Income Taxes: Balance Sheet Classification of Deferred Taxes
, or ASU 2015-17. This new guidance requires that deferred tax liabilities and assets be classified as noncurrent in the balance sheet, in order to simplify the presentation of deferred income taxes. ASU 2015-17 is effective for annual reporting periods beginning after December 15, 2016. The Company adopted ASU 2015-17 as of the fourth quarter in 2015, on a prospective basis, and it did not have a material impact on its consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09,
Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting
. The guidance simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of excess tax benefits in the consolidated statements of cash flows. The Company elected to early adopt the new guidance in the fourth quarter of fiscal year 2016 which requires it to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. Refer to
Stock-Based Compensation
above for further information.
Recent Accounting Pronouncements - Recently Issued
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
(Topic 606) , or ASU 2014-09, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. Since then, the FASB has also issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principals versus Agent Considerations and ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing, which further elaborate on the original ASU No. 2014-09. The core principle of these updates is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgments and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. In July 2015, the FASB approved a one-year deferral of the effective date to January 1, 2018, with early adoption to be permitted as of the original effective date of January 1, 2017. Once this standard becomes effective, companies may use either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company has performed an initial assessment of ASU 2014-09, and expects that this new guidance will impact the timing of when certain sales incentive payments, primarily external parties, are charged to expense as these costs must be deferred over the life of the related customer contract. The Company also expects that a considerable portion of its revenue recognition will not be materially impacted by this new guidance. The Company is currently calculating the impact of all expected changes from this guidance, and expects to have these calculations complete during the second half of fiscal 2017. After completing these calculations, the Company will then determine the transition method to be applied upon adoption.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
. This new standard enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information. This amendment is effective for annual periods beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the impact of its pending adoption of the new standard on its consolidated financial statements, but does not believe that this will have a material effect.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases
. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a 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 is currently evaluating the impact of its pending adoption of the new standard on its consolidated financial statements, but expects that it will increase its assets and liabilities.
In March 2016, the FASB issued Accounting Standards Update No. 2016-07,
Investments—Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting
. This new guidance removes the requirement for retroactive adjustment when an increase or decrease in the level of ownership qualifies an investment for the equity method. This amendment is effective for fiscal years beginning after December 15, 2016. The Company does not expect a material impact on its financial position or results of operations from adoption of this standard.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
. This new standard clarifies certain statement of cash flow presentation issues. This amendment is effective for annual periods beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the impact of its pending adoption of the new standard on its consolidated financial statements.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16,
Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory
. This new standard improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This amendment is effective for annual periods beginning after December 15, 2018, and early adoption is permitted. The Company does not believe the adoption of this ASU will have a material impact on its consolidated Financial Statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18,
Statement of Cash Flows: Restricted Cash
. This new standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. This amendment is effective for annual periods beginning after December 15, 2017, and early adoption is permitted. The Company does not believe the adoption of this ASU will have a material impact on its consolidated Financial Statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04,
Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment
. This new standard eliminates Step 2, and instead an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis .The Company is currently evaluating the impact of its pending adoption of the new standard on its consolidated financial statements.
3. Acquisitions
The Company accounts for the acquisitions of businesses using the purchase method of accounting. The Company allocates the purchase price to the tangible and identifiable intangible assets and liabilities assumed based on their estimated fair values. Purchased identifiable intangible assets typically include subscriber relationships, trade names, domain names held for sale, developed technology and IPR&D. The methodologies used to determine the fair value assigned to subscriber relationships and domain names held for sale are typically based on the excess earnings method that considers the return received from the intangible asset and includes certain expenses and also considers an attrition rate based on the Company’s internal subscriber analysis and an estimate of the average life of the subscribers. The fair value assigned to trade names is typically based on the income approach using a relief from royalty methodology that assumes that the fair value of a trade name can be measured by estimating the cost of licensing and paying a royalty fee for the trade name that the owner of the trade name avoids. The fair value assigned to developed technology typically uses the relief from royalty method. The fair value assigned to IPR&D is based on the relief from royalty method. If applicable, the Company estimates the fair value of contingent consideration payments in determining the purchase price. The contingent consideration is then adjusted to fair value in subsequent periods as an increase or decrease in current earnings in general and administrative expense in the consolidated statements of operations and comprehensive loss.
Acquisitions—2015
Verio
On May 26, 2015, the Company acquired the assets of the U.S. retail portion of the Verio business of NTT America, Inc., which is a provider of shared, virtual private server (“VPS”) and dedicated hosting services.
The aggregate purchase price was
$13.0 million
, of which
$10.5 million
was paid in cash at the closing. The Company was obligated to pay the remaining cash consideration of
$2.5 million
on the first anniversary of the acquisition, less amounts used to satisfy any obligation determined to be owed to the Company for any indemnity pursuant to the asset purchase agreement. As of December 31, 2016, the Company has paid approximately
$2.4 million
of the remaining cash consideration, while
$50,000
has been retained as a hold-back until certain conditions are satisfied.
The purchase price of
$13.0 million
has been allocated to intangible assets consisting of subscriber relationships and trade names of
$13.1 million
and
$0.1 million
, respectively, and goodwill of
$1.2 million
, offset by deferred revenue of
$1.4 million
. Goodwill related to the acquisition is deductible for tax purposes and related primarily to expected synergies.
World Wide Web Hosting
On June 25, 2015, the Company acquired substantially all of the assets of World Wide Web Hosting ("WWWH"), which is a provider of web presence solutions doing business under the brand name Site5. The Company previously had an equity interest in WWWH, which was originally acquired when the Company acquired Hostgator.com LLC on July 13, 2012.
The aggregate purchase price was
$34.9 million
,
$23.0 million
of which was payable in cash and
$11.9 million
of which was the implied value of the pro rata interest in the acquired assets that the Company obtained upon the seller’s redemption of its
40%
equity interest in WWWH. The Company recognized a
$5.4 million
gain as a result of this redemption, which was recorded as other income in the Company’s consolidated statement of operations and comprehensive loss. Of the
$23.0 million
payable in cash,
$18.4 million
was paid at the closing and the Company was obligated to pay the remaining cash consideration of
$4.6 million
on the first anniversary of the acquisition, less amounts used to satisfy any obligation determined to be owed to the Company for any indemnity pursuant to the asset purchase agreement. The Company paid the remaining cash consideration of
$4.6 million
during the year ended December 31, 2016.
The purchase price of
$34.9 million
has been allocated to intangible assets consisting of subscriber relationships and trade names of
$11.0 million
and
$1.9 million
, respectively, goodwill of
$23.3 million
, and prepaid expenses and other current assets of
$1.2 million
, offset by deferred revenue of
$2.5 million
. Goodwill related to the acquisition is deductible for tax purposes and related primarily to expected synergies.
Ace Data Center and Ace Holdings
On September 21, 2015, the Company entered into a purchase agreement with Ace Data Center ("Ace DC") to acquire substantially all of the assets of Ace DC and with Ace Holdings and its owners to acquire all of the ownership interests in Ace Holdings. Ace DC is the manager of a data center that provides colocation, infrastructure and carrier-neutral connectivity services. This data center is the Company’s largest data center. Ace Holdings owns the real property, improvements and building at and on which the data center is located, including certain non-systems equipment and personal property.
The aggregate purchase price was
$74.0 million
, of which
$44.4 million
was paid in cash at the closing. Under the terms of the purchase agreement, within approximately
75 days
of the closing date of the acquisition, the purchase consideration was subject to a working capital adjustment and a tax gross up adjustment, which resulted in an additional
$0.7 million
payment from the Company on December 2, 2015. The Company was obligated to pay the remaining cash consideration of
$31.5 million
on the first anniversary of the acquisition, less amounts used to satisfy any obligation determined to be owed to the Company for any indemnity pursuant to the asset purchase agreement. The net present value of the remaining cash consideration was
$28.9 million
, which was the amount used to calculate the
$74.0 million
aggregate purchase price above. An aggregate amount of
$0.7 million
for the accretion of the present value of the remaining cash consideration was included in interest expense for the year ended December 31, 2015, resulting in the net present value of the remaining cash consideration at December 31, 2015 of
$29.6 million
. The Company paid the remaining cash consideration during the year ended December 31, 2016 of
$31.4 million
.
The purchase price of
$74.0 million
has been allocated to property and equipment, including real property, of
$12.1 million
, goodwill of
$62.2 million
, prepaid expenses and other current assets of
$0.2 million
and developed technology of
$0.1 million
, offset by other liabilities of
$0.6 million
. The goodwill reflects the value of estimated cost efficiencies gained for the Company by owning its own data center. Goodwill related to the acquisition is deductible for tax purposes.
Ecommerce
On November 2, 2015, the Company acquired the assets of Ecommerce, which is a provider of shared, VPS and cloud hosting services, domain registration services and add-on products.
The aggregate purchase price was
$28.0 million
, of which
$23.8 million
was paid in cash at the closing. The Company was obligated to pay the remaining cash consideration of
$4.2 million
on the first anniversary of the acquisition, less amounts used to satisfy any obligation determined to be owed to the Company for any indemnity pursuant to the asset purchase agreement. The Company paid the remaining cash consideration during the year ended December 31, 2016.
The purchase price of
$28.0 million
has been allocated to intangible assets consisting of subscriber relationships, intellectual property and trade names of
$9.4 million
,
$4.4 million
and
$0.1 million
, respectively, and goodwill of
$16.7 million
, offset by deferred revenue of
$2.6 million
. Goodwill reflects the value of estimated synergies and is deductible for tax purposes.
Acquisitions—2016
WZ (UK) Ltd.
In August 2014, the Company made an aggregate investment of
$3.9 million
for a joint venture with a
49%
ownership interest in WZ UK, which is a provider of technology and sales and marketing services associated with web builder solutions. The Company and the other shareholders of WZ UK entered into a put and call option for the Company to acquire additional equity interests WZ UK under certain circumstances.
On January 6, 2016, the Company partially exercised this option, which increased its stake in WZ UK from
49%
to
57.5%
. Upon the exercise of the option, the Company estimated the fair value of the assets and liabilities in accordance with the guidance for business combinations and estimated that the value of the noncontrolling interest (“NCI”) on January 6, 2016 was
$10.8 million
. The estimated aggregate purchase price of
$22.2 million
included a gain of
$11.4 million
that was calculated based on the implied fair value of the Company’s
49.0%
equity investment and the NCI of
$10.8 million
, which were allocated to goodwill of
$21.6 million
, intangible assets consisting of subscriber relationships of
$4.9 million
, and property, plant and equipment of
$0.3 million
, offset by deferred revenue of
$3.3 million
and negative working capital of
$1.3 million
. Goodwill related to the acquisition, which is part of the Company’s web presence reporting segment, is not deductible for tax purposes. Goodwill reflected primarily marketing know-how of the acquired company.
The Company recognized the
$11.4 million
gain in other income in the Company’s consolidated statements of operations and comprehensive loss. As the NCI is subject to a put option that is outside the control of the Company, it is deemed a redeemable non-controlling interest and not recorded in permanent equity, and is being presented as mezzanine redeemable non-controlling interest on the consolidated balance sheet. The difference between the initial fair value of the redeemable non-controlling interest and the value expected to be paid on exercise, which is estimated to be
$30.0 million
, was being accreted over the period commencing January 6, 2016, and up to the end of the second call option period which was August 14, 2016. Adjustments to the carrying amount of the redeemable non-controlling interest were charged to additional paid-in capital.
On May 16, 2016, the Company amended the put and call option described above to allow it to acquire an additional equity interest in WZ UK earlier than August 2016. Pursuant to this amended option, on the same date the Company acquired an additional
20%
stake in WZ UK for
$15.4 million
, thus increasing its ownership interest from
57.5%
to
77.5%
.
On July 13, 2016, WZ UK completed a restructuring pursuant to which the Company and the minority shareholders of Pseudio Limited and Resume Labs Limited sold their shares in these entities to WZ UK, in exchange for shares in WZ UK. As a result of the restructuring, Pseudio Limited and Resume Labs Limited became wholly-owned subsidiaries of WZ UK, and the Company’s ownership of WZ UK was diluted from
77.5%
to
76.4%
. Immediately subsequent to the restructuring, the Company acquired an additional
10%
equity interest in WZ UK for
$18.0 million
, thereby increasing the Company’s ownership interest to
86.4%
.
Concurrent with the restructuring, the Company amended the put and call option described above to provide for Company to acquire the remaining
13.6%
equity interest in WZ UK for
$25.0 million
under certain circumstances, either through a put option that is exercisable by the minority shareholders of WZ UK beginning on July 1, 2017, or by a call option that is exercisable by the Company beginning on January 1, 2018. The Company started accreting the
$25.0 million
starting in July 2016. Refer to
Note 13: Redeemable Non-controlling Interest,
for further details.
Constant Contact, Inc.
On October 30, 2015, the Company entered into a definitive agreement pursuant to which it agreed to acquire all of the outstanding shares of common stock of Constant Contact for
$32.00
per share in cash, for a total purchase price of approximately
$1.1 billion
. Constant Contact is a leading provider of online marketing tools that are designed for small organizations, including small businesses, associations and non-profits. The acquisition closed on February 9, 2016.
The aggregate purchase price of
$1.1 billion
, which was paid in cash at the closing, is being allocated to intangible assets consisting of subscriber relationships, developed technology and trade names of
$263.0 million
,
$83.0 million
and
$52.0 million
, respectively, goodwill of
$604.3 million
, property and equipment of
$39.6 million
, and working capital of
$184.2 million
, offset by a net deferred tax liability of
$125.1 million
and deferred revenue of
$25.2 million
. The goodwill reflects the value of expected synergies.
Goodwill related to the acquisition, which is included in the Company’s email marketing reporting unit, is not deductible for tax purposes.
Pro Forma Disclosure
The Company acquired Constant Contact on February 9, 2016, and the results of Constant Contact have been included in the results of the Company since February 10, 2016. The following unaudited information is presented as if the Constant Contact acquisition was completed as of January 1, 2015. The Company has not presented unaudited pro forma results for the quarterly and annual periods following March 31, 2016, as Constant Contact is included for the entire fiscal periods after that date. The unaudited pro forma results are not necessarily indicative of the actual results that would have occurred had the transaction actually taken place at the beginning of the period indicated.
Unaudited pro forma revenue for the fiscal years ended December 31, 2015 and 2016 was
$1.1 billion
and
$1.2 billion
, respectively. Unaudited pro forma net loss attributable to Endurance International Group Holdings, Inc. for the fiscal years ended December 31, 2015 and 2016 was
$107.8 million
, and
$59.1 million
, respectively. Unaudited pro forma net loss includes adjustments for additional interest expense related to the debt incurred in connection with the acquisition of Constant Contact.
Pro forma revenue for the fiscal year ended December 31, 2016 has been reduced by
$15.2 million
due to the application of purchase accounting for Constant Contact, which reduced the fair value of deferred revenue as of the closing date. Additionally, pro forma net loss for the year ended December 31, 2016 includes restructuring charges of approximately
$22.2 million
as the Company implemented plans to reduce the cost structure of the combined businesses.
AppMachine B.V.
In December 2014, the Company made an aggregate investment of
$15.2 million
to acquire a
40.0%
ownership interest in AppMachine B.V. (“AppMachine”), which is a developer of software that allows users to build mobile applications for smart devices such as phones and tablets. Under the terms of the investment agreement for AppMachine, the Company was obligated to purchase the remaining
60.0%
of AppMachine in three tranches of
20.0%
within specified periods if AppMachine achieved a specified minimum revenue threshold within a designated timeframe. The consideration for each of those three tranches was to be calculated as the product of AppMachine’s revenue, as defined in that investment agreement, for the trailing twelve-month period prior to the applicable determination date times a specified multiple based upon year over year revenue growth multiplied by
20.0%
.
On July 27, 2016, the Company acquired the remaining
60%
equity interest in AppMachine, increasing the Company’s stake to
100%
. In connection with the acquisition, the parties terminated the prior investment agreement pursuant to which the Company was obligated to purchase the remaining shares in AppMachine in three tranches. The total consideration based on the new agreement was
$22.5 million
, of which
$5.5 million
was paid upon closing, and the remaining
$17.0 million
(which includes
$4.0 million
of post-acquisition compensation expense) will be paid in annual installments over a period of
four years
, commencing with June 21, 2017. The net present value of the additional consideration is
$11.5 million
, which is included in the aggregate purchase price and recorded as deferred consideration in the Company’s consolidated balance sheets as of December 31, 2016. The remaining
$1.5 million
is being accreted as interest expense. The
$4.0 million
relating to retention bonuses is being accrued over the employment term associated with these employees.
On the date of acquisition, the Company recognized a loss of
$4.9 million
that was calculated based on the implied fair value of the investment, which was recorded in other income (expense) in the Company’s consolidated statements of operations and comprehensive loss.
The purchase price of
$25.7 million
, which consists of the purchase consideration of
$13.0 million
, at a present value of
$11.5 million
, and the carrying value of the existing investment of
$13.6 million
, partially offset by the loss of
$4.9 million
, is being allocated on a preliminary basis to intangible assets consisting of subscriber relationships of
$0.1 million
, developed technology of
$1.7 million
, and technology in the process of development of
$1.7 million
, goodwill of
$21.5 million
, property and equipment of
$0.6 million
, and working capital of approximately
$0.4 million
, offset by deferred revenue of
$0.2 million
, and other long term liabilities of
$0.1 million
. Goodwill related to the acquisition, which is included in the Company’s web presence reporting unit, is not deductible for tax purposes. The goodwill reflects the value of expected synergies and technology know-how.
Financial Performance
The Company recorded revenue attributable to its 2016 acquisitions in its consolidated statements of operations and comprehensive loss for the year-ended December 31, 2016 of
$340.9 million
. The 2016 acquisitions generated a net loss for the year ended December 31, 2016 of
$46.0 million
which is recorded in the Company’s consolidated statements of operations and comprehensive loss. The
$32.3 million
of transaction expenses in the Company’s consolidated statements of operations and comprehensive loss included a
$16.8 million
charge related to the accelerated vesting of certain Constant Contact equity awards, and approximately
$15.5 million
in advisor, legal, and other acquisition-related fees.
For the intangible assets acquired in connection with all acquisitions completed during the twelve months ended December 31, 2016, developed technology has a weighted-useful life of
4.1 years
, subscriber relationships have a weighted-useful life of
4.4 years
and trade names have a weighted-useful life of
4.7 years
.
