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
4.8 million
subscribers globally with a range of products and services that help SMBs get online, get found and grow their businesses. In addition to for-profit businesses, our subscribers include non-profit organizations, community groups, bloggers, and hobbyists. Although we provide our solutions through a number of brands, we are focusing our marketing, engineering and product development efforts on a small number of strategic assets, including our Constant Contact, Bluehost, HostGator, and Domain.com brands.
We currently report our financial results in three reportable segments, as follows:
Web Presence
. Our web presence segment consists primarily of our web hosting brands, the largest of which are Bluehost and HostGator. This segment also includes related products such as domain names, website security, website design tools and services, and e-commerce products.
Domain
. Our domain segment consists of domain-focused brands such as Domain.com, ResellerClub and LogicBoxes as well as certain web hosting brands that are under common management with our domain-focused brands. This segment sells domain names and domain management services to resellers and end users, as well as premium domain names, and also generates advertising revenue from domain name parking. It also resells domain names and domain management services to our web presence segment.
Email Marketing
. Our email marketing segment consists of Constant Contact email marketing tools and related products and our SinglePlatform digital storefront solution.
Our
2018
financial results reflected progress against our operating plan as we aim to attract subscribers with higher long-term revenue potential and on improving the product, customer support and user experience for key strategic brands. Changes in revenue, net income (loss) and net cash provided by operating activities are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2018
|
Revenue
|
$
|
1,176,867
|
|
|
$
|
1,145,291
|
|
Net income (loss)
|
$
|
(99,784
|
)
|
|
$
|
4,534
|
|
Net cash provided by operating activities
|
$
|
201,273
|
|
|
$
|
182,552
|
|
|
|
•
|
Revenue
decreased
by
3%
from
2017
primarily due to revenue declines in the web presence segment and to a lesser extent, in the domain segment. This decline was partially offset by an increase in email marketing segment revenue.
|
|
|
•
|
Net income (loss) improved in
2018
as compared to
2017
, due primarily to decreases in amortization expense, impairment charges, stock-based compensation expense, restructuring charges, net interest expense, depreciation expense, and lower cost of revenue and lower operating expense, all of which were partially offset by lower revenue and lower income tax benefit.
|
|
|
•
|
Net cash provided by operating activities
decreased
by
9%
from 2017. This decrease was primarily due to the following factors: lower revenue; lower subscriber billings; payments related to our SEC investigation settlement; and the purchase of an interest rate cap to manage interest rate risk on our term loan. These factors were partially offset by lower payments for restructuring and reduced interest payments. Our cash flows allowed us to make voluntary debt principal payments of
$68.6 million
in 2018, which were in addition to required debt principal payments of
$32.2 million
made during the year.
|
Our total subscriber base decreased during
2018
. Attrition in our non-strategic brands accounted for a majority of subscriber losses during the year. These non-strategic brands are principally hosting brands, but also include our cloud backup brands and certain other products that we launched in the past several years but no longer actively market, which we sometimes refer to as "gateway" products. Subscriber counts are decreasing in these brands, and we are managing them to optimize cash flow rather than to acquire new subscribers. These non-strategic brands had a negative impact in 2018 on our revenue growth, net subscriber additions and subscriber billings, and we expect these impacts to continue for the near term.
Our 2018 operating plan focused on delivering increased value to customers of our key strategic brands, including Constant Contact, Bluehost, HostGator and Domain.com, and on simplifying our operations to perform more effectively and efficiently. We increased our investments in engineering and development in 2018 in order to improve the customer experience and expand product offerings in our strategic brands. Year-over-year cost savings in data center and support operations helped offset the impact of these initiatives on net income (loss) and adjusted EBITDA. We expect to continue our focus on engineering and development across our three segments in 2019, as more specifically described below.
Web presence
. In our web presence segment, we focused in 2018 on offering a better customer experience in our key hosting brands by improving customer support levels and enhancing our core hosting and website builder offerings. We expect to continue this progress in 2019 by offering a broader suite of business solutions for customers at various stages in their business lifecycle, and by leveraging our new domain platform, discussed below, to provide a better domain purchase experience for customers of these brands.
Domain
. In our domain segment, in 2018 we launched a new, more intuitive control panel and front-of-site interface on our Domain.com brand, which includes a Microsoft Office 365 email and productivity suite offering. In 2019, we plan to continue investing in engineering and marketing in order to transition this segment from a domain focus to a broader small business solutions offering, and to leverage our new domain control panel on our key strategic hosting brands and on other domain-focused brands on our platform.
Email marketing
. In our email marketing segment, during 2018 we invested in improvements to the customer experience by introducing additional product features in our core email marketing offering, including branded template creation and customer segmentation capabilities. In 2019, we plan to continue to enhance and broaden our service offerings, including through integration with other Endurance assets, and to focus on opportunities to expand the Constant Contact brand as a small business solutions provider.
We believe these continuing investments will position us for growth in the future. Although fiscal year 2019 net income (loss) may not be significantly impacted by these additional investments in engineering and development, mainly due to a partly offsetting decline in amortization expense, our adjusted EBITDA, cash flow from operations and free cash flow are likely to be adversely impacted.
During the first quarter of 2018, we revised the amounts we previously reported for gross profit, net income (loss) and adjusted EBITDA for our web presence and domain segments for fiscal years 2016 and 2017. Consolidated results were not impacted by this misstatement. Please see Note
21
of our Notes to Consolidated Financial statements in Part II, Item 8, "Financial Statements and Supplementary Data" consolidated financial statements for further details regarding the revision.
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:
|
|
•
|
average revenue per subscriber ("ARPS");
|
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 table below summarizes total subscribers, ARPS and adjusted EBITDA by segment for the periods presented (in thousands, except ARPS). For a discussion of free cash flow, see "
Liquidity and Capital Resources."
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
Consolidated metrics:
|
|
|
|
|
|
Total subscribers
|
5,371
|
|
|
5,051
|
|
|
4,802
|
|
Average subscribers
|
5,283
|
|
|
5,211
|
|
|
4,927
|
|
Average revenue per subscriber
|
$
|
17.53
|
|
|
$
|
18.82
|
|
|
$
|
19.37
|
|
Adjusted EBITDA
|
$
|
288,396
|
|
|
$
|
350,814
|
|
|
$
|
338,058
|
|
|
|
|
|
|
|
Web presence segment metrics:
|
|
|
|
|
|
Total subscribers
|
4,198
|
|
|
3,849
|
|
|
3,639
|
|
Average subscribers
|
4,233
|
|
|
4,024
|
|
|
3,744
|
|
Average revenue per subscriber
|
$
|
12.77
|
|
|
$
|
13.29
|
|
|
$
|
13.47
|
|
Adjusted EBITDA
|
$
|
156,718
|
|
|
$
|
165,088
|
|
|
$
|
146,578
|
|
|
|
|
|
|
|
Email marketing segment metrics:
|
|
|
|
|
|
Total subscribers
|
544
|
|
|
519
|
|
|
497
|
|
Average subscribers
|
494
|
|
|
531
|
|
|
508
|
|
Average revenue per subscriber
|
$
|
55.11
|
|
|
$
|
62.92
|
|
|
$
|
67.28
|
|
Adjusted EBITDA
|
$
|
116,261
|
|
|
$
|
185,869
|
|
|
$
|
183,384
|
|
|
|
|
|
|
|
Domain segment metrics:
|
|
|
|
|
|
Total subscribers
|
629
|
|
|
683
|
|
|
666
|
|
Average subscribers
|
556
|
|
|
656
|
|
|
675
|
|
Average revenue per subscriber
|
$
|
20.34
|
|
|
$
|
16.98
|
|
|
$
|
16.05
|
|
Adjusted EBITDA
|
$
|
15,417
|
|
|
$
|
(143
|
)
|
|
$
|
8,096
|
|
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.”
Most of our web presence segment subscribers have hosting subscriptions, but web presence subscribers also include customers who do not have a web hosting subscription but subscribe to other non-hosting services such as email or domain privacy. These subscribers generally have lower-priced subscriptions than hosting subscribers.
Domain segment subscribers mostly consist of customers who have a domain name subscription as well as a subscription to another product, such as domain privacy, or a basic hosting or email service that is bundled with their domain subscription. We refer to these subscribers, along with the non-hosting web presence segment subscribers discussed above, as "light web presence" subscribers. Light web presence subscribers generally have lower long-term revenue potential than other subscribers. As of
December 31, 2018
, we had a total of approximately 577,000 light web presence subscribers, a majority of which were associated with our domain segment. Also included as domain segment subscribers are hosting customers of our BigRock and HostGator India brands and certain other small web hosting brands that share technology platforms with our domain-focused brands.
The table below shows the approximate sources of changes in our total subscriber count by segment during 2017 and 2018 (all numbers in thousands). Adjustments below are shown on a full year basis.
|
|
|
|
|
|
|
|
|
|
|
Web Presence
|
Domain
|
Email Marketing
|
Total
|
|
# subscribers
|
# subscribers
|
# subscribers
|
# subscribers
|
Total Subscribers - December 31, 2016
|
4,198
|
|
629
|
|
544
|
|
5,371
|
|
Light web presence subscribers
|
16
|
|
25
|
|
—
|
|
41
|
|
Adjustments
|
(19
|
)
|
26
|
|
—
|
|
7
|
|
All other subscriber (decrease) growth
|
(346
|
)
|
3
|
|
(25
|
)
|
(368
|
)
|
Total Subscribers - December 31, 2017
|
3,849
|
|
683
|
|
519
|
|
5,051
|
|
Light web presence subscribers
|
10
|
|
(14
|
)
|
—
|
|
(4
|
)
|
All other subscriber decrease
|
(220
|
)
|
(3
|
)
|
(22
|
)
|
(245
|
)
|
Total Subscribers - December 31, 2018
(1)
|
3,639
|
|
666
|
|
497
|
|
4,802
|
|
(1) As previously disclosed, 2018 total email marketing subscriber count was impacted by changes made to Constant Contact's account cancellation policy in the second quarter of 2018, which resulted in a loss of approximately 10,500 subscribers for that quarter.
The decrease in total subscribers from
5.051 million
at
December 31, 2017
to
4.802 million
at
December 31, 2018
was driven primarily by subscriber losses in non-strategic brands in our web presence segment and, to a lesser extent, by subscriber losses in our email marketing and domain segments.
The decrease in total subscribers from
5.371 million
at
December 31, 2016
to
5.051 million
at
December 31, 2017
was driven primarily by subscriber losses in our web presence segment, a majority of which were due to subscriber attrition in our non-strategic brands and, to a lesser extent, by subscriber losses in our email marketing and domain segments.
We expect total subscribers to continue to decrease for the near term, due primarily to the impact of subscriber churn in non-strategic web presence brands.
Average Revenue per Subscriber
We calculate average revenue per subscriber, or ARPS, 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. For our web presence and email marketing segments, we believe ARPS is an indicator of our ability to optimize our mix of products, services and pricing to both new and existing subscribers. For our domain segment, ARPS may fluctuate from period to period due to changes in the amount of non-subscriber based revenue, reseller activity and other factors impacting this segment as discussed in more detail below.
The following table reflects the calculation of ARPS (all data in thousands, except ARPS data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
Consolidated revenue
|
$
|
1,111,142
|
|
|
$
|
1,176,867
|
|
|
$
|
1,145,291
|
|
Consolidated total subscribers
|
5,371
|
|
|
5,051
|
|
|
4,802
|
|
Consolidated average subscribers for the period
|
5,283
|
|
|
5,211
|
|
|
4,927
|
|
Consolidated ARPS
|
$
|
17.53
|
|
|
$
|
18.82
|
|
|
$
|
19.37
|
|
|
|
|
|
|
|
Web presence revenue
|
$
|
648,732
|
|
|
$
|
641,993
|
|
|
$
|
605,315
|
|
Web presence subscribers
|
4,198
|
|
|
3,849
|
|
|
3,639
|
|
Web presence average subscribers
|
4,233
|
|
|
4,024
|
|
|
3,744
|
|
Web presence ARPS
|
$
|
12.77
|
|
|
$
|
13.29
|
|
|
$
|
13.47
|
|
|
|
|
|
|
|
Email marketing revenue
|
$
|
326,808
|
|
|
$
|
401,250
|
|
|
$
|
410,052
|
|
Email marketing subscribers
|
544
|
|
|
519
|
|
|
497
|
|
Email marketing average subscribers
|
494
|
|
|
531
|
|
|
508
|
|
Email marketing ARPS
|
$
|
55.11
|
|
|
$
|
62.92
|
|
|
$
|
67.28
|
|
|
|
|
|
|
|
Domain revenue
|
$
|
135,602
|
|
|
$
|
133,624
|
|
|
$
|
129,924
|
|
Domain subscribers
|
629
|
|
|
683
|
|
|
666
|
|
Domain average subscribers
|
556
|
|
|
656
|
|
|
675
|
|
Domain ARPS
|
$
|
20.34
|
|
|
$
|
16.98
|
|
|
$
|
16.05
|
|
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:
|
|
•
|
Revenue from domain-only customers
. Our web presence and domain segments each earn revenue from domain-only customers. For our web presence segment, 0.9% of our fiscal year
2018
revenue was earned from domain only customers. For our domain segment, approximately 5.7% of our revenue for fiscal year
2018
was earned from domain only customers.
|
|
|
•
|
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. A significant portion of this revenue is associated with our domain segment.
|
|
|
•
|
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 revenue is for the purchase of domains and is primarily related to our domain segment. Approximately 40% of our domain segment revenue is earned from resellers. Reseller revenue earned by our web presence segment and our email marketing segment has been less than 4% and 1%, respectively, for all periods presented, and fluctuations in reseller revenue have not materially impacted ARPS for these segments.
Comparison of Year Ended
December 31, 2017
and
2018
:
ARPS
For the years ended
December 31, 2017
and
2018
, consolidated ARPS
increased
from
$18.82
to
$19.37
, respectively. This increase in ARPS was driven primarily by our email marketing segment, and to a lesser extent, a focus on higher lifetime revenue subscribers in our web presence segment. These increases in ARPS were partially offset by lower ARPS in our domain segment.
Web presence ARPS
increased
from
$13.29
to
$13.47
for the year ended
December 31, 2018
, primarily due to a shift in our marketing programs away from targeting subscribers for our lower priced products, and towards targeting subscribers who
have higher lifetime revenue potential. This shift in focus has resulted in a loss of subscribers of lower priced products, resulting in an overall increase in ARPS.
Email marketing ARPS
increased
from
$62.92
to
$67.28
for the year ended
December 31, 2018
, primarily due to price increases and additional purchases by existing subscribers.
Domain ARPS
decreased
from
$16.98
to
$16.05
for the year ended
December 31, 2018
. This decrease was partially due to a decrease in non-subscriber revenue, including domain monetization and marketing development funds, from $27.6 million for fiscal year 2017 to
$25.8 million
for fiscal year 2018, which decreased ARPS by $0.33, and the balance of the decrease was attributable to increased sales of lower priced products.
Comparison of Year Ended
December 31, 2016
and
2017
: ARPS
For the years ended
December 31, 2016
and
2017
, consolidated ARPS
increased
from
$17.53
to
$18.82
, respectively. This increase in ARPS was driven primarily by our email marketing segment, and to a lesser extent, a focus on higher lifetime revenue subscribers in our web presence segment. These increases in ARPS were partially offset by lower ARPS in our domain segment.
Web presence ARPS
increased
from
$12.77
for the year ended
December 31, 2016
to
$13.29
for the year ended
December 31, 2017
, primarily due to a shift in our marketing programs away from targeting subscribers for our lower priced gateway products, and towards targeting subscribers who have higher lifetime revenue potential. This shift in focus has resulted in a loss of subscribers of lower priced products, resulting in an overall increase in ARPS. Non-subscriber revenue, which includes domain monetization and marketing development funds, increased slightly from $8.4 million for the year ended December 31, 2016 to $8.5 million for the year ended December 31, 2017, causing ARPS to increase by $0.01. Light web presence subscribers, which generally purchase lower priced products, are less than 5% of total subscribers for this segment, and the increase in these subscribers during 2017 did not materially impact ARPS.
Email marketing APRS
increased
from
$55.11
for the year ended December 31, 2016 to
$62.92
for the year ended
December 31, 2017
. This increase was primarily due to the Constant Contact purchase accounting adjustment during 2016, which represents the reduction of post-acquisition revenue from the write-down of deferred revenue to fair value as of the acquisition date. The Constant Contact purchase accounting adjustment reduced email marketing segment revenue during the year ended
December 31, 2016
by $15.2 million and resulted in a negative impact on ARPS of $2.56. The remaining increase in ARPS was primarily attributable to additional purchases by existing subscribers, including price increases.
Domain APRS
decreased
from
$20.34
for the year ended December 31, 2016 to
$16.98
for the year ended
December 31, 2017
. This decrease was primarily due to increases in light web presence subscribers, which generally acquire lower priced products. In addition, a decrease in non-subscriber revenue, including domain monetization and marketing development funds, from $30.1 million for fiscal year 2016 to $27.6 million for fiscal year 2017, decreased ARPS by $1.00.
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, impairment of other long-lived assets, SEC investigations reserve (which refers to an $8.0 million reserve we recorded in the third quarter of 2017 in connection with the Securities and Exchange Commission ("SEC") investigations initiated against Endurance and Constant Contact in December 2015, which we settled in June 2018), and shareholder litigation reserve. 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,
|
|
2016
|
|
2017
|
|
2018
|
Consolidated
|
(in thousands)
|
Net income (loss)
|
$
|
(81,229
|
)
|
|
$
|
(99,784
|
)
|
|
$
|
4,534
|
|
Interest expense, net
(1)
|
152,312
|
|
|
156,406
|
|
|
148,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
(109,858
|
)
|
|
(17,281
|
)
|
|
(6,246
|
)
|
Depreciation
|
60,360
|
|
|
55,185
|
|
|
48,207
|
|
Amortization of other intangible assets
|
143,562
|
|
|
140,354
|
|
|
103,148
|
|
Stock-based compensation
|
58,267
|
|
|
60,001
|
|
|
29,064
|
|
Restructuring expenses
|
24,224
|
|
|
15,810
|
|
|
3,368
|
|
Transaction expenses and charges
|
32,284
|
|
|
773
|
|
|
—
|
|
(Gain) loss of unconsolidated entities
(2)
|
(565
|
)
|
|
(110
|
)
|
|
267
|
|
Impairment of other long-lived assets
|
9,039
|
|
|
31,460
|
|
|
—
|
|
SEC investigations reserve
|
—
|
|
|
8,000
|
|
|
—
|
|
Shareholder litigation reserve
|
—
|
|
|
—
|
|
|
7,325
|
|
Adjusted EBITDA
|
$
|
288,396
|
|
|
$
|
350,814
|
|
|
$
|
338,058
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
Web presence
|
(in thousands)
|
Net income (loss)
|
$
|
(22,161
|
)
|
|
$
|
(64,962
|
)
|
|
$
|
(22,534
|
)
|
Interest expense, net
(1)
|
68,617
|
|
|
67,491
|
|
|
70,956
|
|
Income tax expense (benefit)
|
(78,901
|
)
|
|
4,063
|
|
|
(4,961
|
)
|
Depreciation
|
33,590
|
|
|
37,634
|
|
|
32,915
|
|
Amortization of other intangible assets
|
72,733
|
|
|
60,277
|
|
|
47,020
|
|
Stock-based compensation
|
41,481
|
|
|
46,641
|
|
|
16,000
|
|
Restructuring expenses
|
1,625
|
|
|
9,131
|
|
|
2,135
|
|
Transaction expenses and charges
|
31,260
|
|
|
—
|
|
|
—
|
|
(Gain) loss of unconsolidated entities
(2)
|
(565
|
)
|
|
(110
|
)
|
|
267
|
|
Impairment of other long-lived assets
|
9,039
|
|
|
600
|
|
|
—
|
|
SEC investigations reserve
|
—
|
|
|
4,323
|
|
|
—
|
|
Shareholder litigation reserve
|
—
|
|
|
—
|
|
|
4,780
|
|
Adjusted EBITDA
|
$
|
156,718
|
|
|
$
|
165,088
|
|
|
$
|
146,578
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
Email marketing
|
(in thousands)
|
Net income (loss)
|
$
|
(55,857
|
)
|
|
$
|
(10,615
|
)
|
|
$
|
38,628
|
|
Interest expense, net
(1)
|
81,469
|
|
|
86,914
|
|
|
68,317
|
|
Income tax expense (benefit)
|
(33,543
|
)
|
|
5,152
|
|
|
115
|
|
Depreciation
|
23,747
|
|
|
13,912
|
|
|
11,497
|
|
Amortization of other intangible assets
|
64,679
|
|
|
74,467
|
|
|
53,100
|
|
Stock-based compensation
|
12,403
|
|
|
6,934
|
|
|
9,638
|
|
Restructuring expenses
|
22,379
|
|
|
5,581
|
|
|
589
|
|
Transaction expenses and charges
|
984
|
|
|
773
|
|
|
—
|
|
(Gain) loss of unconsolidated entities
(2)
|
—
|
|
|
—
|
|
|
—
|
|
Impairment of other long-lived assets
|
—
|
|
|
—
|
|
|
—
|
|
SEC investigations reserve
|
—
|
|
|
2,751
|
|
|
—
|
|
Shareholder litigation reserve
|
—
|
|
|
—
|
|
|
1,500
|
|
Adjusted EBITDA
|
$
|
116,261
|
|
|
$
|
185,869
|
|
|
$
|
183,384
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
Domain
|
(in thousands)
|
Net income (loss)
|
$
|
(3,211
|
)
|
|
$
|
(24,207
|
)
|
|
$
|
(11,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
(1)
|
2,226
|
|
|
2,001
|
|
|
9,118
|
|
Income tax expense (benefit)
|
2,586
|
|
|
(26,496
|
)
|
|
(1,400
|
)
|
Depreciation
|
3,023
|
|
|
3,639
|
|
|
3,795
|
|
Amortization of other intangible assets
|
6,150
|
|
|
5,610
|
|
|
3,028
|
|
Stock-based compensation
|
4,383
|
|
|
6,426
|
|
|
3,426
|
|
Restructuring expenses
|
220
|
|
|
1,098
|
|
|
644
|
|
Transaction expenses and charges
|
40
|
|
|
—
|
|
|
—
|
|
(Gain) loss of unconsolidated entities
(2)
|
—
|
|
|
—
|
|
|
—
|
|
Impairment of other long-lived assets
|
—
|
|
|
30,860
|
|
|
—
|
|
SEC investigations reserve
|
—
|
|
|
926
|
|
|
—
|
|
Shareholder litigation reserve
|
—
|
|
|
—
|
|
|
1,045
|
|
Adjusted EBITDA
|
$
|
15,417
|
|
|
$
|
(143
|
)
|
|
$
|
8,096
|
|
|
|
(1)
|
Interest expense includes impact of amortization of deferred financing costs, original issuance discounts and interest income. For the years ended December 31, 2017 and 2018, it also includes $6.5 million and $1.2 million, respectively, of deferred financing costs and original issuance discounts (OID) immediately expensed upon the refinancings of our term loan in 2017 and 2018.
|
|
|
(2)
|
For all years presented, (gain) loss of unconsolidated entities is reported on a net basis, which includes our proportionate share of net (income) losses from unconsolidated entities, any (gain) loss recorded when we acquired our controlling interest in these entities and any impairments related to these entities. The year ended December 31, 2016 includes an $11.4 million gain recorded upon our acquisition of a controlling interest in WZ (UK), Ltd., a loss of $4.8 million upon our acquisition of a controlling interest in AppMachine B.V. ("AppMachine"), and a loss of $4.7 million on the impairment of our 33% equity investment in Fortifico Limited.
|
Comparison of the Years Ended
December 31, 2017
and
2018
: Net Income (Loss) and Adjusted EBITDA
Net income (loss) on a consolidated basis improved from a net loss of
$99.8 million
for the year ended
December 31, 2017
to net income of
$4.5 million
for the year ended
December 31, 2018
. This change was primarily due to improved net income (loss) from our email marketing, web presence and domain segments of $49.2 million, $42.4 million, and $12.6 million, respectively. These improvements in segment net loss were significantly impacted by changes in stock-based compensation, amortization expense, impairment charges, restructuring charges and cost of revenue, among other factors, as described more fully below. We expect net income for fiscal year 2019 to be relatively close to the amount earned in fiscal year 2018, since we anticipate that our continued investment in engineering and development will be largely offset by lower amortization of intangible assets.
Net loss for our web presence segment
decreased
from
$65.0 million
for the year ended
December 31, 2017
to
$22.5 million
for the year ended
December 31, 2018
. The decrease in net loss was primarily related to lower stock-based compensation of $30.6 million, lower amortization expense of $13.3 million, lower operating expenses of $10.4 million, lower cost of revenue costs of $7.8 million, lower restructuring charges of $7.0 million, lower income tax expense of $9.0 million, and lower depreciation expense of $4.7 million. These factors were partially offset by a $36.7 million decrease in revenue, and higher interest expense of $3.5 million.
Net income (loss) for our email marketing segment improved from a net loss of
$10.6 million
for the year ended
December 31, 2017
to a net income of
$38.6 million
for the year ended
December 31, 2018
. This improvement was primarily related to reduced amortization expense of $21.4 million, reduced interest expense allocated to our email marketing segment of $18.6 million, increased revenue of $8.8 million, and other cost reductions, consisting mainly of lower restructuring costs and lower income tax expenses totaling $14.1 million. These increases in net income were partially offset by increased engineering and development expenses.