Summary of Deferred Consideration Related to Acquisitions
Components of deferred consideration short-term and long-term as of December 31, 2015, consisted of the following:
|
|
|
|
|
|
|
|
|
|
Short-
term
|
|
Long-
term
|
|
(in thousands)
|
Mojoness, Inc. (Acquired in 2012)
|
$
|
657
|
|
|
$
|
813
|
|
Typepad (Acquired in 2013)
|
2,800
|
|
|
—
|
|
Webzai (Acquired in 2014)
|
2,848
|
|
|
—
|
|
BuyDomains (Acquired in 2014)
|
4,283
|
|
|
—
|
|
Verio (Acquired in 2015)
|
2,474
|
|
|
—
|
|
WWWH (Acquired in 2015)
|
4,600
|
|
|
—
|
|
Ace (Acquired in 2015)
|
29,626
|
|
|
—
|
|
Ecommerce (Acquired in 2015)
|
4,200
|
|
|
—
|
|
Total
|
$
|
51,488
|
|
|
$
|
813
|
|
Components of deferred consideration short-term and long-term as of December 31, 2016, consisted of the following:
|
|
|
|
|
|
|
|
|
|
Short-
term
|
|
Long-
term
|
|
(in thousands)
|
Mojoness, Inc. (Acquired in 2012)
|
$
|
818
|
|
|
$
|
—
|
|
Verio (Acquired in 2015)
|
50
|
|
|
—
|
|
Social Booster (Acquired in 2016)
|
40
|
|
|
25
|
|
AppMachine (Acquired in 2016)
|
4,365
|
|
|
7,419
|
|
Total
|
$
|
5,273
|
|
|
$
|
7,444
|
|
4. Fair Value Measurements
The following valuation hierarchy is used for disclosure of the inputs to valuation 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, 2015
and
2016
, the Company’s financial assets or liabilities required to be measured on a recurring basis are accrued earn-out consideration payable in connection with the 2012 acquisition of certain assets of Mojoness, Inc., or Mojo, and the 2015 interest rate cap. The Company has classified its interest rate cap discussed in Note 5 below within Level 2 of the fair value hierarchy. The Company has classified its liabilities for contingent earn-out consideration related to the Mojo acquisition within Level 3 of the fair value hierarchy because the fair value is determined using significant unobservable inputs, which included probability weighted cash flows. During the year ended December 31, 2014, the Company paid
$0.2 million
related to the earn-out provisions for the Mojo acquisition and recorded
$23.0 million
related to the 2014 domain name business acquisition of which
$14.0 million
was paid during the year ended December 31, 2014. The Company recorded a
$0.4 million
change in fair value of the earn-out consideration related to Mojo and the 2014 domain name business during the year ended December 31, 2014. During the year ended December 31, 2015, the Company paid
$0.5 million
related to the earn-out provisions for the Mojo acquisition and paid
$10.1 million
related to the earn-out provisions of the 2014 domain name business acquisition. The Company recorded a
$1.2 million
change in fair value of the earn-out consideration related to the earn-out provisions of the Mojo and 2014 domain name business acquisitions during the year ended December 31, 2015. During the year ended December 31, 2016, the Company paid
$0.7 million
related to the earn-out provisions for the Mojo acquisition. The Company recorded an immaterial change in fair value of the earn-out consideration related to the earn-out provisions for the Mojo acquisition.
The earn-out consideration in the table below is included in total deferred consideration in the Company’s consolidated balance sheets.
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, 2015
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
Interest rate cap (included in other assets)
|
$
|
3,130
|
|
|
—
|
|
|
$
|
3,130
|
|
|
$
|
—
|
|
Total financial assets
|
$
|
3,130
|
|
|
$
|
—
|
|
|
$
|
3,130
|
|
|
$
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Contingent earn-out consideration
|
$
|
1,469
|
|
|
—
|
|
|
—
|
|
|
$
|
1,469
|
|
Total financial liabilities
|
$
|
1,469
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,469
|
|
Balance at December 31, 2016
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
Interest rate cap (included in other assets)
|
$
|
979
|
|
|
—
|
|
|
$
|
979
|
|
|
$
|
—
|
|
Total financial assets
|
$
|
979
|
|
|
$
|
—
|
|
|
$
|
979
|
|
|
$
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Contingent earn-out consideration
|
$
|
818
|
|
|
—
|
|
|
—
|
|
|
$
|
818
|
|
Total financial liabilities
|
$
|
818
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
818
|
|
The following table summarizes the changes in the financial liabilities measured on a recurring basis using Level 3 inputs as of
December 31, 2015
and
2016
:
|
|
|
|
|
|
Amount
|
|
(in thousands)
|
Financial liabilities measured using Level 3 inputs at January 1, 2015
|
$
|
10,887
|
|
Payment of contingent earn-out related to 2012 and 2014 acquisitions
|
(10,592
|
)
|
Change in fair value of contingent earn-outs
|
1,174
|
|
Financial liabilities measured using Level 3 inputs at December 31, 2015
|
1,469
|
|
Payment of contingent earn-outs related to 2012 acquisitions
|
(668
|
)
|
Change in fair value of contingent earn-outs
|
17
|
|
Financial liabilities measured using Level 3 inputs at December 31, 2016
|
$
|
818
|
|
5. 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 entered into a
three
-year interest rate cap on December 9, 2015 as part of its risk management strategy. The objective of this interest rate cap, designated as cash flow hedges, involves the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an upfront premium. Therefore, this derivative limits the Company’s exposure if the rate rises, but also allows the Company to benefit when the rate falls.
The effective portion of changes in the fair value of derivatives that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income (“AOCI”), and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. Any ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. There was
no
ineffectiveness recorded in earnings for the year ended
December 31, 2016
.
As of
December 31, 2016
, the Company had
one
interest rate cap with
$500.0 million
notional outstanding that was designated as a cash flow hedge of interest rate risk. The fair value of the interest rate contracts on the consolidated balance sheet as of December 31, 2015 and 2016 was
$3.1 million
and
$1.0 million
, respectively, and the Company recognized an immaterial amount of interest expense in the Company's consolidated statement of operations for both periods. The Company recognized a $
1.4 million
gain, net of tax benefit of
$0.8 million
in AOCI for the year ended December 31, 2016, of which the Company estimates that
$0.6 million
will be reclassified as an increase to interest expense in the next twelve months. For the year ended December 31, 2015, the Company recognized a
$0.1 million
gain in AOCI.
6. Property and Equipment and Capital Lease Obligations
Components of property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2015
|
|
2016
|
|
(in thousands)
|
Land
|
$
|
713
|
|
|
$
|
790
|
|
Building
|
5,091
|
|
|
5,517
|
|
Software
|
40,336
|
|
|
52,130
|
|
Computers and office equipment
|
97,332
|
|
|
143,091
|
|
Furniture and fixtures
|
5,914
|
|
|
10,892
|
|
Leasehold improvements
|
7,126
|
|
|
21,244
|
|
Construction in process
|
6,137
|
|
|
6,691
|
|
Property and equipment—at cost
|
162,649
|
|
|
240,355
|
|
Less accumulated depreciation
|
(86,887
|
)
|
|
(145,083
|
)
|
Property and equipment—net
|
$
|
75,762
|
|
|
$
|
95,272
|
|
Depreciation expense related to property and equipment for the years ended
December 31, 2014
,
2015
and
2016
, was
$31.0 million
,
$34.0 million
, and
$60.4 million
, respectively.
The Company evaluates long-lived assets such as property plant and equipment 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 impairment loss is charged to expense in the period the impairment is identified. During the year ended December 31, 2016, the Company determined that a portion of an internally developed software tool would not meet its needs following the acquisition of Constant Contact. As a result, the Company recorded a
$2.0 million
impairment charge in engineering and development expense in the Company’s consolidated statements of operations and comprehensive loss. Additionally, during the year ended December 31, 2016, the Company recorded an impairment charge of
$0.5 million
in engineering and development expense relating to internally developed software, developed after the Webzai acquisition, which closed in August 2014, after evaluating it for impairment in accordance with ASC 360, Property, Plant and Equipment. This software is also linked to certain developed technology that was acquired as part of the Webzai acquisition and was also determined to be impaired. Refer to
Note 7: Goodwill and Other Intangible Assets
for further details.
Both of these impairment charges discussed above were recognized in the Company's web presence segment.
During the years ended
December 31, 2015
and
2016
, the Company entered into agreements to lease software licenses for use on certain data center server equipment for terms ranging from
thirty-six months
to
thirty-nine months
.
As of
December 31, 2015
and
2016
, the Company’s software shown in the above table included the software assets under a capital lease as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2015
|
|
2016
|
|
(in thousands)
|
Software
|
$
|
21,499
|
|
|
$
|
21,499
|
|
Less accumulated depreciation
|
(8,412
|
)
|
|
(14,750
|
)
|
Assets under capital lease—net
|
$
|
13,087
|
|
|
$
|
6,749
|
|
At
December 31, 2016
, the expected future minimum lease payments under the capital lease discussed above were approximately as follows:
|
|
|
|
|
|
Amount
|
|
(in thousands)
|
2017
|
6,895
|
|
2018
|
575
|
|
Total minimum lease payments
|
$
|
7,470
|
|
Less amount representing interest
|
(268
|
)
|
Present value of minimum lease payments (capital lease obligation)
|
$
|
7,202
|
|
Current portion
|
$
|
6,690
|
|
Long-term portion
|
$
|
512
|
|
7. Goodwill and Other Intangible Assets
The following table summarizes the changes in the Company’s goodwill balances as of
December 31, 2015
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Web Presence Unit
|
|
Email Marketing Unit
|
|
Total
|
|
Amount
|
|
Amount
|
|
Amount
|
|
(in thousands)
|
|
(in thousands)
|
|
(in thousands)
|
Goodwill balance at January 1, 2015
|
$
|
1,105,023
|
|
|
$
|
—
|
|
|
$
|
1,105,023
|
|
Goodwill related to 2015 acquisitions
|
103,444
|
|
|
—
|
|
|
103,444
|
|
Foreign translation impact
|
(1,212
|
)
|
|
—
|
|
|
(1,212
|
)
|
Goodwill balance at December 31, 2015
|
1,207,255
|
|
|
—
|
|
|
1,207,255
|
|
Goodwill related to 2015 acquisitions
|
5,978
|
|
|
—
|
|
|
5,978
|
|
Goodwill related to 2016 acquisitions
|
43,019
|
|
|
604,305
|
|
|
647,324
|
|
Foreign translation impact
|
(648
|
)
|
|
—
|
|
|
(648
|
)
|
Goodwill balance at December 31, 2016
|
$
|
1,255,604
|
|
|
$
|
604,305
|
|
|
$
|
1,859,909
|
|
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.
As of
December 31, 2015
and,
2016
, the fair value of each of the Company’s reporting units exceeded the carrying value of the reporting unit’s net assets. Therefore,
no
impairment existed as of those dates.
At
December 31, 2015
, other intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Weighted
Average
Useful Life
|
|
(dollars in thousands)
|
|
|
Developed technology
|
$
|
205,925
|
|
|
$
|
80,795
|
|
|
$
|
125,130
|
|
|
7 years
|
|
Subscriber relationships
|
397,791
|
|
|
256,461
|
|
|
141,330
|
|
|
5 years
|
|
Trade-names
|
81,792
|
|
|
42,080
|
|
|
39,712
|
|
|
6 years
|
|
Intellectual property
|
34,020
|
|
|
6,596
|
|
|
27,424
|
|
|
13 years
|
|
Domain names available for sale
|
27,859
|
|
|
3,107
|
|
|
24,752
|
|
|
Indefinite
|
|
Leasehold interests
|
314
|
|
|
314
|
|
|
—
|
|
|
1 year
|
|
In-process research and development
|
1,438
|
|
|
—
|
|
|
1,438
|
|
|
—
|
|
Total December 31, 2015
|
$
|
749,139
|
|
|
$
|
389,353
|
|
|
$
|
359,786
|
|
|
|
At
December 31, 2016
, other intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Weighted
Average
Useful Life
|
|
(dollars in thousands)
|
|
|
Developed technology
|
$
|
284,005
|
|
|
$
|
111,348
|
|
|
$
|
172,657
|
|
|
7 years
|
Subscriber relationships
|
659,662
|
|
|
345,070
|
|
|
314,592
|
|
|
7 years
|
Trade-names
|
133,805
|
|
|
57,789
|
|
|
76,016
|
|
|
8 years
|
Intellectual property
|
34,084
|
|
|
10,270
|
|
|
23,814
|
|
|
13 years
|
Domain names available for sale
|
29,954
|
|
|
4,976
|
|
|
24,978
|
|
|
Indefinite
|
Leasehold interests
|
314
|
|
|
314
|
|
|
—
|
|
|
1 year
|
Total December 31, 2016
|
$
|
1,141,824
|
|
|
$
|
529,767
|
|
|
$
|
612,057
|
|
|
|
During the year ended December 31, 2016, the Company wrote-off acquired in-process research and development of
$1.4 million
related to its acquisition of Webzai and
$0.8 million
related to its acquisition of AppMachine, as the Company had abandoned certain research and development projects in favor of other projects. Additionally, during the year ended December 31, 2016, the Company recorded an impairment charge of
$4.4 million
relating to developed technology from the Webzai acquisition, after evaluating it for impairment in accordance with ASC 350. This developed technology is also linked to certain internally developed software that was developed at Webzai after its acquisition by the Company which was also determined to be impaired. Refer to
Note 6: Property and Equipment and Capital Lease Obligations
, for further details.
Both of the impairments described above were recognized in the web presence segment.
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 aggregate amounts of
$102.7 million
,
$91.1 million
, and
$143.6 million
for the years ended
December 31, 2014
,
2015
and
2016
, respectively.
At
December 31, 2016
, the expected future amortization of the other intangible assets, excluding indefinite life and in-process research and development intangibles, was approximately as follows:
|
|
|
|
|
Year Ending December 31,
|
Amount
|
|
(in thousands)
|
2017
|
$
|
137,000
|
|
2018
|
103,000
|
|
2019
|
86,000
|
|
2020
|
72,000
|
|
2021
|
62,000
|
|
Thereafter
|
127,000
|
|
Total
|
$
|
587,000
|
|
8. Investments
As of
December 31, 2015
and
2016
, the Company’s carrying value of investments in privately-held companies was
$27.9 million
and
$15.9 million
, respectively.
In January 2012, the Company made an initial investment of
$0.3 million
to acquire a
25%
interest in BlueZone Labs, LLC (“BlueZone”), a provider of “do-it-yourself” tools and managed search engine optimization services.
The Company also has an agreement with BlueZone to purchase products and services. During the years ended
December 31, 2015
and
2016
, the Company purchased
$1.1 million
and
$1.6 million
, respectively, of products and services from BlueZone, which is included in the Company’s consolidated statements of operations and comprehensive loss. As of
December 31, 2015
and
2016
,
$0.1 million
and
$0.1 million
, respectively, relating to our investment in BlueZone was included in accounts payable and accrued expense in the Company’s consolidated balance sheet.
In July 2012, the Company assumed a
50%
interest in WWWH, a provider of web presence solutions, with a fair value of
$10.0 million
. On October 31, 2013, the Company sold
20%
of its ownership interest, or
10%
of the capital stock of WWWH, reducing its equity interest to
40%
. On June 25, 2015, the Company acquired substantially all of the assets of WWWH. In connection with the asset purchase agreement dated June 25, 2015, the seller redeemed from the Company its
40%
equity interest in exchange for a pro rata interest in the acquired assets, which had an estimated implied value of
$11.9 million
. The Company recognized a
$5.4 million
gain as a result of the redemption of its equity interest, which was recorded as other income for the year ended December 31, 2015 in the Company’s consolidated statements of operations and comprehensive loss. In addition, the Company received a
$3.5 million
repayment of total notes receivable that were due to the Company from the seller of WWWH prior to the acquisition. For more detail, see
Note 3: Acquisitions
to the consolidated financial statements.
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
5.0%
of the outstanding shares of Automattic and better aligns the Company with an important partner.
In August 2014, the Company made an aggregate investment of
$3.9 million
for a joint venture with a
49.0%
ownership interest in WZ UK Ltd., which is a provider of technology and sales marketing services associated with web builder solutions. On January 6, 2016, the Company exercised an option to increase its stake in WZ UK Ltd from
49.0%
to
57.5%
. Refer to
Note 3: Acquisitions
for further details.
During 2014 and 2015, the Company had a license agreement with WZ UK Ltd. to license certain technology to WZ UK Ltd. to enable it to use, develop, market, distribute, host and support website builder applications. Under the terms of the license agreement, the Company received a royalty payment in the amount of
4.5%
of all billings in the previous month, net of any refunds, chargebacks and any other credits applied. During the years ended December 31, 2014 and 2015, the Company recognized
$0.0 million
and
$0.4 million
, respectively, of royalty revenue under the terms of the license agreement.
During the years ended December 31, 2014 and 2015, the Company’s proportionate share of net loss from its investment in WZ UK Ltd. was
$0.2 million
and
$13.9 million
, respectively. On July 2, 2015, the Company and the majority investor made additional equity contributions to WZ UK Ltd. The Company’s share of the incremental investments was approximately
$7.4 million
. On December 21, 2015, the Company and the majority investor made additional equity contributions to WZ UK Ltd. The Company’s share of the incremental investment was
$1.1 million
.
The significance of the net loss of WZ UK Ltd., in comparison to the Company’s net loss requires the disclosure of summarized financial information from the statement of operations and comprehensive loss for WZ UK Ltd. The following table presents a summary of the statement of operations and comprehensive loss for WZ UK Ltd. for the years ended December 31, 2014 and 2015:
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
2014
|
|
2015
|
|
(in thousands)
|
Revenue
|
$
|
1
|
|
|
$
|
4,053
|
|
Gross profit (loss)
|
$
|
(96
|
)
|
|
$
|
1,095
|
|
Operating loss
|
$
|
(694
|
)
|
|
$
|
(28,439
|
)
|
Net loss
|
$
|
(694
|
)
|
|
$
|
(28,439
|
)
|
As of December 31, 2015, WZ UK Ltd. had total assets of
$2.1 million
, and total liabilities of
$6.7 million
. On January 6, 2016, the Company exercised its option to increase its stake on WZ UK Ltd. from
49.0%
to
57.5%
, thereby acquiring a controlling interest. As of December 31, 2016, WZ UK Ltd. is consolidated in the Company's financial statements. Refer to
Note 3: Acquisitions
and
Note 13: Redeemable Non-controlling Interest,
for further details.
In December 2014, the Company also made an aggregate investment of
$15.2 million
to acquire a
40.0%
ownership interest in AppMachine, which is a developer of software that allows users to build mobile applications for smart devices such as phones and tablets. Under the terms of the investment agreement for AppMachine the Company was obligated to purchase the remaining
60.0%
of AppMachine in three tranches of
20.0%
within specified periods if AppMachine achieved a specified
minimum revenue threshold within a designated timeframe. The agreement was terminated in July 2016, when the Company acquired the remaining
60.0%
of the equity interest in AppMachine. Refer to
Note 3: Acquisitions
for further details.
On March 3, 2016, the Company purchased a
$0.6 million
convertible promissory note from a business that provides web and mobile money management solutions, with the potential for subsequent purchases of additional convertible notes.
On April 8, 2016, the Company made an investment of
$5.0 million
for a
33.0%
equity interest in Fortifico Limited, a company providing a billing, CRM, and affiliate management solution to small and mid-sized businesses. During the year ended December 31, 2016, the Company incurred a charge of
$4.7 million
to impair the Company's
33%
equity interest in Fortifico Limited, after determining that there were diminishing projected future cash flows on this investment.
Investments in which the Company’s interest is less than
20.0%
and which are not classified as available-for-sale securities are carried at the lower of cost or net realizable value unless it is determined that the Company exercises significant influence over the investee company, in which case the equity method of accounting is used. For those investments in which the Company’s voting interest is between
20.0%
and
50.0%
, the equity method of accounting is used. Under this method, the investment balance, originally recorded at cost, is adjusted to recognize the Company’s share of net earnings or losses of the investee company, as they occur, limited to the extent of the Company’s investment in, advances to and commitments for the investee. These adjustments are reflected in equity (income) loss of unconsolidated entities, net of tax in the Company’s consolidated statements of operations and comprehensive loss. The Company recognized net losses of
$0.1 million
,
$14.6 million
, and
$1.3 million
for the years ended
December 31, 2014
,
2015
and
2016
, respectively, related to its investments.
From time to time, the Company may make new and follow-on investments and may receive distributions from investee companies. As of
December 31, 2016
, the Company was not obligated to fund any follow-on investments in these investee companies.
As of
December 31, 2016
, the Company did not have an equity method investment in which the Company’s proportionate share exceeded
10%
of the Company’s consolidated assets or income from continuing operations. As of
December 31, 2016
, the Company did not have an equity method investment in which the Company’s proportionate share of net losses exceeded
20%
of net loss of the Company’s consolidated statement of operations and comprehensive loss.
9. Notes Payable
At December 31, 2015 and 2016, notes payable, net of original issuance discount and deferred financing costs, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2015
|
|
2016
|
|
|
(in thousands)
|
|
First Lien Term Loan
|
$
|
1,025,385
|
|
|
$
|
985,640
|
|
|
Incremental First Lien Term Loan
|
—
|
|
|
674,860
|
|
|
Senior Notes
|
—
|
|
|
326,480
|
|
|
Revolving Credit Facilities
|
67,000
|
|
|
—
|
|
|
Total Notes Payable
|
1,092,385
|
|
|
1,986,980
|
|
|
Current portion of Notes Payable
|
77,500
|
|
|
35,700
|
|
|
Notes Payable - long-term
|
$
|
1,014,885
|
|
|
$
|
1,951,280
|
|
|
First Lien Term Loan
The Company has a first lien term loan (“First Lien”), which originated in November 2013, had an original balance of
$1,050.0 million
and a maturity date of November 9, 2019. As of December 31, 2015 and 2016, the First Lien had an outstanding balance of:
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2015
|
|
2016
|
First Lien Term Loan
|
|
$
|
1,026,375
|
|
|
$
|
985,875
|
|
Unamortized deferred financing costs
|
|
(990
|
)
|
|
(235
|
)
|
Net First Lien Term Loan
|
|
1,025,385
|
|
|
985,640
|
|
Current portion of First Lien Term Loan
|
|
10,500
|
|
|
21,000
|
|
First Lien Term Loan - long term
|
|
$
|
1,014,885
|
|
|
$
|
964,640
|
|
The First Lien automatically bears interest at the bank’s reference rate unless the Company gives notice to opt for LIBOR-based interest rate term loans. During the year ended December 31, 2015 and during the period January 1, 2016 through February 8, 2016, the interest rate for a LIBOR based interest term loan was
4.00%
plus the greater of the LIBOR rate or
1.00%
, and the interest rate for a reference rate term loan was
3.00%
per annum plus the greater of the prime rate, the federal funds effective rate plus
0.50%
, an adjusted LIBOR rate or
2.00%
. The First Lien bore interest at a LIBOR-based rate of
5.00%
during this period.
As a result of the refinancing on February 9, 2016 (the “Refinancing”) in connection with the acquisition of Constant Contact and the triggering of the “most-favored nation” pricing provision in the First Lien, the interest rate on the First Lien increased to LIBOR (subject to a LIBOR floor of
1.0%
) plus
5.23%
per annum starting February 9, 2016 and to LIBOR (subject to a LIBOR floor of
1.0%
) plus
5.48%
per annum on February 28, 2016. The interest rate on a reference First Lien loan increased to reference rate (subject to a floor of
2.0%
) plus
4.23%
per annum starting February 9, 2016 and to reference rate (subject to a floor of
2.0%
) plus
4.48%
per annum starting February 28, 2016.
The First Lien requires quarterly mandatory repayments of principal. During the year ended December 31, 2015, these mandatory repayments were set at
$2.6 million
at the end of each quarter. As a result of the Refinancing, the Company is obligated to use commercially reasonable efforts to make voluntary repayments on the First Lien to effectively double the amount of each scheduled amortization payment under this facility. During the year ended December 31, 2015, the Company repaid
$10.5 million
against the First Lien. During the year ended December 31, 2016, the Company made mandatory repayments of
$10.5 million
and voluntary prepayments of
$30.0 million
against the First Lien.
Interest is payable on maturity of the elected interest period for a LIBOR-based interest loan, which can be
one
,
two
,
three
or
6 months
. Interest is payable at the end of each fiscal quarter for a reference rate interest First Lien loan.
Incremental First Lien Term Loan
In connection with the acquisition of Constant Contact on February 9, 2016, the Company entered into the Incremental First Lien Term Loan (the “Incremental First Lien”) in the principal amount of
$735.0 million
. As of December 31, 2016, the First Lien had an outstanding balance of:
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2016
|
|
Incremental First Lien Term Loan
|
|
$
|
720,300
|
|
|
Unamortized deferred financing costs
|
|
(25,869
|
)
|
|
Unamortized original issue discounts
|
|
(19,571
|
)
|
|
Net Incremental First Lien Term Loan
|
|
674,860
|
|
|
Current portion of Incremental First Lien Term Loan
|
|
14,700
|
|
|
Incremental First Lien Term Loan - long term
|
|
$
|
660,160
|
|
|
The Incremental First Lien matures
seven years
from issuance, was issued at a price of
97.0%
of par (subject to the payment of an additional upfront fee of
1.0%
on February 28, 2016 under certain circumstances), bears interest at a rate of LIBOR plus
5.0%
per annum, subject to a LIBOR floor of
1.0%
per annum, or at an alternate rate with a spread of
4.0%
,
subject to a floor of
2.0%
per annum, and has scheduled principal payments equal to
0.50%
of the original principal per quarter, or
$3.7 million
, starting September 30, 2016.
The Incremental First Lien automatically bears interest at the bank’s reference rate unless the Company gives notice to opt for LIBOR-based interest rate term loans. Interest is payable on maturity of the elected interest period for a LIBOR-based interest loan, which can be
one
,
two
,
three
or
6 months
. Interest is payable at the end of each fiscal quarter for a reference rate loan term loan.
During the year ended December 31, 2016, the Company made
$14.7 million
in mandatory and voluntary prepayments against the Incremental First Lien.
Revolving Credit Facilities
The Company had an existing credit facility of
$125.0 million
(the “Prior Revolver”) which originated in November 2013 and had a maturity date of December 22, 2016. The Company could elect to draw down against the Prior Revolver using a LIBOR-rate interest loan or an alternate base interest loan. The interest rate for an alternate rate base revolver loan was
5.25%
per annum plus the greater of the prime rate, the federal funds effective rate plus
0.50%
, an adjusted LIBOR rate or
2.25%
. The interest rate for a LIBOR based revolver loan was
6.25%
per annum plus the greater of the LIBOR rate or
1.50%
. There was also a non-refundable fee (the "commitment fee"), equal to
0.50%
of the daily unused principal amount of the revolver payable in arrears on the last day of each fiscal quarter. As of December 31, 2015, the balance outstanding under the Prior Revolver was
$67.0 million
, consisting of a loan of
$59.0 million
which bore interest at a LIBOR-based rate of
7.75%
and a loan of
$8.0 million
which bore interest at an alternate rate of
8.50%
.
As a result of the Refinancing, the Company entered into a new revolving facility (the “Current Revolver”), which increased the Company’s available revolving credit to
$165.0 million
. The Current Revolver has a “springing” maturity date of August 10, 2019 unless the First Lien has been repaid in full or otherwise extended to at least
91 days
after the maturity of the Current Revolver. As of December 31, 2016, the Company did not have any balances outstanding under the Current Revolver, and the full amount of the facility, or
$165.0 million
, was unused and available.
The Company has the ability to draw down against the Current Revolver using a LIBOR-based interest loan or an alternate based interest loan. LIBOR-based interest revolver loans bear interest at a rate of LIBOR plus
4.0%
per annum (subject to a leverage-based step-down), without a LIBOR floor. Alternate base interest revolver loans bear interest at the alternate rate plus
3.0%
(subject to a leverage-based step down), without an alternate rate floor. There is also a non-refundable commitment fee, equal to
0.50%
of the daily unused principal amount (subject to a leverage-based step down), which is payable in arrears on the last day of each fiscal quarter. Interest is payable on maturity of the elected interest period for a LIBOR-based interest loan, which can be
one
,
two
,
three
or
6 months
. Interest is payable at the end of each fiscal quarter for a reference rate revolver loan.
Senior Notes
On February 9, 2016, EIG Investors issued
$350.0 million
aggregate principal amount of Senior Notes (the “Notes”). The Notes will mature on February 1, 2024, were issued at a price of
98.065%
of par and bear interest at the rate of
10.875%
per annum. The Notes have been fully and unconditionally guaranteed, on a senior unsecured basis, by the Company and its subsidiaries that guarantee the Senior Credit Facilities (including Constant Contact and certain of its subsidiaries). As of December 31, 2016, the Senior Notes had an outstanding balance of:
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2016
|
|
Senior Notes
|
|
$
|
350,000
|
|
|
Unamortized deferred financing costs
|
|
(17,238
|
)
|
|
Unamortized original issue discounts
|
|
(6,282
|
)
|
|
Net Senior Notes
|
|
326,480
|
|
|
Current portion of Senior Notes
|
|
—
|
|
|
Senior Notes - long term
|
|
$
|
326,480
|
|
|
Interest on the notes is payable twice a year, on August 1 and February 1.
On January 30, 2017, the Company completed a registered exchange offer for the Notes, as required under the registration rights agreement we entered into with the initial purchasers of the Notes. All of the
$350.0 million
aggregate principal amount of the original notes was validly tendered for exchange as part of this exchange offer.
Presentation of Debt Issuance Costs
The Company adopted ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” beginning on January 1, 2016, and retrospectively for all periods presented. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Unamortized balances of deferred financing costs relating to the First Lien, and unamortized balances of deferred financing costs and of original issue discounts relating to the Incremental Term Lien and the Notes are presented as a reduction of the notes payable in our consolidated balance sheets. The unamortized value of deferred financing costs associated with our revolving credit facility were not affected by the ASU and continue to be presented as an asset on the Company’s consolidated balance sheets.
Maturity of Notes Payable
The maturity of the notes payable at
December 31, 2016
is as follows:
|
|
|
|
|
|
First Lien, Incremental First Lien, and Notes
|
|
(in thousands)
|
2017
|
$
|
35,700
|
|
2018
|
35,700
|
|
2019
|
958,575
|
|
2020
|
14,700
|
|
2021
|
14,700
|
|
Thereafter
|
996,800
|
|
Total
|
$
|
2,056,175
|
|
Interest
The Company recorded
$57.4 million
,
$58.8 million
, and
$152.9 million
in interest expense for the years ended
December 31, 2014
,
2015
and
2016
, respectively.
The following table provides a summary of loan interest rates incurred and interest expense for the years ended
December 31, 2014
,
2015
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
|
(dollars in thousands)
|
Interest rate—LIBOR
|
5.00%-7.75%
|
|
|
5.00%-7.75%
|
|
|
4.49%-7.75%
|
|
Interest rate—reference
|
8.50
|
%
|
|
8.50
|
%
|
|
6.75%-8.75%
|
|
Interest rate—Notes
|
—
|
%
|
|
—
|
%
|
|
10.875
|
%
|
Non-refundable fee—unused facility
|
0.50
|
%
|
|
0.50
|
%
|
|
0.50
|
%
|
Interest expense and service fees
|
$
|
56,247
|
|
|
$
|
56,760
|
|
|
$
|
140,470
|
|
Amortization of deferred financing fees
|
$
|
83
|
|
|
$
|
82
|
|
|
$
|
6,073
|
|
Amortization of original issue discounts
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,970
|
|
Amortization of net present value of deferred consideration
|
$
|
183
|
|
|
$
|
1,264
|
|
|
$
|
2,617
|
|
Other interest expense
|
$
|
901
|
|
|
$
|
722
|
|
|
$
|
758
|
|
Total interest expense
|
$
|
57,414
|
|
|
$
|
58,828
|
|
|
$
|
152,888
|
|
Debt Covenants
The First Lien and Incremental First Lien (collectively, the "Senior Credit Facilities") require that the Company complies with a financial covenant to maintain a maximum ratio of consolidated senior secured indebtedness to Bank Adjusted EBITDA (as defined in the credit agreement). Please see "
Management's Discussion and Analysis
" for further discussion of Bank Adjusted EBITDA and this covenant.
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. 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. The Company was in compliance with all covenants at
December 31, 2016
.
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 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 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 Notes to be due and payable immediately.
10. Stockholders’ Equity
Preferred Stock
The Company has
5,000,000
shares of authorized preferred stock, par value
$0.0001
. There were
no
preferred shares issued or outstanding as of
December 31, 2015
and
2016
.
Common Stock
The Company has
500,000,000
shares of authorized common stock, par value
$0.0001
.
Voting Rights
All holders of common stock are entitled to
one
vote per share.
11. Stock-Based Compensation
The Company follows the provisions of ASC 718,
Compensation—Stock Compensation
(“ASC 718”), 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. The Company uses the straight-line amortization method for recognizing stock-based compensation expense.
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 granted, the
Company estimates the fair value of each restricted stock award based on the closing trading price of its common stock on the date of grant.
The Company elected to early adopt Accounting Standards Update No. 2016-09,
Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting,
in the fourth quarter of fiscal year 2016 which requires it to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. The guidance simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of excess tax benefits in the consolidated statements of cash flows. The impact of the early adoption resulted in the following:
|
|
•
|
Due to the Company's net shortfall position upon the time of adoption, the new standard resulted in additional tax expense in our provision for income taxes rather than paid-in capital of
$0.9 million
for the year ended December 31, 2016. The Company's beginning retained earnings was
not
impacted by the early adoption as the Company had a full valuation allowance against the U.S. deferred tax assets as of December 31, 2015.
|
|
|
•
|
As a result of prior guidance that required excess tax benefits reduce taxes payable prior to recognition as an increase in paid in capital, the Company had not recognized certain deferred tax assets (loss carryforwards) that could be attributed to tax deductions related to equity compensation in excess of compensation recognized for financial reporting. As of January 1, 2016, the Company had generated federal and state net operating loss carryforwards due to excess tax benefits of
$1.5 million
and
$0.7 million
, respectively.
|
|
|
•
|
The Company elected to eliminate the forfeiture rate and adopted the new policy to account for forfeitures in the period that they are incurred, and applied this policy on a modified retrospective basis. The impact of eliminating the forfeiture rate increased the stock compensation recorded in 2016 by
$0.9 million
, which included an immaterial prior period adjustment that the Company recorded through the consolidated statement of operations and comprehensive loss for the year ended December 31, 2016.
|
2012 Restricted Stock Awards
Unless otherwise determined by the Company’s board of directors, stock-based awards granted prior to the IPO generally vested over a
four
-year period or had vesting that was dependent on the achievement of specified performance targets. The fair value of these stock-based awards was determined as of the grant date of each award using an option-pricing model and assuming no pre-vesting forfeiture of the awards.
Given the absence of an active trading market for the Company’s common stock prior to the completion of its IPO, the fair value of the equity interests underlying stock-based awards was determined by the Company’s management. In doing so, valuation analyses were prepared in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid,
Valuation of Privately-Held-Company Equity Securities Issued as Compensation,
and were used by the Company’s management to assist in determining the fair value of the equity interests underlying its stock-based awards. Each equity interest was granted with a “threshold amount” meaning that the recipient of an equity security only participated to the extent that the Company appreciated in value from and after the date of grant of the equity interest (with the value of the entity as of the grant date being the “threshold amount”). The assumptions used in the valuation models were based on future expectations combined with management’s judgment. In the absence of a public trading market, the Company’s management exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of the stock-based awards as of the date of each award. These factors included:
|
|
•
|
contemporaneous or retrospective valuations for the Company and its securities;
|
|
|
•
|
the rights, preferences, and privileges of the stock-based awards relative to each other as well as to the existing shareholders;
|
|
|
•
|
lack of marketability of the Company’s equity securities;
|
|
|
•
|
historical operating and financial performance;
|
|
|
•
|
the Company’s stage of development;
|
|
|
•
|
current business conditions and projections;
|
|
|
•
|
hiring of key personnel and the experience of the Company’s management team;
|
|
|
•
|
risks inherent to the development of the Company’s products and services and delivery of its solutions;
|
|
|
•
|
trends and developments in the Company’s industry;
|
|
|
•
|
the threshold amount for the stock-based awards and the values at which the stock-based awards would vest;
|
|
|
•
|
the market performance of comparable publicly traded companies;
|
|
|
•
|
likelihood of achieving a liquidity event, such as an IPO or a merger or acquisition of the Company given prevailing market conditions; and
|
|
|
•
|
U.S. and global economic and capital market conditions.
|
The Company completed its IPO in October 2013, and determined that the performance targets associated with the performance-based stock awards were met in full and consequently the performance-based stock awards would be fully vested. However, effective prior to the first day of public trading of the Company’s common stock, the Company accelerated the vesting of
2,167,870
shares of common stock issued in respect of the time-based stock awards and modified the vesting of
3,574,637
shares issued in respect of the performance-based stock awards so that
2,580,271
shares of common stock were fully vested and
994,366
shares of common stock will follow the same vesting schedule as the time-based stock awards that were granted on the same date as such performance-based stock awards.
The following tables present a summary of the 2012 restricted stock awards activity for the year ended
December 31, 2016
for restricted stock awards that were granted prior to the Company’s IPO:
|
|
|
|
|
2012 Restricted Stock Awards
|
Non-Vested at December 31, 2015
|
46,645
|
|
Forfeitures
|
—
|
|
Vested
|
(46,645
|
)
|
Non-Vested at December 31, 2016
|
—
|
|
In connection with the IPO the Company granted restricted stock units under the prior equity plan. The following table provides a summary of the restricted stock units that were granted in connection with the IPO under this plan and the non-vested balance as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Weighted
Average
Grant Date
Fair Value
|
Non-vested at December 31, 2015
|
22,158
|
|
|
$
|
12.00
|
|
Vested
|
(22,158
|
)
|
|
$
|
12.00
|
|
Non-vested at December 31, 2016
|
—
|
|
|
$
|
—
|
|
2013 Stock Incentive Plan
The Amended and Restated 2013 Stock Incentive Plan (the “2013 Plan”) of the Company became effective upon the closing of our IPO. The 2013 Plan of the Company provides for the grant of options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards to employees, officers, directors, consultants and advisors of the Company. Under the 2013 Plan, the Company may issue up to
38,000,000
shares of the Company’s common stock. At December 31, 2016,
16,964,969
shares were available for grant under the 2013 Plan.
For stock options issued under the 2013 Plan, the fair value of each option is estimated on the date of grant, and upon the adoption of ASU 2016-09, the Company accounts for forfeitures as they are incurred. Unless otherwise approved by the Company’s board of directors, stock options typically vest over
four years
and the Company recognizes compensation expense on a straight-line basis over the requisite service period of the award. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option awards and determine the related compensation expense. The weighted-average assumptions used to compute stock-based compensation expense for awards granted under the 2013 Stock Incentive Plan during the years ended December 31, 2014, 2015 and 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2015
|
|
2016
|
Risk-free interest rate
|
2.1
|
%
|
|
1.8
|
%
|
|
1.6
|
%
|
Expected volatility
|
58.3
|
%
|
|
56.1
|
%
|
|
53.1
|
%
|
Expected life (in years)
|
6.25
|
|
|
6.25
|
|
|
6.25
|
|
Expected dividend yield
|
—
|
|
|
—
|
|
|
—
|
|
The risk-free interest rate assumption was based on the U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The Company bases its estimate of expected volatility using volatility data from comparable public companies in similar industries and markets because there is currently limited public history for the Company’s common stock, and therefore, a lack of market-based company-specific historical and implied volatility information. The weighted-average expected life for employee options reflects the application of the simplified method, which represents the average of the contractual term of the options and the weighted-average vesting period for all option tranches. The simplified method has been used since the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to a limited history of stock option grants. The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future.