Net loss for our domain segment
decreased
from
$24.2 million
for the year ended
December 31, 2017
to
$11.6 million
for the year ended
December 31, 2018
. This decrease was primarily due to a reduction of $30.9 million in impairment charges related to both goodwill and long-lived assets which was incurred in the year ended December 31, 2017 and did not reoccur in the year ended December 31, 2018, and lower costs of revenue of $8.0 million, primarily related to lower domain registration costs. These cost decreases were partially offset by a reduction of the allocated income tax benefit of $25.1 million, and other net cost increases of $1.2 million.
Adjusted EBITDA on a consolidated basis
decreased
from
$350.8 million
for the year ended
December 31, 2017
to
$338.1 million
for the year ended
December 31, 2018
. This decrease is primarily attributable to our web presence and email marketing segments, partially offset by an increase in our domain segment as described below. We expect a similar decrease in Adjusted EBITDA from fiscal year 2018 to fiscal year 2019, as we continue to invest in engineering and development.
Adjusted EBITDA for our web presence segment
decreased
from
$165.1 million
for the year ended
December 31, 2017
to
$146.6 million
for the year ended
December 31, 2018
. This decrease was primarily due to a $36.7 million decline in revenue and to increased engineering and development expense of $3.6 million. This decrease was partially offset by an $8.1 million decrease in sales and marketing expense, which primarily consisted of reduced expenditures on non-strategic brands; lower cost of revenue of $7.8 million, primarily due to lower support costs and data center costs; and lower general and administrative expense of $5.9 million, primarily due to lower labor costs.
Adjusted EBITDA for our email marketing segment
decreased
from
$185.9 million
for the year ended
December 31, 2017
to
$183.4 million
for the year ended
December 31, 2018
. This decrease was primarily attributable to increased engineering and development costs of $9.7 million, primarily due to increased labor and higher sales and marketing costs of $3.9 million, primarily due to higher marketing program spend. This decrease was partially offset by $8.8 million of revenue growth (which includes the impact of price increases); lower general and administrative expense of $1.6 million; and lower cost of revenue of $0.8 million, primarily due to lower data center costs.
Adjusted EBITDA for our domain segment
increased
from loss of
$0.1 million
for the year ended
December 31, 2017
to income of
$8.1 million
for the year ended
December 31, 2018
. This increase was attributable to lower cost of revenue of $8.0 million, primarily due to lower domain registration costs and lower support costs; lower general and administrative expenses of $5.0 million, primarily due to labor costs; and lower sales and marketing related costs of $0.3 million, primarily related to changes in labor and program spend. This increase was partially offset by a $3.7 million decrease in revenue, most of which related to domain monetization, and higher engineering and development costs of $1.4 million, primarily due to increased labor costs.
Comparison of the Years Ended
December 31, 2016
and
2017
: Net Income and Adjusted EBITDA
Net loss on a consolidated basis increased from
$81.2 million
for the year ended
December 31, 2016
to
$99.8 million
for the year ended
December 31, 2017
. This increase in net loss was primarily due to an increased net loss from our web presence segment of $42.8 million and an increased net loss in our domain segment of $21.0 million. These increases in net loss were partially offset by a decrease in email marketing segment net loss of $45.3 million. Theses changes in segment net loss were significantly impacted by changes in income tax benefits, impairment charges, the SEC investigations reserve, and changes in stock-based compensation and restructuring charges, as described more fully below.
Net loss for our web presence segment increased from
$22.2 million
for the year ended
December 31, 2016
to
$65.0 million
for the year ended
December 31, 2017
. The increase in net loss was primarily related to a decrease in our income tax benefit of $83.0 million, higher restructuring charges of $7.5 million, a $6.7 million decrease in revenue, higher stock-based compensation of $5.2 million and an allocation of the SEC investigations reserve of $4.3 million in 2017. These factors were partially offset by lower acquisition transaction costs of $31.3 million and lower marketing expense of $31.4 million as we reduced spending on our gateway products.
Net loss for our email marketing segment decreased from
$55.9 million
for the year ended
December 31, 2016
to
$10.6 million
for the year ended
December 31, 2017
. The decrease was primarily related to lower costs as a result of the Constant Contact 2016 restructuring plan, including lower restructuring costs of $16.8 million, and the inclusion of Constant Contact for a full twelve months in fiscal year 2017.
Net loss for our domain segment increased from
$3.2 million
for the year ended
December 31, 2016
to
$24.2 million
for the year ended
December 31, 2017
. This increase was primarily due to $30.9 million of impairment charges related to both goodwill and long-lived assets, increased net loss of $7.4 million related to our international expansion efforts, lower revenue of $2.0 million mainly related to domain monetization, increased stock-based compensation expense of $2.0 million, and an allocation of the SEC investigations reserve of $0.9 million. These factors were partially offset by an increased income tax benefit of $29.1 million.
Adjusted EBITDA on a consolidated basis increased from
$288.4 million
for the year ended
December 31, 2016
to
$350.8 million
for the year ended
December 31, 2017
. Substantially all of this increase is attributable to our email marketing segment as described below.
Adjusted EBITDA for our web presence segment increased from
$156.7 million
for the year ended
December 31, 2016
to
$165.1 million
for the year ended
December 31, 2017
. This increase was attributable to a $31.4 million decrease in sales and marketing expense, which primarily consisted of reduced expenditures on gateway products and other non-strategic brands. This was partially offset by a $6.7 million decline in revenue, increased engineering expense of $8.9 million, higher domain registration costs of $0.8 million and $3.9 million of costs to transition customer support formerly based in Utah to our Arizona customer support center, which we refer to as the "customer support consolidation."
Adjusted EBITDA for our email marketing segment increased from
$116.3 million
for the year ended
December 31, 2016
to
$185.9 million
for the year ended
December 31, 2017
. This increase was primarily attributable to $15.7 million of
revenue growth (which includes the impact of price increases), the negative $15.2 million impact of the Constant Contact purchase adjustment in 2016, and the inclusion of Constant Contact results for the entire year in fiscal year 2017, which increased adjusted EBITDA by $7.9 million. The remainder of the increase related mostly to cost reduction actions implemented during fiscal year 2016.
Adjusted EBITDA for our domain segment decreased from income of
$15.4 million
for the year ended
December 31, 2016
to loss of
$0.1 million
for the year ended
December 31, 2017
. This decrease was attributable to a $2.0 million decrease in revenue, most of which related to domain monetization, combined with a $21.0 million increase in net loss related primarily to our international expansion efforts.
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 automatically renew a subscription at the end of the subscription period. Due to factors such as discounted introductory pricing, our renewal fees may be higher than our initial subscription. A majority of our web presence segment and domain segment subscriptions have terms of 24 months or less, 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.
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 actual data center facility and network equipment costs and 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 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. 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 expense due to the significance of the costs incurred to acquire Constant Contact. In 2017, we started breaking out impairment of goodwill due to the significance of the charge incurred in our domain segment.
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.
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.
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.
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 original issue discounts and the amortization of the net present value adjustment which we may apply to some deferred consideration payments related to our acquisitions in our calculation of interest expense. Interest income consists primarily of interest income earned on our cash and cash equivalents balances.
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.
Please see Note 2 of Part II, Item 8 of this Annual Report on Form 10-K for a discussion of recently issued accounting pronouncements.
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 and delivery of an authorization key to access the domain name has occurred. Premium domain names are paid for in advance prior to the delivery of the domain name.
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.
Contracts with Multiple Performance Obligations
A considerable amount of the Company's revenue is generated from transactions that are contracts with customers that may include hosting plans, domain name registrations, and other cloud-based products and services. In these cases, the Company determines whether the products and services are distinct performance obligations that should be accounted for separately versus together. The Company allocates revenue to each performance obligation based on its relative standalone selling price, generally based on the price charged to customers. Hosting services, domain name registrations, and other cloud-based products and services have distinct performance obligations and are often sold separately. If the promise is not distinct and there is not a performance obligation, then the total transaction amount is allocated to the identified performance obligation based on a relative selling price hierarchy. When multiple performance obligations are included in a contract, the total transaction amount for the contract is allocated to the performance obligations based on a relative selling price hierarchy. The Company determines the relative selling price for a performance obligation based on a standalone selling price ("SSP"). The Company determines SSP by considering its observed standalone selling prices, competitive prices in the marketplace and management judgment; these standalone selling prices may vary depending upon the particular facts and circumstances related to each performance obligation. The Company analyzes the standalone selling prices used in its allocation of transaction amount, at a minimum, on a quarterly basis.
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
$0.4 million
as of
December 31, 2017
and
2018
, respectively. The portion of deferred revenue that is expected to be refunded at
December 31, 2017
and
2018
was
$1.8 million
and
$2.2 million
, respectively. Based on refund history, approximately
83%
of all refunds happen in the same fiscal month that the customer contract starts or renews, and approximately
95%
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. We have historically performed our annual goodwill test as of December 31 of each fiscal year. As a result of changes in our management structure during fiscal year 2017, including the change in our chief executive officer, we have revised our internal financial reporting structure, which has resulted in a change to our reporting units. We have identified a total of ten reporting units under our new structure. With the increase in reporting units, we determined that more time would be required to perform future goodwill impairment tests, and as a result, decided to accelerate our annual goodwill impairment test date to October 31 of each fiscal year, starting with the fiscal year 2017 test. We also early adopted the provisions of ASU 2017-04 in fiscal year 2017, which eliminates the second step of the goodwill impairment test. As a result, our goodwill impairment test as of October 31, 2017 and all future goodwill impairment tests include only one step, which is a comparison of the carrying value of each reporting unit to its fair value, and any excess carrying value, up to the amount of goodwill allocated to that reporting unit, is impaired.
Before testing goodwill at October 31, 2017, we allocated assets and liabilities to their respective reporting units. Goodwill was allocated to each reporting unit in accordance with ASC 350-20-40, which requires that goodwill be allocated based on the relative fair values of each reporting unit. After completing this valuation process, we allocated goodwill to seven reporting units. We did not allocate any goodwill to three smaller reporting units that were determined to have no material fair value.
The carrying value of each reporting unit is based on the assignment of the appropriate assets and liabilities to each reporting unit. Assets and liabilities were assigned to our reporting units if the assets or liabilities are employed in the operations of the reporting unit and the asset and liability is considered in the determination of the reporting unit fair value. Certain assets and liabilities are shared by multiple reporting units, and were allocated to each reporting unit based on the relative size of a reporting unit, primarily based on revenue.
Our goodwill impairment test as of October 31, 2017 resulted in a $12.1 impairment of goodwill to our domain monetization reporting unit within our domain segment. The impairment was a direct result of a more rapid decline in domain parking revenue than originally expected, and to a lesser extent, reduced sales of premium domain names. Goodwill for this reporting unit has been completely impaired. Goodwill allocated to the other six reporting units was not impaired. As of the test date of October 31, 2018, the fair value for all reporting units was higher than their respective carrying values, and
no
impairment has been recorded. No triggering events were identified between the October 31, 2018 test and December 31, 2018.
We determine the fair value of each reporting unit by utilizing the income approach and market approach. For the income approach, fair value is determined based on the present value of estimated future after-tax cash flows, discounted at an appropriate risk adjusted rate. We derive our discount rates using a capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the weighted average cost of capital. We use discount rates that are commensurate with the risks and uncertainty inherent in our business and in our internally developed forecasts. For fiscal years 2017 and 2018, we used a discount rate of 10.0% for all but one of our reporting units. We also performed sensitivity analysis on our discount rates. We use our internal forecasts to estimate future after-tax cash flows and include an estimate of long-term future growth rates based on our view of long-term outlook for each reporting unit. Actual results may differ from those assumed in our forecasts. For the market approach, we use a valuation technique in which values are derived based on valuation multiples from comparable public companies, and a valuation multiple from sales of comparable companies.
For our fiscal year 2017 goodwill impairment analysis, we compared the fair value from the income approach to the market approach based on multiples of comparable public companies and noted no material variances in the valuation techniques. For our fiscal 2018 goodwill impairment analysis, we compared the fair value from the income approach to two market approaches, which included a valuation multiple of comparable public companies and a valuation multiple from sales of comparable companies. For three of our reporting units, which represent approximately 95% of our goodwill, the fair value derived from the income approach was consistent with the fair value derived from the two market approaches. We established fair value for these reporting units based on the average fair value from all three valuation approaches.
For two of our reporting units, which represent approximately 3% of our goodwill, we based their fair value entirely upon the income approach, as these two reporting units are experiencing declining cash flows and are expected to continue to experience declines over time. The fair values from the income approach for these two reporting units were materially below the fair values derived from both market approaches. The goodwill allocated to these two reporting units is approximately $64.2 million as of December 31, 2018. Although we do not expect an impairment of goodwill for these two reporting units in the near term, we do expect that cash flows will continue to decline which could result in goodwill impairment charges for these two reporting units at some point in the future.
For one of our reporting units, which represents approximately 2% of our goodwill, the fair values derived from the market approaches were much lower than the income approach using a discount rate of 10%. We determined that more risk was present in the projected future cash flows of this reporting unit as compared to our other reporting units, and determined that a discount rate of 17% was appropriate. The fair value of this reporting unit under the income approach at a discount rate of 17% was consistent with the fair values determined under the two market approaches. We established fair value for this reporting unit based on the average fair value from all three valuation approaches.
Goodwill as of
December 31, 2018
is
$1,849.1 million
. The carrying value of goodwill that was allocated to the domain, email marketing and web presence reporting segments was
$29.9 million
,
$604.3 million
and
$1,214.9 million
, respectively.
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.
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 income (loss) in our web presence segment.
Additionally, we recognized an impairment charge of
$4.9 million
for technology assets related to Webzai Ltd, or Webzai, which was recorded in engineering and development expense in the consolidated statements of operations and comprehensive income (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.
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.
During the year ended December 31, 2017, we recognized an impairment charge of $13.8 million relating to certain domain name intangible assets acquired in 2014, as the intangible assets were producing diminished cash flows. In addition, we
recognized an impairment charge of $4.9 million primarily relating to developed technology and customer relationships associated with our acquisition of the Directi web presence business in 2014. This impairment also resulted from diminished cash flows associated with these intangible assets.
We did not recognize any impairments of long-lived intangible and tangible assets in the year ended December 31, 2018.
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 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 year ended December 31, 2016. We recorded unrecognized tax benefits for uncertain tax positions of
$1.1 million
and
$4.4 million
in the years ended
December 31, 2017
and
2018
, respectively.
We record interest related to unrecognized tax benefits in interest expense and penalties in operating expense. We recognized no interest or penalties related to unrecognized tax benefits during the year ended December 31, 2016. The Company recognized immaterial interest and penalties related to unrecognized tax benefits during the years ended December 31, 2016 and 2017,
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 had a statutory tax rate of 25% and represents $8.3 million of our foreign losses.
In 2017, a significant amount of our GAAP foreign losses were generated by our subsidiaries in India and the Netherlands. The foreign rate differential in 2017 predominantly related to our subsidiaries in the United Kingdom. Our foreign rate differential in 2017 had a positive impact on our expected tax expense since the majority of the foreign income is 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 the Netherlands that has a statutory rate of 25%.
In 2018, our GAAP foreign losses were generated by our subsidiaries in India and China. The foreign rate differential in 2018 predominantly related to our subsidiary in Brazil. Our foreign rate differential in 2018 had a negative impact on our expected tax expense since the majority of the foreign income is generated in jurisdictions where the statutory tax rate is higher than the U.S. statutory rate - specifically Brazil, which has a statutory tax rate of 34%.
We describe our accounting treatment of taxes more fully in Note
15
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, 2018. 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 a blended average of the historical volatility measures of this peer group of companies and of the historical volatility measures of our stock. 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 required us to reflect any adjustments as of January 1, 2016, the beginning of the annual period that included 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 income (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
From the fourth quarter of fiscal year 2016 through the third quarter of fiscal year 2017, we had two reportable segments, web presence and email marketing. We have experienced significant changes in our management structure during fiscal year 2017, including a change in our chief executive officer. Our leadership structure has been revised to centralize management of certain domain-leading brands in order to improve overall performance. As a result of these management changes, we have revised our internal financial reporting structure, and broken our former web presence segment into two reportable segments, web presence and domain. Our third reportable segment, email marketing, remains unchanged.
The products and services included in our three reportable segments are as follows:
Web Presence
. Our web presence segment consists primarily of our web hosting brands, the largest of which are Bluehost and HostGator. This segment also includes related products such as domain names, website security, website design tools and services, and e-commerce products.
Domain
. Our domain segment consists of domain-focused brands such as Domain.com, ResellerClub and LogicBoxes as well as certain web hosting brands that are under common management with our domain-focused brands. This segment sells domain names and domain management services to resellers and end users, as well as premium domain names, and also generates advertising revenue from domain name parking. It also resells domain names and domain management services to our web presence segment.
Email Marketing
. Our email marketing segment consists of Constant Contact email marketing tools and related products and our SinglePlatform digital storefront solution.
Our segments share certain resources, primarily related to sales and marketing, engineering and general and administrative functions. We allocate these costs to each respective segment based on a consistently applied methodology.
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,
|
|
2016
|
|
2017
|
|
2018
|
|
(in thousands)
|
Revenue
|
$
|
1,111,142
|
|
|
$
|
1,176,867
|
|
|
$
|
1,145,291
|
|
Cost of revenue
|
583,991
|
|
|
603,930
|
|
|
520,737
|
|
Gross profit
|
527,151
|
|
|
572,937
|
|
|
624,554
|
|
Operating expense:
|
|
|
|
|
|
Sales and marketing
|
303,511
|
|
|
277,460
|
|
|
265,424
|
|
Engineering and development
|
87,601
|
|
|
78,772
|
|
|
87,980
|
|
General and administrative
|
143,095
|
|
|
163,972
|
|
|
124,204
|
|
Impairment of goodwill
|
—
|
|
|
12,129
|
|
|
—
|
|
Transaction expenses
|
32,284
|
|
|
773
|
|
|
—
|
|
Total operating expense
|
566,491
|
|
|
533,106
|
|
|
477,608
|
|
(Loss) income from operations
|
(39,340
|
)
|
|
39,831
|
|
|
146,946
|
|
Other income (expense)
|
(150,450
|
)
|
|
(157,006
|
)
|
|
(148,391
|
)
|
Loss before income taxes and equity earnings of unconsolidated entities
|
(189,790
|
)
|
|
(117,175
|
)
|
|
(1,445
|
)
|
Income tax benefit
|
(109,858
|
)
|
|
(17,281
|
)
|
|
(6,246
|
)
|
(Loss) income before equity earnings of unconsolidated entities
|
(79,932
|
)
|
|
(99,894
|
)
|
|
4,801
|
|
Equity loss (income) of unconsolidated entities, net of tax
|
1,297
|
|
|
(110
|
)
|
|
267
|
|
Net (loss) income
|
$
|
(81,229
|
)
|
|
$
|
(99,784
|
)
|
|
$
|
4,534
|
|
Net (loss) income attributable to non-controlling interest
|
(8,398
|
)
|
|
7,524
|
|
|
—
|
|
Net (loss) income attributable to Endurance International Group Holdings, Inc.
|
$
|
(72,831
|
)
|
|
$
|
(107,308
|
)
|
|
$
|
4,534
|
|
Comparison of the Years Ended
December 31, 2017
and
2018
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Change
|
|
2017
|
|
2018
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Revenue
|
$
|
1,176,867
|
|
|
$
|
1,145,291
|
|
|
$
|
(31,576
|
)
|
|
(3
|
)%
|
Revenue
decreased
by
$31.6 million
, or
3%
, from
$1,176.9 million
for the year ended
December 31, 2017
to
$1,145.3 million
for the year ended
December 31, 2018
. This decrease is attributable to a $36.7 million decrease in revenue from our web presence segment and a $3.7 million decrease in revenue from our domain segment, partially offset by increased revenue of $8.8 million from our email marketing segment.
Our revenue is 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. We also generate non-subscription revenue through domain monetization and marketing development funds. Non-subscription revenue
decreased
from
$39.4 million
, or
3%
of revenue for the year ended
December 31, 2017
to
$35.1 million
, or
3%
of total revenue for the year ended
December 31, 2018
. The majority of our non-subscription revenue is included in our domain segment.
Our web presence segment revenue
decreased
by
$36.7 million
, or
6%
, from
$642.0 million
for the year ended
December 31, 2017
to
$605.3 million
for the year ended
December 31, 2018
. This decrease was primarily attributable to a decline in revenue from non-strategic brands.
Our email marketing segment revenue
increased
by
$8.8 million
, or
2%
, from
$401.3 million
for the year ended
December 31, 2017
to
$410.1 million
for the year ended
December 31, 2018
. This increase was mostly attributable to price increases, and to a lesser extent, growth in services delivered to existing customers.
Our domain segment revenue
decreased
by
$3.7 million
, or
3%
, from
$133.6 million
for the year ended
December 31, 2017
to
$129.9 million
for the year ended
December 31, 2018
, which was caused in part by a reduction in non-subscriber revenues, mainly domain monetization revenue, of $1.9 million, with the balance of the decrease related to declines in subscription based revenues.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2017
|
|
2018
|
|
Change
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Cost of revenue
|
$
|
603,930
|
|
|
51
|
%
|
|
$
|
520,737
|
|
|
45
|
%
|
|
$
|
(83,193
|
)
|
|
(14
|
)%
|
Cost of revenue
decreased
by
$83.2 million
, or
14%
, from
$603.9 million
for the year ended
December 31, 2017
to
$520.7 million
for the year ended
December 31, 2018
. This decrease was due to decreased cost of revenue across our three segments, as further discussed below, including the impact of an $18.7 million impairment charge incurred in our domain segment in fiscal 2017. We expect cost of revenue to decline slightly in fiscal year 2019 as compared to fiscal year 2018, as we anticipate that our amortization expense will decrease by approximately $20.0 million.
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. The following table sets forth the significant non-cash components of cost of revenue.
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2018
|
|
(in thousands)
|
Amortization expense
|
$
|
140,354
|
|
|
$
|
103,148
|
|
Depreciation expense
|
46,235
|
|
|
42,548
|
|
Stock-based compensation expense
|
6,135
|
|
|
3,823
|
|
Cost of revenue for our web presence segment
decreased
by
$28.7 million
, or
9%
, from
$336.4 million
for the year ended
December 31, 2017
to
$307.7 million
for the year ended
December 31, 2018
. The decrease was primarily the result of lower amortization expense of $13.3 million and lower stock-based compensation expense of $3.3 million. The balance of the decrease was mostly related to lower customer support and data center costs as we further consolidated our operations in these areas.
Cost of revenue for our email marketing segment
decreased
by
$24.3 million
, or
17%
, from
$146.3 million
for the year ended
December 31, 2017
to
$122.0 million
for the year ended
December 31, 2018
. The decrease was primarily attributable to lower amortization expense of $21.4 million.
Cost of revenue for our domain segment
decreased
by
$30.2 million
, or
25%
, from
$121.2 million
for the year ended
December 31, 2017
to
$91.0 million
for the year ended
December 31, 2018
. The decrease was mostly due to an impairment
charge of $18.7 million recorded in fiscal year 2017, which was related primarily to domain monetization intangible assets, and reduced amortization expense of $2.6 million. The balance of the decrease was primarily related to reduced domain registration costs, as we discontinued certain low priced product offerings.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2017
|
|
2018
|
|
Change
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Gross profit
|
$
|
572,937
|
|
|
49
|
%
|
|
$
|
624,554
|
|
|
55
|
%
|
|
$
|
51,617
|
|
|
9
|
%
|
Gross profit
increased
by
$51.6 million
, or
9%
, from
$572.9 million
for the year ended
December 31, 2017
to
$624.6 million
for the year ended
December 31, 2018
. This increase was primarily due to a $33.1 million increase in the gross profit contribution from our email marketing segment, and a $26.5 million increase in the gross profit contribution from our domain segment, partially offset by an $8.0 million decrease in the gross profit contribution from our web presence segment. Our gross profit as a percentage of revenue increased by 6 percentage points from
49%
for the year ended
December 31, 2017
to
55%
for the year ended
December 31, 2018
, mainly due to the performance of our email marketing segment.
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,
|
|
2017
|
|
2018
|
|
(dollars in thousands)
|
Revenue
|
$
|
1,176,867
|
|
|
$
|
1,145,291
|
|
Gross profit
|
572,937
|
|
|
624,554
|
|
Gross profit % of revenue
|
49
|
%
|
|
55
|
%
|
Amortization expense % of revenue
|
12
|
%
|
|
9
|
%
|
Depreciation expense % of revenue
|
4
|
%
|
|
4
|
%
|
Stock-based compensation expense % of revenue
|
*
|
|
|
*
|
|
Our web presence segment gross profit
decreased
by
$8.0 million
, or
3%
, from
$305.6 million
for the year ended
December 31, 2017
to
$297.6 million
for the year ended
December 31, 2018
. The decrease was primarily due to the reduction in revenue of $36.7 million discussed above, which was partially offset by the lower cost of revenue discussed above. Our web presence segment gross profit as a percentage of revenue was 49% for the year ended December 31, 2018 as compared to 48% in the prior year.