The following table provides a summary of the Company’s stock options as of
December 31, 2016
and the stock option activity for all stock options granted under the 2013 Plan during the year ended
December 31, 2016
(dollars in thousands except exercise price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual Term
(In years)
|
|
Aggregate
Intrinsic
Value(3)
|
Outstanding at December 31, 2015
|
6,950,858
|
|
|
$
|
13.83
|
|
|
|
|
|
Granted
|
3,575,851
|
|
|
$
|
10.96
|
|
|
|
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Forfeited
|
(595,364
|
)
|
|
$
|
13.56
|
|
|
|
|
|
Canceled
|
(323,914
|
)
|
|
$
|
13.41
|
|
|
|
|
|
Outstanding at December 31, 2016
|
9,607,431
|
|
|
$
|
12.79
|
|
|
8.0
|
|
$
|
205
|
|
Exercisable as of December 31, 2016
|
4,435,261
|
|
|
$
|
13.15
|
|
|
7.1
|
|
$
|
—
|
|
Expected to vest after December 31, 2016(1)
|
5,172,170
|
|
|
$
|
12.49
|
|
|
8.7
|
|
$
|
205
|
|
Exercisable as of December 31, 2016 and expected to vest thereafter(2)
|
9,607,431
|
|
|
$
|
12.79
|
|
|
8.0
|
|
$
|
205
|
|
|
|
(1)
|
This represents the number of unvested options outstanding as of
December 31, 2016
that are expected to vest in the future.
|
|
|
(2)
|
This represents the number of vested options as of
December 31, 2016
plus the number of unvested options outstanding as of
December 31, 2016
that are expected to vest in the future.
|
|
|
(3)
|
The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company’s common stock on
December 31, 2016
of
$9.30
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 awards granted under the 2013 Plan generally vest annually over a
four
-year period. 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 performance criteria are weighted and have threshold, target and maximum performance goals. The following table provides a summary of the Company’s restricted stock award activity for the 2013 Plan during the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
|
|
Weighted
Average
Grant Date
Fair Value
|
Non-vested at December 31, 2015
|
4,849,290
|
|
|
$
|
15.24
|
|
Granted
|
3,355,341
|
|
|
$
|
10.36
|
|
Vested
|
(613,751
|
)
|
|
$
|
13.84
|
|
Canceled
|
(258,343
|
)
|
|
$
|
12.75
|
|
Non-vested at December 31, 2016
|
7,332,537
|
|
|
$
|
13.21
|
|
Unless otherwise determined by the Company’s board of directors, restricted stock units granted under the 2013 Plan generally vest monthly over a
four
-year period. The following table provides a summary of the Company’s restricted stock unit activity for the 2013 Plan during the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Weighted
Average
Grant Date
Fair Value
|
Non-vested at December 31, 2015
|
220,765
|
|
|
$
|
12.00
|
|
Vested and unissued
|
(120,396
|
)
|
|
$
|
12.00
|
|
Non-vested at December 31, 2016
|
100,369
|
|
|
$
|
12.00
|
|
2015 Performance Based Award
The performance-based award granted to the Company’s chief executive officer during the year ended December 31, 2015 provides an opportunity for the participant to earn a fully vested right to up to
3,693,754
shares of the Company’s common stock (collectively, the “Award Shares”) over a
three
-year period beginning July 1, 2015 and ending on June 30, 2018 (the “Performance Period”). Award shares may be earned based on the Company achieving pre-established, threshold, target and maximum performance metrics.
Award Shares may be earned during each calendar quarter during the Performance Period (each, a “Performance Quarter”) if the Company achieves a threshold, target or maximum level of the performance metric for the Performance Quarter. If the performance metric is less than the threshold level for a Performance Quarter, no Award Shares will be earned during the Performance Quarter. Award Shares that were not earned during a Performance Quarter may be earned later during the then current twelve-month period from July 1st to June 30th during the Performance Period (each, a “Performance Year”), at a threshold, target or maximum level of the performance metric for the Performance Year. For the fourth quarter of 2016,
184,115
Award Shares were earned for the Performance Quarter ending
December 31, 2016
because a performance level between the threshold and target for the performance metric was met. An aggregate total of
1,003,600
Award Shares were earned during the year ended December 31, 2016.
Any Award Shares that are earned during the Performance Period will vest on June 30, 2018, provided the chief executive officer is employed by the Company on such date. The requirement that the chief executive officer be employed by the Company on June 30, 2018 is waived in the event the executive’s employment is terminated due to death, disability or by the Company without cause, if the executive terminates employment with the Company for good reason, or if the executive is employed by the Company on the date of a change in control (as such terms are defined in the executive’s employment agreement). Upon the occurrence of any of the foregoing events, additional Award Shares may be earned, as provided for in the performance-based restricted stock agreement.
This performance-based award is evaluated quarterly to determine the probability of its vesting and determine the amount of stock-based compensation to be recognized. During the year ended
December 31, 2016
, the Company recognized
$6.8 million
of stock-based compensation expense related to the performance-based award.
2016 Performance Based Awards
On February 16, 2016, the Compensation Committee of the Board of Directors of the Company approved the grant of performance-based restricted stock awards to the Company’s Chief Financial Officer (“CFO”), Chief Operating Officer (“COO”) and Chief Administrative Officer (“CAO”).
The CFO performance-based restricted stock award provided an opportunity to earn a fully vested right to up to
223,214
shares of the Company’s common stock, with a target of
178,571
shares. The COO performance-based restricted stock award provided an opportunity to earn a fully vested right to up to
260,416
shares of the Company’s common stock, with a target of
208,333
shares. The CAO performance based restricted stock award provided an opportunity to earn a fully vested right to up to
148,810
shares of the Company’s common stock, with a target of
119,048
shares.
The shares subject to the performance-based restricted stock awards will be earned based on the Company’s email marketing segment achieving a pre-established level of adjusted revenue (weighted
50%
), adjusted EBITDA (weighted
25%
) and adjusted free cash flow (weighted
25%
), each as defined in the award agreement and in each case for the twelve months ending December 31, 2016, assuming for this purpose that the Company’s acquisition of Constant Contact had taken place on January 1, 2016 (the “Performance Metric”).
As of December 31, 2016, the maximum level of the Performance Metric was met and upon Board approval, each executive will earn the maximum number of shares subject to their award. These earned shares will vest on March 31, 2017.
During the fiscal year ended December 31, 2016, the Company recognized
$4.1 million
of stock-based compensation expense related to these performance-based awards.
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 (“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 December 31, 2016, there were
9,278,088
shares available for grant under the 2011 Plan.
The Company calculated the fair value of the exchanged awards in accordance with the provisions of ASC 718 as of the acquisition date. The Company allocated the fair value of these awards between the pre-acquisition and post-acquisition stock-based compensation expense. The Company determined that the value of the awards under this plan was
$22.3 million
, of which
$5.4 million
was attributed to the pre-acquisition period and recognized as part of the purchase consideration for Constant Contact. The balance of
$16.9 million
has been attributed to the post-acquisition period, and will be recognized in the Company’s consolidated statements of operations and comprehensive loss over the vesting period of the awards.
For stock options issued under the 2011 Plan, the fair value of each option is estimated on the date of grant, and an estimated forfeiture rate is used when calculating stock-based compensation expense for the period. Unless otherwise approved by the Company’s board of directors, stock options typically vest over
four years
and the Company recognizes compensation expense on a straight-line basis over the requisite service period of the award. The Company uses the Black-Scholes option simplified pricing model to estimate the fair value of stock option awards and determine the related compensation expense. The weighted-average assumptions used to compute stock-based compensation expense for awards granted under the 2011 Stock Incentive Plan during the year ended December 31, 2016 are as follows:
|
|
|
|
|
2016
|
Risk-free interest rate
|
1.27
|
%
|
Expected volatility
|
53.1
|
%
|
Expected life (in years)
|
4.75
|
|
Expected dividend yield
|
—
|
|
The following table provides a summary of the Company’s stock options as of December 31, 2016 and the stock option activity for all stock options granted under the 2011 Plan during the year ended December 31, 2016 :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual Term
(In years)
|
|
Aggregate
Intrinsic
Value(3)
(In thousands)
|
Outstanding at December 31, 2015
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Granted/Exchanged
|
3,002,887
|
|
|
$
|
8.28
|
|
|
|
|
|
Exercised
|
(396,486
|
)
|
|
$
|
6.47
|
|
|
|
|
|
Canceled
|
(674,571
|
)
|
|
$
|
8.07
|
|
|
|
|
|
Outstanding at December 31, 2016
|
1,931,830
|
|
|
$
|
8.73
|
|
|
5.1
|
|
2,606
|
|
Exercisable as of December 31, 2016
|
529,472
|
|
|
$
|
7.12
|
|
|
3.7
|
|
1,316
|
|
Expected to vest after December 31, 2016(1)
|
1,123,921
|
|
|
$
|
9.28
|
|
|
5.6
|
|
1,099
|
|
Exercisable as of December 31, 2016 and expected to vest thereafter(2)
|
1,653,393
|
|
|
$
|
8.59
|
|
|
5.0
|
|
2,415
|
|
|
|
(1)
|
This represents the number of unvested options outstanding as of
December 31, 2016
that are expected to vest in the future.
|
|
|
(2)
|
This represents the number of vested options as of
December 31, 2016
plus the number of unvested options outstanding as of
December 31, 2016
that are expected to vest in the future.
|
|
|
(3)
|
The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company’s common stock on
December 31, 2016
of
$9.30
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
four
-year period. The following table provides a summary of the Company’s restricted stock unit activity for the 2011 Plan during the year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Weighted
Average
Grant Date
Fair Value
|
Non-vested at December 31, 2015
|
—
|
|
|
—
|
|
Granted
|
3,154,897
|
|
|
$
|
8.49
|
|
Vested
|
(1,266,771
|
)
|
|
$
|
7.69
|
|
Canceled
|
(414,471
|
)
|
|
$
|
8.26
|
|
Non-vested at December 31, 2016
|
1,473,655
|
|
|
$
|
9.25
|
|
2016 Award Obligations
At December 31, 2016, stock based compensation expense included
$0.7 million
of equity award obligations that the Company has agreed to issue in shares of common stock upon the achievement of certain conditions, of which
$0.3 million
was recorded in sales and marketing expense,
$0.1 million
was recorded in engineering and development expense, and
$0.3 million
was recorded in general and administrative expense within the consolidated statement of operations and comprehensive loss for the year ended December 31, 2016. This amount was included in accrued expenses at year end, and will be reclassified against additional paid in capital upon issuance of the shares.
All Plans
The following table presents total stock-based compensation expense recorded in the consolidated statement of operations and comprehensive loss for all 2012 restricted stock awards and units issued prior to the Company’s IPO in October 2013 and all awards granted under the 2013 Plan in connection with or subsequent to the IPO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
|
(in thousands)
|
Cost of revenue
|
$
|
547
|
|
|
$
|
1,975
|
|
|
$
|
5,855
|
|
Sales and marketing
|
1,585
|
|
|
3,285
|
|
|
8,702
|
|
Engineering and development
|
883
|
|
|
1,988
|
|
|
5,989
|
|
General and administrative
|
13,028
|
|
|
22,677
|
|
|
37,721
|
|
Total operating expense
|
$
|
16,043
|
|
|
$
|
29,925
|
|
|
$
|
58,267
|
|
The Company recognized tax benefit related to stock compensation expense of
$4.6 million
,
$9.3 million
, and
$19.2 million
, for the years ended December 31, 2014, 2015, and 2016.
As of
December 31, 2016
the Company has approximately
$29.5 million
of unrecognized stock-based compensation expense related to option awards that will be recognized over
2.4
years and approximately
$40.6 million
of unrecognized stock-based compensation expense related to restricted stock awards to be recognized that will be recognized over
2.0
years for the 2013 Stock Incentive Plan.
As of
December 31, 2016
the Company has approximately
$5.0 million
of unrecognized stock-based compensation expense related to option awards that will be recognized over
2.7
years and approximately
$10.3 million
of unrecognized stock-based compensation expense related to restricted stock awards to be recognized that will be recognized over
2.6
years for the 2011 Stock Incentive Plan.
12. Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive loss, net of tax were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
Unrealized Gains
(Losses) on
Cash Flow
Hedges
|
|
Total
|
|
(in thousands)
|
Balance at December 31, 2014
|
(517
|
)
|
|
—
|
|
|
(517
|
)
|
Other comprehensive income (loss)
|
(1,281
|
)
|
|
80
|
|
|
(1,201
|
)
|
Balance at December 31, 2015
|
$
|
(1,798
|
)
|
|
$
|
80
|
|
|
$
|
(1,718
|
)
|
Other comprehensive income (loss)
|
(597
|
)
|
|
(1,351
|
)
|
|
(1,948
|
)
|
Balance at December 31, 2016
|
$
|
(2,395
|
)
|
|
$
|
(1,271
|
)
|
|
$
|
(3,666
|
)
|
13. Redeemable Non-Controlling Interest
2014 Non-controlling interest
In connection with a 2013 equity investment in JDI Backup Ltd., where the Company acquired a controlling interest, the agreement provided for a put option for the then non-controlling interest (“NCI”) shareholders to put the remaining equity interest to the Company within pre-specified put periods. As the NCI was subject to a put option that was outside the control of the Company, it was deemed a redeemable non-controlling interest and not recorded in permanent equity, and was presented as mezzanine redeemable non-controlling interest on the consolidated balance sheet, and was subject to the guidance of the Securities and Exchange Commission (“SEC”) under ASC 480-10-S99,
Accounting for Redeemable Equity Securities.
The difference between the
$20.8 million
initial fair value of the redeemable non-controlling interest and the value that was expected to be paid upon exercise of the put option was being accreted over the period commencing December 11, 2013 and up to the end of the first put option period, which commenced on the 18-month anniversary of the acquisition date. Adjustments to the carrying amount of the redeemable non-controlling interest were charged to additional paid-in capital.
Non-controlling interest arising from the application of the consolidation rules was classified within total stockholders’ equity with any adjustments charged to net loss attributable to non-controlling interest in a consolidated subsidiary in the consolidated statement of operations and comprehensive loss.
During the year ended December 31, 2014, the Company paid
$4.2 million
to increase its investment in JDI Backup Ltd. and entered into an amendment to the put option with the NCI shareholders. During the year ended December 31, 2014, due to the Company’s assessment of the financial performance and forecasted profitability of JDI Backup Ltd., the Company changed its estimate of the expected exercise amount of the put option. The change in estimate resulted in the fair value of the put option increasing to
$30.5 million
as of December 31, 2014.
On January 13, 2015, the Company entered into an agreement to acquire the remaining interests owned by the NCI shareholders for
$30.5 million
, which was originally payable in
three
equal installments on January 13, 2015, June 15, 2015 and September 15, 2015. During the year ended December 31, 2015, the Company entered into amendments to change the dates of the second installment from June 15, 2015 to April 10, 2015 and the date of the third installment from September 15, 2015 to July 2, 2015. The Company will continue to consolidate JDI Backup Ltd. for financial reporting purposes, however, because the Company now owns
100.0%
of JDI Backup Ltd., commencing on January 13, 2015, the Company no longer records a non-controlling interest in the consolidated statement of operations and comprehensive loss.
2016 Non-controlling interest
In connection with a 2014 equity investment in WZ UK, on January 6, 2016, the Company exercised its option to increase its stake in WZ UK from
49.0%
to
57.5%
, thereby acquiring a controlling interest, in exchange for a payment of approximately
$2.1 million
to the other shareholders of WZ UK. The agreement related to the transaction provides for a put option for the then NCI shareholders to put the remaining equity interest to the Company within pre-specified put periods. As the NCI is subject to a put option that is outside the control of the Company, it is deemed a redeemable non-controlling interest and is not recorded in permanent equity, and is presented as mezzanine redeemable non-controlling interest on the consolidated balance sheet, and is subject to the guidance of the Securities and Exchange Commission (“SEC”) under ASC 480-10-S99,
Accounting for Redeemable Equity Securities.
The difference between the
$10.8 million
fair value of the redeemable NCI and the
$30.0 million
value that is expected to be paid upon exercise of the put option was being accreted over the period commencing January 6, 2016 and up to the first put option period, which commenced on the
24 months
anniversary of the acquisition date, August 14, 2016. Adjustments to the carrying amount of the redeemable non-controlling interest were charged to additional paid-in capital.
In January 2016, the Company obtained a controlling interest in Resume Labs Limited for
$1.5 million
and Pseudio Limited for
$1.5 million
.
The agreements related to these transactions provide for put options for the NCI shareholders of each company to put the remaining equity interest to the Company within pre-specified put periods. As the NCI for these entities were subject to put options that are outside the control of the Company, they were deemed redeemable non-controlling interests and were also not recorded in permanent equity, and were presented as part of the mezzanine redeemable non-controlling interest on the consolidated balance sheet.
On May 16, 2016, the Company amended the put option with respect to WZ UK to allow it to acquire an additional equity interest in WZ UK earlier than August 2016. Pursuant to this amended option, on the same date the Company acquired an additional
20.0%
stake in WZ UK for
$15.4 million
, thus increasing its ownership interest from
57.5%
to
77.5%
.
On July 13, 2016, WZ UK completed a restructuring pursuant to which Pseudio Limited and Resume Labs became wholly owned subsidiaries of WZ UK. As a result of the restructuring, WZ UK became the
100.0%
owner of Pseudio Limited and Resume Labs Limited and the Company’s ownership of WZ UK was diluted from
77.5%
to
76.4%
. Immediately subsequent to the restructuring, the Company acquired an additional
10.0%
stake in WZ UK on July 13, 2016 for
$18.0 million
, bringing the Company’s aggregate stake in WZ UK to
86.4%
. The restructuring significantly reduced the amount of the potential redemption amount payable to the minority shareholders of WZ UK, and gave the Company the flexibility to reduce investments in this business. Based on these reduced investments, and based on the Company's fair value measurement of the NCI using market multiples and discounted cash flows, the Company determined that the estimated fair value of the non-controlling interest is below the expected redemption amount of
$25.0 million
, which resulted in
$14.2 million
of excess accretion that reduces income available to common shareholders for the period starting on the date of the restructuring through the redemption date of July 1, 2017. The Company recognized excess accretion of
$6.8 million
during the year ended December 31, 2016, which is reflected in net loss attributable to accretion of non-controlling interest in the Company’s
consolidated statements of operations and comprehensive loss. Prior to the third quarter of 2016, the Company did not have any accretion amounts in excess of fair value.
The following table presents changes in this redeemable non-controlling interest:
|
|
|
|
|
|
Redeemable noncontrolling Interest
|
|
(in thousands)
|
Balance as of December 31, 2015
|
$
|
—
|
|
Additions to non-controlling interest upon acquisition
|
12,790
|
|
Capital contribution from non-controlling interest
|
1,775
|
|
Accretion to redemption value
|
30,844
|
|
Accretion in excess of fair value
|
6,769
|
|
Adjustment to non-controlling interest
|
(1,000
|
)
|
Redemption of non-controlling interest
|
(33,425
|
)
|
Balance as of December 31, 2016
|
$
|
17,753
|
|
The Company starts accreting non-controlling interest to its redeemable value from the date the redemption of the noncontrolling interest becomes probable through the earliest redemption date. If the non-controlling interest is redeemable at an amount higher than its fair value, the excess accretion is taken into consideration in the calculation of loss per share.
14. Income Taxes
The Company accounts for income taxes in accordance with authoritative guidance, which requires the use of the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based upon the difference between the consolidated financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply in the years in which the differences are expected to be reversed.