Our email marketing segment gross profit
increased
by
$33.1 million
, or
13%
, from
$254.9 million
for the year ended
December 31, 2017
to
$288.0 million
for the year ended
December 31, 2018
. This increase was primarily due to reduced cost of revenue of $24.3 million and increased revenue of $8.8 million, as described above. Our email marketing segment gross profit as a percentage of revenue was 70% for the year ended December 31, 2018 as compared to 64% in the prior year.
Our domain segment gross profit
increased
by
$26.5 million
, or
214%
, from
$12.4 million
for the year ended
December 31, 2017
to
$38.9 million
for the year ended
December 31, 2018
. This increase was primarily due to the reductions in cost of revenue described above. Our domain segment gross profit as a percentage of revenue was 30% for the year ended December 31, 2018 as compared to 9% in the prior year.
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2017
|
|
2018
|
|
Change
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Sales and marketing
|
$
|
277,460
|
|
|
24
|
%
|
|
$
|
265,424
|
|
|
23
|
%
|
|
$
|
(12,036
|
)
|
|
(4
|
)%
|
Engineering and development
|
78,772
|
|
|
7
|
%
|
|
87,980
|
|
|
8
|
%
|
|
9,208
|
|
|
12
|
%
|
General and administrative
|
163,972
|
|
|
14
|
%
|
|
124,204
|
|
|
11
|
%
|
|
(39,768
|
)
|
|
(24
|
)%
|
Impairment of goodwill
|
12,129
|
|
|
1
|
%
|
|
—
|
|
|
—
|
%
|
|
(12,129
|
)
|
|
(100
|
)%
|
Transaction expenses
|
773
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
(773
|
)
|
|
(100
|
)%
|
Total
|
$
|
533,106
|
|
|
46
|
%
|
|
$
|
477,608
|
|
|
42
|
%
|
|
$
|
(55,498
|
)
|
|
(10
|
)%
|
Sales and Marketing.
Sales and marketing expense
decreased
by
$12.0 million
, or
4%
, from
$277.5 million
for the year ended
December 31, 2017
to
$265.4 million
for the year ended
December 31, 2018
. Of this decrease,
$13.0 million
was due to lower marketing expense in our web presence segment, primarily due to decreased marketing investments in non-strategic brands, partially offset by an increase of
$1.1 million
in our email marketing segment.
Sales and marketing expense for our web presence segment
decreased
by
$13.0 million
, or
8%
, from
$160.7 million
for the year ended
December 31, 2017
to
$147.7 million
for the year ended
December 31, 2018
. This decrease was primarily attributable to reduced expense on non-strategic brands, which was partially offset by increased investments in key hosting brands.
Sales and marketing expense for our email marketing segment
increased
by
$1.1 million
, or
1%
, from
$96.8 million
for the year ended
December 31, 2017
to
$97.8 million
for the year ended
December 31, 2018
. The increase, which is net of a $1.9 million decrease in restructuring charges, is primarily due to investments in brand building activities.
Sales and marketing expense for our domain segment
decreased
by
$0.1 million
, or
0%
, from
$20.0 million
for the year ended
December 31, 2017
to
$19.9 million
for the year ended
December 31, 2018
. This decrease was primarily attributable to lower labor costs of $1.4 million, partially offset by increased marketing program spend of $1.1 million and higher stock-based expense of $0.2 million.
Engineering and Development.
Engineering and development expense
increased
by
$9.2 million
, or
12%
, from
$78.8 million
for the year ended
December 31, 2017
to
$88.0 million
for the year ended
December 31, 2018
. Of this increase,
$7.9 million
and
$1.5 million
were due to increased engineering and development expense for our email marketing and domain segments, respectively, partially offset by slightly reduced expense for our web presence segment. For fiscal year 2019, we expect to continue to make investments in our engineering and development organization in order to further enhance our products.
Engineering and development expense for our web presence segment
decreased
by
$0.2 million
, or
0%
, from
$39.2 million
for the year ended
December 31, 2017
to
$39.0 million
for the year ended
December 31, 2018
. This decrease was primarily attributable to lower depreciation and stock-based compensation expense of $3.4 million. These cost decreases were almost completely offset by growth in engineering resources aimed at enhancing our products.
Engineering and development expense for our email marketing segment
increased
by
$7.9 million
, or
23%
, from
$33.4 million
for the period ended
December 31, 2017
to
$41.3 million
for the year ended
December 31, 2018
. This increase was primarily attributable to increases in engineering resources aimed at enhancing our products.
Engineering and development expense for our domain segment
increased
by approximately
$1.5 million
, or
25%
, from
$6.1 million
for the year ended
December 31, 2017
to
$7.7 million
for the year ended
December 31, 2018
. This increase was primarily attributable to increases in engineering resources aimed at enhancing our products.
General and Administrative.
General and administrative expense
decreased
by
$39.8 million
, or
24%
, from
$164.0 million
for the year ended
December 31, 2017
to
$124.2 million
for the year ended
December 31, 2018
. Our general and administrative expenses primarily consist of consolidated corporate wide support functions, and the costs of these functions are allocated between our three segments primarily based on relative revenues. The decrease in consolidated general and administrative expense was primarily attributable to reductions in stock-based compensation, labor, and restructuring costs of $23.8 million, $12.6 million, and $4.4 million, respectively, and changes in our shareholder litigation reserve charges of $0.7 million.
General and administrative expense for our web presence segment
decreased
by
$31.5 million
, or
32%
, from
$98.6 million
for the year ended
December 31, 2017
to
$67.1 million
for the year ended
December 31, 2018
. General and administrative expense for our email marketing segment
decreased
by
$0.7 million
, or
2%
, from
$42.5 million
for the period ended
December 31, 2017
to
$41.9 million
for the year ended
December 31, 2018
. General and administrative expense for our domain segment
decreased
by
$7.6 million
, or
33%
, from
$22.8 million
for the year ended
December 31, 2017
to
$15.2 million
for the year ended
December 31, 2018
.
Transaction Expenses.
Transaction expense decreased by
$0.8 million
, or
100%
, from
$0.8 million
for the year ended
December 31, 2017
to
$0.0 million
for the year ended
December 31, 2018
. The year-over-year decrease was attributable to the lack of merger and acquisitions activity in 2018.
Impairment of Goodwill.
We recorded an impairment of goodwill of
$12.1 million
during the year ended
December 31, 2017
, which was entirely attributable to the domain monetization reporting unit within our domain segment. The impairment was the result of a more rapid decline in domain parking revenue than originally anticipated, and to a lesser extent, a decrease in premium domain name sales. No such impairment recurred in fiscal 2018.
Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Change
|
|
2017
|
|
2018
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Other expense, net
|
$
|
(157,006
|
)
|
|
$
|
(148,391
|
)
|
|
$
|
8,615
|
|
|
(5
|
)%
|
Other expense, net
decreased
by
$8.6 million
, or
5%
, from
$157.0 million
for the year ended
December 31, 2017
to
$148.4 million
for the year ended
December 31, 2018
. The decrease primarily consists of a lower amount of immediately expensed deferred financing costs of
$4.3 million
and a lower loss on extinguishment of debt of
$0.7 million
for our 2018 term loan refinancing when compared to our 2017 term loan refinancing, with the balance of the decrease mainly due to lower average debt balances.
Income Tax Expense (Benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Change
|
|
2017
|
|
2018
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Income tax benefit
|
$
|
(17,281
|
)
|
|
$
|
(6,246
|
)
|
|
$
|
11,035
|
|
|
(64
|
)%
|
For the years ended
December 31, 2017
and
2018
, we recognized an income tax benefit of
$17.3 million
and
$6.2 million
, respectively, in the consolidated statements of operations and comprehensive income (loss).
The income tax benefit for the year ended
December 31, 2017
was primarily attributable to $21.8 million in federal and state deferred tax benefit (which includes a $16.9 million tax benefit pertaining to the federal tax rate change as a result of the Tax Cut and Jobs Act of 2017 and the identification and recognition of $1.2 million of U.S. federal and state tax credits) and a foreign deferred tax benefit of $1.0 million, offset by a provision for federal and state current income taxes of $2.9 million, and foreign current tax expense of $2.6 million. This aggregate tax benefit of $17.3 million is inclusive of $1.8 million of reserves provided for unrecognized tax benefits.
The income tax benefit for the year ended
December 31, 2018
was primarily attributable to $9.6 million of a federal and state deferred tax benefit, a foreign deferred tax benefit of $0.8 million, and a federal and state current income taxes benefit of $1.3 million, partially offset by foreign current tax expense of $5.4 million. This aggregate tax benefit of $10.4 million is inclusive of $2.2 million of reserves provided for unrecognized tax benefits.
Comparison of the Years Ended
December 31, 2016
and
2017
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Change
|
|
2016
|
|
2017
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Revenue
|
$
|
1,111,142
|
|
|
$
|
1,176,867
|
|
|
$
|
65,725
|
|
|
6
|
%
|
Revenue increased by
$65.7 million
, or
6%
, from
$1,111.1 million
for the year ended
December 31, 2016
to
$1,176.9 million
for the year ended
December 31, 2017
. Almost all of this increase, or $74.4 million, is attributable to increased revenue from our email marketing segment, partially offset by slight declines in revenue from our web presence and domain segments.
Our revenue is 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 revenue through premium domain sales and domain parking (which we refer to as domain monetization) and marketing development funds. Non-subscription revenue declined from $41.5 million for the year ended December 31, 2016 to $39.4 million for the year ended December 31,
2017
, and represented
4%
of total revenue for the year ended
December 31, 2016
, and
3%
of total revenue for the year ended
December 31, 2017
.
Our web presence segment revenue decreased by
$6.7 million
, or
1%
, from
$648.7 million
for the year ended
December 31, 2016
to
$642.0 million
for the year ended
December 31, 2017
. This decrease was primarily attributable to a decline in revenue from non-strategic brands.
Our email marketing segment revenue increased by
$74.4 million
, or
23%
, from
$326.8 million
for the year ended
December 31, 2016
to
$401.3 million
for the year ended
December 31, 2017
. This increase was primarily due to the inclusion of Constant Contact revenue for an entire year in fiscal 2017, which increased revenue by $41.1 million, and to the negative $15.2 million impact of the Constant Contact purchase adjustment during 2016. Excluding these factors, revenue from our email marketing segment grew by approximately $18.1 million, which related to price increases and to a lesser extent, growth in services delivered to existing customers.
Our domain segment revenue decreased by
$2.0 million
, or
1%
, from
$135.6 million
for the year ended
December 31, 2016
to
$133.6 million
for the year ended
December 31, 2017
, primarily due to a reduction in domain monetization revenue.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2016
|
|
2017
|
|
Change
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Cost of revenue
|
$
|
583,991
|
|
|
53
|
%
|
|
$
|
603,930
|
|
|
51
|
%
|
|
$
|
19,939
|
|
|
3
|
%
|
Cost of revenue increased by
$19.9 million
, or
3%
, from
$584.0 million
for the year ended
December 31, 2016
to
$603.9 million
for the year ended
December 31, 2017
. This increase was primarily due to an $18.7 million impairment charge incurred in our domain segment and, to a lesser extent, to increased cost of revenue in our web presence segment. These factors were partially offset by decreased cost of revenue in our email marketing segment.
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. The following table sets forth the significant non-cash components of cost of revenue.
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2017
|
|
(in thousands)
|
Amortization expense
|
143,562
|
|
|
$
|
140,354
|
|
Depreciation expense
|
48,120
|
|
|
46,235
|
|
Stock-based compensation expense
|
5,855
|
|
|
6,135
|
|
Cost of revenue for our web presence segment
decreased
by
$0.3 million
, or
0%
, from
$336.7 million
for the year ended
December 31, 2016
to
$336.4 million
for the year ended
December 31, 2017
. The decrease was due to lower amortization
expense of $12.5 million. The offsets to this increase were primarily increased support costs to restructure and consolidate domestic customer support locations.
Cost of revenue for our email marketing segment
decreased
by
$7.3 million
, or
5%
, from
$153.6 million
for the year ended
December 31, 2016
to
$146.3 million
for the year ended
December 31, 2017
. The decrease was attributable to approximately $14.4 million in cost savings as a result of the Constant Contact 2016 restructuring plan, decreased restructuring charges of $6.9 million and lower depreciation expense of $5.4 million, partially offset by higher amortization expense of $9.8 million and other net cost increases of $9.6 million, most of which were attributable to the inclusion of a full year of Constant Contact operations during the year ended December 31, 2017.
Cost of revenue for our domain segment
increased
by
$27.5 million
, or
29%
, from
$93.7 million
for the year ended
December 31, 2016
to
$121.2 million
for the year ended
December 31, 2017
. The increase was primarily due to an impairment charge of $18.7 million due to diminished cash flows from intangible assets, primarily domain monetization related assets, increased domain registration costs of $4.0 million, with the balance of the increase related to increased support and data center costs for our international expansion efforts.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2016
|
|
2017
|
|
Change
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Gross profit
|
$
|
527,151
|
|
|
47
|
%
|
|
$
|
572,937
|
|
|
49
|
%
|
|
$
|
45,786
|
|
|
9
|
%
|
Gross profit
increased
by
$45.8 million
, or
9%
, from
$527.2 million
for the year ended
December 31, 2016
to
$572.9 million
for the year ended
December 31, 2017
. This increase was primarily due to increased gross profit from our email marketing segment, which was partially offset by decreases in gross profit from our web presence and domain segments. Our gross profit as a percentage of revenue
increased
by
2
percentage points from
47%
for the year ended
December 31, 2016
to
49%
for the year ended
December 31, 2017
, mainly due to the performance of our email marketing segment.
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,
|
|
2016
|
|
2017
|
|
(dollars in thousands)
|
Revenue
|
$
|
1,111,142
|
|
|
$
|
1,176,867
|
|
Gross profit
|
527,151
|
|
|
572,937
|
|
Gross profit % of revenue
|
47
|
%
|
|
49
|
%
|
Amortization expense % of revenue
|
13
|
%
|
|
12
|
%
|
Depreciation expense % of revenue
|
4
|
%
|
|
4
|
%
|
Stock-based compensation expense % of revenue
|
*
|
|
|
*
|
|
Our web presence segment gross profit
decreased
by
$6.5 million
, or
2%
, from
$312.1 million
for the year ended
December 31, 2016
to
$305.6 million
for the year ended
December 31, 2017
. The decrease was primarily due to the decrease in revenue discussed above.
Our email marketing segment gross profit
increased
by $81.7 million, or
47%
, from
$173.2 million
for the year ended
December 31, 2016
to
$254.9 million
for the year ended
December 31, 2017
. This increase was primarily due to the $74.4 million increase in revenue discussed above, and to a lesser extent, the $7.3 million reduction in cost of revenue discussed above.
Our domain segment gross profit
decreased
by
$29.5 million
, or
70%
, from
$41.9 million
for the year ended
December 31, 2016
to
$12.4 million
for the year ended
December 31, 2017
. This reduction was primarily due to the impairment charge of $18.7 million and other cost of revenue increases described above.
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2016
|
|
2017
|
|
Change
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
% of
Revenue
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Sales and marketing
|
$
|
303,511
|
|
|
27
|
%
|
|
$
|
277,460
|
|
|
24
|
%
|
|
$
|
(26,051
|
)
|
|
(9
|
)%
|
Engineering and development
|
87,601
|
|
|
8
|
%
|
|
78,772
|
|
|
7
|
%
|
|
(8,829
|
)
|
|
(10
|
)%
|
General and administrative
|
143,095
|
|
|
13
|
%
|
|
163,972
|
|
|
14
|
%
|
|
20,877
|
|
|
15
|
%
|
Impairment of goodwill
|
—
|
|
|
—
|
%
|
|
12,129
|
|
|
1
|
%
|
|
12,129
|
|
|
NA
|
|
Transaction expenses
|
32,284
|
|
|
3
|
%
|
|
773
|
|
|
—
|
%
|
|
(31,511
|
)
|
|
(98
|
)%
|
Total
|
$
|
566,491
|
|
|
51
|
%
|
|
$
|
533,106
|
|
|
45
|
%
|
|
$
|
(33,385
|
)
|
|
(6
|
)%
|
Sales and Marketing.
Sales and marketing expense
decreased
by
$26.1 million
, or
9%
, from
$303.5 million
for the year ended
December 31, 2016
to
$277.5 million
for the year ended
December 31, 2017
. Of this decrease, $31.9 million was due to lower marketing expense in our web presence segment, primarily due to decreased marketing investments in gateway products, partially offset by an increase of $3.9 million and $1.7 million in our domain segment and email marketing segment, respectively.
Sales and marketing expense for our web presence segment
decreased
by
$31.9 million
, or
17%
, from
$192.6 million
for the year ended
December 31, 2016
to
$160.7 million
for the year ended
December 31, 2017
. This decrease was primarily attributable to reduced expense on gateway products, which was partially offset by increased investments in key hosting brands.
Sales and marketing expense for our email marketing segment
increased
by
$1.7 million
, or
2%
, from
$95.1 million
for the year ended
December 31, 2016
to
$96.8 million
for the year ended
December 31, 2017
. The increase in the marketing expense for this segment was primarily attributable to an increase of $16.4 million due to the inclusion of Constant Contact for the entire year during fiscal year 2017. This increase was partially offset by decreases of an aggregate of $8.3 million in depreciation, stock-based compensation, and restructuring expense, as well as $6.5 million in cost reductions resulting from the Constant Contact 2016 restructuring plan.
Sales and marketing expense for our domain segment
increased
by
$4.2 million
, or
27%
, from
$15.8 million
for the year ended
December 31, 2016
to
$20.0 million
for the year ended
December 31, 2017
. This increase was primarily attributable to expansion of our international operations.
Engineering and Development.
Engineering and development expense
decreased
by
$8.8 million
, or
10%
, from
$87.6 million
for the year ended
December 31, 2016
to
$78.8 million
for the year ended
December 31, 2017
. Of this decrease, $13.5 million was due to decreased engineering and development expense for our email marketing segment, partially offset by increased expense for our web presence and domain segments.
Engineering and development expense for our web presence segment
increased
by
$1.9 million
, or
5%
, from
$37.3 million
for the year ended
December 31, 2016
to
$39.2 million
for the year ended
December 31, 2017
. This increase was primarily attributable to a shift in engineering resources from our email marketing segment to our web presence segment, and is net of $9.0 million of impairment charges in 2016 that did not recur in 2017.
Engineering and development expense for our email marketing segment
decreased
by
$13.5 million
, or
29%
, from
$46.9 million
for the period ended
December 31, 2016
to
$33.4 million
for the year ended
December 31, 2017
. This decrease was primarily attributable to cost reductions and engineering resource shifts from our email marketing segment to our web presence segment, which together accounted for $14.8 million of the decrease. Additionally, restructuring charges declined by $3.5
million and depreciation declined by $2.1 million. These cost decreases were partially offset by the inclusion of Constant Contact for the entire year for fiscal year 2017.
Engineering and development expense for our domain segment
increased
by
$2.7 million
, or
80%
, from
$3.4 million
for the year ended
December 31, 2016
to
$6.1 million
for the year ended
December 31, 2017
. The increase was primarily attributable to our international expansion efforts during 2017.
General and Administrative.
General and administrative expense
increased
by
$20.9 million
, or
15%
, from
$143.1 million
for the year ended
December 31, 2016
to
$164.0 million
for the year ended
December 31, 2017
. This increase was primarily attributable to the SEC investigations reserve of $8.0 million, increased restructuring costs of $6.1 million and an increase in stock-based compensation expense of $4.2 million. Our general and administrative expenses primarily consist of consolidated corporate wide support functions, and the costs of these functions are allocated between our three segments primarily based on relative revenues.
General and administrative expense for our web presence segment
increased
by
$14.7 million
, or
18%
, from
$83.9 million
for the year ended
December 31, 2016
to
$98.6 million
for the year ended
December 31, 2017
. General and administrative expense for our email marketing segment
increased
by
$4.4 million
, or
12%
, from
$38.1 million
for the period ended
December 31, 2016
to
$42.5 million
for the year ended
December 31, 2017
. General and administrative expense for our domain segment
increased
by
$1.7 million
, or
8%
, from
$21.1 million
for the year ended
December 31, 2016
to
$22.8 million
for the year ended
December 31, 2017
.
Transaction Expenses.
Transaction expense
decreased
by
$31.5 million
, or
98%
, from
$32.3 million
for the year ended
December 31, 2016
to
$0.8 million
for the year ended
December 31, 2017
. The year-over-year decrease was primarily attributable to costs related to our acquisition of Constant Contact in February 2016.
Impairment of Goodwill.
We recorded an impairment of goodwill of
$12.1 million
during the year ended
December 31, 2017
, which was entirely attributable to the domain monetization reporting unit within our domain segment. The impairment was the result of a more rapid decline in domain parking revenue than originally anticipated, and to a lesser extent, a decrease in premium domain name sales.
Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Change
|
|
2016
|
|
2017
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Other expense, net
|
$
|
(150,450
|
)
|
|
$
|
(157,006
|
)
|
|
$
|
(6,556
|
)
|
|
4
|
%
|
Other expense, net
increased
by
$6.6 million
, or
4%
, from
$150.5 million
for the year ended
December 31, 2016
to
$157.0 million
for the year ended
December 31, 2017
. The increase primarily consists of immediately expensed deferred financing costs of
$5.5 million
and a loss on extinguishment of debt of
$1.0 million
, both arising from our 2017 term loan refinancing.
Income Tax Expense (Benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Change
|
|
2016
|
|
2017
|
|
Amount
|
|
%
|
|
(dollars in thousands)
|
Income tax benefit
|
$
|
(109,858
|
)
|
|
$
|
(17,281
|
)
|
|
$
|
92,577
|
|
|
(84
|
)%
|
For the years ended
December 31, 2016
and
2017
, we recognized an income tax benefit of
$109.9 million
and
$17.3 million
, respectively, in the consolidated statements of operations and comprehensive income (loss).
The income tax benefit for the year ended
December 31, 2017
was primarily attributable to $21.8 million in federal and state deferred tax benefit (which includes a $16.9 million tax benefit pertaining to the federal tax rate change as a result of the Tax Cut and Jobs Act of 2017 and the identification and recognition of $1.2 million of U.S. federal and state tax credits) and a foreign deferred tax benefit of $1.0 million, offset by a provision for federal and state current income taxes of $2.9 million, and
foreign current tax expense of $2.6 million. This aggregate tax benefit of $17.3 million is inclusive of a reserve of $1.8 million for unrecognized tax benefits.
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
. The deferred tax benefits recorded during the year ended December 31, 2016 were primarily attributable to the acquisition of Constant Contact, which resulted in the recognition of a significant amount of deferred tax liabilities which offset previously recorded deferred tax assets for a which a valuation allowance was previously provided.
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.
In November 2013, we entered into a $1,050.0 million first lien term loan facility and a $125.0 million revolving credit facility. On February 9, 2016, in connection with our acquisition of Constant Contact and the related financing of that transaction, we entered into a $735.0 million incremental first lien term loan facility and a new $165.0 million revolving credit facility, which replaced our previous revolving credit facility and which we refer to as the "2016 Revolver", and our wholly owned subsidiary, EIG Investors, issued $350.0 million aggregate principal amount of 10.875% senior notes due 2024, or the "Senior Notes". On June 14, 2017, we refinanced our then-outstanding term loans and replaced them with a new $1,697.3 million first lien term loan facility, which we refer to as the “2017 Term Loan”. On June 20, 2018, we refinanced the 2017 Term Loan and replaced it with a new $1,580.3 million first lien term loan facility, which we refer to as the "2018 Term Loan", and we also extended the maturity of $106.2 million of the 2016 Revolver.
We refer to the 2018 Term Loan (or prior to June 20, 2018, the 2017 Term Loan) and the 2016 Revolver together as the "Senior Credit Facilities."
2018 First Lien Term Loan Facility.
The 2018 Term Loan was issued at par and has a maturity date of February 9, 2023. The 2018 Term Loan automatically bears interest at an alternate base rate unless we give notice to opt for the LIBOR-based interest rate. The LIBOR-based interest rate for the 2018 Term Loan is 3.75% per annum plus the greater of an adjusted LIBOR and 1.00%. The alternate base rate for the 2018 Term Loan is 2.75% per annum plus the greatest of the prime rate, the federal funds effective rate plus 0.50%, an adjusted LIBOR for a one-month interest period plus 1.00%, and 2.00%. The 2018 Term Loan requires quarterly mandatory repayments of principal. For the year ended
December 31, 2018
, we made three mandatory repayments of
$7.9 million
each, and three voluntary prepayments for a total of
$51.6 million
in voluntary prepayments following the refinancing of the 2017 Term Loan.
2017 First Lien Term Loan Facility
. The 2017 Term Loan was issued at a price of 99.75% of par and had a maturity date of February 9, 2023. The 2017 Term Loan automatically bore interest at an alternate base rate unless we gave notice to opt for the LIBOR-based interest rate. The LIBOR-based interest rate for the 2017 Term Loan was 4.00% per annum plus the greater of an adjusted LIBOR and 1.00%. The alternate base rate for the 2017 Term Loan was 3.00% per annum plus the greatest of the prime rate, the federal funds effective rate plus 0.50%, an adjusted LIBOR for a one-month interest period plus 1.00%, and 2.00%. The 2017 Term Loan required quarterly mandatory repayments of principal. During the year ended
December 31, 2018
, we made one mandatory repayment of
$8.5 million
and one voluntary prepayment of
$17.0 million
prior to the refinancing of the 2017 Term Loan.