The domestic and foreign components of income (loss) before income taxes for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
|
(in thousands)
|
United States
|
$
|
(17,002
|
)
|
|
$
|
1,258
|
|
|
$
|
(137,197
|
)
|
Foreign
|
(27,603
|
)
|
|
(1,046
|
)
|
|
(52,593
|
)
|
Total income (loss) before income taxes
|
$
|
(44,605
|
)
|
|
$
|
212
|
|
|
$
|
(189,790
|
)
|
The components of the provision (benefit) for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
|
(in thousands)
|
Current:
|
|
|
|
|
|
U.S. federal
|
$
|
781
|
|
|
$
|
1,827
|
|
|
$
|
328
|
|
State
|
183
|
|
|
696
|
|
|
744
|
|
Foreign
|
1,582
|
|
|
1,699
|
|
|
2,312
|
|
Total current provision
|
2,546
|
|
|
4,222
|
|
|
3,384
|
|
Deferred:
|
|
|
|
|
|
U.S. federal
|
(581
|
)
|
|
(1,103
|
)
|
|
(44,447
|
)
|
State
|
(3,983
|
)
|
|
1,952
|
|
|
(6,225
|
)
|
Foreign
|
(5,310
|
)
|
|
(818
|
)
|
|
(10,037
|
)
|
Change in valuation allowance
|
13,514
|
|
|
7,089
|
|
|
(52,533
|
)
|
Total deferred provision
|
3,640
|
|
|
7,120
|
|
|
(113,242
|
)
|
Total expense (benefit)
|
$
|
6,186
|
|
|
$
|
11,342
|
|
|
$
|
(109,858
|
)
|
The Company established a valuation allowance on substantially all of its deferred tax assets during the year ended December 31, 2013. The benefit had been reduced after the establishment of the valuation allowance by the deferred tax expense associated with the tax amortization of assets that have an indefinite life for U.S. GAAP purposes. The Company maintained a valuation allowance against certain U.S. deferred tax assets until the acquisition of Constant Contact. The acquisition of Constant Contact resulted in a significant increase in deferred tax liabilities, which far exceeded deferred tax assets. The Company scheduled out the reversal of the consolidated U.S. deferred tax assets and liabilities as of March 31, 2016, and determined that these reversals would be sufficient to realize most domestic deferred tax assets. The deferred tax liabilities, supporting the realizability of these deferred tax assets will reverse in the same period, are in the same jurisdiction and are of the same character as the temporary differences that gave rise to these deferred tax assets. As a result, the Company recorded a deferred tax benefit to reverse the valuation allowances during the year ended December 31, 2016. The Company recorded a valuation allowance against the majority of the state research and development tax credits and state investment tax credits, a portion of state operating loss credit carryforwards, federal and state capital loss carryforwards, and federal research credits which the Company projected to expire prior to utilization.
The following table presents a reconciliation of the statutory federal rate, and the Company’s effective tax rate, for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
U.S. federal taxes at statutory rate
|
34.0
|
%
|
|
34.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
5.9
|
|
|
685.0
|
|
|
0.9
|
|
Nondeductible stock-based compensation
|
(2.5
|
)
|
|
827.3
|
|
|
(1.5
|
)
|
Nondeductible transaction costs
|
(1.0
|
)
|
|
856.5
|
|
|
(2.9
|
)
|
Nontaxable gain on redemption of equity interest
|
—
|
|
|
(674.9
|
)
|
|
—
|
|
Other foreign permanent differences
|
(2.5
|
)
|
|
187.8
|
|
|
(0.4
|
)
|
Credits
|
0.6
|
|
|
—
|
|
|
3.7
|
|
Foreign rate differential
|
(11.7
|
)
|
|
299.7
|
|
|
(4.6
|
)
|
Change in valuation allowance—U.S.
|
(23.2
|
)
|
|
3,398.6
|
|
|
31.2
|
|
Change in valuation allowance—foreign
|
(7.0
|
)
|
|
(130.8
|
)
|
|
(4.1
|
)
|
Rate change
|
(1.1
|
)
|
|
216.5
|
|
|
0.4
|
|
Prior year true-up stock-based compensation—U.S.
|
(2.0
|
)
|
|
(132.8
|
)
|
|
—
|
|
Other
|
(3.4
|
)
|
|
(217.5
|
)
|
|
(0.5
|
)
|
Total
|
(13.9
|
)%
|
|
5,349.4
|
%
|
|
57.2
|
%
|
The provision (benefit) for income taxes shown on the consolidated statements of operations differs from amounts that would result from applying the statutory tax rates to income before taxes primarily because of the release of the valuation allowance on U.S. deferred tax assets, state income taxes, the impact of changes in state apportionment, jurisdiction mix of earnings, nondeductible expenses, as well as the application of valuation allowances against foreign deferred tax assets.
The significant components of the Company’s deferred income tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2015
|
|
2016
|
Deferred income tax assets:
|
|
|
|
Net operating loss carry forward
|
$
|
43,698
|
|
|
$
|
76,060
|
|
Credit carryforward
|
2,190
|
|
|
28,271
|
|
Other
|
6,612
|
|
|
5,414
|
|
Deferred compensation
|
497
|
|
|
364
|
|
Deferred revenue
|
21,327
|
|
|
26,291
|
|
Other reserves
|
4,895
|
|
|
3,545
|
|
Stock-based compensation
|
13,221
|
|
|
25,424
|
|
Total deferred income tax assets
|
92,440
|
|
|
165,369
|
|
Deferred income tax liabilities:
|
|
|
|
Purchased intangible assets
|
(11,098
|
)
|
|
(119,719
|
)
|
Goodwill
|
(26,062
|
)
|
|
(37,099
|
)
|
Property and equipment
|
(8,361
|
)
|
|
(12,403
|
)
|
Total deferred income tax liabilities
|
(45,521
|
)
|
|
(169,221
|
)
|
Valuation allowance
|
(75,705
|
)
|
|
(36,091
|
)
|
Net deferred income tax liabilities
|
$
|
(28,786
|
)
|
|
$
|
(39,943
|
)
|
The Company conducts business globally and, as a result, its subsidiaries file income tax returns in U.S. federal and state jurisdictions and various foreign jurisdictions. In the normal course of business, the Company may be subject to examination by taxing authorities throughout the world, including such major jurisdictions as Brazil, India, the United Kingdom, the Netherlands and the United States.
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, the Company 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. The Company is currently under audit in India for fiscal years ended March 31, 2014 and 2015 and Israel for the fiscal years ended December 31, 2012, 2013 and 2014. The Company does not expect material changes as a result of the audits.
The statute of limitations in the Company’s other tax jurisdictions, the United Kingdom and Brazil, remains open for various periods between 2011 and the present. However, carryforward attributes from prior years may still be adjusted upon examination by tax authorities if they are used in an open period.
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. The Company has
no
unrecognized tax positions at
December 31, 2015
and
December 31, 2016
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
.
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:
•
Net Operating Losses (“NOL”) incurred from the Company’s inception to
December 31, 2016
;
•
Expiration of various federal and state tax attributes;
•
Reversals of existing temporary differences;
•
Composition and cumulative amounts of existing temporary differences; and
•
Forecasted profit before tax.
Prior to the acquisition of Constant Contact, the Company maintained a valuation allowance against certain deferred tax assets. The acquisition of Constant Contact resulted in a significant increase in deferred tax liabilities, which far exceeded pre-acquisition deferred tax assets. The Company, with the significant deferred tax liabilities resulting from the acquisition, scheduled out the reversal of the consolidated U.S. deferred tax assets and liabilities as of March 31, 2016, and determined that these reversals would be sufficient to realize most domestic deferred tax assets. The deferred tax liabilities supporting the realizability of these deferred tax assets in the acquisition will reverse in the same period, are in the same jurisdiction and are of the same character as the temporary differences that gave rise to these deferred tax assets. The Company maintained a valuation allowance on the acquired Massachusetts research and development tax credits and limited life investment tax credit carryforwards and a portion of the acquired Colorado and Utah operating loss carryforwards. The Company maintained its valuation allowance on the several of the legacy state net operating loss carryforwards expected to expire unused as a result of the scheduling analysis. As a result, the Company recorded a tax benefit of
$70.6 million
to reverse valuation allowances during the year ended December 31, 2016. The Company performed a deferred scheduling analysis as of December 31, 2016, and as a result recorded a valuation allowance against
$7.8 million
of federal research credits,
$1.2 million
of federal and state capital loss carryforwards, and
$1.0 million
of additional state net operating losses, which resulted in Company recording an increase in tax expense of
$10.0 million
related to the increase in the U.S. valuation allowance.
The Company assessed its ability to realize its foreign deferred tax assets as of December 31, 2016 and determined that, it was more likely than not that the Company would not realize
$13.1 million
of net deferred tax assets in the United Kingdom,
$2.5 million
of net deferred tax assets in the Netherlands,
$0.8 million
of net deferred tax assets in India,
$0.5 million
of net deferred tax assets in Israel,
$0.1 million
of net deferred tax assets in China.
For the years ended
December 31, 2014
,
2015
and
2016
, the Company has recognized a tax expense (benefit) of
$6.2 million
,
$11.3 million
and
$(109.9) million
, respectively, in the consolidated statements of operations and comprehensive loss. The income tax expense for the year ended
December 31, 2016
is primarily attributable to a provision for federal and state current income taxes of
$1.1 million
, foreign current tax expense of
$2.3 million
, federal and state deferred tax benefit of
$111.2 million
and attributable to the
$70.6 million
release of valuation allowance and
$40.6 million
of deferred tax benefit related to an increase in deferred tax assets, and foreign deferred benefit of
$2.0 million
related to the reductions of deferred liabilities created in purchase accounting.
The income tax expense for the year ended December 31, 2015 is primarily attributable to a provision for federal and state current income taxes of
$2.5 million
, foreign current tax expense of
$1.7 million
, federal and state deferred tax expense of
$0.8 million
and attributable to a
$7.1 million
increase in the valuation allowance, partially offset by a foreign deferred benefit of
$0.8 million
related to the reductions of deferred liabilities created in purchase accounting.
The income tax expense for the year ended December 31, 2014 was primarily attributable to a provision for foreign taxes of
$1.8 million
, including
$0.2 million
of withholding taxes, and U.S. alternative minimum taxes of
$0.5 million
and
$0.2 million
of state taxes. The remaining balance of
$3.6 million
for the year ended December 31, 2014 was primarily attributable to an increase in U.S. deferred tax liabilities due to the differences in the accounting treatment of goodwill under U.S. GAAP and the tax accounting treatment for goodwill of
$5.8 million
of U.S. federal and state deferred taxes, partially offset by a foreign deferred benefit of
$2.2 million
related to the reductions of deferred liabilities created in purchase accounting.
As of
December 31, 2016
, the Company had NOL carry-forwards available to offset future U.S. federal taxable income of approximately
$142.7 million
and future state taxable income of approximately
$125.6 million
. These NOL carry-forwards expire on various dates through 2036.
As of December 31, 2016, the Company had NOL carry-forwards in foreign jurisdictions available to offset future foreign taxable income by approximately
$96.8 million
. The Company has loss carry-forwards that begin to expire in 2021 in India totaling
$2.5 million
and in China totaling
$0.3 million
. The Company has loss carry-forwards that begin to expire in 2020 in the Netherlands totaling
$10.7 million
. The Company also has loss carry-forwards in the United Kingdom, Israel and Singapore of
$81.1 million
,
$1.9 million
, and
$0.3 million
, respectively, which have an indefinite carry-forward period.
In addition, the Company has
$3.4 million
of U.S. federal capital loss carry-forwards and
$1.4 million
in state capital loss-forwards, generally expiring through 2021. As of December 31, 2016, the Company had U.S. tax credit carryforwards
available to offset future U.S. federal and state taxes of approximately
$20.3 million
and
$12.2 million
, respectively. These credit carryforwards expire on various dates through 2036.
Utilization of the NOL carry-forwards may be subject to an annual limitation due to the ownership percentage change limitations under Section 382 of the Internal Revenue Code (“Section 382 limitation”). 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. In connection with a change in control in 2011, the Company was subject to Section 382 annual limitations of
$77.1 million
against the balance of NOL carry-forwards generated prior to the change in control in 2011. Through December 31, 2013, the Company accumulated the unused amount of Section 382 limitations in excess of the amount of NOL carry-forwards that were originally subject to limitation. Therefore, these unused NOL carry-forwards are available for future use to offset taxable income. The Company has completed an analysis of changes in its ownership from 2011, through its IPO, to December 31, 2013. The Company concluded that there was not a Section 382 ownership change during this period and therefore any NOLs generated through December 31, 2013, are not subject to any new Section 382 annual limitations on NOL carry-forwards. On November 20, 2014, the Company completed a follow-on offering of
13,000,000
shares of common stock. The underwriters also exercised their overallotment option to purchase an additional
1,950,000
shares of common stock from the selling stockholders. The Company performed an analysis of the impact of this offering and determined that no Section 382 change in ownership had occurred.
On March 11, 2015, the Company closed a follow-on offering of its common stock, in which selling stockholders sold
12,000,000
shares of common stock at a public offering price of
$19.00
per share. The underwriter also exercised its overallotment option to purchase an additional
1,800,000
shares of common stock from the selling stockholders. The Company completed an analysis of its ownership changes in the first half of 2016, which resulted in no ownership-change for tax purposes within the meaning of the Internal Revenue Code Section 382(g).
As of the date of the Company’s acquisition of Constant Contact, Constant Contact had approximately
$60.2 million
and
$32.4 million
of federal and state NOLs, respectively, and approximately
$10.9 million
of U.S. federal research and development credits and
$9.2 million
of state credits. These losses and credits are not subject to limitation under Internal Revenue Code Sections 382 and 383.
As a result, all unused NOL carry-forwards at
December 31, 2016
are available for future use to offset taxable income.
Permanent Reinvestment of Foreign Earnings
As of December 31, 2016, the cumulative amount of undistributed earnings of our foreign subsidiaries amounted to
$7.9 million
. We have not provided U.S. taxes on these undistributed earnings of our foreign subsidiaries that we consider indefinitely reinvested. Our indefinite reinvestment determination is based on the future operational and capital requirements of our domestic and foreign operations. We expect the cash held by our foreign subsidiaries of
$14.1 million
will continue to be used for our foreign operations and therefore do not anticipate repatriating these funds.
Except for Subpart F income, the Company has not provided taxes for the remaining
$7.9 million
of undistributed earnings of its foreign subsidiaries because we plan to keep these amounts permanently reinvested overseas except for instances where we can remit such earnings to the U.S. without an associated net tax cost. If the Company decides to repatriate the foreign earnings, it would need to adjust its income tax provision in the period it determines that the earnings will no longer be indefinitely invested outside the United States. Due to the timing and circumstances of repatriation of such earnings, if any, it is not practicable to determine the unrecognized deferred tax liability relating to such amounts.
Adoption of ASU 2016-09
In March 2016, the FASB issued ASU 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”). ASU 2016-09 intends to simplify various aspects of how share-based payments are accounted for and presented in the financial statements. The main provisions include: all tax effects related to stock awards will now be recorded through the income statement instead of through equity, all tax-related cash flows resulting from stock awards will be reported as operating activities on the cash flow statement, and entities can make an accounting policy election to either estimate forfeitures or account for forfeitures as they occur. The amendments in ASU 2016-09, required to be updated for all annual periods and interim reporting periods beginning after December 15, 2016, were adopted early by the Company in the fourth quarter of 2016 and were applied to its related consolidated financial statements on a prospective basis. The adoption of these amendments had an impact of
$0.9 million
on the consolidated statement of operations and comprehensive loss through December 31, 2016 due to the reclassification of shortfalls from additional paid in
capital. The Company also elected to account for forfeitures as they occur with no adjustment for estimated forfeitures, which had an impact of
$0.9 million
to the Company’s consolidated statement of operations and comprehensive loss.
As previously mentioned, as a result of prior guidance that required excess tax benefits reduce taxes payable prior to recognition as an increase in paid in capital, the Company had not recognized certain deferred tax assets (loss carryforwards) that could be attributed to tax deductions related to equity compensation in excess of compensation recognized for financial reporting. As of January 1, 2016, the Company had generated U.S. federal and state net operating loss carryforwards due to excess tax benefits of
$1.5 million
and
$0.7 million
, respectively.
15. Severance and Other Exit Costs
In connection with acquisitions, the Company may evaluate its data center, sales and marketing, support and engineering operations and the general and administrative function in an effort to eliminate redundant costs. As a result, the Company may incur charges for employee severance, exiting facilities and restructuring data center commitments and other related costs.
2014 Restructuring Plan
During the year ended December 31, 2014, the Company implemented plans to further integrate and consolidate its data center, support and engineering operations, resulting in severance and facility exit costs. The severance charges were associated with eliminating approximately
90
positions across primarily support, engineering operations and sales and marketing. The Company incurred severance costs of
$2.3 million
in the year ended December 31, 2014 related to these restructuring activities. The employee-related charges associated with these restructurings were completed during the year ended December 31, 2014. As of
December 31, 2016
, the Company did not have any remaining accrued employee severance related to these severance costs.
The Company had incurred facility costs associated with closing offices in Redwood City, California and Englewood, Colorado. At the time of closing these offices, the Company had remaining lease obligations of approximately
$3.0 million
for these vacated facilities through
March 31, 2018. The Company recorded a facilities charge for these future lease payments, less expected sublease income, of
$2.1 million
during the year ended December 31, 2014. During the year ended December 31, 2015 the Company recorded an adjustment of
$0.6 million
as
a result of entering an agreement for an early buyout of the lease agreement for the Englewood, Colorado facility.
During the year ended December 31, 2016, the Company recorded a true-up adjustment of
$0.2 million
.
The Company paid
$1.0 million
of facility costs and received sublease income of
$0.6 million
related to the 2014 Restructuring Plan during the year ended December 31, 2016, and had a remaining accrued facility liability of
$0.3 million
as of December 31, 2016. The Company expects payments related to the 2014 Restructuring Plan to be completed during the year ended December 31, 2018.
2015 Restructuring Plan
During the year ended December 31, 2015, the Company implemented plans to enhance operational efficiencies across the business, resulting in severance costs (the “2015 Restructuring Plan”). The severance charges were associated with eliminating approximately
67
positions across the business. The Company incurred severance costs of
$2.1 million
during the year ended December 31, 2015 related to the 2015 Restructuring Plan. The Company completed employee-related charges associated with the 2015 Restructuring Plans during the year ended December 31, 2015. The Company paid
$1.2 million
of severance costs during the year ended December 31, 2016 and did not have any remaining severance liability accrued as of December 31, 2016. Payments related to the 2015 Restructuring Plan have been completed during the year ended December 31, 2016.
2016 Restructuring Plan
In connection with the Company’s acquisition of Constant Contact on February 9, 2016, the Company implemented a plan to create operational efficiencies and synergies resulting in severance costs and facility exit costs (the “2016 Restructuring Plan”).
The severance charges were associated with eliminating approximately
265
positions across the business. The Company incurred severance costs of
$11.7 million
during the year ended December 31, 2016. The Company paid
$10.2 million
of severance costs during the year ended December 31, 2016 and had a remaining accrued severance liability of
$1.6 million
as of December 31, 2016.
The Company’s 2016 Restructuring Plan included a plan to close offices in San Francisco, California, Delray Beach, Florida, New York, New York, United Kingdom, Porto Alegre, Brazil and Miami, Florida, and a plan to relocate certain employees to its Austin Office. The Company also closed a portion of the Constant Contact offices in Waltham, Massachusetts. During the year ended December 31, 2016, the Company recorded a facilities charge for future lease payments of
$23.6 million
, less expected sublease income of
$12.0 million
. The Company also recorded
$0.7 million
in relocation charges during the year ended December 31, 2016 after closing these facilities. The Company paid
$3.6 million
of facility costs related to the 2016 Restructuring Plan during the year ended December 31, 2016 and had a remaining accrued facility liability of
$8.7 million
as of December 31, 2016.
The Company does not expect any additional employee-related charges associated with the 2016 Restructuring Plan after December 31, 2016, and expects severance payments related to the 2016 Restructuring Plan to be completed during the year ended December 31, 2017. The Company expects to complete facility-related charges associated with the 2016 Restructuring Plan during the year ended December 31, 2016, and expects to complete facility exit cost payments related to the plan during the year ended December 31, 2022.
The following table provides a summary of the aggregate activity for the year ended December 31, 2016 related to the Company’s combined Restructuring Plans severance accrual for each reporting segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
(in thousands)
|
|
Web presence segment
|
|
Email marketing segment
|
|
Total
|
Balance at December 31, 2015
|
$
|
1,201
|
|
|
$
|
—
|
|
|
$
|
1,201
|
|
Severance Charges
|
1,596
|
|
|
10,113
|
|
|
$
|
11,709
|
|
Cash Paid
|
(2,164
|
)
|
|
(9,187
|
)
|
|
$
|
(11,351
|
)
|
Balance at December 31, 2016
|
$
|
633
|
|
|
$
|
926
|
|
|
$
|
1,559
|
|
The following table provides a summary of the aggregate activity for the year ended December 31, 2016 related to the Company’s combined Restructuring Plans facilities exit accrual for each reporting segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
(in thousands)
|
|
Web presence segment
|
|
Email marketing segment
|
|
Total
|
Balance at December 31, 2015
|
$
|
479
|
|
|
$
|
—
|
|
|
$
|
479
|
|
Facility charges, net of estimated sublease income
|
445
|
|
|
12,070
|
|
|
12,515
|
|
Sublease income received
|
596
|
|
|
—
|
|
|
596
|
|
Cash paid
|
(1,247
|
)
|
|
(3,323
|
)
|
|
(4,570
|
)
|
Balance at December 31, 2016
|
$
|
273
|
|
|
$
|
8,747
|
|
|
$
|
9,020
|
|
The following table presents restructuring charges recorded in the consolidated statement of operations and comprehensive loss for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
2014
|
|
2015
|
|
2016
|
|
(in thousands)
|
Cost of revenue
|
$
|
2,349
|
|
|
$
|
(45
|
)
|
|
$
|
8,986
|
|
Sales and marketing
|
301
|
|
|
555
|
|
|
6,550
|
|
Engineering and development
|
960
|
|
|
636
|
|
|
4,288
|
|
General and administrative
|
850
|
|
|
343
|
|
|
4,400
|
|
Total severance charges
|
$
|
4,460
|
|
|
$
|
1,489
|
|
|
$
|
24,224
|
|
16. Commitments and Contingencies
Operating Leases
The Company has operating lease commitments for certain facilities and equipment that expire on various dates through
2026
. The following table outlines future minimum annual rental payments under these leases at
December 31, 2016
:
|
|
|
|
|
Year Ending December 31,
|
Amount
|
|
(in thousands)
|
2017
|
20,058
|
|
2018
|
18,367
|
|
2019
|
17,457
|
|
2020
|
17,120
|
|
2021
|
14,074
|
|
Thereafter
|
27,779
|
|
Total minimum lease payments
|
$
|
114,855
|
|
Total net rent expense incurred under non-cancellable operating leases for the years ended
December 31, 2014
,
2015
and
2016
, were
$9.8 million
,
$8.2 million
and
$20.0 million
, respectively. Total sublease income for the years ended
2015
and
2016
was
$0.2 million
, and
$0.4 million
, respectively.
Contingencies
From time to time, the Company is involved in legal proceedings or subject to claims arising in the ordinary course of its business. The Company is not presently involved in any such legal proceeding or subject to any such claim that, in the opinion of its management would have a material adverse effect on its business, operating results or financial condition. However, the results of such legal proceedings or claims cannot be predicted with certainty, and regardless of the outcome, can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. Neither the ultimate outcome of the matters listed below nor an estimate of any probable losses or any reasonably possible losses can be assessed at this time.
On May 4, 2015, Christopher Machado, a purported holder of the Company’s common stock, filed a civil action in the United States District Court for the District of Massachusetts against the Company and its chief executive officer and former chief financial officer, Machado v. Endurance International Group Holdings, Inc., et al, Civil Action No. 1:15-cv-11775-GAO. In a second amended complaint, filed on March 18, 2016, the plaintiff alleged claims for violations of Section 10(b) and 20(a) of the Exchange Act, on behalf of a purported class of purchasers of the Company’s securities between February 25, 2014 and February 29, 2016. Those claims challenged as false or misleading certain of the Company’s disclosures about its total number of subscribers, average revenue per subscriber, the number of customers paying over
$500
per year for the Company’s products and services, the average number of products sold per subscriber, and customer churn. The plaintiff seeks, on behalf of himself and the purported class, compensatory damages and his costs and expenses of litigation. The Company filed a motion to dismiss on May 16, 2016, which remains pending. In August 2016, the parties in the Machado action and another potential claimant, who asserts that he purchased common stock in the Company’s initial public offering, agreed to toll, as of July 1, 2016, the statutes of limitation and repose for all claims under the Securities Act of 1933 that the plaintiff and claimant might bring, individually or in a representative capacity, arising from alleged actions or omissions between September 9, 2013 and
February 29, 2016. The Company and the individual defendants intend to deny any liability or wrongdoing and to vigorously defend all claims asserted. The Company cannot, however, make any assurances as to the outcome of the current proceeding or any additional claims if they are brought.
The Company received a subpoena dated December 10, 2015 from the Boston Regional Office of the SEC, requiring the production of certain documents, including, among other things, documents related to its financial reporting, including operating and non-GAAP metrics, refund, sales and marketing practices and transactions with related parties. The Company is fully cooperating with the SEC’s investigation. The Company can make no assurances as to the time or resources that will need to be devoted to this investigation or its final outcome, or the impact, if any, of this investigation or any related legal or regulatory proceedings on the Company’s business, financial condition, results of operations and cash flows.
Constant Contact
On October 30, 2015, the Company entered into a definitive agreement pursuant to which it agreed to acquire all of the outstanding shares of common stock of Constant Contact. The acquisition closed on February 9, 2016. Constant Contact contingencies are noted below.
On December 10, 2015, Constant Contact received a subpoena from the Boston Regional Office of the SEC, requiring the production of documents pertaining to Constant Contact’s sales, marketing, and customer retention practices, as well as periodic public disclosure of financial and operating metrics. The Company is fully cooperating with the SEC’s investigation. The Company can make no assurances as to the time or resources that will need to be devoted to this investigation or its final outcome, or the impact, if any, of this investigation or any related legal or regulatory proceedings on the Company’s business, financial condition, results of operations and cash flows.
On August 7, 2015, a purported class action lawsuit, William McGee v. Constant Contact, Inc., et al, was filed in the United States District Court for the District of Massachusetts against Constant Contact and
two
of its former officers. An amended complaint, which named an additional former officer as a defendant, was filed December 19, 2016. The lawsuit asserts claims under Sections 10(b) and 20(a) of the Exchange Act, and is premised on allegedly false and/or misleading statements, and nondisclosure of material facts, regarding Constant Contact’s business, operations, prospects and performance during the proposed class period of October 23, 2014 to July 23, 2015. This litigation remains in its early stages. The Company and the individual defendants intend to vigorously defend all claims asserted. The Company cannot, however, make any assurances as to the outcome of this proceeding.
In August 2012, RPost Holdings, Inc., RPost Communications Limited and RMail Limited, or collectively, RPost, filed a complaint in the United States District Court for the Eastern District of Texas that named Constant Contact as a defendant in a lawsuit. The complaint alleged that certain elements of Constant Contact’s email marketing technology infringe
five
patents held by RPost. RPost seeks an award for damages in an unspecified amount and injunctive relief. In February 2013, RPost amended its complaint to name
five
of Constant Contact’s marketing partners as defendants. Under Constant Contact’s contractual agreements with these marketing partners, it is obligated to indemnify them for claims related to patent infringement. Constant Contact filed a motion to sever and stay the claims against its partners and multiple motions to dismiss the claims against it. In January 2014, the case was stayed pending the resolution of certain state court and bankruptcy actions involving RPost, to which Constant Contact is not a party. The case continues to be stayed pending the state court and bankruptcy actions. Meanwhile, RPost asserted the same patents asserted against Constant Contact in litigation against Go Daddy. In June 2016, Go Daddy succeeded in invalidating all of those RPost patents. RPost has appealed, and the appellate court is expected to hear oral argument on the appeal in the Spring of 2017. The litigation against Constant Contact remains stayed, and is in its early stages. The Company believes it has meritorious defenses to any claim of infringement and intends to defend against the lawsuit vigorously.
On December 11, 2015, a putative class action lawsuit relating to the Constant Contact acquisition, captioned Irfan Chawdry, Individually and On Behalf of All Others Similarly Situated v. Gail Goodman, et al. Case No. 11797, and on December 21, 2015, a putative class action lawsuit relating to the acquisition captioned David V. Myers, Individually and On Behalf of All Others Similarly Situated v. Gail Goodman, et al. Case No. 11828 (together , the "Complaints") were filed in the Court of Chancery of the State of Delaware naming Constant Contact, each of Constant Contact’s directors, Endurance and Paintbrush Acquisition Corporation as defendants. The Complaints generally alleged, among other things, that in connection with the acquisition the directors of Constant Contact breached their fiduciary duties owed to the stockholders of Constant Contact by agreeing to sell Constant Contact for purportedly inadequate consideration, engaging in a flawed sales process, omitting material information necessary for stockholders to make an informed vote, and agreeing to a number of purportedly preclusive deal protection devices. The Complaints sought, among other things, to rescind the acquisition, as well as award of plaintiffs’ attorneys’ fees and costs in the action. The Complaints were consolidated on January 12, 2016. On December 5,
2016, plaintiff Myers filed a consolidated amended complaint (the "Amended Complaint") naming as defendants the former Constant Contact directors and Morgan Stanley & Co. LLC ("Morgan Stanley"), Constant Contact’s financial adviser for the acquisition, alleging breach of fiduciary duty by the former directors, and aiding and abetting the alleged breach by Morgan Stanley. On December 15, 2016, the Constant Contact defendants filed a motion to dismiss. On February 14, 2017, the court approved a briefing schedule for the motion, with defendants' opening brief due March 17, 2017. The defendants believe the claims asserted in the Amended Complaint are without merit and intend to defend against them vigorously.
17. Employee Benefit Plans
The Company has a defined contribution plan established under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”), which covers substantially all employees. Employees are eligible to participate in the 401(k) Plan beginning on the first day of the month following commencement of their employment. The 401(k) Plan includes a salary deferral arrangement pursuant to which participants may elect to reduce their current compensation by up to the statutorily prescribed limit, equal to
$18,000
in
2016
, and have the amount of the reduction contributed to the 401(k) Plan. Beginning January 1, 2013, the Company matched
100%
of each participant’s annual contribution to the 401(k) plan up to
3%
of the participant’s salary and then
50%
of each participant’s contribution up to
2%
of each participant’s salary. The match immediately vests
100%
. Matching contributions by the Company to the 401(k) Plan related to the
2014
,
2015
and
2016
plan years were approximately
$2.2 million
,
$2.5 million
,
$5.7 million
respectively.
In connection with an acquisition in 2011, the Company assumed a defined contribution plan established under Section 401(k) of the Internal Revenue Code (the “Dotster 401(k) Plan”), in which employees were eligible to participate upon the date of hire. Under the Dotster 401(k) Plan, the Company matched
100%
of each participant’s annual contribution to the Dotster 401(k) Plan up to
3%
of each participant’s salary and then
50%
of each participant’s annual contribution to the Dotster 401(k) Plan up to
2%
of each participant’s salary. The match immediately vested
100%
. A matching contribution by the Company related to the 2013 plan year in the amount of
$0.4 million
was made to the Dotster 401(k) Plan. The Dotster 401(k) plan merged with the Company’s 401(k) plan during the year ended December 31, 2014.
In connection with the HostGator acquisition in 2012, the Company assumed a defined contribution plan established under Section 401(k) of the Internal Revenue Code (the “HostGator 401(k) Plan”), in which employees were eligible to participate on the date of hire. Under the HostGator 401(k) Plan, the Company matched
25%
of each participant’s annual contribution up to
4%
of each participant’s salary, vesting
100%
after
three
years of service. A matching contribution by the Company related to the 2013 plan year in the amount of
$0.1 million
was made to the HostGator 401(k) Plan. The HostGator 401(k) plan merged with the Company’s 401(k) plan during the year ended December 31, 2014.
18. Variable Interest Entity
The Company, through a subsidiary formed in China, has entered into various agreements with Shanghai Xiao Lan Network Technology Co., Ltd (“Shanghai Xiao”) and its shareholders that allow 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.
The shareholders of Shanghai Xiao cannot transfer their equity interests without the approval of the Company, and as a result, are considered de facto agents of the Company in accordance with ASC 810-10-25-43. The Company and its de facto agents acting together have the power to direct the activities that most significantly impact the entity’s economic performance and they have the obligation to absorb losses and the right to receive benefits from the entity. In situations where a de facto agency relationship is present, one party is required to be identified as the primary beneficiary. The factors considered include the presence of a principal/agent relationship, the relationship and significance of activities to the reporting entity, the variability associated with the VIE’s anticipated economics and the design of the VIE. The analysis is qualitative in nature and is based on weighting the relative importance on each of the factors in relation to the specifics of the VIE arrangement. Upon the execution of the agreements with Shanghai Xiao and its shareholders, the Company performed an analysis and concluded that the Company is the party that is most closely associated with Shanghai Xiao, as it is the most exposed to the variability of the VIE’s economics and therefore is the primary beneficiary of the VIE.
As of December 31, 2016, 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.
19. Related Party Transactions
The Company has various agreements in place with related parties. Below are details of related party transactions that occurred during the years ended
December 31, 2014
,
2015
and
2016
.
Tregaron:
The Company has contracts with Tregaron India Holdings, LLC and its affiliates, including Diya Systems (Mangalore) Private Limited, Glowtouch Technologies Pvt. Ltd. and Touchweb Designs, LLC, (collectively, “Tregaron”), for outsourced services, including email- and chat-based customer and technical support, network monitoring, engineering and development support, web design and web building services, and an office space lease. These entities are owned directly or indirectly by family members of the Company’s chief executive officer, who is also a director and stockholder of the Company.
The following table includes the amounts of related party transactions recorded in the consolidated statements of operations and comprehensive loss for the years ended
December 31, 2014
,
2015
and
2016
relating to services provided by Tregaron and its affiliates under these agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
|
(in thousands)
|
Cost of revenue
|
$
|
7,300
|
|
|
$
|
10,200
|
|
|
$
|
12,200
|
|
Sales and marketing
|
500
|
|
|
700
|
|
|
500
|
|
Engineering and development
|
1,700
|
|
|
1,100
|
|
|
1,300
|
|
General and administrative
|
900
|
|
|
300
|
|
|
300
|
|
Total related party transaction expense
|
$
|
10,400
|
|
|
$
|
12,300
|
|
|
$
|
14,300
|
|
As of
December 31, 2015
, and
2016
approximately
$1.9 million
and
$1.3 million
, respectively, was included in accounts payable and accrued expense relating to services provided by Tregaron.
Innovative Business Services, LLC:
The Company also has agreements with Innovative Business Services, LLC (“IBS”), which provides multi-layered third-party security applications that are sold by the Company. IBS is indirectly majority owned by the Company’s chief executive officer and a director of the Company, each of whom are also stockholders of the Company. During the year ended December 31, 2014, the Company’s principal agreement with this entity was amended which resulted in the accounting treatment of expenses being recorded against revenue.
The following table includes the revised amounts of related party transactions recorded in the consolidated statements of operations and comprehensive loss for the years ended
December 31, 2014
,
2015
and
2016
relating to services provided by IBS under these agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
|
(in thousands)
|
Revenue
|
$
|
(400
|
)
|
|
$
|
(1,300
|
)
|
|
$
|
(3,100
|
)
|
Revenue (contra)
|
600
|
|
|
7,000
|
|
|
7,500
|
|
Total related party transaction impact to revenue
|
$
|
200
|
|
|
$
|
5,700
|
|
|
$
|
4,400
|
|
Cost of revenue
|
4,600
|
|
|
600
|
|
|
700
|
|
Total related party transaction expense, net
|
$
|
4,800
|
|
|
$
|
6,300
|
|
|
$
|
5,100
|
|
As of
December 31, 2015
and
2016
, approximately
$0.2 million
and
$0.2 million
, respectively, was included in prepaid expenses and other current assets relating to the Company’s agreements with IBS.
As of
December 31, 2015
and
2016
, approximately
$1.1 million
and
$1.1 million
, respectively was included in accounts payable and accrued expense relating to the Company’s agreements with IBS.
As of
December 31, 2015
and
2016
, approximately
$0.3 million
and
$0.6 million
, respectively, was included in accounts receivable relating to the Company’s agreements with IBS.
Goldman, Sachs & Co.
The Company entered into a
three
year interest rate cap on December 9, 2015 with a subsidiary of Goldman Sachs & Co. ("Goldman Sachs"). Goldman Sachs is a significant shareholder of the Company. Refer to
Note 4: Fair Value Measurements,
for further details
in the consolidated financial statements.
In connection with and concurrently with the acquisition of Constant Contact in February 2016, the Company entered into the
$735.0 million
incremental first lien term loan facility and the
$165.0 million
revolving credit facility, and EIG Investors Corp. issued Notes in the aggregate principal amount of
$350.0 million
. An affiliate of Goldman Sachs provided loans in the aggregate principal amount of
$312.4 million
under the incremental first lien term loan facility and a commitment in the aggregate principal amount of
$57.6 million
under the revolving credit facility, and Goldman Sachs acted as a book-running manager in the Company’s offering of the Notes and purchased approximately
$148.8 million
worth of the Notes. The foregoing financing arrangements were provided in accordance with a commitment letter the Company entered into with an affiliate of Goldman Sachs and certain other investment banks in November 2015. Refer to
Note 9: Notes Payable
, for further details.
Goldman Sachs also served as a financial advisor in connection with the acquisition of Constant Contact and during the year ended December 31, 2016, the Company paid approximately
$8.6 million
to Goldman Sachs in connection with these services.
In connection with the issuance of the Notes, the Company agreed to assist the initial purchasers, including Goldman Sachs, in marketing the Notes. Through December 31, 2016, the Company incurred expenses on behalf of the initial purchasers of approximately
$0.8 million
.
A subsidiary of Goldman Sachs is also the counterparty to our interest rate cap, for which the Company paid
$3.0 million
to the counterparty as a premium during the year ended December 31, 2016. No further premiums are payable under this interest rate cap.
20. 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. The Company's Chief Executive Officer is the Company's chief operating decision maker.
On February 9, 2016, the Company acquired Constant Contact. The Company evaluated the criteria in ASC 280-10-50-11 contemporaneously with its acquisition of Constant Contact, which closed on February 9, 2016. Based on the Company's original evaluation, the Company believed that it met the qualitative aggregation criteria in ASC 280-10-50-11, and that the economic characteristics of the Constant Contact and legacy businesses were similar. In particular, at the time of this evaluation, the Company expected that the gross margin of Constant Contact and its legacy business would be similar. However, beginning with the second quarter of 2016, the Company recognized that the legacy business did not meet expectations and as such resulted in lower legacy gross margin than originally anticipated, which continued into the third and fourth quarter. As such, during the Company's annual assessment of segments, and due to the resulting 2016 legacy performance, the Company determined it had
two
reportable segments:
•
Email marketing
, which includes the products and services acquired as part of the Constant Contact acquisition in February 2016. The services included in this segment are primarily email marketing, and to a lesser extent, event marketing, survey tools and the Single Platform digital storefront product.