Revolving Credit Facility.
The 2016 Revolver consists of a non-extended tranche of approximately $58.8 million and an extended tranche of approximately $106.2 million. The non-extended tranche has a maturity date of February 9, 2021. The extended tranche has a maturity date of June 20, 2023, with a "springing" maturity date of November 10, 2022 if the 2018 Term Loan has not been repaid in full or otherwise extended to September 19, 2023 or later prior to November 10, 2022. We have the ability to draw down against the 2016 Revolver using a LIBOR-based interest rate or an alternate base rate. The LIBOR-based interest rate for a non-extended revolving loan is 4.00% per annum (subject to a leverage-based step-down) and for an extended revolving loan is 3.25% per annum (subject to a leverage-based step-down), in each case plus an adjusted LIBOR for a selected interest period. The alternate base rate for a non-extended revolving loan is 3.00% per annum (subject to a leverage-based step-down) and for an extended revolving loan is 2.25% per annum (subject to a leverage-based step-down), in each case plus the greatest of the prime rate, the federal funds rate plus 0.50% and an adjusted LIBOR or a one-month interest period plus 1.00%. We are also required to pay a commitment fee of 0.50% per annum (subject to a leverage-based step-down) to the lenders based on the average daily unused principal amount of the 2016 Revolver.
Senior Notes.
The Senior Notes were issued at a price of 98.065% of par and have a maturity date of February 1, 2024. The Senior Notes bear interest at the rate of 10.875% per annum. We have the right to redeem all or part of the Senior Notes at any time for a premium which is based on the applicable redemption date. On January 30, 2017, we completed a registered exchange offer for the Senior Notes, as required under the registration rights agreement we entered into with the initial purchasers of the Senior Notes. All of the $350.0 million aggregate principal amount of the Senior Notes was validly tendered for exchange as part of this exchange offer. The registration rights agreement also obligated us to use reasonable efforts to cause to become effective a registration statement providing for the registration of certain secondary transactions in the Senior Notes by Goldman, Sachs & Co. and its affiliates. This registration statement became effective on December 29, 2016. 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).
The Senior Notes have been fully and unconditionally guaranteed, on a senior unsecured basis, by us and our subsidiaries that guarantee the Senior Credit Facilities.
As of
December 31, 2018
, we had cash and cash equivalents totaling
$88.6 million
and negative working capital of
$300.7 million
, which included the
$31.6 million
current portion of the 2018 Term Loan. There was no balance outstanding on the 2016 Revolver as of
December 31, 2018
. In addition, we had approximately
$1,802.0 million
of long term indebtedness, including of deferred financing costs, outstanding under the 2018 Term Loan and the Senior Notes. We also had
$467.9 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 net 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, 2018
.
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.
Senior Notes
The indenture governing the Senior 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 Senior Notes at 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, up to, but not including, the repurchase date. These covenants are subject to a number of important limitations and exceptions.
The indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately.
We were in compliance with all covenants under the Senior Credit Facilities and the Senior Notes at
December 31, 2018
.
Secured Net Leverage Ratio
The Senior Credit Facilities require that we comply with a financial covenant to maintain a maximum ratio of consolidated senior secured net 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 is tested as of the last day of each fiscal quarter and was required to be at or below 6.50 to 1.00 through December 31, 2016 and at or below 6.25 to 1.00 from March 31, 2017 through December 31, 2017, and
may not exceed 6.00 to 1.00 from March 31, 2018 and thereafter. As of
December 31, 2018
, we were in compliance with this covenant.
The credit agreement governing the Senior Credit Facilities defines consolidated senior secured net indebtedness as our and our restricted subsidiaries' aggregate amount of indebtedness that is secured by a lien not expressly subordinated to the liens securing the Senior Credit Facilities. Consolidated senior secured net indebtedness is determined on a consolidated basis in accordance with GAAP and consists only of indebtedness for borrowed money, unreimbursed obligations under letters of credit, obligations with respect to property, plant and equipment financing 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.
The credit agreement defines Bank Adjusted EBITDA as net income (loss) adjusted to exclude, among other things, interest expense, income tax expense (benefit), depreciation and amortization. Bank Adjusted EBITDA also adjusts net income (loss) by excluding certain non-cash 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) to give pro forma effect to acquisitions, debt incurrences, repayments of debt, other specified transactions and certain cost savings on a TTM basis.
We use Bank Adjusted EBITDA to monitor our secured 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, 2018
, our secured net leverage ratio on a TTM basis was
4.19
to 1.00 and was calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended,
|
|
|
|
|
March 31, 2018
|
|
June 30, 2018
|
|
September 30, 2018
|
|
December 31, 2018
|
|
TTM
|
|
|
(in thousands except ratios)
|
Net (loss) income
|
|
$
|
(2,528
|
)
|
|
$
|
627
|
|
|
$
|
(6,335
|
)
|
|
$
|
12,770
|
|
|
$
|
4,534
|
|
Interest expense
|
|
36,050
|
|
|
38,346
|
|
|
37,527
|
|
|
37,557
|
|
|
149,480
|
|
Income tax expense (benefit)
|
|
(1,943
|
)
|
|
(946
|
)
|
|
11,715
|
|
|
(15,072
|
)
|
|
(6,246
|
)
|
Depreciation
|
|
12,068
|
|
|
12,796
|
|
|
11,889
|
|
|
11,454
|
|
|
48,207
|
|
Amortization of other intangible assets
|
|
25,735
|
|
|
25,978
|
|
|
26,177
|
|
|
25,258
|
|
|
103,148
|
|
Stock-based compensation
|
|
6,992
|
|
|
7,390
|
|
|
7,550
|
|
|
7,132
|
|
|
29,064
|
|
Integration and restructuring costs
|
|
1,529
|
|
|
1,295
|
|
|
197
|
|
|
347
|
|
|
3,368
|
|
Transaction expenses and charges
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(Gain) loss of unconsolidated entities
|
|
27
|
|
|
(25
|
)
|
|
—
|
|
|
265
|
|
|
267
|
|
Impairment of long-lived assets
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(Gain) loss on assets, not ordinary course
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Legal advisory expenses
|
|
10,501
|
|
|
710
|
|
|
(832
|
)
|
|
159
|
|
|
10,538
|
|
Billed revenue to GAAP revenue adjustment
|
|
11,098
|
|
|
(2,431
|
)
|
|
(4,834
|
)
|
|
(8,035
|
)
|
|
(4,202
|
)
|
Domain registration cost cash to GAAP adjustment
|
|
(1,222
|
)
|
|
1,258
|
|
|
1,299
|
|
|
1,255
|
|
|
2,590
|
|
Currency translation
|
|
(6
|
)
|
|
(17
|
)
|
|
(17
|
)
|
|
(506
|
)
|
|
(546
|
)
|
Bank Adjusted EBITDA
|
|
$
|
98,301
|
|
|
$
|
84,981
|
|
|
$
|
84,336
|
|
|
$
|
72,584
|
|
|
$
|
340,202
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of notes payable
|
|
|
|
|
|
|
|
|
|
$
|
31,606
|
|
Current portion of financed equipment
|
|
|
|
|
|
|
|
|
|
8,379
|
|
Notes payable - long term
|
|
|
|
|
|
|
|
|
|
1,770,055
|
|
Financed equipment - long term
|
|
|
|
|
|
|
|
|
|
—
|
|
Original issue discounts and deferred financing costs
|
|
|
|
|
|
|
|
|
|
53,341
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Unsecured notes
|
|
|
|
|
|
|
|
|
|
(350,000
|
)
|
Cash
|
|
|
|
|
|
|
|
|
|
(88,644
|
)
|
Certain permitted restricted cash
|
|
|
|
|
|
|
|
|
|
(101
|
)
|
Net senior secured indebtedness
|
|
|
|
|
|
|
|
|
|
$
|
1,424,636
|
|
Net leverage ratio
|
|
|
|
|
|
|
|
|
|
4.19
|
|
Maximum net leverage ratio
|
|
|
|
|
|
|
|
|
|
6.00
|
|
Cash and Cash Equivalents
As of
December 31, 2018
, 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 $22.1 million from
$66.5 million
at
December 31, 2017
to
$88.6 million
at
December 31, 2018
. Of the
$88.6 million
cash and cash equivalents we had at
December 31, 2018
, $26.5 million was held in foreign countries, and due to tax reasons, we do not plan to repatriate this cash in the near future. We used cash on hand at
December 31, 2017
and cash flows from operations to purchase property and equipment and to make our debt repayments on the 2017 and 2018 Term Loan, as described under "Financing Activities" below. Our future capital requirements will depend on many factors including, but not limited to our growth rate, our level of sales and marketing activities, the development and introduction of new and enhanced products and services, market acceptance of our solutions, potential settlements of legal proceedings, 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 property, plant and equipment financing obligations, depreciation, amortization and cash flows from operating activities, investing activities and financing activities for the stated period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
|
(in thousands)
|
Purchases of property and equipment
|
$
|
(37,259
|
)
|
|
$
|
(43,062
|
)
|
|
$
|
(45,880
|
)
|
Principal payments on financed equipment
|
(5,892
|
)
|
|
(7,390
|
)
|
|
(7,439
|
)
|
Depreciation
|
60,360
|
|
|
55,185
|
|
|
48,207
|
|
Amortization
|
155,222
|
|
|
152,162
|
|
|
114,280
|
|
Cash flows provided by operating activities
|
154,961
|
|
|
201,273
|
|
|
182,552
|
|
Cash flows used in investing activities
|
(930,147
|
)
|
|
(44,498
|
)
|
|
(45,882
|
)
|
Cash flows provided by (used in) financing activities
|
796,396
|
|
|
(146,705
|
)
|
|
(113,421
|
)
|
Capital Expenditures
Our capital expenditures on the purchase of property and equipment for the years ended
December 31, 2017
and
2018
were
$43.1 million
and
$45.9 million
, respectively. The higher property and equipment expenditures in the year ended December 31, 2018 consisted primarily of an investment in data center and customer infrastructure, including internally developed software. In addition, during the years ended
December 31, 2017
and
2018
we made principal payments of
$7.4 million
and
$7.4 million
, respectively, under property, plant and equipment financings for software. The remaining balance payable on the property, plant and equipment financings is
$8.4 million
as of
December 31, 2018
.
Depreciation
Our depreciation expense for the years ended
December 31, 2017
and
2018
decreased
by
$7.0 million
from
$55.2 million
to
$48.2 million
, respectively. This decrease was primarily due to a reduction in depreciation for our email marketing segment as certain assets became fully depreciated.
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,
decreased
by
$37.9 million
from
$152.2 million
for the year ended
December 31, 2017
to
$114.3 million
for the year ended
December 31, 2018
. Of this decrease in amortization expense,
$37.2 million
related to lower amortization expense of intangible assets relating to businesses and assets acquired. These decreases were partially offset by a decrease of
$0.9 million
relating to increased amortization of deferred financing costs and an increase of
$0.4 million
relating to amortization of original issue discounts related to our Senior Credit Facilities.
Operating Activities
Cash provided by operating activities consists primarily of net income (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.
During fiscal year 2018, we adopted ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606),
which superseded nearly all existing revenue recognition guidance under U.S. GAAP. Our implementation of Topic 606 resulted in an increase of $23.1 million to our deferred revenue balance as of January 1, 2018. At the same time, our subscriber billings decreased during fiscal year 2018 as compared to fiscal year 2017 due to subscriber attrition, which partially offset the increase in deferred revenue from the adoption of Topic 606.
Net cash provided by operating activities was
$182.6 million
for the year ended
December 31, 2018
compared with
$201.3 million
for the year ended
December 31, 2017
. Net cash provided by operating activities for the year ended
December 31, 2018
consisted of net profit of
$4.5 million
, offset by non-cash charges of
$183.1 million
and an unfavorable net change of
$5.1 million
in our operating assets and liabilities. The $5.1 million of cash outlays for operating assets and liabilities was primarily due to lower subscriber billings resulting from subscriber attrition, which adversely impacted deferred revenue. In addition, we paid $8.0 million to settle our SEC investigations and $5.7 million to purchase an interest rate cap. These uses of cash were partially offset by lower payments for interest expense and lower payments for restructuring
programs.We expect cash provided by operations to decrease in fiscal year 2019 by five to ten percent from the levels achieved in fiscal year 2018 as we continue to invest in engineering and development.
Net cash provided by operating activities was
$201.3 million
for the year ended
December 31, 2017
, compared with
$155.0 million
for the year ended
December 31, 2016
. Net cash provided by operating activities for the year ended
December 31, 2017
consisted of a net loss of
$99.8 million
, offset by non-cash charges of $282.2 million and a net change of $18.9 million in our operating assets and liabilities. The net change in our operating assets and liabilities included an increase in deferred revenue of $8.2 million, which was $46.2 million less than in the same period in 2016. The increase in net cash provided by operating activities was the result of a reduction in Constant Contact acquisition and restructuring related payments, which favorably impacted the fiscal year 2017 period by $42.7 million. In addition, increased operating profit in our email marketing segment had a favorable impact on cash flow provided by operations. These increases in cash flow were partially offset by increased interest payments of $22.1 million as we incurred a full year of interest payments on the debt incurred to acquire Constant Contact.
Net cash provided by operating activities was
$155.0 million
for the year ended
December 31, 2016
, and consisted of a 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.
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, 2018
, cash flows used in investing activities was
$45.9 million
, which was used to purchase property and equipment.
During the year ended
December 31, 2017
, we used $43.1 million of cash to purchase property and equipment and $2.0 million of cash to acquire intangible assets, net of proceeds of $0.5 million from asset disposals.
During the year ended
December 31, 2016
, we used
$887.9 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. 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.
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, 2018
, cash flows used in financing activities was
$113.4 million
. We paid $
100.8 million
of principal payments related to our 2017 Term Loan and 2018 Term Loan, which included mandatory repayments of
$32.2 million
and voluntary repayments of
$68.6 million
. We also made
$7.4 million
of principal payments related to property, plant and equipment financing obligations and
$4.5 million
deferred consideration payments relating to AppMachine. In addition, we paid
$1.6 million
for deferred financing costs relating to the 2018 refinancing. These payments were partially offset by
$0.9 million
of proceeds that we received from the exercise of stock options. For fiscal year 2019, we plan to continue to use our cash flow from operations to reduce our outstanding debt obligations, including both voluntary and mandatory repayments, in amounts similar to those paid during fiscal year 2018.
During the year ended
December 31, 2017
, cash flows used in financing activities was $146.7 million. We made repayments on our term loans of $1,797.6 million (including the refinancing of our 2017 Term Loan, which provided new term debt proceeds of $1,693.0 million), for a net cash debt payment of $100.4 million during fiscal year 2017. In addition, we incurred $6.3 million of costs related to the 2017 Term Loan refinancing, made property, plant and equipment financing payments of $7.4 million, paid $5.4 million of deferred consideration (primarily related to our AppMachine acquisition), and made the final payment of non-controlling interest obligations of $25.0 million to acquire all equity interests in WZ UK. These cash outlays were partially offset by $2.0 million in proceeds from the exercise of stock options.
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 debt 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 refinanced 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 financing of the Constant Contact acquisition and $51.0 million of deferred consideration payments, the largest component of which was $31.4 million related to our 2015 Ace Data Center acquisition.
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 property, plant and financed equipment. 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 property, plant and financed equipment). 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,
|
|
2016
|
|
2017
|
|
2018
|
Cash flow from operations
|
$
|
154,961
|
|
|
$
|
201,273
|
|
|
$
|
182,552
|
|
Less:
|
|
|
|
|
|
Capital expenditures and financed equipment (1)
|
(43,151
|
)
|
|
(50,452
|
)
|
|
(53,319
|
)
|
Free cash flow
|
$
|
111,810
|
|
|
$
|
150,821
|
|
|
$
|
129,233
|
|
|
|
(1)
|
Capital expenditures during the year ended
December 31, 2017
includes
$7.4 million
of principal payments under a three year agreement for equipment financing. Capital expenditures during the year ended
December 31, 2018
includes
$7.4 million
of principal payments under a two year agreement for equipment financing. The remaining balance on the equipment financing is
$8.4 million
as of
December 31, 2018
.
|
Free cash flow
decreased
from
$150.8 million
for the year ended
December 31, 2017
to
$129.2 million
for the year ended
December 31, 2018
. This decrease of $21.6 million was primarily driven by the same factors that led to a decrease in adjusted EBITDA from $350.8 million to $338.1 million, including reduced revenues from our non-strategic web presence brands and increased investment in engineering and development resources. Additionally, we experienced lower cash billings due to subscriber attrition, mainly from our non-strategic brands, which reduced deferred revenue by $6.3 million; paid $8.0 million to settle our SEC investigations; and paid $5.7 million to purchase an interest rate cap. These reductions in free cash flow were partially offset by lower payments for both interest expense and restructuring costs. We expect free cash flow for fiscal year 2019 to decline by approximately five to ten percent as we continue to invest in engineering and development resources to further enhance our products.
Free cash flow
increased
from
$111.8 million
for the year ended
December 31, 2016
to
$150.8 million
for the year ended
December 31, 2017
. This increase was attributable to lower Constant Contact related acquisition and restructuring payments of $42.6 million, and increased cash flow from our email marketing segment. These increases in free cash flow were partially offset by increased interest payments of $22.1 million as we incurred a full year of interest payments on the debt incurred to acquire Constant Contact, and by increased capital expenditures of $7.3 million.
Net Operating Loss (NOL) Carry-Forwards
As of
December 31, 2018
, we had NOL carry-forwards available to offset future U.S. federal taxable income of approximately $108.9 million and future state taxable income of approximately $115.5 million. These NOL carry-forwards expire on various dates through 2038. Under the Tax Cuts and Jobs Act of 2017, or the Tax Act, NOL carry-forwards arising in taxable years beginning after December 31, 2017 may be carried forward indefinitely, but the use of such NOLs is limited to 80% of our taxable income in any future taxable year. It is uncertain how various states will respond to the Tax Act. As of December 31, 2018, we had NOL carry-forwards in foreign jurisdictions available to offset future foreign taxable income by approximately $13.8 million. We have loss carry-forwards that begin to expire in 2021 in China totaling $0.9 million. We have loss carryforwards that begin to expire in 2020 in India totaling $0.5 million. We have loss carry-forwards that begin to expire in 2020 in the Netherlands totaling $12.1 million. We also have loss carry-forwards in Singapore of $0.3 million, 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. Although we have experienced a number of ownership changes over time, we do not currently have any Section 382
limitations on our ability to utilize NOL carry-forwards.
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, 2017
and
2018
was
$452.9 million
and
$467.9 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 2018 included one quarterly principal repayment of $8.5 million against the 2017 Term Loan and three quarterly principal repayments of $7.9 million against the refinanced 2018 Term Loan, interest payments on the 2017 Term Loan and 2018 Term Loan, which are typically three-month LIBOR loans, and interest payments on the Senior 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, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
1,855,002
|
|
|
$
|
31,606
|
|
|
$
|
63,212
|
|
|
$
|
1,410,184
|
|
|
$
|
350,000
|
|
Interest payments and other debt facility related fees
(1)
|
703,571
|
|
|
138,288
|
|
|
266,529
|
|
|
257,900
|
|
|
40,854
|
|
Financed equipment
|
8,676
|
|
|
8,676
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Operating lease obligations
|
114,141
|
|
|
20,770
|
|
|
38,206
|
|
|
29,565
|
|
|
25,600
|
|
Deferred consideration
(2)
|
3,789
|
|
|
2,425
|
|
|
1,364
|
|
|
—
|
|
|
—
|
|
Purchase commitments
|
47,661
|
|
|
33,466
|
|
|
13,320
|
|
|
875
|
|
|
—
|
|
Total
|
$
|
2,732,840
|
|
|
$
|
235,231
|
|
|
$
|
382,631
|
|
|
$
|
1,698,524
|
|
|
$
|
416,454
|
|
|
|
(1)
|
Term loan facility interest rate is based on adjusted LIBOR plus 375 basis points for the 2018 Term Loan, subject to a LIBOR floor of 1.00%. As of
December 31, 2018
, the interest rates on the 2018 Term Loan and the Senior Notes were 6.44% and 10.875%, respectively. The 2018 Term Loan and the Senior Notes mature on February 9, 2023, and February 1, 2024, respectively. Our revolving credit facility, which has no balance outstanding as of
December 31, 2018
, has maturity dates of February 9, 2021 and June 20, 2023 for the non-extended tranche and extended tranche, respectively, and bears a non-refundable commitment fee, equal to
0.50%
per annum (subject to a leverage-based step-down) of the daily unused principal amount .
|
|
|
(2)
|
Consists of deferred payment obligations related to acquisitions.
|
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
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Endurance International Group Holdings, Inc. (the “Company”) as of
December 31, 2017
and
2018
, the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2018
, and the related notes (collectively referred to as "the consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at
December 31, 2017
and
2018
, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2018
, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of
December 31, 2018
, 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 21, 2019
expressed an unqualified opinion thereon.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, on January 1, 2018, the Company changed its method of accounting for revenue and direct costs of revenue from sales to customers due to the adoption of ASU 2014-09,
Revenue from Contracts with Customers
(Topic 606).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2008.
Boston, Massachusetts
February 21, 2019
Endurance International Group Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2018
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
66,493
|
|
|
$
|
88,644
|
|
Restricted cash
|
2,625
|
|
|
1,932
|
|
Accounts receivable
|
15,945
|
|
|
12,205
|
|
Prepaid domain name registry fees
|
53,805
|
|
|
56,779
|
|
Prepaid commissions
|
—
|
|
|
41,458
|
|
Prepaid and refundable taxes
|
4,367
|
|
|
7,235
|
|
Prepaid expenses and other current assets
|
23,908
|
|
|
27,855
|
|
Total current assets
|
167,143
|
|
|
236,108
|
|
Property and equipment—net
|
95,452
|
|
|
92,275
|
|
Goodwill
|
1,850,582
|
|
|
1,849,065
|
|
Other intangible assets—net
|
455,440
|
|
|
352,516
|
|
Deferred financing costs
|
3,189
|
|
|
2,656
|
|
Investments
|
15,267
|
|
|
15,000
|
|
Prepaid domain name registry fees, net of current portion
|
10,806
|
|
|
11,207
|
|
Prepaid commissions, net of current portion
|
—
|
|
|
42,472
|
|
Other assets
|
2,155
|
|
|
5,208
|
|
Total assets
|
$
|
2,600,034
|
|
|
$
|
2,606,507
|
|
Liabilities and stockholders’ equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
11,058
|
|
|
$
|
12,449
|
|
Accrued expenses
|
78,601
|
|
|
79,279
|
|
Accrued taxes
|
338
|
|
|
2,498
|
|
Accrued interest
|
24,457
|
|
|
25,259
|
|
Deferred revenue
|
361,940
|
|
|
371,758
|
|
Current portion of notes payable
|
33,945
|
|
|
31,606
|
|
Current portion of financed equipment
|
7,630
|
|
|
8,379
|
|
Deferred consideration—short term
|
4,365
|
|
|
2,425
|
|
Other current liabilities
|
4,031
|
|
|
3,147
|
|
Total current liabilities
|
526,365
|
|
|
536,800
|
|
Long-term deferred revenue
|
90,972
|
|
|
96,140
|
|
Notes payable—long term, net of original issue discounts of $25,811 and $21,349, and deferred financing costs of $37,736 and $31,992, respectively
|
1,858,300
|
|
|
1,770,055
|
|
Financed equipment—long term
|
7,719
|
|
|
—
|
|
Deferred tax liability—long term
|
19,696
|
|
|
16,457
|
|
Deferred consideration—long term
|
3,551
|
|
|
1,364
|
|
Other liabilities
|
10,426
|
|
|
11,237
|
|
Total liabilities
|
2,517,029
|
|
|
2,432,053
|
|
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; 140,190,695 and 143,444,515 shares issued at December 31, 2017 and December 31, 2018, respectively; 140,190,695 and 143,444,178 outstanding at December 31, 2017 and December 31, 2018, respectively
|
14
|
|
|
14
|
|
Additional paid-in capital
|
931,033
|
|
|
961,235
|
|
Accumulated other comprehensive loss
|
(541
|
)
|
|
(3,211
|
)
|
Accumulated deficit
|
(847,501
|
)
|
|
(783,584
|
)
|
Total stockholders’ equity
|
83,005
|
|
|
174,454
|
|
Total liabilities and stockholders’ equity
|
$
|
2,600,034
|
|
|
$
|
2,606,507
|
|
See accompanying notes to consolidated financial statements.