•
Web presence
, which consists of all of the Company's web hosting and related services such as domain names, website security, website design tools and services, ecommerce services and other services and tools to expand the online presence of a small business.
The Company measures profitably of these segments based on revenue, gross profit, and adjusted EBITDA.
The accounting policies of each segment are the same as those described in the summary of significant accounting policies, refer to
Note 2: Summary of Significant Accounting Policies
, for further details. The following tables contain financial information for each reportable segment for the year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
Web presence
|
Email marketing
|
Total
|
|
(in thousands)
|
Revenue
|
$
|
784,334
|
|
$
|
326,808
|
|
$
|
1,111,142
|
|
Gross profit
|
$
|
353,988
|
|
$
|
173,163
|
|
$
|
527,151
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
172,135
|
|
$
|
116,261
|
|
$
|
288,396
|
|
Less:
|
|
|
|
Interest expense, net (including impact of amortization of deferred financing costs and original issuance discount)
|
|
|
152,312
|
|
Income tax expense (benefit)
|
|
|
(109,858
|
)
|
Depreciation
|
|
|
60,360
|
|
Amortization of other intangible assets
|
|
|
143,562
|
|
Stock-based compensation
|
|
|
58,267
|
|
Restructuring expenses
|
|
|
24,224
|
|
Transaction expenses and charges
|
|
|
32,284
|
|
Gain of unconsolidated entities
|
|
|
(565
|
)
|
Impairment of other long lived assets
|
|
|
9,039
|
|
Net loss
|
|
|
$
|
(81,229
|
)
|
|
|
|
|
Total assets
|
$
|
1,507,977
|
|
$
|
1,248,297
|
|
$
|
2,756,274
|
|
Depreciation expense
|
$
|
36,613
|
|
$
|
23,747
|
|
$
|
60,360
|
|
Amortization expense
|
$
|
78,883
|
|
$
|
64,679
|
|
$
|
143,562
|
|
Prior to 2016 and prior to the acquisition of Constant Contact, the Company reported as
one
single reporting segment.
21. Subsequent Events
In January 2017, the Company announced its plans to close certain facilities as part of a plan to consolidate certain web presence customer support operations. As a result of this plan, the Company expects to incur approximately
$8.0 million
in charges during fiscal year 2017, mostly related to severance.
On January 30, 2017, the Company completed a registered exchange offer for the Notes, as required under the registration rights agreement we entered into with the initial purchasers of the Notes. All of the
$350.0 million
aggregate principal amount of the original notes was validly tendered for exchange as part of this exchange offer.
22. Geographic and Other Information
Revenue, classified by the major geographic areas in which our customers are located, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
|
(in thousands)
|
United States
|
$
|
409,765
|
|
|
$
|
465,446
|
|
|
$
|
787,915
|
|
International
|
220,080
|
|
|
275,869
|
|
|
323,227
|
|
Total
|
$
|
629,845
|
|
|
$
|
741,315
|
|
|
$
|
1,111,142
|
|
The following table presents the amount of tangible long-lived assets by geographic area:
|
|
|
|
|
|
|
|
|
|
2015
|
|
2016
|
|
(in thousands)
|
United States
|
$
|
72,025
|
|
|
$
|
89,147
|
|
International
|
3,737
|
|
|
6,125
|
|
Total
|
$
|
75,762
|
|
|
$
|
95,272
|
|
The Company’s revenues are generated primarily from products and services delivered on a subscription basis, which include web hosting, domains, website builders, search engine marketing, email marketing and other similar services. The Company also generates non-subscription revenues through domain monetization and marketing development funds. Non-subscription revenues increased from
$28.3 million
, or
4%
of total revenue for the year ended December 31, 2014 to
$52.5 million
, or
7%
of revenue for the year ended December 31, 2015, and decreased to
$39.4 million
, or
4%
of total revenue for the year ended December 31, 2016. Substantially all of the Company's non-subscription revenues are included in its web presence segment.
No individual international country represented more than 10% of total revenue in any period presented. Furthermore, substantially all of the Company's tangible long-lived assets are located in the U.S.
23. Quarterly Financial Data (unaudited)
The following table presents the Company’s unaudited quarterly financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
March 31,
2015
|
|
June 30,
2015
|
|
Sept. 30,
2015
|
|
Dec. 31,
2015
|
|
March 31,
2016
|
|
June 30,
2016
|
|
Sept. 30,
2016
|
|
Dec. 31,
2016
|
|
(in thousands, except per share data)
|
Revenue
|
$
|
177,318
|
|
|
$
|
182,431
|
|
|
$
|
188,523
|
|
|
$
|
193,043
|
|
|
$
|
237,113
|
|
|
$
|
290,713
|
|
|
$
|
291,193
|
|
|
$
|
292,123
|
|
Gross profit
|
$
|
76,344
|
|
|
$
|
77,494
|
|
|
$
|
77,750
|
|
|
$
|
84,692
|
|
|
$
|
100,637
|
|
|
$
|
137,636
|
|
|
$
|
141,766
|
|
|
$
|
147,112
|
|
Income (loss) from operations
|
$
|
17,199
|
|
|
$
|
12,548
|
|
|
$
|
9,113
|
|
|
$
|
14,326
|
|
|
$
|
(66,311
|
)
|
|
$
|
(6,168
|
)
|
|
$
|
8,879
|
|
|
$
|
24,260
|
|
Net income (loss) attributable to Endurance International Group Holdings, Inc.
|
$
|
884
|
|
|
$
|
(2,071
|
)
|
|
$
|
(15,351
|
)
|
|
$
|
(9,232
|
)
|
|
$
|
21,811
|
|
|
$
|
(28,040
|
)
|
|
$
|
(31,737
|
)
|
|
$
|
(34,865
|
)
|
Basic net income (loss) per share attributable to Endurance International Group Holdings, Inc.
|
$
|
0.01
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
0.17
|
|
|
$
|
(0.21
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.26
|
)
|
Diluted net income (loss) per share attributable to Endurance International Group Holdings, Inc.
|
$
|
0.01
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
0.16
|
|
|
$
|
(0.21
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.26
|
)
|
On February 9, 2016, the Company acquired Constant Contact for
$1.1 billion
. As such, financial results reflected above were materially impacted by this acquisition. Revenue and gross profit increases throughout 2016 are primarily driven by this acquisition. The loss from operations has also been impacted by the Constant Contact acquisition due to the
$31.1 million
of transaction costs incurred in the first quarter of 2016, and higher operating expenses from Constant Contact, including
$22.4 million
of restructuring costs incurred throughout 2016, of which,
$11.6 million
was incurred during the first quarter. Net income (loss) was impacted by all of the factors previously noted, and a
$94.1 million
increase in interest expense for all of 2016 as well as a
$109.9 million
tax benefit recorded during 2016. The tax benefit was primarily related to the reduction of valuation allowances on deferred tax assets which occurred during the first quarter of 2016, partially offset by increased valuation allowances of
$10.0 million
during the fourth quarter of 2016.
24. Supplemental Guarantor Financial Information
In February 2016, EIG Investors Corp., a wholly-owned subsidiary of the Company (the “Issuer”), issued
$350.0 million
aggregate principal amount of its
10.875%
Senior Notes due 2024 (the “Original Notes”) (refer to
Note 9: Notes Payables,
in the consolidated financial statements), which it expects to exchange for new
10.875%
Senior Notes due 2024 (the “Exchange Notes” and together with the Original Notes, collectively, the “Notes”) pursuant to a registration statement on Form S-4. The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Company, and the following wholly-owned subsidiaries: The Endurance International Group, Inc., Bluehost Inc., FastDomain Inc., Domain Name Holding Company, Inc., Endurance International Group – West, Inc., HostGator.com LLC, A Small Orange, LLC, Constant Contact, Inc., and SinglePlatform, LLC, (collectively, the “Subsidiary Guarantors”), subject to certain customary guarantor release conditions. The Company’s other domestic subsidiaries and its foreign subsidiaries (collectively, the “Non-Guarantor Subsidiaries”) have not guaranteed the Notes.
The Company sold
two
immaterial guarantors, CardStar, Inc. and CardStar Publishing, LLC (collectively, "CardStar"), during the quarter ended December 31, 2016. CardStar was released and discharged from the guarantee as a result of the sale and no longer guarantees the debt of the Company as of December 1, 2016. Proceeds from the sale of CardStar were approximately
$0.1 million
.
The following tables present supplemental condensed consolidating balance sheet information of the Company (“Parent”), the Issuer, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries as of December 31, 2015 and December 31, 2016, and supplemental condensed consolidating results of operations and cash flow information for the years ended December 31, 2014, 2015 and 2016:
Condensed Consolidating Balance Sheets
December 31, 2015
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Issuer
|
Guarantor Subsidiaries
|
Non-Guarantor Subsidiaries
|
Eliminations
|
Consolidated
|
Assets:
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12
|
|
$
|
67
|
|
$
|
21,286
|
|
$
|
11,665
|
|
—
|
|
$
|
33,030
|
|
Restricted cash
|
|
—
|
|
—
|
|
973
|
|
75
|
|
—
|
|
1,048
|
|
Accounts receivable
|
|
—
|
|
—
|
|
7,120
|
|
4,920
|
|
—
|
|
12,040
|
|
Prepaid domain name registry fees
|
|
—
|
|
—
|
|
29,250
|
|
26,878
|
|
(335
|
)
|
55,793
|
|
Prepaid expenses & other current assets
|
|
—
|
|
62
|
|
9,722
|
|
8,263
|
|
(2,372
|
)
|
15,675
|
|
Total current assets
|
|
12
|
|
129
|
|
68,351
|
|
51,801
|
|
(2,707
|
)
|
117,586
|
|
Intercompany receivables, net
|
|
29,092
|
|
(10,324
|
)
|
91,938
|
|
(110,706
|
)
|
—
|
|
—
|
|
Property and equipment, net
|
|
—
|
|
—
|
|
66,011
|
|
9,751
|
|
—
|
|
75,762
|
|
Goodwill
|
|
—
|
|
—
|
|
1,072,838
|
|
134,417
|
|
—
|
|
1,207,255
|
|
Other intangible assets, net
|
|
—
|
|
—
|
|
328,922
|
|
30,864
|
|
—
|
|
359,786
|
|
Investment in subsidiaries
|
|
150,164
|
|
1,260,399
|
|
38,819
|
|
—
|
|
(1,449,382
|
)
|
—
|
|
Other assets
|
|
—
|
|
3,130
|
|
34,151
|
|
4,830
|
|
—
|
|
42,111
|
|
Total assets
|
|
$
|
179,268
|
|
$
|
1,253,334
|
|
$
|
1,701,030
|
|
$
|
120,957
|
|
$
|
(1,452,089
|
)
|
$
|
1,802,500
|
|
Liabilities, redeemable non-controlling interest and stockholders' equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
—
|
|
$
|
3,769
|
|
$
|
7,269
|
|
$
|
1,242
|
|
—
|
|
$
|
12,280
|
|
Accrued expenses and other current liabilities
|
|
—
|
|
7,016
|
|
38,092
|
|
12,106
|
|
(2,372
|
)
|
54,842
|
|
Deferred revenue
|
|
—
|
|
—
|
|
230,396
|
|
56,290
|
|
(741
|
)
|
285,945
|
|
Current portion of notes payable
|
|
—
|
|
77,500
|
|
—
|
|
—
|
|
—
|
|
77,500
|
|
Current portion of capital lease obligations
|
|
—
|
|
—
|
|
5,866
|
|
—
|
|
—
|
|
5,866
|
|
Deferred consideration, short-term
|
|
—
|
|
—
|
|
50,840
|
|
648
|
|
—
|
|
51,488
|
|
Total current liabilities
|
|
—
|
|
88,285
|
|
332,463
|
|
70,286
|
|
(3,113
|
)
|
487,921
|
|
Deferred revenue, long-term
|
|
—
|
|
—
|
|
71,982
|
|
7,700
|
|
—
|
|
79,682
|
|
Notes payable
|
|
—
|
|
1,014,885
|
|
—
|
|
—
|
|
—
|
|
1,014,885
|
|
Capital lease obligations
|
|
—
|
|
—
|
|
7,215
|
|
—
|
|
—
|
|
7,215
|
|
Deferred consideration
|
|
—
|
|
—
|
|
—
|
|
813
|
|
—
|
|
813
|
|
Other long-term liabilities
|
|
—
|
|
—
|
|
28,970
|
|
3,340
|
|
—
|
|
32,310
|
|
Total liabilities
|
|
—
|
|
1,103,170
|
|
440,630
|
|
82,139
|
|
(3,113
|
)
|
1,622,826
|
|
Redeemable non-controlling interest
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Equity
|
|
179,268
|
|
150,164
|
|
1,260,400
|
|
38,818
|
|
(1,448,976
|
)
|
179,674
|
|
Total liabilities and equity
|
|
$
|
179,268
|
|
$
|
1,253,334
|
|
$
|
1,701,030
|
|
$
|
120,957
|
|
$
|
(1,452,089
|
)
|
$
|
1,802,500
|
|
Condensed Consolidating Balance Sheets
December 31, 2016
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Issuer
|
Guarantor Subsidiaries
|
Non-Guarantor Subsidiaries
|
Eliminations
|
Consolidated
|
Assets:
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3
|
|
$
|
4
|
|
$
|
39,034
|
|
$
|
14,555
|
|
$
|
—
|
|
$
|
53,596
|
|
Restricted cash
|
|
—
|
|
—
|
|
2,620
|
|
682
|
|
—
|
|
3,302
|
|
Accounts receivable
|
|
—
|
|
—
|
|
10,148
|
|
2,940
|
|
—
|
|
13,088
|
|
Prepaid domain name registry fees
|
|
—
|
|
—
|
|
31,044
|
|
24,697
|
|
(297
|
)
|
55,444
|
|
Prepaid expenses & other current assets
|
|
—
|
|
81
|
|
17,996
|
|
10,601
|
|
—
|
|
28,678
|
|
Total current assets
|
|
3
|
|
85
|
|
100,842
|
|
53,475
|
|
(297
|
)
|
154,108
|
|
Intercompany receivables, net
|
|
31,665
|
|
799,953
|
|
(690,761
|
)
|
(140,857
|
)
|
—
|
|
—
|
|
Property and equipment, net
|
|
—
|
|
—
|
|
82,901
|
|
12,371
|
|
—
|
|
95,272
|
|
Goodwill
|
|
—
|
|
—
|
|
1,683,121
|
|
176,788
|
|
—
|
|
1,859,909
|
|
Other intangible assets, net
|
|
—
|
|
—
|
|
592,095
|
|
19,962
|
|
—
|
|
612,057
|
|
Investment in subsidiaries
|
|
92,068
|
|
1,299,562
|
|
40,651
|
|
—
|
|
(1,432,281
|
)
|
—
|
|
Other assets
|
|
—
|
|
5,911
|
|
23,153
|
|
5,864
|
|
—
|
|
34,928
|
|
Total assets
|
|
$
|
123,736
|
|
$
|
2,105,511
|
|
$
|
1,832,002
|
|
$
|
127,603
|
|
$
|
(1,432,578
|
)
|
$
|
2,756,274
|
|
Liabilities, redeemable non-controlling interest and stockholders' equity:
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
—
|
|
$
|
—
|
|
$
|
13,801
|
|
$
|
2,273
|
|
$
|
—
|
|
$
|
16,074
|
|
Accrued expenses and other current liabilities
|
|
—
|
|
27,208
|
|
60,760
|
|
9,890
|
|
—
|
|
97,858
|
|
Deferred revenue
|
|
—
|
|
—
|
|
295,208
|
|
60,925
|
|
(943
|
)
|
355,190
|
|
Current portion of notes payable
|
|
—
|
|
35,700
|
|
—
|
|
—
|
|
—
|
|
35,700
|
|
Current portion of capital lease obligations
|
|
—
|
|
—
|
|
6,690
|
|
—
|
|
—
|
|
6,690
|
|
Deferred consideration, short-term
|
|
—
|
|
—
|
|
4,415
|
|
858
|
|
—
|
|
5,273
|
|
Total current liabilities
|
|
—
|
|
62,908
|
|
380,874
|
|
73,946
|
|
(943
|
)
|
516,785
|
|
Deferred revenue, long-term
|
|
—
|
|
—
|
|
77,649
|
|
11,551
|
|
—
|
|
89,200
|
|
Notes payable
|
|
—
|
|
1,951,280
|
|
—
|
|
—
|
|
—
|
|
1,951,280
|
|
Capital lease obligations
|
|
—
|
|
—
|
|
512
|
|
—
|
|
—
|
|
512
|
|
Deferred consideration
|
|
—
|
|
—
|
|
7,419
|
|
25
|
|
—
|
|
7,444
|
|
Other long-term liabilities
|
|
—
|
|
(745
|
)
|
48,233
|
|
1,429
|
|
—
|
|
48,917
|
|
Total liabilities
|
|
—
|
|
2,013,443
|
|
514,687
|
|
86,951
|
|
(943
|
)
|
2,614,138
|
|
Redeemable non-controlling interest
|
|
—
|
|
—
|
|
17,753
|
|
—
|
|
—
|
|
17,753
|
|
Equity
|
|
123,736
|
|
92,068
|
|
1,299,562
|
|
40,652
|
|
(1,431,635
|
)
|
124,383
|
|
Total liabilities and equity
|
|
$
|
123,736
|
|
$
|
2,105,511
|
|
$
|
1,832,002
|
|
$
|
127,603
|
|
$
|
(1,432,578
|
)
|
$
|
2,756,274
|
|
Condensed Consolidating Statements of Operations and Comprehensive Loss
Year Ended December 31, 2014
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Issuer
|
Guarantor Subsidiaries
|
Non-Guarantor Subsidiaries
|
Eliminations
|
Consolidated
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