Endurance International Group Holdings, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2018
|
Revenue
|
$
|
1,111,142
|
|
|
$
|
1,176,867
|
|
|
$
|
1,145,291
|
|
Cost of revenue
|
583,991
|
|
|
603,930
|
|
|
520,737
|
|
Gross profit
|
527,151
|
|
|
572,937
|
|
|
624,554
|
|
Operating expense:
|
|
|
|
|
|
Sales and marketing
|
303,511
|
|
|
277,460
|
|
|
265,424
|
|
Engineering and development
|
87,601
|
|
|
78,772
|
|
|
87,980
|
|
General and administrative
|
143,095
|
|
|
163,972
|
|
|
124,204
|
|
Transaction costs
|
32,284
|
|
|
773
|
|
|
—
|
|
Impairment of goodwill
|
—
|
|
|
12,129
|
|
|
—
|
|
Total operating expense
|
566,491
|
|
|
533,106
|
|
|
477,608
|
|
(Loss) income from operations
|
(39,340
|
)
|
|
39,831
|
|
|
146,946
|
|
Other income (expense):
|
|
|
|
|
|
Other income (expense), net
|
1,862
|
|
|
(600
|
)
|
|
—
|
|
Interest income
|
576
|
|
|
736
|
|
|
1,089
|
|
Interest expense
|
(152,888
|
)
|
|
(157,142
|
)
|
|
(149,480
|
)
|
Total other expense—net
|
(150,450
|
)
|
|
(157,006
|
)
|
|
(148,391
|
)
|
Loss before income taxes and equity earnings of unconsolidated entities
|
(189,790
|
)
|
|
(117,175
|
)
|
|
(1,445
|
)
|
Income tax benefit
|
(109,858
|
)
|
|
(17,281
|
)
|
|
(6,246
|
)
|
(Loss) income before equity earnings of unconsolidated entities
|
(79,932
|
)
|
|
(99,894
|
)
|
|
4,801
|
|
Equity loss (income) of unconsolidated entities, net of tax
|
1,297
|
|
|
(110
|
)
|
|
267
|
|
Net (loss) income
|
$
|
(81,229
|
)
|
|
$
|
(99,784
|
)
|
|
$
|
4,534
|
|
Net (loss) income attributable to non-controlling interest
|
(15,167
|
)
|
|
277
|
|
|
—
|
|
Excess accretion of non-controlling interest
|
6,769
|
|
|
7,247
|
|
|
—
|
|
Total net income (loss) attributable to non-controlling interest
|
(8,398
|
)
|
|
7,524
|
|
|
—
|
|
Net (loss) income attributable to Endurance International Group Holdings, Inc.
|
$
|
(72,831
|
)
|
|
$
|
(107,308
|
)
|
|
$
|
4,534
|
|
Comprehensive loss:
|
|
|
|
|
|
Foreign currency translation adjustments
|
(597
|
)
|
|
3,091
|
|
|
(2,233
|
)
|
Unrealized (loss) gain on cash flow hedge, net of taxes of ($792), $11 and ($137) for the years ended December 31, 2016, 2017 and 2018
|
(1,351
|
)
|
|
34
|
|
|
(437
|
)
|
Total comprehensive (loss) income
|
$
|
(74,779
|
)
|
|
$
|
(104,183
|
)
|
|
$
|
1,864
|
|
Net (loss) income per share attributable to Endurance International Group Holdings, Inc. - basic earnings per share
|
$
|
(0.55
|
)
|
|
$
|
(0.78
|
)
|
|
$
|
0.03
|
|
Net (loss) income per share attributable to Endurance International Group Holdings, Inc. - diluted earnings per share
|
$
|
(0.55
|
)
|
|
$
|
(0.78
|
)
|
|
$
|
0.03
|
|
Weighted-average number of common shares used in computing net (loss) income per share attributable to Endurance International Group Holdings, Inc.
|
|
|
|
|
|
Basic
|
133,415,732
|
|
|
137,322,201
|
|
|
142,316,993
|
|
Diluted
|
133,415,732
|
|
|
137,322,201
|
|
|
145,669,760
|
|
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, 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
|
)
|
Investment in 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
|
|
Vesting of restricted shares
|
5,040,609
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercise of stock options
|
356,229
|
|
|
—
|
|
|
2,049
|
|
|
—
|
|
|
—
|
|
|
2,049
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
3,125
|
|
|
—
|
|
|
3,125
|
|
Net loss attributable to non-controlling interest
|
—
|
|
|
—
|
|
|
277
|
|
|
—
|
|
|
—
|
|
|
277
|
|
Net loss attributable to Endurance International Group Holdings, Inc.
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(107,308
|
)
|
|
(107,308
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
60,479
|
|
|
—
|
|
|
—
|
|
|
60,479
|
|
Balance—December 31, 2017
|
140,190,695
|
|
|
14
|
|
|
931,033
|
|
|
(541
|
)
|
|
(847,501
|
)
|
|
83,005
|
|
Vesting of restricted shares
|
3,122,079
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercise of stock options
|
131,404
|
|
|
—
|
|
|
887
|
|
|
—
|
|
|
—
|
|
|
887
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,670
|
)
|
|
—
|
|
|
(2,670
|
)
|
Adjustment to beginning retained earnings resulting from adoption of ASC 606, net of tax impact of $7.0 million
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
59,383
|
|
|
59,383
|
|
Net loss attributable to Endurance International Group Holdings, Inc.
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,534
|
|
|
4,534
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
29,315
|
|
|
—
|
|
|
—
|
|
|
29,315
|
|
Balance—December 31, 2018
|
143,444,178
|
|
|
$
|
14
|
|
|
$
|
961,235
|
|
|
$
|
(3,211
|
)
|
|
$
|
(783,584
|
)
|
|
$
|
174,454
|
|
See accompanying notes to consolidated financial statements.
Endurance International Group Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2018
|
Cash flows from operating activities:
|
|
|
|
|
|
Net (loss) income
|
$
|
(81,229
|
)
|
|
$
|
(99,784
|
)
|
|
$
|
4,534
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation of property and equipment
|
60,360
|
|
|
55,185
|
|
|
48,207
|
|
Amortization of other intangible assets from acquisitions
|
143,562
|
|
|
140,354
|
|
|
103,148
|
|
Amortization of deferred financing costs
|
6,073
|
|
|
7,316
|
|
|
6,454
|
|
Amortization of net present value of deferred consideration
|
2,617
|
|
|
632
|
|
|
373
|
|
Amortization of original issuance discount
|
2,970
|
|
|
3,860
|
|
|
4,305
|
|
Impairment of long-lived assets
|
9,039
|
|
|
18,731
|
|
|
—
|
|
Impairment of investments
|
—
|
|
|
600
|
|
|
—
|
|
Impairment of goodwill
|
—
|
|
|
12,129
|
|
|
—
|
|
Stock-based compensation
|
58,267
|
|
|
60,001
|
|
|
29,064
|
|
Deferred tax benefit
|
(113,242
|
)
|
|
(22,807
|
)
|
|
(10,438
|
)
|
(Gain) loss on sale of assets
|
(243
|
)
|
|
(315
|
)
|
|
198
|
|
Gain from unconsolidated entities
|
(1,862
|
)
|
|
(110
|
)
|
|
—
|
|
Loss of unconsolidated entities
|
1,297
|
|
|
—
|
|
|
267
|
|
Financing costs expensed
|
—
|
|
|
5,487
|
|
|
1,228
|
|
Loss on early extinguishment of debt
|
—
|
|
|
992
|
|
|
331
|
|
Dividend from minority interest
|
100
|
|
|
100
|
|
|
—
|
|
Gain from change in deferred consideration
|
(20
|
)
|
|
—
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
(1,620
|
)
|
|
(3,102
|
)
|
|
3,616
|
|
Prepaid expenses and other current assets
|
(4,932
|
)
|
|
5,435
|
|
|
(11,759
|
)
|
Accounts payable and accrued expenses
|
19,458
|
|
|
8,334
|
|
|
9,339
|
|
Deferred revenue
|
54,366
|
|
|
8,235
|
|
|
(6,315
|
)
|
Net cash provided by operating activities
|
154,961
|
|
|
201,273
|
|
|
182,552
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Businesses acquired in purchase transaction, net of cash acquired
|
(887,937
|
)
|
|
—
|
|
|
—
|
|
Purchases of property and equipment
|
(37,259
|
)
|
|
(43,062
|
)
|
|
(45,880
|
)
|
Cash paid for minority investment
|
(5,600
|
)
|
|
—
|
|
|
—
|
|
Proceeds from sale of assets
|
676
|
|
|
530
|
|
|
6
|
|
Purchases of intangible assets
|
(27
|
)
|
|
(1,966
|
)
|
|
(8
|
)
|
Net cash used in investing activities
|
(930,147
|
)
|
|
(44,498
|
)
|
|
(45,882
|
)
|
Endurance International Group Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2018
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from issuance of term loan
|
1,056,178
|
|
|
1,693,007
|
|
|
1,580,305
|
|
Repayment of term loan
|
(55,200
|
)
|
|
(1,797,634
|
)
|
|
(1,681,094
|
)
|
Proceeds from borrowing of revolver
|
54,500
|
|
|
—
|
|
|
—
|
|
Repayment of revolver
|
(121,500
|
)
|
|
—
|
|
|
—
|
|
Payment of financing costs
|
(52,561
|
)
|
|
(6,304
|
)
|
|
(1,580
|
)
|
Payment of deferred consideration
|
(51,044
|
)
|
|
(5,433
|
)
|
|
(4,500
|
)
|
Payment of redeemable non-controlling interest liability
|
(33,425
|
)
|
|
(25,000
|
)
|
|
—
|
|
Principal payments on financed equipment
|
(5,892
|
)
|
|
(7,390
|
)
|
|
(7,439
|
)
|
Proceeds from exercise of stock options
|
2,564
|
|
|
2,049
|
|
|
887
|
|
Capital investment from minority interest partner
|
2,776
|
|
|
—
|
|
|
—
|
|
Net cash provided by (used in) financing activities
|
796,396
|
|
|
(146,705
|
)
|
|
(113,421
|
)
|
Net effect of exchange rate on cash and cash equivalents and restricted cash
|
1,610
|
|
|
2,150
|
|
|
(1,791
|
)
|
Net increase in cash and cash equivalents and restricted cash
|
22,820
|
|
|
12,220
|
|
|
21,458
|
|
Cash and cash equivalents and restricted cash:
|
|
|
|
|
|
Beginning of period
|
34,078
|
|
|
56,898
|
|
|
69,118
|
|
End of period
|
$
|
56,898
|
|
|
$
|
69,118
|
|
|
$
|
90,576
|
|
Supplemental cash flow information:
|
|
|
|
|
|
Interest paid
|
$
|
119,063
|
|
|
$
|
141,157
|
|
|
$
|
134,145
|
|
Income taxes paid
|
$
|
4,278
|
|
|
$
|
3,369
|
|
|
$
|
4,141
|
|
Supplemental disclosure of non-cash financing activities:
|
|
|
|
|
|
Shares or awards issued in connection with acquisitions
|
$
|
5,395
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Assets acquired under equipment financing
|
$
|
—
|
|
|
$
|
15,536
|
|
|
$
|
1,179
|
|
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 subsidiaries of EIG, collectively form the “Company”. The Company is a leading provider of cloud-based platform solutions designed to help small- and medium-sized businesses succeed online.
EIG and EIG Investors were incorporated in April 1997 and May 2007, respectively, and Holdings was originally formed as a limited liability company in October 2011 in connection with the acquisition of a controlling interest in EIG Investors, EIG and EIG’s subsidiaries by investment funds and entities affiliated with Warburg Pincus and Goldman, Sachs & Co. on December 22, 2011. On November 7, 2012, Holdings reorganized as a Delaware limited partnership and on June 25, 2013, Holdings converted into a Delaware C-corporation and changed its name to Endurance International Group Holdings, Inc.
2. Summary of Significant Accounting Policies
Basis of Preparation
The accompanying consolidated financial statements, which include the accounts of the Company and its subsidiaries, have been prepared using accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany transactions have been eliminated on consolidation.
Segment Information
Operating segments are defined as components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker ("CODM"). The Company has determined that its chief executive officer is the Company's CODM.
The Company has identified
three
operating segments: Web Presence, Domains and Email Marketing. The Company has determined that it does not satisfy aggregation criteria for these operating segments, and that each segment meets the quantitative threshold of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 280,
Segment Reporting
, or ASC 280. Therefore, all
three
operating segments are reportable segments.
The Company's segments share certain resources, primarily related to sales and marketing, engineering and general and administrative functions. Management allocates these costs to each respective segment based on a consistently applied methodology.
The Company has revised amounts reported for gross profit, net loss and adjusted EBITDA for the web presence and the domain segments in the segment disclosures, which impacted fiscal years 2016 and 2017. The amounts reported for the email marketing segment were not impacted. The revisions arose because of an error in the classification of certain domain registration expenses. Domain segment gross profit, net income (loss) and adjusted EBITDA were overstated by
$3.0 million
for fiscal year 2016, and by
$6.9 million
for fiscal year 2017, and web presence segment gross profit, net income (loss) and adjusted EBITDA were understated by equal amounts. Consolidated results were not impacted by this misstatement. See Note 21,
Segment Information
, for further details.
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 contracts with multiple performance obligations, 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 chargebacks, fees, or other items that may be charged back to the Company by credit card companies and other merchants, and collateral for certain facility leases.
Accounts Receivable
Accounts receivable is primarily composed of cash due from credit card companies for unsettled transactions charged to subscribers’ credit cards. As these amounts reflect authenticated transactions that are fully collectible, the Company does not maintain an allowance for doubtful accounts. The Company also accrues for earned referral fees and commissions, which are governed by reseller or affiliate agreements, when the amount is reasonably estimable.
Prepaid Domain Name Registry Fees
Prepaid domain name registry fees represent amounts that are paid in full at the time a domain is registered by one of the Company’s registrars on behalf of a customer. The registry fees are recognized on a straight-line basis over the term of the domain registration period.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, which include cash equivalents, accounts receivable, accounts payable and certain accrued expenses, approximate their fair values due to their short maturities. The fair value of the Company’s notes payable is based on the borrowing rates currently available to the Company for debt with similar terms and average maturities and approximates their carrying value.
Derivative Instruments and Hedging Activities
FASB ASC 815,
Derivatives and Hedging
, or 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 Accounting Standard Update ("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, 2016
,
2017
and
2018
, no subscriber represented
10%
or more of the Company’s total revenue. Additionally, as of December 31,
2017
and
2018
, 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 property, plant and equipment financing are depreciated over the lease term. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets as follows:
|
|
|
|
|
|
|
Building
|
|
Thirty-five years
|
|
|
Software
|
|
Two to three years
|
|
|
Computers and office equipment
|
|
Three years
|
|
|
Furniture and fixtures
|
|
Five years
|
|
|
Leasehold improvements
|
|
Shorter of useful life or remaining term of the lease
|
|
Software Development Costs
The Company accounts for software development costs for internal use software under the provisions of 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, 2016
,
2017
and
2018
, the Company capitalized internal-use software development costs of
$11.8 million
,
$10.2 million
and
$10.1 million
, respectively.
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 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 it 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 ASU No. 2011-08,
Intangibles-Goodwill and Other (Topic 350) Testing Goodwill for Impairment
, or ASU 2011-08, 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. A reporting unit is either the equivalent of, or one level below, an operating segment.
The Company has historically performed its annual goodwill test as of December 31 of each fiscal year. As a result of changes in its management structure during fiscal year 2017, including the change in the Company's chief executive officer, the Company has revised its internal reporting structure, which has resulted in a change to the Company's reporting units. The Company has identified a total of ten reporting units under its new structure. With the increase in reporting units, the Company determined that more time would be required to perform future goodwill impairment tests, and as a result, decided to accelerate the annual goodwill impairment test date to October 31 of each fiscal year, starting with the fiscal year 2017 test. The Company also early adopted the provisions of ASU 2017-04, which eliminates the second step of the goodwill impairment test. As a result, the Company's goodwill impairment test as of October 31, 2017 and all future goodwill impairment tests include only one step, which is a comparison of the carrying value of each reporting unit to its fair value, and any excess carrying value, up to the amount of goodwill allocated to that reporting unit is impaired.
Before testing goodwill at October 31, 2017, the Company allocated assets and liabilities to their respective reporting units. Goodwill was allocated to each reporting unit in accordance with ASC 350-20-40, which requires that goodwill be allocated based on the relative fair values of each reporting unit. After completing this valuation process, the Company allocated goodwill to
seven
reporting units. The Company did not allocate any goodwill to
three
smaller reporting units that were determined to have no material fair value.
The carrying value of each reporting unit is based on the assignment of the appropriate assets and liabilities to each reporting unit. Assets and liabilities were assigned to each reporting unit if the assets or liabilities are employed in the operations of the reporting unit and the asset and liability is considered in the determination of the reporting unit fair value. Certain assets and liabilities are shared by multiple reporting units, and were allocated to each reporting unit based on the relative size of a reporting unit, primarily based on revenue.
The Company's goodwill impairment test as of October 31, 2017 resulted in a
$12.1
impairment of goodwill to the Company's domain monetization reporting unit within the domain segment. The impairment is a direct result of a more rapid decline in domain parking revenue than originally expected, and to a lesser extent, reduced sales of premium domain names. Goodwill for this reporting unit has been completely impaired. Goodwill allocated to the other
six
reporting units was not impaired. As of the test date of October 31, 2018, the fair value for all reporting units was higher than their respective carrying values, and
no
impairment has been recorded. No triggering events were identified between the October 31, 2018 test and December 31, 2018.
The Company determines the fair value of each reporting unit by utilizing the income approach and the market approach. For the income approach, fair value is determined based on the present value of estimated future after-tax cash flows, discounted at an appropriate risk adjusted rate. The Company derives its discount rates using a capital asset pricing model and analyzing published rates for industries relevant to its reporting units to estimate the weighted-average cost of capital. The Company uses discount rates that are commensurate with the risks and uncertainty inherent in its business and in its internally developed forecasts. For fiscal years 2017 and 2018, the Company used a discount rate of
10.0%
for all but one of its reporting units. The Company also performed sensitivity analysis on its discount rates. The Company uses internal forecasts to estimate future after-tax cash flows, which include an estimate of long-term future growth rates based on the Company's view of the long-term outlook for each reporting unit. Actual results may differ from those assumed in the Company's forecasts.
For the market approach, the Company uses a valuation technique in which values are derived based on valuation multiples from comparable public companies, and a valuation multiple from sales of comparable companies.
For the fiscal 2017 goodwill impairment analysis, the Company compared the fair value from the income approach to the market approach based on multiples of comparable public companies and noted no material variances in the valuation techniques. For the fiscal 2018 goodwill impairment analysis, the Company compared the fair value from the income approach to two market approaches, which included a valuation multiple of comparable public companies and a valuation multiple from sales of comparable companies. For
three
of the Company's reporting units, which represent approximately
95%
of the Company's goodwill, the fair value derived from the income approach was consistent with the fair value derived from the two market approaches. The Company established the fair value for these reporting units based on the average fair value from all three valuation approaches.
For
two
of the Company's reporting units, which represent approximately
3%
of the Company's goodwill, the Company based their fair value entirely upon the income approach, as these
two
reporting units are experiencing declining cash flows and are expected to continue to experience declines over time. The fair values from the income approach for these
two
reporting units were materially below the fair values derived from both market approaches. The goodwill allocated to these
two
reporting units is approximately
$64.2 million
as of December 31, 2018. Although the Company does not expect an impairment of goodwill for these
two
reporting units in the near term, the Company expects that cash flows will continue to decline which could result in goodwill impairment charges for these
two
reporting units at some point in the future.
For
one
of the Company's reporting units, which represents approximately
2%
of the Company's goodwill, the fair values derived from the market approaches were much lower than the income approach using a discount rate of
10%
. The Company
determined that more risk was present in the projected future cash flows of this reporting unit as compared to the Company's other reporting units and determined that a discount rate of
17%
was appropriate. The fair value of this reporting unit under the income approach at a discount rate of
17%
was consistent with the fair values determined under the two market approaches. The Company established fair value for this reporting unit based on the average fair value from all three valuation approaches.
Goodwill as of
December 31, 2018
is
$1,849.1 million
. The carrying value of goodwill that was allocated to the domain, email marketing and web presence segments was
$29.9 million
,
$604.3 million
and
$1,214.9 million
, respectively. The fair value of all reporting units with goodwill at December 31, 2018 exceeds each reporting units carrying value by at least
20%
.
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.
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 income (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 income (loss). Refer to
Note 6: Property and Equipment and Property, Plant and Equipment Financing 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 year ended December 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 2016 impairments described above were recognized in the web presence segment.
During the year ended December 31, 2017, the Company recognized an impairment charge of
$13.8 million
relating to certain domain name intangible assets acquired in 2014, which was recorded in cost of revenue in the consolidated statements of operations and comprehensive income (loss). The impairment resulted from diminished cash flows associated with these intangible assets.
Also during the year ended December 31, 2017, the Company recognized an impairment charge of
$4.9 million
primarily relating to developed technology and customer relationships associated with the acquisition of the Directi web presence business in 2014. This impairment was recorded in cost of revenue in the consolidated statements of operations and comprehensive income (loss). The impairment resulted from diminished cash flows associated with these intangible assets.
All of the 2017 impairments described above were recognized in the domain segment.
During the year ended December 31, 2018, the Company did not identify any impairments relating to its long-lived assets.
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.
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 income (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 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 income (loss).
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, or ASU 2014-09 or ASC 606, 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,
ASU 2016-10,
Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing,
and ASU 2017-13,
Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606)
, Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments, which further elaborate on the original ASU No. 2014-09. The Company adopted the guidance in ASC 606 on January 1, 2018. Revenue is recognized when control of the promised products or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to for those products and services. In general, the Company determines revenue recognition through the following steps:
|
|
•
|
Identification of the contract, or contracts, with the customer
|
|
|
•
|
Identification of the performance obligations in the contract
|
|
|
•
|
Determination of the transaction price
|
|
|
•
|
Allocation of the transaction price to the performance obligations in the contract
|
|
|
•
|
Recognition of revenue when, or as, the Company satisfies a performance obligation.
|
The Company provides cloud-based subscription services, which include website hosting and related add-ons, search engine optimization (SEO) services, domain registration services and email marketing.
Website hosting gives subscribers access to an environment where the Company hosts a customer’s website. The related contract terms are generally for
one year
, but can range from
30 days
to
3 years
. Website hosting services are typically sold in bundled offerings that include website hosting, domain registration services and various add-ons. The Company recognizes revenue for website hosting and domain registration services over the term of the contract.
The main add-on services related to website hosting are domain privacy, secure sockets layer (SSL) security, site backup and restoration, and website builder tools. These services may be included in website hosting bundles, or they may be purchased on a standalone basis. Certain add-on services are provided by third parties. In cases where the Company is acting as an agent for the sale of third party add-on services, the Company recognizes revenue on a net basis at the time of sale. In cases where the Company is acting as a principal for the sale of third party add-on services (i.e., the Company has the primary responsibility to provide specific goods or services, it has discretion to establish prices and it may assume inventory risk), the Company recognizes revenue on a gross basis over the term of the contract. The revenue for Company-provided add-on services is primarily recognized over the term of the contract.
SEO services are monthly subscriptions that provide a customer with increased traffic to their website over the term of the subscription. Revenue from SEO services is recognized over the monthly term of the contract.
In the case of domain registration services, the Company is an accredited registrar and can provide registration services to the customer, or it can select an accredited third party registrar to perform these duties. Domain registration services are generally annual subscriptions, but can cover multiple years. Revenue for these services is recognized over time.
Email marketing services provide subscribers with a cloud-based platform that can send broadcast emails to a customer list managed by the subscriber. Pricing is based on contract list volume from the prior monthly period, which determines the contractual billing price for the upcoming month. Revenue for this service is recognized over the monthly term of the contract.
Non-subscription based services include certain professional services, primarily website design or re-design services, marketing development fund revenue ("MDF"), premium domain names and domain parking services.
Website design and re-design services are recognized when the service is complete.
Marketing development funds consist of commissions earned by the Company when a third party sells its products or services directly to the Company’s subscribers, and advertising revenue for third party ads placed on Company websites. The Company records revenue when the service is provided and calculates it based on the contractual revenue share arrangement or over the term of the advertisement.
Domain parking allows the Company to monetize certain of its premium domain names by loaning them to specialized third parties that generate advertising revenue from these parked domains on a pay per click ("PPC") basis. Revenue is recognized when earned and calculated based on the revenue share arrangement with the third party.
Revenue from the sale of premium domains is recognized when persuasive evidence of an arrangement to sell such domains exists and delivery of an authorization key to access the domain name has occurred. Premium domain names are paid for in advance prior to the delivery of the domain name.
For most of the Company’s performance obligations, the customer simultaneously receives and consumes the service over a period of time as the Company performs the service, resulting in the recognition of revenue over the subscription period. This method provides an appropriate depiction of the timing of the transfer of services to the customer. In limited instances, the customer obtains control of the promised service at a point in time, with no future obligations on the part of the Company. In these instances, the Company recognizes revenue at the point in time control is transferred. The contracts that the Company enters into typically do not contain any variable or non-cash considerations.
The Company maintains a reserve for refunds and chargebacks related to revenue that has been recognized and is expected to be refunded. The Company had a refund and chargeback reserve of
$0.5 million
and
$0.4 million
as of
December 31, 2017
and
2018
, respectively. The portion of deferred revenue that is expected to be refunded at
December 31, 2017
and
2018
was
$1.8 million
and
$2.2 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
83%
of all refunds happen in the same fiscal month that the contract starts or renews, and approximately
95%
of all refunds happen within
45 days
of the contract start or renewal date.
The Company did not apply any practical expedients during its adoption of ASC 606. The Company elected to use the portfolio method in the calculation of the deferred contract assets.
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.