—
|
|
$
|
—
|
|
$
|
559,434
|
|
$
|
70,990
|
|
$
|
(579
|
)
|
$
|
629,845
|
|
Cost of revenue
|
|
—
|
|
—
|
|
327,225
|
|
54,500
|
|
(237
|
)
|
381,488
|
|
Gross profit
|
|
—
|
|
—
|
|
232,209
|
|
16,490
|
|
(342
|
)
|
248,357
|
|
Operating expense:
|
|
|
|
|
|
|
|
Sales & marketing
|
|
—
|
|
—
|
|
114,367
|
|
32,607
|
|
(177
|
)
|
146,797
|
|
Engineering and development
|
|
—
|
|
—
|
|
16,805
|
|
2,744
|
|
—
|
|
19,549
|
|
General and administrative
|
|
—
|
|
232
|
|
61,291
|
|
8,010
|
|
—
|
|
69,533
|
|
Total operating expense
|
|
—
|
|
232
|
|
192,463
|
|
43,361
|
|
(177
|
)
|
235,879
|
|
Income (loss) from operations
|
|
—
|
|
(232
|
)
|
39,746
|
|
(26,871
|
)
|
(165
|
)
|
12,478
|
|
Interest expense, net
|
|
—
|
|
56,330
|
|
829
|
|
(76
|
)
|
—
|
|
57,083
|
|
Income (loss) before income taxes and equity earnings of unconsolidated entities
|
|
—
|
|
(56,562
|
)
|
38,917
|
|
(26,795
|
)
|
(165
|
)
|
(44,605
|
)
|
Income tax expense (benefit)
|
|
—
|
|
6,163
|
|
613
|
|
(590
|
)
|
—
|
|
6,186
|
|
Loss before equity earnings of unconsolidated entities
|
|
—
|
|
(62,725
|
)
|
38,304
|
|
(26,205
|
)
|
(165
|
)
|
(50,791
|
)
|
Equity loss of unconsolidated entities, net of tax
|
|
42,835
|
|
(19,890
|
)
|
26,500
|
|
—
|
|
(49,384
|
)
|
61
|
|
Net loss
|
|
(42,835
|
)
|
(42,835
|
)
|
11,804
|
|
(26,205
|
)
|
49,219
|
|
(50,852
|
)
|
Net loss attributable to non-controlling interest
|
|
—
|
|
—
|
|
(8,017
|
)
|
—
|
|
—
|
|
(8,017
|
)
|
Net loss attributable to Endurance
|
|
$
|
(42,835
|
)
|
$
|
(42,835
|
)
|
$
|
19,821
|
|
$
|
(26,205
|
)
|
$
|
49,219
|
|
$
|
(42,835
|
)
|
Comprehensive loss
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
—
|
|
—
|
|
—
|
|
(462
|
)
|
—
|
|
(462
|
)
|
Total comprehensive loss
|
|
$
|
(42,835
|
)
|
$
|
(42,835
|
)
|
$
|
19,821
|
|
$
|
(26,667
|
)
|
$
|
49,219
|
|
$
|
(43,297
|
)
|
Condensed Consolidating Statements of Operations and Comprehensive Loss
Year Ended December 31, 2015
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Issuer
|
Guarantor Subsidiaries
|
Non-Guarantor Subsidiaries
|
Eliminations
|
Consolidated
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
—
|
|
$
|
—
|
|
$
|
628,266
|
|
$
|
113,766
|
|
$
|
(717
|
)
|
$
|
741,315
|
|
Cost of revenue
|
|
—
|
|
—
|
|
349,059
|
|
77,177
|
|
(1,201
|
)
|
425,035
|
|
Gross profit
|
|
—
|
|
—
|
|
279,207
|
|
36,589
|
|
484
|
|
316,280
|
|
Operating expense:
|
|
|
|
|
|
|
|
Sales & marketing
|
|
—
|
|
—
|
|
120,637
|
|
24,815
|
|
(33
|
)
|
145,419
|
|
Engineering and development
|
|
—
|
|
—
|
|
23,019
|
|
3,688
|
|
—
|
|
26,707
|
|
General and administrative
|
|
—
|
|
177
|
|
80,548
|
|
10,132
|
|
111
|
|
90,968
|
|
Total operating expense
|
|
—
|
|
177
|
|
224,204
|
|
38,635
|
|
78
|
|
263,094
|
|
Income (loss) from operations
|
|
—
|
|
(177
|
)
|
55,003
|
|
(2,046
|
)
|
406
|
|
53,186
|
|
Interest expense and other income, net
|
|
—
|
|
56,843
|
|
(3,554
|
)
|
(315
|
)
|
—
|
|
52,974
|
|
Income (loss) before income taxes and equity earnings of unconsolidated entities
|
|
—
|
|
(57,020
|
)
|
58,557
|
|
(1,731
|
)
|
406
|
|
212
|
|
Income tax expense (benefit)
|
|
—
|
|
10,320
|
|
331
|
|
691
|
|
—
|
|
11,342
|
|
Loss before equity earnings of unconsolidated entities
|
|
—
|
|
(67,340
|
)
|
58,226
|
|
(2,422
|
)
|
406
|
|
(11,130
|
)
|
Equity loss of unconsolidated entities, net of tax
|
|
26,176
|
|
(41,164
|
)
|
17,063
|
|
—
|
|
12,565
|
|
14,640
|
|
Net loss
|
|
(26,176
|
)
|
(26,176
|
)
|
41,163
|
|
(2,422
|
)
|
(12,159
|
)
|
(25,770
|
)
|
Net loss attributable to non-controlling interest
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Net loss attributable to Endurance
|
|
$
|
(26,176
|
)
|
$
|
(26,176
|
)
|
$
|
41,163
|
|
$
|
(2,422
|
)
|
$
|
(12,159
|
)
|
$
|
(25,770
|
)
|
Comprehensive loss
|
|
|
|
|
|
|
—
|
|
Foreign currency translation adjustments
|
|
—
|
|
—
|
|
—
|
|
(1,281
|
)
|
—
|
|
(1,281
|
)
|
Unrealized gain on cash flow hedge
|
|
—
|
|
80
|
|
—
|
|
—
|
|
—
|
|
80
|
|
Total comprehensive loss
|
|
$
|
(26,176
|
)
|
$
|
(26,096
|
)
|
$
|
41,163
|
|
$
|
(3,703
|
)
|
$
|
(12,159
|
)
|
$
|
(26,971
|
)
|
Condensed Consolidating Statements of Operations and Comprehensive Loss
Year Ended December 31, 2016
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Issuer
|
Guarantor Subsidiaries
|
Non-Guarantor Subsidiaries
|
Eliminations
|
Consolidated
|
|
|
|
|
|
|
|
Revenue
|
$
|
—
|
|
$
|
—
|
|
$
|
978,690
|
|
$
|
133,274
|
|
$
|
(822
|
)
|
$
|
1,111,142
|
|
Cost of revenue
|
—
|
|
—
|
|
496,267
|
|
88,753
|
|
(1,029
|
)
|
583,991
|
|
Gross profit
|
—
|
|
—
|
|
482,423
|
|
44,521
|
|
207
|
|
527,151
|
|
Operating expense:
|
|
|
|
|
|
|
Sales and marketing
|
—
|
|
—
|
|
235,988
|
|
67,556
|
|
(33
|
)
|
303,511
|
|
Engineering and development
|
—
|
|
—
|
|
72,922
|
|
14,679
|
|
—
|
|
87,601
|
|
General and administrative
|
—
|
|
242
|
|
128,337
|
|
14,516
|
|
—
|
|
143,095
|
|
Transaction expenses
|
—
|
|
—
|
|
32,284
|
|
—
|
|
—
|
|
32,284
|
|
Total operating expense
|
—
|
|
242
|
|
469,531
|
|
96,751
|
|
(33
|
)
|
566,491
|
|
Income (loss) from operations
|
—
|
|
(242
|
)
|
12,892
|
|
(52,230
|
)
|
240
|
|
(39,340
|
)
|
Interest expense and other income —net
|
—
|
|
149,512
|
|
(3,606
|
)
|
4,544
|
|
—
|
|
150,450
|
|
Income (loss) before income taxes and equity earnings of unconsolidated entities
|
—
|
|
(149,754
|
)
|
16,498
|
|
(56,774
|
)
|
240
|
|
(189,790
|
)
|
Income tax expense (benefit)
|
—
|
|
(53,847
|
)
|
(55,953
|
)
|
(58
|
)
|
—
|
|
(109,858
|
)
|
Loss before equity earnings of unconsolidated entities
|
—
|
|
(95,907
|
)
|
72,451
|
|
(56,716
|
)
|
240
|
|
(79,932
|
)
|
Equity loss of unconsolidated entities, net of tax
|
73,071
|
|
(22,837
|
)
|
58,014
|
|
297
|
|
(107,248
|
)
|
1,297
|
|
Net loss
|
$
|
(73,071
|
)
|
$
|
(73,070
|
)
|
$
|
14,437
|
|
$
|
(57,013
|
)
|
$
|
107,488
|
|
$
|
(81,229
|
)
|
Net loss attributable to non-controlling interest
|
—
|
|
—
|
|
(8,398
|
)
|
—
|
|
—
|
|
(8,398
|
)
|
Net loss attributable to Endurance International Group Holdings, Inc.
|
(73,071
|
)
|
(73,070
|
)
|
22,835
|
|
(57,013
|
)
|
107,488
|
|
(72,831
|
)
|
Comprehensive loss:
|
|
|
|
|
|
—
|
|
Foreign currency translation adjustments
|
—
|
|
—
|
|
—
|
|
(597
|
)
|
—
|
|
(597
|
)
|
Unrealized gain (loss) on cash flow hedge
|
|
(1,351
|
)
|
—
|
|
—
|
|
—
|
|
(1,351
|
)
|
Total comprehensive loss
|
$
|
(73,071
|
)
|
$
|
(74,421
|
)
|
$
|
22,835
|
|
$
|
(57,610
|
)
|
$
|
107,488
|
|
$
|
(74,779
|
)
|
Condensed Consolidating Statements of Cash Flows
Year Ended December 31, 2014
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Issuer
|
Guarantor Subsidiaries
|
Non-Guarantor Subsidiaries
|
Eliminations
|
Consolidated
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(1
|
)
|
$
|
(63,853
|
)
|
$
|
215,212
|
|
$
|
(8,465
|
)
|
—
|
|
$
|
142,893
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
Businesses acquired in purchase transaction, net of cash acquired
|
|
—
|
|
—
|
|
(69,578
|
)
|
(24,120
|
)
|
—
|
|
(93,698
|
)
|
Purchases of property and equipment
|
|
—
|
|
—
|
|
(22,850
|
)
|
(1,054
|
)
|
—
|
|
(23,904
|
)
|
Cash paid for minority investments
|
|
—
|
|
—
|
|
(34,140
|
)
|
—
|
|
—
|
|
(34,140
|
)
|
Proceeds from sale of property and equipment
|
|
—
|
|
—
|
|
39
|
|
55
|
|
—
|
|
94
|
|
Proceeds from sale of assets
|
|
—
|
|
—
|
|
100
|
|
—
|
|
—
|
|
100
|
|
Purchases of intangible assets
|
|
—
|
|
—
|
|
(200
|
)
|
—
|
|
—
|
|
(200
|
)
|
Net (deposits) and withdrawals of principal balances in restricted cash accounts
|
|
—
|
|
—
|
|
191
|
|
242
|
|
—
|
|
433
|
|
Net cash used in investing activities
|
|
—
|
|
—
|
|
(126,438
|
)
|
(24,877
|
)
|
—
|
|
(151,315
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds from issuance of notes payable and draws on revolver
|
|
—
|
|
150,000
|
|
—
|
|
—
|
|
—
|
|
150,000
|
|
Repayment of notes payable and revolver
|
|
—
|
|
(110,500
|
)
|
—
|
|
—
|
|
—
|
|
(110,500
|
)
|
Payment of financing costs
|
|
—
|
|
(53
|
)
|
—
|
|
—
|
|
—
|
|
(53
|
)
|
Payment of deferred consideration
|
|
—
|
|
—
|
|
(41,244
|
)
|
(57,074
|
)
|
—
|
|
(98,318
|
)
|
Payment of redeemable non-controlling interest liability
|
|
—
|
|
—
|
|
(4,190
|
)
|
—
|
|
—
|
|
(4,190
|
)
|
Principal payments on capital lease obligations
|
|
—
|
|
—
|
|
(3,608
|
)
|
—
|
|
—
|
|
(3,608
|
)
|
Proceeds from exercise of stock options
|
|
137
|
|
—
|
|
—
|
|
—
|
|
—
|
|
137
|
|
Proceeds from issuance of common stock
|
|
43,500
|
|
—
|
|
—
|
|
—
|
|
—
|
|
43,500
|
|
Issuance costs of common stock
|
|
(2,904
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
(2,904
|
)
|
Intercompany loans and investments
|
|
(40,731
|
)
|
(7,126
|
)
|
(46,073
|
)
|
93,930
|
|
—
|
|
—
|
|
Net cash provided by (used in) financing activities
|
|
2
|
|
32,321
|
|
(95,115
|
)
|
36,856
|
|
—
|
|
(25,936
|
)
|
Net effect of exchange rate on cash and cash equivalents
|
|
—
|
|
—
|
|
—
|
|
(78
|
)
|
—
|
|
(78
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
1
|
|
(31,532
|
)
|
(6,341
|
)
|
3,436
|
|
—
|
|
(34,436
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
Beginning of period
|
|
—
|
|
35,879
|
|
25,043
|
|
5,893
|
|
—
|
|
$
|
66,815
|
|
End of period
|
|
$
|
1
|
|
$
|
4,347
|
|
$
|
18,702
|
|
$
|
9,329
|
|
$
|
—
|
|
$
|
32,379
|
|
Condensed Consolidating Statements of Cash Flows
Year Ended December 31, 2015
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Issuer
|
Guarantor Subsidiaries
|
Non-Guarantor Subsidiaries
|
Eliminations
|
Consolidated
|
Net cash provided by (used in) operating activities
|
|
$
|
2
|
|
$
|
(50,147
|
)
|
$
|
220,468
|
|
6,905
|
|
—
|
|
$
|
177,228
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
Businesses acquired in purchase transaction, net of cash acquired
|
|
—
|
|
—
|
|
(92,376
|
)
|
(5,419
|
)
|
—
|
|
(97,795
|
)
|
Purchases of property and equipment
|
|
—
|
|
—
|
|
(28,058
|
)
|
(3,185
|
)
|
—
|
|
(31,243
|
)
|
Cash paid for minority investments
|
|
—
|
|
—
|
|
(8,475
|
)
|
—
|
|
—
|
|
(8,475
|
)
|
Proceeds from sale of property and equipment
|
|
—
|
|
—
|
|
51
|
|
42
|
|
—
|
|
93
|
|
Proceeds from note receivable
|
|
—
|
|
—
|
|
3,454
|
|
—
|
|
—
|
|
3,454
|
|
Proceeds from sale of assets
|
|
—
|
|
—
|
|
191
|
|
—
|
|
—
|
|
191
|
|
Purchases of intangible assets
|
|
—
|
|
—
|
|
(76
|
)
|
—
|
|
—
|
|
(76
|
)
|
Net (deposits) and withdrawals of principal balances in restricted cash accounts
|
|
—
|
|
—
|
|
(296
|
)
|
346
|
|
—
|
|
50
|
|
Net cash used in investing activities
|
|
—
|
|
—
|
|
(125,585
|
)
|
(8,216
|
)
|
—
|
|
(133,801
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds from issuance of notes payable and draws on revolver
|
|
—
|
|
147,000
|
|
—
|
|
—
|
|
—
|
|
147,000
|
|
Repayment of notes payable and revolver
|
|
—
|
|
(140,500
|
)
|
—
|
|
—
|
|
—
|
|
(140,500
|
)
|
Payment of financing costs
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Payment of deferred consideration
|
|
—
|
|
—
|
|
(14,503
|
)
|
(488
|
)
|
—
|
|
(14,991
|
)
|
Payment of redeemable non-controlling interest liability
|
|
—
|
|
—
|
|
(30,543
|
)
|
—
|
|
—
|
|
(30,543
|
)
|
Principal payments on capital lease obligations
|
|
—
|
|
—
|
|
(4,822
|
)
|
—
|
|
—
|
|
(4,822
|
)
|
Proceeds from exercise of stock options
|
|
2,224
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2,224
|
|
Intercompany loans and investments
|
|
(2,215
|
)
|
39,367
|
|
(42,431
|
)
|
5,279
|
|
—
|
|
—
|
|
Net cash provided by (used in) financing activities
|
|
9
|
|
45,867
|
|
(92,299
|
)
|
4,791
|
|
—
|
|
(41,632
|
)
|
Net effect of exchange rate on cash and cash equivalents
|
|
—
|
|
—
|
|
—
|
|
(1,144
|
)
|
—
|
|
(1,144
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
11
|
|
(4,280
|
)
|
2,584
|
|
2,336
|
|
—
|
|
651
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
Beginning of period
|
|
1
|
|
4,347
|
|
18,702
|
|
9,329
|
|
—
|
|
32,379
|
|
End of period
|
|
$
|
12
|
|
$
|
67
|
|
$
|
21,286
|
|
$
|
11,665
|
|
$
|
—
|
|
$
|
33,030
|
|
Condensed Consolidating Statements of Cash Flows
Year Ended December 31, 2016
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Issuer
|
Guarantor Subsidiaries
|
Non-Guarantor Subsidiaries
|
Eliminations
|
Consolidated
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
$
|
(71,204
|
)
|
$
|
256,461
|
|
(30,296
|
)
|
|
$
|
154,961
|
|
Cash flows from investing activities:
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Businesses acquired in purchase transaction, net of cash acquired
|
|
—
|
|
—
|
|
(889,634
|
)
|
—
|
|
—
|
|
(889,634
|
)
|
Purchases of property and equipment
|
|
—
|
|
—
|
|
(32,528
|
)
|
(4,731
|
)
|
—
|
|
(37,259
|
)
|
Cash paid for minority investments
|
|
—
|
|
—
|
|
(5,600
|
)
|
—
|
|
—
|
|
(5,600
|
)
|
Proceeds from sale of property and equipment
|
|
—
|
|
—
|
|
674
|
|
2
|
|
—
|
|
676
|
|
Proceeds from note receivable
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Proceeds from sale of assets
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Purchases of intangible assets
|
|
—
|
|
—
|
|
(7
|
)
|
(20
|
)
|
—
|
|
(27
|
)
|
Net (deposits) and withdrawals of principal balances in restricted cash accounts
|
|
—
|
|
—
|
|
(347
|
)
|
(210
|
)
|
—
|
|
(557
|
)
|
Net cash used in investing activities
|
|
—
|
|
—
|
|
(927,442
|
)
|
(4,959
|
)
|
—
|
|
(932,401
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds from issuance of notes payable and draws on revolver
|
|
—
|
|
1,110,678
|
|
—
|
|
—
|
|
—
|
|
1,110,678
|
|
Repayment of notes payable and revolver
|
|
—
|
|
(176,700
|
)
|
—
|
|
—
|
|
—
|
|
(176,700
|
)
|
Payment of financing costs
|
|
—
|
|
(52,561
|
)
|
—
|
|
—
|
|
—
|
|
(52,561
|
)
|
Payment of deferred consideration
|
|
—
|
|
—
|
|
(50,375
|
)
|
(669
|
)
|
—
|
|
(51,044
|
)
|
Payment of redeemable non-controlling interest liability
|
|
—
|
|
—
|
|
(33,425
|
)
|
—
|
|
—
|
|
(33,425
|
)
|
Principal payments on capital lease obligations
|
|
—
|
|
—
|
|
(5,892
|
)
|
—
|
|
—
|
|
(5,892
|
)
|
Proceeds from exercise of stock options
|
|
2,564
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2,564
|
|
Capital investments from minority partner
|
|
—
|
|
—
|
|
—
|
|
2,776
|
|
—
|
|
2,776
|
|
Intercompany loans and investments
|
|
(2,573
|
)
|
(810,276
|
)
|
778,421
|
|
34,428
|
|
—
|
|
—
|
|
Net cash provided by (used in) financing activities
|
|
(9
|
)
|
71,141
|
|
688,729
|
|
36,535
|
|
—
|
|
796,396
|
|
Net effect of exchange rate on cash and cash equivalents
|
|
—
|
|
—
|
|
—
|
|
1,610
|
|
—
|
|
1,610
|
|
Net increase (decrease) in cash and cash equivalents
|
|
(9
|
)
|
(63
|
)
|
17,748
|
|
2,890
|
|
—
|
|
20,566
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
Beginning of period
|
|
12
|
|
67
|
|
21,286
|
|
11,665
|
|
|
33,030
|
|
End of period
|
|
$
|
3
|
|
$
|
4
|
|
$
|
39,034
|
|
$
|
14,555
|
|
$
|
—
|
|
$
|
53,596
|
|