Contracts with Multiple Performance Obligations
A considerable amount of the Company's revenue is generated from transactions that are contracts with customers that may include hosting plans, domain name registrations, and other cloud-based products and services. In these cases, the Company determines whether the products and services are distinct performance obligations that should be accounted for separately versus together. The Company allocates revenue to each performance obligation based on its relative standalone selling price, generally based on the price charged to customers. Hosting services, domain name registrations, and other cloud-based products and services have distinct performance obligations and are often sold separately. If the promise is not distinct and there is not a performance obligation, then the total transaction amount is allocated to the identified performance obligation based on a relative selling price hierarchy. When multiple performance obligations are included in a contract, the total transaction amount for the contract is allocated to the performance obligations based on a relative selling price hierarchy. The Company determines the relative selling price for a performance obligation based on a standalone selling price ("SSP"). The Company determines SSP by considering its observed standalone selling prices, competitive prices in the marketplace and management judgment; these standalone selling prices may vary depending upon the particular facts and circumstances related to each performance obligation. The Company analyzes the standalone selling prices used in its allocation of transaction amount, at a minimum, on a quarterly basis.
Deferred Revenue
The Company records deferred revenue when cash payments are received or are due in advance of the Company’s performance, including amounts that are refundable. The change in the deferred revenue balance for the year ended
December 31, 2018
is primarily driven by cash payments received or due in advance of the Company satisfying its performance obligations, offset by
$370.7 million
of revenue recognized that were included in the deferred revenue balance at the beginning of the period.
The following table provides a reconciliation of the Company's deferred revenue as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
Long-term
|
|
(in thousands)
|
Balance at December 31, 2017
|
$
|
361,940
|
|
|
$
|
90,972
|
|
Effect of adoption of ASC 606 to balances at December 31, 2017
|
20,275
|
|
|
2,882
|
|
Recognition of the beginning deferred revenue into revenue, as a result of performance obligations satisfied
|
(370,715
|
)
|
|
—
|
|
Cash received in advance during the period
|
827,218
|
|
|
311,758
|
|
Recognition of cash received in the period into revenue, as a result of performance obligations satisfied
|
(774,576
|
)
|
|
—
|
|
Foreign translation impact
|
(1,592
|
)
|
|
(264
|
)
|
Reclassification between short-term and long-term
|
309,208
|
|
|
(309,208
|
)
|
Balance at December 31, 2018
|
$
|
371,758
|
|
|
$
|
96,140
|
|
The difference between the opening and closing balances of the Company’s deferred liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment. During the year ended
December 31, 2018
, the Company recognized
$370.7 million
and
$0.0 million
, respectively, from beginning deferred revenue current and long-term balances existing at
December 31, 2017
. The Company did not recognize any revenue from performance obligations satisfied in prior periods.
The following table provides the remaining performance obligation amounts as of
December 31, 2018
. These amounts are equivalent to the ending deferred revenue balance of
$467.9 million
, which includes both short and long-term amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Web presence
|
|
Email marketing
|
|
Domain
|
|
Total
|
|
(in thousands)
|
Remaining performance obligation, short-term
|
$
|
257,722
|
|
|
$
|
55,235
|
|
|
$
|
58,801
|
|
|
$
|
371,758
|
|
Remaining performance obligation, long-term
|
81,564
|
|
|
—
|
|
|
14,576
|
|
|
96,140
|
|
Total
|
$
|
339,286
|
|
|
$
|
55,235
|
|
|
$
|
73,377
|
|
|
$
|
467,898
|
|
This backlog of revenue related to future performance obligations is prepaid by customers and supported by executed contracts with customers. The Company has established a reserve of
$0.4 million
for refunds and chargebacks,
95%
of which is expected to materialize in the first
45 days
after the contract start or renewal date. The remainder of the deferred revenue is expected to be recognized in future periods.
Deferred Customer Acquisition Costs
As a result of the implementation of ASC 606, the Company now capitalizes the incremental costs directly related to obtaining and fulfilling a contract (such as sales commissions and certain direct sales and marketing success based costs), if these costs are expected to be recovered. These costs are amortized over the period the services are transferred to the customer, which is estimated based on customer churn rates for various segments of the business. The Company includes only those incremental costs that would not have been incurred if the contracts had not been entered into:
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
Long-term
|
|
(in thousands)
|
Balance at December 31, 2017
|
$
|
—
|
|
|
$
|
—
|
|
Adjustments resulting from adoption of ASC 606
|
43,408
|
|
|
40,040
|
|
Deferred customer acquisition costs incurred in the period
|
18,671
|
|
|
33,465
|
|
Amounts recognized as expense in the period
|
(51,558
|
)
|
|
—
|
|
Foreign translation impact
|
(121
|
)
|
|
25
|
|
Reclassification between short-term and long-term
|
31,058
|
|
|
(31,058
|
)
|
Balance at December 31, 2018
|
$
|
41,458
|
|
|
$
|
42,472
|
|
As of
December 31, 2018
, the Company has a total of
$70.6 million
in deferred assets relating to costs incurred to obtain or fulfill contracts in its web presence segment, which consists entirely of recoverable, specific, success-based sales commissions. As of
December 31, 2018
, the Company has a total of
$11.9 million
deferred assets relating to costs incurred to obtain or fulfill contracts in its email marketing segment, which consists entirely of specific, success-based sales commissions. As of
December 31, 2018
, the Company has a total of
$1.4 million
deferred assets relating to costs incurred to obtain or fulfill contracts in its domain segment, which consists entirely of recoverable, specific, success-based sales commissions. During the year ended
December 31, 2018
, the Company recognized total amortization costs related to the above items of
$46.3 million
,
$4.8 million
, and
$0.5 million
in its web presence, email marketing and domain segments, respectively.
Significant Judgments
The Company sells a number of third party cloud-based services to enhance a subscriber’s overall website hosting experience. The Company exercises considerable judgment to determine if it is the principal or agent in each of these arrangements, and in some instances, has concluded that it is an agent of the third party and recognizes revenue at time of subscriber purchase at an amount that is net of the revenue share payable to the third party.
The Company exercises judgment to determine the standalone selling price for each distinct performance obligation. In instances where the standalone selling price is not directly observable, such as when the Company does not sell the product or service separately, the Company determines the standalone selling price using information that may include a competitive market assessment approach and other observable inputs. The Company typically has more than one standalone selling price for individual products and services.
Judgment is required to determine whether particular types of sales and marketing costs incurred, including commissions, are incremental and recoverable costs incurred to obtain and fulfill the customer contract. In addition, judgment is required to determine the life of the customer over which deferred customer acquisition costs are amortized.
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, 2016
,
2017
and
2018
, the Company’s sales and marketing costs were
$303.5 million
,
$277.5 million
and
$265.4 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 revenue 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
$1.8 million
,
$0.8 million
, and
$0.5 million
during the years ended
December 31, 2016
,
2017
and
2018
, respectively. These amounts are recorded in general and administrative expense in the Company’s consolidated statements of operations and comprehensive income (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. The Company had
no
unrecognized tax benefits in the year ended
December 31, 2016
$1.1 million
in the year ended
December 31, 2017
, and
$4.4 million
in the year ended
December 31, 2018
.
The Company records interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company recognized immaterial interest and penalties related to unrecognized tax benefits during the years ended December 31, 2016 and 2017, and
$0.4 million
in the year ended
December 31, 2018
.
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 ASU 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.
Net Income (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 income (loss). The Company’s basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding for the period, and, if there are dilutive securities, diluted net income (loss) 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.
For the years ended
December 31, 2016
,
2017
, all non-vested shares granted prior to the Company’s initial public offering ("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, 2018, the Company excluded stock options, restricted stock awards and restricted shares that were determined to be anti-dilutive under the treasury stock method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
|
(in thousands, except share amounts
and per share data)
|
Computation of basic and diluted net income (loss) per share:
|
|
|
|
|
|
Net (loss) income attributable to Endurance International Group Holdings, Inc.
|
$
|
(72,831
|
)
|
|
$
|
(107,308
|
)
|
|
$
|
4,534
|
|
Net (loss) income per share attributable to Endurance International Group Holdings, Inc.:
|
|
|
|
|
|
Basic
|
$
|
(0.55
|
)
|
|
$
|
(0.78
|
)
|
|
$
|
0.03
|
|
Diluted
|
$
|
(0.55
|
)
|
|
$
|
(0.78
|
)
|
|
$
|
0.03
|
|
Weighted-average number of common shares used in computing net (loss) income per share attributable to Endurance International Group Holdings, Inc.:
|
|
|
|
|
|
Basic
|
133,415,732
|
|
|
137,322,201
|
|
|
142,316,993
|
|
Diluted
|
133,415,732
|
|
|
137,322,201
|
|
|
145,669,760
|
|
The following number of weighted-average potentially dilutive shares were excluded from the calculation of diluted income (loss) per share because the effect of including such potentially dilutive shares would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
Restricted Stock Awards and Units
|
8,019,241
|
|
|
8,967,840
|
|
|
4,325,516
|
|
Options
|
10,380,991
|
|
|
10,728,795
|
|
|
8,443,928
|
|
Total
|
18,400,232
|
|
|
19,696,635
|
|
|
12,769,444
|
|
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, 2018, the only losses incurred by the Company in connection with any of its indemnification obligations or guarantees relate to immaterial amounts incurred to indemnify officers in connection with the SEC investigation. The Company does not expect material 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
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,
ASU 2016-10,
Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing,
and ASU 2017-13,
Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606)
, Amendments to SEC Paragraphs
Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments, which further elaborate on the original ASU No. 2014-09. The 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 previous 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 became 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 "modified retrospective approach"). The Company adopted this guidance on January 1, 2018 using the modified retrospective approach. The new standard impacted the timing of when certain sales incentive payments, primarily to external parties, are charged to expense as these costs must now be deferred over the life of the related customer relationship, whereas previously these amounts were expensed as incurred. In addition, a small portion of the Company's revenue recognition was impacted by this new guidance. The impact to opening retained earnings as a result of the adoption of the new guidance was
$59.4 million
, which consists of an
$83.4 million
deferred asset relating to customer acquisition costs and a
$6.1 million
deferred asset for domain registration costs, partially offset by a
$23.1 million
liability for deferred revenue, net of a deferred tax liability of
$7.0 million
. The Company applied the new guidance to all revenue contracts and did not use any practical expedients. The adoption of Topic 606 impacted the results of operations and certain balance sheet accounts. The impact of applying Topic 606 on the results for reporting periods and balance sheet beginning after January 1, 2018 is presented under Topic 606, while prior amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605. The impact of applying Topic 606 as of
December 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2018 under Topic 606
|
For the year ended December 31, 2018 under Topic 605
|
Increase (decrease)
|
Consolidated statement of operations and comprehensive income (loss) data
|
(in thousands)
|
Revenue
|
$
|
1,145,291
|
|
$
|
1,145,883
|
|
$
|
(592
|
)
|
Cost of revenue
|
520,737
|
|
520,309
|
|
428
|
|
Sales and marketing
|
265,424
|
|
266,003
|
|
(579
|
)
|
|
|
|
|
|
As of December 31, 2018 under Topic 606
|
As of December 31, 2018 under Topic 605
|
Increase (decrease)
|
Consolidated balance sheet data
|
(in thousands)
|
Prepaid commissions, current portion
|
$
|
41,458
|
|
$
|
—
|
|
$
|
41,458
|
|
Prepaid commissions, long-term
|
42,472
|
|
—
|
|
42,472
|
|
Deferred revenue, current
|
371,758
|
|
350,891
|
|
20,867
|
|
Deferred revenue, long-term
|
96,140
|
|
93,258
|
|
2,882
|
|
Deferred tax liability—long term
|
16,457
|
|
9,431
|
|
7,026
|
|
Accumulated deficit
|
(783,584
|
)
|
(843,373
|
)
|
59,789
|
|
|
|
|
|
|
For the year ended December 31, 2018 under Topic 606
|
For the year ended December 31, 2018 under Topic 605
|
Increase (decrease)
|
Consolidated statement of cash flow data
|
(in thousands)
|
Net income
|
$
|
4,534
|
|
$
|
4,975
|
|
$
|
(441
|
)
|
Change in prepaid expenses and other assets
|
(11,759
|
)
|
(11,608
|
)
|
(151
|
)
|
Change in deferred revenue
|
(6,315
|
)
|
(5,723
|
)
|
592
|
|
Cash flows from operations
|
182,552
|
|
182,552
|
|
—
|
|
In January 2016, the FASB issued ASU 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 adoption of this standard did not have a material impact on the Company's consolidated financial statements.
In November 2016, the FASB issued ASU 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 adoption of this standard did not have a material impact on the Company's statement of cash flows.
In August 2016, the FASB issued ASU 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 adoption of this standard did not have a material impact on the Company's statement of cash flows.
In October 2016, the FASB issued ASU 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, 2017, and early adoption is permitted. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment
. This new standard eliminates step two of the prior goodwill test, and instead requires that an entity 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 elected to early adopt the provisions of ASU 2017-04 effective in the fourth quarter of fiscal year 2017, which simplified the process of calculating the
$12.1 million
impairment to goodwill during the fourth quarter of fiscal year 2017.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation - Stock Compensation (Topic 718)
. This new standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This amendment is effective for annual or interim periods in fiscal years beginning after December 15, 2017, and should be applied prospectively to an award modified on or after the adoption date. The Company adopted this guidance as of January 1, 2018 and will apply this guidance to any modifications, based on the new definition of a modification, for all periods beginning on or after January 1, 2018. During the year ended December 31, 2018, there were no modifications that would impact the Company's consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.
This new guidance better aligns an entity's risk management activities and financial reporting for hedging relationships through changes to the designation and measurement guidance for qualifying hedging relationships and to the method of presenting hedge results. The amendments in this guidance require an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported, to allow users to better understand the results and costs of an entity's hedging program. This new guidance is effective for fiscal years beginning after December 15, 2019 and early adoption is allowed. The amended presentation and disclosure guidance is required only prospectively, while the measurement guidance should be applied to hedges existing at the time of adoption through a one-time cumulative-effect adjustment to accumulated other comprehensive income with respect to the elimination of the separate measurement of ineffectiveness with a corresponding adjustment to the opening balance of the retained earnings. The Company adopted this guidance on June 1, 2018 using the modified retrospective approach. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.
Recent Accounting Pronouncements - Recently Issued
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. Since then, the FASB has also issued ASU 2017-13,
Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)
:
Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments,
which further elaborates on the original ASU No. 2016-02. The new standard establishes a right-of-use (ROU) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of its pending adoption of the new standard on its consolidated financial statements, but expects that the adoption will increase its assets and liabilities. The Company's preliminary calculations of the ROU asset to be recognized upon initial adoption amounts to
$105.0 million
to
$120.0 million
, and the preliminary calculation of the lease liability amounts to
$115.0 million
to
$130.0 million
.
In July 2018, the FASB issued ASU No. 2018-07,
Compensation - Stock Compensation (Topic 718)
. The new guidance expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments in ASU No. 2018-07 specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment awards to a non-employee. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606,
Revenue from Contract with Customers
. The new guidance is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and early adoption is permitted, provided the company has already adopted the guidance in Topic 606. A company should only remeasure liability-classified awards that have not been settled by the date of adoption and equity-classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Upon transition, the company is required to measure these nonemployee awards at fair value as of the adoption date. The Company does not expect the adoption of this ASU will have a material impact 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 income (loss).
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) Ltd. ("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 of WZ UK. On January 6, 2016, the Company 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 was
$22.2 million
, which was 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 WZ UK 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. Additionally, the Company recorded an
$11.4 million
gain on this transaction based on the implied value of the
49.0%
interest held prior to acquiring the controlling interest. The difference between the initial fair value of the NCI of
$10.8 million
and the estimated fair value of
$30.0 million
was being accreted over the option period. Adjustments to the carrying amount of the redeemable non-controlling interest were charged to additional paid-in capital.
Throughout the balance of fiscal year 2016, the Company acquired additional equity interests in WZ UK for an aggregate price of
$33.4 million
, which increased the Company's ownership from
57.5%
to
86.4%
. As part of the agreement to acquire these additional interests, the Company agreed to acquire the remaining
13.6%
of WZ UK for
$25.0 million
, under certain circumstances. The additional
13.6%
was acquired on July 7, 2017. Refer to
Note 14: 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
. 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.
AppMachine
In December 2014, the Company made an aggregate investment of
$15.2 million
to acquire a
40.0%
ownership interest in AppMachine, 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) is payable 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 was included in the aggregate purchase price and recorded as deferred consideration in the Company’s consolidated balance sheet as of December 31, 2017. 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 income (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 the following: subscriber relationships of
$0.1 million
; developed technology of
$1.7 million
; 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.
Summary of Deferred Consideration Related to Acquisitions
Components of deferred consideration short-term and long-term as of
December 31, 2017
, consisted of the following:
|
|
|
|
|
|
|
|
|
|
Short-
term
|
|
Long-
term
|
|
(in thousands)
|
AppMachine (Acquired in 2016)
|
$
|
4,365
|
|
|
$
|
3,551
|
|
Total
|
$
|
4,365
|
|
|
$
|
3,551
|
|
Components of deferred consideration short-term and long-term as of
December 31, 2018
, consisted of the following:
|
|
|
|
|
|
|
|
|
|
Short-
term
|
|
Long-
term
|
|
(in thousands)
|
AppMachine (Acquired in 2016)
|
$
|
2,425
|
|
|
$
|
1,364
|
|
Total
|
$
|
2,425
|
|
|
$
|
1,364
|
|
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, 2017
and
2018
, the Company’s financial assets required to be measured on a recurring basis consist of the 2015 interest rate cap, the 2018 interest rate cap and certain cash equivalents, which include money market instruments and bank time deposits. The Company has classified these interest rate caps, which are discussed in
Note
5. Derivatives and Hedging Activities
below, within Level 2 of the fair value hierarchy. The Company has also classified these cash equivalents within Level 2 of the fair value hierarchy.
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, 2017
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
Cash equivalents (included in cash and cash equivalents)
|
$
|
5,853
|
|
|
—
|
|
|
$
|
5,853
|
|
|
$
|
—
|
|
Interest rate cap (included in other assets)
|
452
|
|
|
—
|
|
|
452
|
|
|
$
|
—
|
|
Total financial assets
|
$
|
6,305
|
|
|
$
|
—
|
|
|
$
|
6,305
|
|
|
$
|
—
|
|
Balance at December 31, 2018
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
Cash equivalents (included in cash and cash equivalents)
|
$
|
7,874
|
|
|
—
|
|
|
$
|
7,874
|
|
|
$
|
—
|
|
Interest rate cap (included in other assets)
|
2,583
|
|
|
—
|
|
|
2,583
|
|
|
$
|
—
|
|
Total financial assets
|
$
|
10,457
|
|
|
$
|
—
|
|
|
$
|
10,457
|
|
|
$
|
—
|
|
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, 2017, the Company paid
$0.8 million
related to the earn-out provisions for the Mojo acquisition, which constituted the final payment for this acquisition. The following table summarizes the changes in the financial liabilities measured on a recurring basis using Level 3 inputs as of
December 31, 2017
and
2018
:
|
|
|
|
|
|
Amount
|
|
(in thousands)
|
Financial liabilities measured using Level 3 inputs at December 31, 2016
|
$
|
818
|
|
Payment of contingent earn-outs related to 2012 acquisitions
|
(818
|
)
|
Financial liabilities measured using Level 3 inputs at December 31, 2017
|
—
|
|
Payment of contingent earn-outs related to 2012 acquisitions
|
—
|
|
Financial liabilities measured using Level 3 inputs at December 31, 2018
|
$
|
—
|
|
5. Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company has entered into
two
three
-year interest rate caps as part of its risk management strategy. The interest rate caps, designated as cash flow hedges of interest rate risk, provide for the payment to the Company of variable amounts if interest rates rise above the strike rate on the contract in exchange for an upfront premium. Therefore, these derivatives limit the Company’s exposure if the interest rate rises, but also allow the Company to benefit when the interest rate falls.
In December 2015, the Company entered into a
three
-year interest rate cap with a
$500.0 million
notional value outstanding. This interest rate cap was effective beginning on February 29, 2016. The fair value of this interest rate contract included in other assets on the consolidated balance sheet as of
December 31, 2017
and
2018
was
$0.5 million
and
$0.5 million
, respectively. The Company recognized interest expense of
$0.6 million
and
$1.9 million
, respectively, in the Company’s consolidated statement of operations for the years ended
December 31, 2017
and
2018
, respectively. The Company recognized a
$2.1 million
gain, net of a tax expense of
$0.5 million
, in Accumulated Other Comprehensive Income ("AOCI") for the year ended
December 31, 2018
. The Company estimates that a cumulative amount of
$0.1 million
will be reclassified from AOCI to interest expense (as a decrease to interest expense) in the next twelve months. For the year ended
December 31, 2017
, the Company recognized a
$0.0 million
loss in AOCI, net of a tax benefit of
$0.0 million
.
In June 2018, the Company entered into a
three
-year interest rate cap with an
$800.0 million
notional value outstanding. This interest rate cap was effective beginning on August 28, 2018. The fair value of this interest rate contract included in other assets on the consolidated balance sheet as of
December 31, 2018
was
$2.0 million
, and the Company recognized
$0.9 million
of interest expense in the Company’s consolidated statement of operations for the year ended
December 31, 2018
. The Company recognized a
$2.7 million
loss, net of a tax benefit of
$0.6 million
, in AOCI for the year ended
December 31, 2018
. The Company estimates that
$1.8 million
will be reclassified from AOCI to interest expense (as an increase to interest expense) in the next twelve months.
The effective portion of changes in the fair value of derivatives that qualify as cash flow hedges is recorded in AOCI, and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts recorded in AOCI 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, 2018
.
6. Property and Equipment and Property, Plant and Equipment Financing Obligations
Components of property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2018
|
|
(in thousands)
|
Land
|
$
|
790
|
|
|
$
|
790
|
|
Building
|
5,037
|
|
|
7,819
|
|
Software
|
82,618
|
|
|
102,259
|
|
Computers and office equipment
|
153,273
|
|
|
157,396
|
|
Furniture and fixtures
|
18,825
|
|
|
19,258
|
|
Leasehold improvements
|
22,260
|
|
|
20,215
|
|
Construction in process
|
3,800
|
|
|
12,314
|
|
Property and equipment—at cost
|
286,603
|
|
|
320,051
|
|
Less accumulated depreciation
|
(191,151
|
)
|
|
(227,776
|
)
|
Property and equipment—net
|
$
|
95,452
|
|
|
$
|
92,275
|
|
Depreciation expense related to property and equipment for the years ended
December 31, 2016
,
2017
and
2018
was
$60.4 million
,
$55.2 million
, and
$48.2 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 years ended
December 31, 2017
and
2018
, the Company did not recognize any impairments with respect to its property, plant and equipment.
During the years ended
December 31, 2017
and
2018
, the Company entered into agreements to finance software licenses for use on certain data center server equipment for terms ranging from
twenty-four months
to
thirty-nine months
.
As of
December 31, 2017
and
2018
, the Company’s software shown in the above table included the software assets under financed equipment was as follows:
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2018
|
|
(in thousands)
|
Software
|
$
|
17,256
|
|
|
$
|
16,715
|
|
Less accumulated depreciation
|
(2,265
|
)
|
|
(6,221
|
)
|
Financed equipment—net
|
$
|
14,991
|
|
|
$
|
10,494
|
|
At
December 31, 2018
, the expected future minimum lease payments under financed equipment discussed above were approximately as follows:
|
|
|
|
|
|
Amount
|
|
(in thousands)
|
2019
|
$
|
8,676
|
|
2020
|
—
|
|
Total minimum lease payments
|
$
|
8,676
|
|
Less amount representing interest
|
(297
|
)
|
Present value of minimum lease payments (financed equipment)
|
$
|
8,379
|
|
Current portion
|
$
|
8,379
|
|
Long-term portion
|
$
|
—
|
|
7. Goodwill and Other Intangible Assets
The following table summarizes the changes in the Company’s goodwill balances as of
December 31, 2017
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Web presence
|
|
Email marketing
|
|
Domain
|
|
Total
|
|
Amount
|
|
(in thousands)
|
Goodwill balance at December 31, 2016
|
$
|
1,255,604
|
|
|
$
|
604,305
|
|
|
$
|
—
|
|
|
$
|
1,859,909
|
|
Reallocation of goodwill
|
(41,987
|
)
|
|
—
|
|
|
41,987
|
|
|
—
|
|
Foreign translation impact
|
2,802
|
|
|
—
|
|
|
—
|
|
|
2,802
|
|
Impairment
|
—
|
|
|
—
|
|
|
(12,129
|
)
|
|
(12,129
|
)
|
Goodwill balance at December 31, 2017
|
1,216,419
|
|
|
604,305
|
|
|
29,858
|
|
|
1,850,582
|
|
Foreign translation impact
|
(1,517
|
)
|
|
—
|
|
|
|
|
(1,517
|
)
|
Goodwill balance at December 31, 2018
|
$
|
1,214,902
|
|
|
$
|
604,305
|
|
|
$
|
29,858
|
|
|
$
|
1,849,065
|
|
In accordance with ASC 350, the Company reviews goodwill and other indefinite-lived intangible assets for indicators of impairment on an annual basis, in addition to ad hoc reviews of goodwill if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill below its carrying amount.
During the year ended
December 31, 2017
, an impairment charge of
$12.1 million
was recorded in the consolidated statement of operations and comprehensive income (loss) relating to the Company's domain segment. As of
December 31, 2018
, the fair value of each of the Company’s reporting units exceeded the carrying value of the reporting unit’s net assets and, therefore,
no
impairment existed as of that date. Refer to
Note 2: Summary of Significant Accounting Policies
above for further details.
At
December 31, 2017
, other intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Weighted
Average
Useful Life
|
|
(dollars in thousands)
|
|
|
Developed technology
|
$
|
285,911
|
|
|
$
|
149,514
|
|
|
$
|
136,397
|
|
|
7 years
|
Subscriber relationships
|
659,732
|
|
|
431,938
|
|
|
227,794
|
|
|
7 years
|
Trade-names
|
134,054
|
|
|
73,019
|
|
|
61,035
|
|
|
8 years
|
Intellectual property
|
34,313
|
|
|
27,336
|
|
|
6,977
|
|
|
5 years
|
Domain names available for sale
|
30,458
|
|
|
7,221
|
|
|
23,237
|
|
|
Indefinite
|
Total December 31, 2017
|
$
|
1,144,468
|
|
|
$
|
689,028
|
|
|
$
|
455,440
|
|
|
|
During the year ended
December 31, 2017
, the Company wrote down intellectual property, specifically, certain domain names that generated domain monetization revenue, to fair value and recorded a charge of
$18.7 million
, which is included in cost of revenue in the consolidated statement of operations and comprehensive income (loss). The impairment resulted from diminishing cash flows associated with these assets. This impairment charge was recognized in the Company's domain segment.
At
December 31, 2018
, other intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Weighted
Average
Useful Life
|
|
(dollars in thousands)
|
|
|
Developed technology
|
$
|
284,266
|
|
|
$
|
180,914
|
|
|
$
|
103,352
|
|
|
7 years
|
Subscriber relationships
|
659,515
|
|
|
486,518
|
|
|
172,997
|
|
|
7 years
|
Trade-names
|
134,048
|
|
|
84,617
|
|
|
49,431
|
|
|
8 years
|
Intellectual property
|
34,263
|
|
|
28,954
|
|
|
5,309
|
|
|
5 years
|
Domain names available for sale
|
30,981
|
|
|
9,554
|
|
|
21,427
|
|
|
Indefinite
|
Total December 31, 2018
|
$
|
1,143,073
|
|
|
$
|
790,557
|
|
|
$
|
352,516
|
|
|
|
During the year ended
December 31, 2018
, there were no impairment charges of intangible assets.
The estimated useful lives of the individual categories of other intangible assets are based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets
with finite lives is recognized over the period of time the assets are expected to contribute to future cash flows. The Company amortizes finite-lived intangible assets over the period in which the economic benefits are expected to be realized based upon their estimated projected cash flows.
The Company’s amortization expense is included in cost of revenue in the aggregate amounts of
$143.6 million
,
$140.4 million
, and
$103.1 million
for the years ended
December 31, 2016
,
2017
and
2018
, respectively.
At
December 31, 2018
, 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)
|
2019
|
$
|
83,646
|
|
2020
|
70,486
|
|
2021
|
61,490
|
|
2022
|
37,514
|
|
2023
|
18,679
|
|
Thereafter
|
59,274
|
|
Total
|
$
|
331,089
|
|
8. Investments
As of
December 31, 2017
and
2018
, the Company’s carrying value of investments in privately-held companies was
$15.3 million
and
$15.0 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 had an agreement with BlueZone to purchase products and services. During the years ended
December 31, 2017
and
2018
, the Company purchased
$1.7 million
and
$1.0 million
, respectively, of products and services from BlueZone, which is included in the Company’s consolidated statements of operations and comprehensive income (loss). As of
December 31, 2017
and
2018
,
$0.1 million
and
$0.0 million
, respectively, relating to the investment in BlueZone was included in accounts payable and accrued expense in the Company’s consolidated balance sheet. As of
December 31, 2017
and
2018
,
$0.7 million
and
$0.0 million
, respectively, relating to the investment in BlueZone was included in prepaid expenses in the Company's consolidated balance sheet. The Company ceased doing business with this investee during fiscal year 2018, and fully impaired the
$0.3 million
remaining carrying value of this investment during the fourth quarter of fiscal year 2018. This impairment was recognized in the Company's web presence segment.
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. The investment is accounted for using the measurement alternative under ASU 2016-01 as fair value is not readily available.
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. During the year ended December 31, 2017, the Company recognized an impairment expense of
$0.6 million
in other expense in the consolidated statement of operations and comprehensive income (loss), as the carrying amount of the investment was deemed unrecoverable. This impairment was recognized in the Company's web presence segment.
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 income (loss). The Company recognized net loss of
$1.3 million
, net profit of
$0.1 million
, and net loss of
$0.3 million
for the years ended
December 31, 2016
,
2017
and
2018
, 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, 2018
, the Company was not obligated to fund any follow-on investments in these investee companies.
As of
December 31, 2018
, 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, 2018
, 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 income (loss).
9
. Notes Payable
At
December 31, 2017
and
2018
, notes payable, net of original issuance discounts (sometimes referred to as "OID") and deferred financing costs, consisted of the following:
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2017
|
|
2018
|
|
(in thousands)
|
2018 First Lien Term Loan
|
$
|
—
|
|
|
$
|
1,470,085
|
|
2017 First Lien Term Loan
|
1,563,197
|
|
|
—
|
|
Senior Notes
|
329,048
|
|
|
331,576
|
|
Revolving Credit Facilities
|
—
|
|
|
—
|
|
Total Notes Payable
|
1,892,245
|
|
|
1,801,661
|
|
Current portion of Notes Payable
|
33,945
|
|
|
31,606
|
|
Notes Payable - long-term
|
$
|
1,858,300
|
|
|
$
|
1,770,055
|
|
2018 First Lien Term Loan Facility
In connection with the Company's June 20, 2018 refinancing of its then-outstanding term loans (the "2018 Refinancing"), the Company entered into its current first lien term loan facility (the "2018 Term Loan") with an original balance of
$1,580.3 million
and a maturity date of February 9, 2023. As of
December 31, 2018
, the 2018 Term Loan had an outstanding balance of:
|
|
|
|
|
|
At December 31,
|
|
2018
|
|
(in thousands)
|
2018 First Lien Term Loan
|
$
|
1,505,002
|
|
Unamortized deferred financing costs
|
(18,556
|
)
|
Unamortized original issue discount
|
(16,361
|
)
|
Net 2018 First Lien Term Loan
|
1,470,085
|
|
Current portion of 2018 First Lien Term Loan
|
31,606
|
|
2018 First Lien Term Loan - long term
|
$
|
1,438,479
|
|
The 2018 Term Loan was issued at par and automatically bears interest at an alternate base rate unless the Company gives notice to opt for the LIBOR-based interest rate. The LIBOR-based interest rate for the 2018 Term Loan is
3.75%
per annum plus the greater of an adjusted LIBOR or
1.00%
. The alternate base rate for the 2018 Term Loan is
2.75%
per annum plus the greatest of the prime rate, the federal funds effective rate plus
0.50%
, an adjusted LIBOR for a one-month interest period plus
1.00%
and
2.00%
.
The 2018 Term Loan requires quarterly mandatory repayments of principal. During the year ended
December 31, 2018
, following the 2018 Refinancing, the Company made
three
mandatory repayments of
$7.9 million
each and
three
voluntary repayments in the aggregate amount of
$51.6 million
.
Interest is payable on maturity of the elected interest period for a term loan with LIBOR-based interest rate, which interest period can be one, two, three or six months. Interest is payable at the end of each fiscal quarter for a term loan with an alternate base rate.
2017 First Lien Term Loan Facility
The Company's prior first lien term loan facility (the "2017 Term Loan") was entered into in connection with the Company's June 14, 2017 refinancing of its then-outstanding term loans (the "2017 Refinancing"). The 2017 Term Loan had an original balance of
$1,697.3 million
and a maturity date of February 9, 2023. As of
December 31, 2017
and
2018
, the 2017 Term Loan had an outstanding balance of:
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2017
|
|
2018
|
|
(in thousands)
|
2017 First Lien Term Loan
|
$
|
1,605,792
|
|
|
$
|
—
|
|
Unamortized deferred financing costs
|
(22,456
|
)
|
|
—
|
|
Unamortized original issue discount
|
(20,139
|
)
|
|
—
|
|
Net 2017 First Lien Term Loan
|
1,563,197
|
|
|
—
|
|
Current portion of 2017 First Lien Term Loan
|
33,945
|
|
|
—
|
|
2017 First Lien Term Loan - long term
|
$
|
1,529,252
|
|
|
$
|
—
|
|
The 2017 Term Loan was issued at a price of
99.75%
of par and automatically bore interest at an alternate rate unless the Company gave notice to opt for the LIBOR-based interest rate. The LIBOR-based interest rate was
4.00%
per annum plus the greater of an adjusted LIBOR and
1.00%
. The alternate base rate for the 2017 Term Loan was
3.00%
per annum plus the greatest of the prime rate, the federal funds effective rate plus
0.50%
, an adjusted LIBOR for a one-month interest period plus
1.00%
, and
2.00%
.
The 2017 Term Loan required quarterly mandatory repayments of principal. During the year ended
December 31, 2018
, prior to the 2018 Refinancing, the Company made
one
mandatory repayment of
$8.5 million
and
one
voluntary prepayment of
$17.0 million
.
Interest was payable on maturity of the elected interest period for a term loan with a LIBOR-based interest rate, which interest period could be one, two, three or six months. Interest was payable at the end of each fiscal quarter for a term loan with an alternate base rate.
As part of the 2018 Refinancing, the Company refinanced the then-outstanding 2017 Term Loan balance of
$1,580.3 million
.
Revolving Credit Facility
In connection with the Company's February 9, 2016 acquisition of Constant Contact and the related financing of that transaction (the "Constant Contact Financing"), the Company entered into a revolving facility (the “2016 Revolver”), that replaced the Company’s prior revolving credit facility. The 2016 Revolver has an aggregate available amount of
$165.0 million
. As of
December 31, 2017
and
2018
, the Company did not have any balances outstanding under the 2016 Revolver and the full amount of the facility was unused and available.
In June 2018, the Company extended the maturity of a portion of the 2016 Revolver. The 2016 Revolver consists of a non-extended tranche of approximately
$58.8 million
and an extended tranche of approximately
$106.2 million
. The non-extended tranche has a maturity date of February 9, 2021. The extended tranche has a maturity date of June 20, 2023, with a "springing" maturity date of November 10, 2022 if the 2018 Term Loan has not been repaid in full or otherwise extended to September 19, 2023 or later prior to November 10, 2022.
The Company has the ability to draw down against the 2016 Revolver using a LIBOR-based interest rate or an alternate based interest rate. The LIBOR-based interest rate for a non-extended revolving loan is
4.0%
per annum (subject to a leverage-based step-down) and for an extended revolving loan is
3.25%
per annum (subject to a leverage-based step-down), in each plus an adjusted LIBOR for a selected interest period. The alternate base rate for a non-extended revolving loan is
3.0%
per annum (subject to a leverage-based step-down) and for an extended revolving loan is
2.25%
per annum (subject to a leverage-based step down), in each case plus the greatest of the prime rate, the federal funds rate plus
0.50%
and an adjusted LIBOR or a one-month interest period plus
1.00%
. There is also a non-refundable commitment fee, equal to
0.50%
per annum (subject to a leverage-based step-down) of the daily unused principal amount of the 2016 Revolver, 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 revolver loan with a LIBOR-based interest rate, which interest period can be one, two, three or six months. Interest is payable at the end of each fiscal quarter for a revolver loan with an alternate base rate.
Senior Notes
In connection with the Constant Contact Financing, EIG Investors issued
$350.0 million
aggregate principal amount of Senior Notes (the “Senior Notes”) with a maturity date of February 1, 2024. The Senior Notes were issued at a price of
98.065%
of par and bear interest at the rate of
10.875%
per annum. The Senior Notes have been fully and unconditionally guaranteed, on a senior unsecured basis, by the Company and its subsidiaries that guarantee the 2018 Term Loan and the 2016 Revolver (including Constant Contact and certain of its subsidiaries). The Company has the right to redeem all or part of the Senior Notes at any time for a premium which is based on the applicable redemption date. As of
December 31, 2017
and
2018
, the Senior Notes had an outstanding balance of:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2018
|
|
(in thousands)
|
Senior Notes
|
$
|
350,000
|
|
|
$
|
350,000
|
|
Unamortized deferred financing costs
|
(15,280
|
)
|
|
(13,436
|
)
|
Unamortized original issue discounts
|
(5,672
|
)
|
|
(4,988
|
)
|
Net Senior Notes
|
329,048
|
|
|
331,576
|
|
Current portion of Senior Notes
|
—
|
|
|
—
|
|
Senior Notes - long term
|
$
|
329,048
|
|
|
$
|
331,576
|
|
Interest on the Senior 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 Senior Notes, as required under the registration rights agreement it entered into with the initial purchasers of the Senior Notes. All of the
$350.0 million
aggregate principal amount of the Senior Notes was validly tendered for exchange as part of this exchange offer.
Maturity of Notes Payable
The maturity of the notes payable at
December 31, 2018
is as follows:
|
|
|
|
|
|
Amounts
|
Maturity date as of December 31,
|
(in thousands)
|
2019
|
$
|
31,606
|
|
2020
|
31,606
|
|
2021
|
31,606
|
|
2022
|
31,606
|
|
2023
|
1,378,578
|
|
Thereafter
|
350,000
|
|
Total
|
$
|
1,855,002
|
|
Interest
The Company recorded
$152.9 million
,
$157.1 million
, and
$149.5 million
in interest expense for the years ended
December 31, 2016
,
2017
and
2018
, respectively.
The following table provides a summary of loan interest rates incurred and interest expense for the years ended
December 31, 2016
,
2017
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
|
(dollars in thousands)
|
Interest rate—LIBOR
|
4.49%-7.75%
|
|
|
5.14%-6.68%
|
|
|
5.46%-6.44%
|
|
Interest rate—alternate base
|
6.75%-8.75%
|
|
|
*
|
|
|
*
|
|
Interest rate—Notes
|
10.875
|
%
|
|
10.875
|
%
|
|
10.875
|
%
|
Non-refundable fee—unused facility
|
0.50
|
%
|
|
0.50
|
%
|
|
0.50
|
%
|
Interest expense and service fees
|
$
|
140,470
|
|
|
$
|
138,041
|
|
|
$
|
136,094
|
|
Loss on extinguishment of debt
|
$
|
—
|
|
|
$
|
992
|
|
|
$
|
331
|
|
Deferred financing costs immediately expensed
|
$
|
—
|
|
|
$
|
5,487
|
|
|
$
|
1,228
|
|
Amortization of deferred financing fees
|
$
|
6,073
|
|
|
$
|
7,316
|
|
|
$
|
6,454
|
|
Amortization of original issue discounts
|
$
|
2,970
|
|
|
$
|
3,860
|
|
|
$
|
4,305
|
|
Amortization of net present value of deferred consideration
|
$
|
2,617
|
|
|
$
|
632
|
|
|
$
|
373
|
|
Other interest expense
|
$
|
758
|
|
|
$
|
814
|
|
|
$
|
695
|
|
Total interest expense
|
$
|
152,888
|
|
|
$
|
157,142
|
|
|
$
|
149,480
|
|
* The Company did not have debt bearing interest based on the alternate base rate for the twelve months ended
December 31, 2017
and
2018
.
The Company concluded that the 2017 Refinancing was primarily a debt modification of the existing term loans in accordance with ASC 470-50,
Debt: Modifications and Extinguishments,
with extinguishment relating only to a few existing lenders that did not participate in the 2017 Refinancing. As a result, during the second quarter of 2017, the Company capitalized
$4.2 million
of additional OID and
$0.9 million
of deferred financing costs related to new lenders participating in the 2017 Term Loan. These capitalized costs will be amortized over the remaining life of the loan using the effective interest method. Additionally, in the second quarter of 2017, the Company recorded a charge of
$1.0 million
, included in interest expense, to write off OID and deferred financing costs related to the refinanced debt for lenders not participating in the 2017 Term Loan. Lastly, the Company recorded a charge of
$5.5 million
during the second quarter of 2017, included in interest expense, for deferred financing costs incurred for the 2017 Term Loan that related to existing lenders that carried over from the refinanced debt.
The Company concluded that the 2018 Refinancing was primarily a debt modification of the existing term loan in accordance with ASC 470-50,
Debt: Modifications and Extinguishments
, with extinguishment relating only to one existing lender that did not participate in the 2018 Refinancing. As a result, during the second quarter of 2018, the Company capitalized
$0.4 million
of deferred financing costs related to new lenders participating in the 2018 Term Loan. These capitalized costs will be amortized over the remaining life of the loan using the effective interest method. Additionally, in the second quarter of 2018,the Company recorded a charge of
$0.3 million
, included in interest expense, to write off OID and deferred financing costs related to the refinanced debt for the lender not participating in the 2018 Term Loan. Lastly, the Company recorded a charge of
$1.2 million
during the second quarter of 2018, included in interest expense, for deferred financing costs incurred for the 2018Term Loan that related to existing lenders that carried over from the refinanced debt.
Debt Covenants
The 2018 Term Loan and the 2016 Revolver (together, the "Senior Credit Facilities") require that the Company complies with a financial covenant to maintain a maximum ratio of consolidated senior secured net indebtedness to an adjusted consolidated EBITDA measure.
The Senior Credit Facilities also contain covenants that limit the Company's ability to, among other things, incur additional debt or issue certain preferred shares; pay dividends on or make other distributions in respect of capital stock; make other restricted payments; make certain investments; sell or transfer certain assets; create liens on certain assets to secure debt; consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; and enter into certain transactions with affiliates. These covenants are subject to a number of important limitations and exceptions.
Additionally, the Senior Credit Facilities require the Company to comply with certain negative covenants and specify certain events of default that could result in amounts becoming payable, in whole or in part, prior to their maturity dates.
With the exception of certain equity interests and other excluded assets under the terms of the Senior Credit Facilities, substantially all of the Company's assets are pledged as collateral for the obligations under the Senior Credit Facilities. The indenture with respect to the 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.
The Company was in compliance with all covenants at
December 31, 2018
.
10. Stockholders’ Equity
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
, 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. 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 and units granted, the Company estimates the fair value of each restricted stock award and unit based on the closing trading price of its common stock on the date of grant.
2013 Stock Incentive Plan
The Amended and Restated 2013 Stock Incentive Plan (the “2013 Plan”) of the Company became effective upon the closing of the Company's IPO. The 2013 Plan 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 advisers of the Company. Under the 2013 Plan, the Company may issue up to
38,000,000
shares of the Company’s common stock. At
December 31, 2018
, there were
16,805,174
shares available for grant under the 2013 Plan.
2011 Stock Incentive Plan
As of February 9, 2016, the effective date of the acquisition of Constant Contact, the Company assumed and converted certain outstanding equity awards granted by Constant Contact under the Constant Contact 2011 Stock Incentive Plan (the “2011 Plan”) prior to the effective date of the acquisition (the “Assumed Awards”) into corresponding equity awards with respect to shares of the Company’s common stock. In addition, the Company assumed certain shares of Constant Contact common stock, par value
$0.01
per share, available for issuance under the 2011 Plan (the “Available Shares”), which are 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, 2018
, there were
8,458,904
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 is being recognized in the Company’s consolidated statements of operations and comprehensive income (loss) over the vesting period of the awards.
All Plans
The following table presents total stock-based compensation expense recorded in the consolidated statement of operations and comprehensive income (loss) for all awards granted under the Company’s 2013 Plan and the 2011 Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
|
(in thousands)
|
Cost of revenue
|
$
|
5,855
|
|
|
$
|
6,135
|
|
|
$
|
3,823
|
|
Sales and marketing
|
8,702
|
|
|
8,658
|
|
|
5,418
|
|
Engineering and development
|
5,989
|
|
|
6,090
|
|
|
4,495
|
|
General and administrative
|
37,721
|
|
|
39,118
|
|
|
15,328
|
|
Total operating expense
|
$
|
58,267
|
|
|
$
|
60,001
|
|
|
$
|
29,064
|
|
2013 Stock Incentive 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 a
three
- or
four
-year period 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, 2016
,
2017
and
2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2017
|
|
2018
|
Risk-free interest rate
|
1.5
|
%
|
|
2.2
|
%
|
|
2.9
|
%
|
Expected volatility
|
53.1
|
%
|
|
50.5
|
%
|
|
47.8
|
%
|
Expected life (in years)
|
6.25
|
|
|
6.25
|
|
|
6.00
|
|
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 blended volatility data from the Company's common stock and 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, 2018
and the stock option activity for all stock options granted under the 2013 Plan during the year ended
December 31, 2018
(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, 2017
|
8,575,150
|
|
|
$
|
12.30
|
|
|
|
|
|
Granted
|
611,010
|
|
|
$
|
7.50
|
|
|
|
|
|
Exercised
|
(20,584
|
)
|
|
$
|
8.09
|
|
|
|
|
|
Forfeited
|
(314,940
|
)
|
|
$
|
12.70
|
|
|
|
|
|
Canceled
|
(1,528,343
|
)
|
|
$
|
13.57
|
|
|
|
|
|
Outstanding at December 31, 2018
|
7,322,293
|
|
|
$
|
11.62
|
|
|
4.8
|
|
$
|
—
|
|
Exercisable as of December 31, 2018
|
5,681,927
|
|
|
$
|
12.34
|
|
|
3.8
|
|
$
|
—
|
|
Expected to vest after December 31, 2018(1)
|
1,640,366
|
|
|
$
|
9.13
|
|
|
8.3
|
|
$
|
—
|
|
Exercisable as of December 31, 2018 and expected to vest thereafter(2)
|
7,322,293
|
|
|
$
|
11.62
|
|
|
4.8
|
|
$
|
—
|
|
|
|
(1)
|
This represents the number of unvested options outstanding as of
December 31, 2018
that are expected to vest in the future.
|
|
|
(2)
|
This represents the number of vested options as of
December 31, 2018
plus the number of unvested options outstanding as of
December 31, 2018
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, 2018
of
$6.65
per share, or the date of exercise, as appropriate, and the exercise price of the underlying options.
|
Restricted stock awards granted under the 2013 Plan generally vest annually over a
four
-year period, unless otherwise determined by the Company’s board of directors. Performance-based restricted stock awards are earned based on the achievement of performance criteria established by the Company’s compensation committee and board of directors. The following table provides a summary of the Company’s restricted stock award activity for the 2013 Plan during the year ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
|
|
Weighted
Average
Grant Date
Fair Value
|
Non-vested at December 31, 2017
|
3,432,946
|
|
|
$
|
13.79
|
|
Granted
|
—
|
|
|
$
|
—
|
|
Vested
|
(836,723
|
)
|
|
$
|
12.24
|
|
Canceled
|
(2,152,976
|
)
|
|
$
|
14.82
|
|
Non-vested at December 31, 2018
|
443,247
|
|
|
$
|
11.67
|
|
Restricted stock units granted under the 2013 Plan generally vest annually over a
three
-year period, unless otherwise determined by the Company’s board of directors. The following table provides a summary of the Company’s restricted stock unit activity for the 2013 Plan during the year ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Weighted
Average
Grant Date
Fair Value
|
December 31, 2017
|
3,004,137
|
|
|
$
|
7.93
|
|
Granted
|
3,983,782
|
|
|
$
|
7.58
|
|
Vested
|
(1,211,367
|
)
|
|
$
|
9.07
|
|
Canceled
|
(573,293
|
)
|
|
$
|
7.75
|
|
December 31, 2018
|
5,203,259
|
|
|
$
|
7.69
|
|
2015 Performance Based Award
During fiscal year 2015, the Company granted a performance-based restricted stock award to the Company's chief executive officer at that time, Hari Ravichandran, which provided for the opportunity to earn up to
3,693,754
shares of the Company's common stock (the "Award Shares") over a three-year period beginning July 1, 2015 and ending on June 30, 2018 (the "Performance Period"). Award Shares could be earned based on the Company achieving pre-established threshold, target and maximum performance metrics.This performance-based award was evaluated quarterly to determine the probability of its vesting and to determine the amount of stock-based compensation to be recognized.
In April 2017, the Company announced that its board of directors and Mr. Ravichandran adopted a transition plan. As a result of this transition, Mr. Ravichandran's employment with the Company ended during the fourth quarter of fiscal year 2017. Upon the end of his employment, in accordance with the terms of the award, Mr. Ravichandran received the Award Shares earned in the quarters completed prior to the separation, plus the number of Award Shares that would have been earned in the quarter in which the separation occurred, which amounted to an aggregate of
1,661,439
shares. The unearned
2,032,315
shares were forfeited. During the years ended December 31, 2015 and December 31, 2016, the Company recorded compensation expense of
$5.9 million
and
$6.8 million
, respectively, in connection with this award. The final compensation charges in connection with this award of
$12.1 million
were recorded during the year ended December 31, 2017.
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”) at that time, and chief administrative officer (“CAO”) at that time. Based on the Company's achievement of Constant Contact revenue, adjusted EBITDA and cash flow metrics, each executive earned the maximum number of shares subject to his or her award. The CFO earned
223,214
shares of the Company’s stock, the COO earned
260,416
shares of the Company’s stock, and the CAO earned
148,810
shares of the Company’s stock. These earned shares vested 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. During the year ended December 31, 2017, the Company recognized
$1.2 million
of stock-based compensation expense related to these performance-based awards.
New CEO Award
On August 11, 2017, the Company and Jeffrey H. Fox entered into an employment agreement (the "Employment Agreement") appointing Mr. Fox as the Company's president and chief executive officer effective upon his employment start date (the "Effective Date") of August 22, 2017. The Employment Agreement provides for Mr. Fox to receive, on the Effective Date, an equity award under the 2013 Plan with a total value of
$10,375,000
as of August 11, 2017, split between and award of
1,032,500
restricted stock units (the "RSU Award") and an option to purchase
612,419
shares of the Company's common stock (the "Stock Option Grant").
Two Hundred Eighty-Two Thousand Five Hundred (
282,500
) of the restricted stock units subject to the RSU Award vested immediately on the Effective Date, but are subject to a requirement that Mr. Fox hold the shares underlying such restricted stock units until the earlier of the third anniversary of the Effective Date, his death or disability (as defined in the Employment Agreement) or a change in control of the company (as defined in the Employment Agreement). The Company recorded a charge of
$2.2 million
for these immediately vested shares during the year ended December 31, 2017. The remaining
750,000
restricted stock units subject to the RSU Award will vest over a
three
-year period, with
250,000
of such restricted stock units vesting annually on the anniversary of the Effective Date. The Stock Option Grant will vest over a
three
-year period, with one-third of the total number of shares subject to the Stock Option Grant vesting on the first anniversary of the Effective Date and the remainder vesting in equally monthly installments thereafter.
2011 Stock Incentive Plan
For stock options issued under the 2011 Plan, the fair value of each option is estimated on the date of grant. Unless otherwise approved by the Company’s board of directors, stock options typically vest over a
three
- or a
four
years period 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 years ended
December 31, 2017
and
2018
are as
follows:
|
|
|
|
|
|
|
2017
|
2018
|
Risk-free interest rate
|
1.98
|
%
|
*
|
|
Expected volatility
|
49.6
|
%
|
*
|
|
Expected life (in years)
|
4.75
|
|
*
|
|
Expected dividend yield
|
—
|
|
—
|
|
*
There were
no
stock options granted under the 2011 plan for the year ended December 31, 2018.
The following table provides a summary of the Company’s stock options as of
December 31, 2018
and the stock option activity for all stock options granted under the 2011 Plan during the year ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual Term
(In years)
|
|
Aggregate
Intrinsic
Value(3)
(In thousands)
|
Outstanding at December 31, 2017
|
888,260
|
|
|
$
|
8.75
|
|
|
|
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Exercised
|
(110,820
|
)
|
|
$
|
6.50
|
|
|
|
|
|
Forfeited
|
(19,016
|
)
|
|
$
|
10.82
|
|
|
|
|
|
Canceled
|
(43,320
|
)
|
|
$
|
9.39
|
|
|
|
|
|
Outstanding at December 31, 2018
|
715,104
|
|
|
$
|
9.00
|
|
|
3.4
|
|
$
|
134
|
|
Exercisable as of December 31, 2018
|
573,124
|
|
|
$
|
8.86
|
|
|
3.2
|
|
$
|
134
|
|
Expected to vest after December 31, 2018(1)
|
141,980
|
|
|
$
|
9.57
|
|
|
4.3
|
|
$
|
—
|
|
Exercisable as of December 31, 2018 and expected to vest thereafter(2)
|
715,104
|
|
|
$
|
9.00
|
|
|
3.4
|
|
$
|
134
|
|
|
|
(1)
|
This represents the number of unvested options outstanding as of
December 31, 2018
that are expected to vest in the future.
|
|
|
(2)
|
This represents the number of vested options as of
December 31, 2018
plus the number of unvested options outstanding as of
December 31, 2018
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, 2018
of
$6.65
per share, or the date of exercise, as appropriate, and the exercise price of the underlying options.
|
Unless otherwise determined by the Company’s board of directors, restricted stock units granted under the 2011 Plan generally vest annually over a
three
or
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, 2018
:
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Weighted
Average
Grant Date
Fair Value
|
Non-vested at December 31, 2017
|
1,541,141
|
|
|
$
|
8.30
|
|
Granted
|
41,379
|
|
|
$
|
7.25
|
|
Vested
|
(591,741
|
)
|
|
$
|
8.24
|
|
Canceled
|
(122,753
|
)
|
|
$
|
8.54
|
|
Non-vested at December 31, 2018
|
868,026
|
|
|
$
|
8.26
|
|
2016 Award Obligations
For the year ended December 31, 2016, stock-based compensation expense included
$0.7 million
of equity award obligations pursuant to which the Company agreed to issue 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 income (loss) for the year ended December 31, 2016. This amount was included in accrued
expenses at December 31, 2017, and would be reclassified against additional paid in capital upon issuance of the shares. During the year ended December 31, 2017, the Company incurred stock-based compensation expense of
$1.2 million
relating to these 2016 award obligations, all of which was recorded in sales and marketing expense within the consolidated statement of operations and comprehensive income (loss) for the year ended December 31, 2017. All of the shares issued pursuant to the 2016 equity award obligations were issued during the year ended December 31, 2017 and were reclassified against additional paid in capital at that time.
Under both plans combined, as of
December 31, 2018
, the Company has approximately
$7.3 million
of unrecognized stock-based compensation expense related to option awards that will be recognized over
1.4 years
and approximately
$37.4 million
of unrecognized stock-based compensation expense related to restricted stock awards and units that will be recognized over approximately
1.9 years
.
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, 2016
|
$
|
(2,395
|
)
|
|
$
|
(1,271
|
)
|
|
$
|
(3,666
|
)
|
Other comprehensive income
|
3,091
|
|
|
34
|
|
|
3,125
|
|
Balance at December 31, 2017
|
696
|
|
|
(1,237
|
)
|
|
(541
|
)
|
Other comprehensive loss
|
(2,233
|
)
|
|
(437
|
)
|
|
(2,670
|
)
|
Balance at December 31, 2018
|
$
|
(1,537
|
)
|
|
$
|
(1,674
|
)
|
|
$
|
(3,211
|
)
|
13. Revenue
Adoption of ASC Topic 606, “Revenue from Contracts with Customers”
The Company recorded a net increase to opening retained earnings of
$59.4 million
as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to customer acquisition costs. The impact to revenue and customer acquisition costs during the year ended
December 31, 2018
was a decrease of
$0.6 million
and
$0.6 million
, respectively.
During the year ended
December 31, 2018
, the Company recognized
$1,145.3 million
of revenue, the majority of which was derived from contracts with customers.
During the year ended
December 31, 2018
, the Company did not incur any impairment losses on any receivables or contract assets arising from the Company’s contracts with customers.
During the year ended
December 31, 2018
, the Company did not incur any credit losses on any receivables or contract assets arising from the Company’s contracts with customers.
In accordance with ASC 606, the Company disaggregates revenue from contracts with customers based on the timing of revenue recognition. The Company determined that disaggregating revenue into these categories depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. As discussed in
Note
21
.
Segment Information
, the Company business consists of the web presence, domain and email marketing segments. The following table presents disaggregated revenues by category for the year ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
Web presence
|
|
Email marketing
|
|
Domain
|
|
Total
|
|
(in thousands)
|
Subscription-based revenue
|
|
|
|
|
|
|
|
Direct revenue from subscriptions
|
$
|
561,583
|
|
|
$
|
404,533
|
|
|
$
|
52,016
|
|
|
$
|
1,018,132
|
|
Professional services
|
13,414
|
|
|
1,373
|
|
|
401
|
|
|
15,188
|
|
Reseller revenue
|
21,587
|
|
|
3,537
|
|
|
51,754
|
|
|
76,878
|
|
Total subscription-based revenue
|
$
|
596,584
|
|
|
$
|
409,443
|
|
|
$
|
104,171
|
|
|
$
|
1,110,198
|
|
|
|
|
|
|
|
|
|
Non-subscription-based revenue
|
|
|
|
|
|
|
|
MDF
|
$
|
7,842
|
|
|
$
|
609
|
|
|
$
|
789
|
|
|
$
|
9,240
|
|
Premium domains
|
84
|
|
|
—
|
|
|
20,025
|
|
|
20,109
|
|
Domain parking
|
805
|
|
|
—
|
|
|
4,939
|
|
|
5,744
|
|
Total non-subscription-based revenue
|
$
|
8,731
|
|
|
$
|
609
|
|
|
$
|
25,753
|
|
|
$
|
35,093
|
|
|
|
|
|
|
|
|
|
Total revenue:
|
$
|
605,315
|
|
|
$
|
410,052
|
|
|
$
|
129,924
|
|
|
$
|
1,145,291
|
|
Subscriber revenue is primarily recognized over time, when the services are performed, except for third party products for which the Company acts as an agent. Revenue from third party products for which the Company acts as an agent is recognized at a point in time, when the revenue is earned.
Revenue, classified by the major geographic areas in which the Company’s customers are located, was as follows for the year ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
Web presence
|
|
Email marketing
|
|
Domain
|
|
Total
|
|
(in thousands)
|
Domestic
|
$
|
405,928
|
|
|
$
|
376,974
|
|
|
$
|
50,962
|
|
|
$
|
833,864
|
|
International
|
199,387
|
|
|
33,078
|
|
|
78,962
|
|
|
311,427
|
|
Total
|
$
|
605,315
|
|
|
$
|
410,052
|
|
|
$
|
129,924
|
|
|
$
|
1,145,291
|
|
14. Redeemable Non-Controlling Interest
As described in Note 3 -
Acquisitions
, on January 6, 2016, the Company acquired a controlling interest in WZ UK. In connection with this acquisition, the Company recorded redeemable NCI of
$10.8 million
. In accordance with 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 million
value that was expected to be paid upon exercise of the put option was being accreted over the option period. Adjustments to the carrying amount of the redeemable non-controlling interest were charged to additional paid-in capital.
Throughout the balance of fiscal year 2016, the Company acquired additional equity interests in WZ UK for an aggregate price of
$33.4 million
, which increased the Company's ownership from
57.5%
to
86.4%
. As part of the agreement to acquire these additional interests, the Company agreed to acquire the remaining
13.6%
of WZ UK for
$25.0 million
, under certain circumstances. 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 was below the expected redemption amount of
$25.0 million
, which resulted in
$14.2 million
of excess accretion that reduced 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
and
$7.2 million
during the year ended December 31, 2016 and 2017, respectively, which is reflected in net loss attributable to accretion of non-controlling interest in the Company’s consolidated statements of operations and comprehensive income (loss). On July 7, 2017, the Company redeemed the remaining redeemable non-controlling interest for
$25.0 million
.
15
. Income Taxes
The following table presents domestic and foreign components of loss before income taxes for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
|
(in thousands)
|
United States
|
$
|
(137,197
|
)
|
|
$
|
(117,715
|
)
|
|
$
|
(52,029
|
)
|
Foreign
|
(52,593
|
)
|
|
540
|
|
|
50,584
|
|
Total income (loss) before income taxes
|
$
|
(189,790
|
)
|
|
$
|
(117,175
|
)
|
|
$
|
(1,445
|
)
|
The components of the provision (benefit) for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
|
(in thousands)
|
Current:
|
|
|
|
|
|
U.S. federal
|
$
|
328
|
|
|
$
|
319
|
|
|
$
|
(4,000
|
)
|
State
|
744
|
|
|
2,610
|
|
|
2,772
|
|
Foreign
|
2,312
|
|
|
2,597
|
|
|
5,420
|
|
Total current provision
|
3,384
|
|
|
5,526
|
|
|
4,192
|
|
Deferred:
|
|
|
|
|
|
U.S. federal
|
(44,447
|
)
|
|
(36,854
|
)
|
|
(4,671
|
)
|
State
|
(6,225
|
)
|
|
(3,243
|
)
|
|
236
|
|
Foreign
|
(10,037
|
)
|
|
9,377
|
|
|
10,435
|
|
Change in valuation allowance
|
(52,533
|
)
|
|
7,913
|
|
|
(16,438
|
)
|
Total deferred provision
|
(113,242
|
)
|
|
(22,807
|
)
|
|
(10,438
|
)
|
Total benefit
|
$
|
(109,858
|
)
|
|
$
|
(17,281
|
)
|
|
$
|
(6,246
|
)
|
The income tax benefit for the year ended December 31, 2018 was primarily attributable to a
$9.6 million
federal and state deferred tax benefit, a foreign deferred tax benefit of
$0.8 million
, and a federal and state current income tax benefit of
$1.3 million
, offset by foreign current tax expense of
$5.4 million
. This aggregate tax benefit of
$10.4 million
is inclusive of
$2.2 million
of reserves provided during the year ended December 31, 2018 for unrecognized tax benefits.
The income tax benefit for the year ended December 31, 2017 was primarily attributable to a federal and state deferred tax benefit of
$21.8 million
(which includes a
$16.9 million
tax benefit pertaining to the federal tax rate change as a result of the Tax Cut and Jobs Act of 2017 and the identification and recognition of
$1.2 million
of U.S. federal and state tax credits) and a foreign deferred tax benefit of
$1.0 million
, offset by a provision for federal and state current income taxes of
$2.9 million
and foreign current tax expense of
$2.6 million
. This aggregate tax benefit of
$17.3 million
is inclusive of
$1.8 million
of reserves provided during the year ended December 31, 2017 for unrecognized tax benefits.
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
. The deferred tax benefits recorded during the year ended December 31, 2016, including the change in the valuation allowance, were primarily attributable to the acquisition of Constant Contact, which resulted in the recognition of a significant amount of deferred tax liabilities which offset previously recorded deferred tax assets for which a valuation allowance was previously provided.
The following table presents a reconciliation of the Company's income tax benefit based on statutory income tax rates and the actual income tax benefit, for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
U.S. federal taxes at statutory rate
|
$
|
(67,103
|
)
|
|
$
|
(40,973
|
)
|
|
$
|
(303
|
)
|
State income taxes, net of federal benefit
|
(1,781
|
)
|
|
(749
|
)
|
|
265
|
|
Non-deductible stock-based compensation
|
2,883
|
|
|
9,265
|
|
|
3,906
|
|
Non-deductible transaction costs
|
5,471
|
|
|
—
|
|
|
1,538
|
|
Non-taxable loss on redemption of equity interest
|
—
|
|
|
—
|
|
|
9,230
|
|
Credits
|
(8,847
|
)
|
|
(1,247
|
)
|
|
(5,659
|
)
|
Foreign rate differential
|
8,737
|
|
|
(1,404
|
)
|
|
369
|
|
Change in valuation allowance—U.S.
|
(60,438
|
)
|
|
18,777
|
|
|
(5,199
|
)
|
Change in valuation allowance—foreign
|
7,905
|
|
|
(10,864
|
)
|
|
(11,239
|
)
|
Rate change
|
(768
|
)
|
|
(8,809
|
)
|
|
694
|
|
Foreign attribute - write-off
|
—
|
|
|
9,261
|
|
|
—
|
|
Permanent differences and other
|
4,083
|
|
|
9,462
|
|
|
153
|
|
Total
|
$
|
(109,858
|
)
|
|
$
|
(17,281
|
)
|
|
$
|
(6,246
|
)
|
The benefit for income taxes shown on the consolidated statements of operations differs considerably from amounts that would result from applying the statutory tax rates to income before taxes primarily because of U.S. net operating losses historically incurred, which offset federal income taxes, but do not fully offset state or foreign income taxes. In addition, acquisitions and the recent changes in U.S. tax law that limit the deductibility of interest expenses have impacted the calculation of deferred tax liabilities and created variability in deferred income tax benefit from period to period. Lastly, the Company provides a valuation allowance against most of its deferred tax assets, which prevents recognition of certain deferred tax assets and results in further variability in deferred income tax benefit from period to period.
The significant components of the Company’s deferred income tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2018
|
Deferred income tax assets:
|
|
|
|
Net operating loss carry forward
|
$
|
47,098
|
|
|
$
|
39,765
|
|
Credit carryforward
|
27,337
|
|
|
33,526
|
|
Interest expense limitation carryforward
|
—
|
|
|
14,711
|
|
Deferred compensation
|
215
|
|
|
179
|
|
Deferred revenue
|
19,729
|
|
|
3,752
|
|
Other reserves
|
(72
|
)
|
|
2,549
|
|
Stock-based compensation
|
14,887
|
|
|
11,673
|
|
Other, net
|
(327
|
)
|
|
977
|
|
Total deferred income tax assets
|
108,867
|
|
|
107,132
|
|
Deferred income tax liabilities:
|
|
|
|
Purchased intangible assets
|
(47,580
|
)
|
|
(29,855
|
)
|
Goodwill
|
(27,922
|
)
|
|
(35,400
|
)
|
Property and equipment
|
(9,024
|
)
|
|
(11,183
|
)
|
Total deferred income tax liabilities
|
(84,526
|
)
|
|
(76,438
|
)
|
Valuation allowance
|
(44,068
|
)
|
|
(47,151
|
)
|
Net deferred income tax liabilities
|
$
|
(19,727
|
)
|
|
$
|
(16,457
|
)
|
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, 2017;
|
|
|
•
|
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.
|
The Company assessed its ability to realize its U.S. deferred tax assets as of December 31, 2018 and determined that it was more likely than not that the Company would not realize
$43.0 million
of net deferred tax assets. The Company assessed its ability to realize its foreign deferred tax assets as of December 31, 2018 and determined that it was more likely than not that the Company would not realize
$3.3 million
of net deferred tax assets in the Netherlands,
$0.4 million
of net deferred tax assets in India,
$0.2 million
in deferred tax assets in Israel and
$0.2 million
of net deferred tax assets in China.
As of December 31, 2018, the Company had NOL carry-forwards available to offset future U.S. federal taxable income of approximately
$108.9 million
and future state taxable income of approximately
$115.5 million
. These NOL carry-forwards expire on various dates through 2038.
As of December 31, 2018, the Company had NOL carry-forwards in foreign jurisdictions available to offset future foreign taxable income by approximately
$13.8 million
. The Company has loss carry-forwards that begin to expire in 2021 in China totaling
$0.9 million
. The Company has loss carry-forwards that begin to expire in 2020 in the Netherlands totaling
$12.1 million
. The Company has loss carryforwards that begin to expire in 2020 in India totaling
$0.6 million
. The Company also has loss carry-forwards in Singapore of
$0.3 million
which has an indefinite carry-forward period.
In addition, the Company has
$29.2 million
of U.S. federal capital loss carry-forwards and
$12.9 million
in state capital loss-forwards, generally expiring through 2023. As of December 31, 2018, the Company had U.S. tax credit carry-forwards available to offset future U.S. federal and state taxes of approximately
$23.7 million
and
$12.4 million
, respectively. These credit carry-forwards expire on various dates through 2038. Due to provisions of the Tax Cuts and Jobs Act of 2017, the Company has a carryforward of disallowed interest expense of
$61.2 million
, which has an indefinite carryforward 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, the Company was subject to Section 382 annual limitation of
$77.1 million
, which was in excess of the actual NOLs available. Therefore, these NOLs were not impacted by this limitation. The Company performed additional Section 382 analysis following its IPO during the year ended December 31, 2013, and after additional offerings of its common stock during the years ended December 31, 2014 and 2015, and determined that no additional Section 382 limitations applied. The acquisition of Constant Contact during the year ended December 31, 2016 was considered a change of control under Section 382 for Constant Contact, however, the amount of the limitation exceeded the amount of NOLs and other tax attributes available at the time of the acquisition, therefore, these NOLs and tax attributes were not adversely impacted by these limitations. As a result, all unused NOL carry-forwards at December 31, 2018 are available for future use to offset taxable income.
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.
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 unrecognized tax benefits for uncertain tax positions of
$1.1 million
and
$4.4 million
at December 31, 2017 and 2018, respectively, that would affect its effective tax rate. The Company records interest related to unrecognized tax benefits in interest expense and penalties in operating expense. The Company recognized immaterial interest and penalties related to unrecognized tax benefits during the years ended December 31, 2016 and 2017, and
$0.4 million
in the year ended December 31, 2018.
The Company does not expect a significant change in the liability for unrecognized tax benefits in the next 12 months.
|
|
|
|
|
Unrecognized tax benefits at December 31, 2017
|
$
|
1,129
|
|
Addition for tax positions of prior years
|
887
|
|
Addition for tax positions of current year
|
2,365
|
|
Unrecognized tax benefits at December 31, 2018
|
$
|
4,381
|
|
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.
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's Constant Contact subsidiary is currently under an Internal Revenue Service audit in the United States for the periods ended December 31, 2015 and February 9, 2016 (short period), India for fiscal years ended March 31, 2014, 2015 and 2016 and Israel for the fiscal years ended December 31, 2012, 2013, 2014, 2015 and 2016. At this time, the Company does not expect material changes as a result of the audits.
The statute of limitations in the Company’s other tax jurisdictions, in the United Kingdom and Brazil, remains open for various periods between 2014 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.
Tax Cuts and Jobs Act
On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act, which significantly changed the existing U.S. tax laws, including a reduction in the corporate tax rate from 35% to 21%, a limitation on the deductibility of interest expenses, a move from a worldwide tax system to a territorial system, as well as other changes. As a result of enactment of the legislation, we incurred an additional one-time income tax benefit on the re-measurement of certain deferred tax assets and liabilities in the amount of
$16.9 million
. The legislation also introduced substantial international tax reform that moves the U.S. toward a territorial system, in which income earned in other countries will generally not be subject to U.S. taxation. The accumulated foreign earnings of U.S. shareholders of certain foreign corporations will be subject to a one-time transition tax. Amounts held in cash or cash equivalents will be subject to a 15.5 percent tax, while amounts held in illiquid assets will be subject to an eight percent tax. Due to an accumulated deficit in the undistributed earnings of its foreign subsidiaries, the one-time transition tax will not apply to the Company.
Permanent Reinvestment of Foreign Earnings
As of
December 31, 2018
, the cumulative amount of undistributed earnings of the Company's foreign subsidiaries amounted to
$31.8 million
. The Company has not provided U.S. taxes on these undistributed earnings of its foreign subsidiaries that it considers indefinitely reinvested. This indefinite reinvestment determination is based on the future operational and capital requirements of the Company's domestic and foreign operations. The Company expects that the cash held by its foreign subsidiaries of
$26.1 million
will continue to be used for its foreign operations and therefore does not anticipate repatriating these funds.
Included within the Tax Cuts and Jobs Act of 2017 were changes to Subpart F rules and a requirement for taxation of the aggregate net unrepatriated foreign earnings accumulated before January 1, 2018. These changes did not impact the Company in 2017 and the Company does not expect the Subpart F changes to have a material impact in the future. Except for Subpart F income, the Company has not provided taxes for the remaining
$31.8 million
of undistributed earnings of its profitable foreign subsidiaries because the Company plans to keep these amounts permanently reinvested overseas except for instances where it 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
, or 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 income (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 income (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 carry-forwards) 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 carry-forwards due to excess tax benefits of
$1.5 million
and
$0.7 million
, respectively.
16. Severance and Other Exit Costs
The Company evaluates its data center, sales and marketing, support and engineering operations and the general and administrative function on an ongoing basis in an effort to optimize its cost structure. As a result, the Company may incur charges for employee severance, exiting facilities and restructuring data center commitments and other related costs.
2018 Restructuring Plan
In January 2018, the Company announced plans to eliminate approximately
71
positions, later increased to approximately
95
positions, primarily in the Asia Pacific region and to a lesser extent in the U.S., in order to streamline operations and create operational efficiencies (the "2018 Restructuring Plan"). During the year ended
December 31, 2018
, the Company incurred severance costs of
$3.0 million
and paid
$2.8 million
and had a remaining accrued severance liability of
$0.2 million
at
December 31, 2018
in connection with the 2018 Restructuring Plan. The Company completed severance charges related to the 2018 Restructuring Plan during the year ended
December 31, 2018
.
In connection with the 2018 Restructuring Plan, the Company closed offices in Ohio. During the year ended
December 31, 2018
, the Company recorded facility charges of
$0.5 million
. The Company made payments of
$0.1 million
during the year ended
December 31, 2018
, and had a remaining accrued facility liability of
$0.4 million
as of
December 31, 2018
.
2017 Restructuring Plan
In January 2017, the Company announced plans to close certain offices as part of a plan to consolidate certain web presence customer support operations, resulting in severance costs. These severance charges were associated with the elimination of approximately
660
positions, primarily in customer support. Additionally, the Company implemented additional restructuring plans to create operational efficiencies and synergies related to the Constant Contact acquisition, which resulted in additional severance charges for the elimination of approximately
50
positions. For the year ended
December 31, 2018
, in connection with these plans (together, the “2017 Restructuring Plan”), the Company incurred
no
additional severance costs and paid
$3.5 million
. The Company had a remaining accrued severance liability of
$0.2 million
as of
December 31, 2018
.
In connection with the 2017 Restructuring Plan, the Company closed offices in Orem, Utah and relocated certain employees to its Tempe, Arizona office. During the year ended
December 31, 2018
, the Company recorded a reduction to facility charges of
$0.2 million
. The Company made payments of
$0.1 million
during the year ended
December 31, 2018
, and had a remaining accrued facility liability of
$0.0 million
as of
December 31, 2018
.
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 all employee-related charges associated with the 2016 Restructuring Plan during the year ended December 31, 2016 and all severance payments were complete at December 31, 2017. There is
no
severance accrual remaining as of
December 31, 2018
.
The 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, 2018
, the Company incurred facility charges of
$0.1 million
. The Company paid
$2.4 million
of facility costs related to the 2016 Restructuring Plan during the year ended
December 31, 2018
and had a remaining accrued facility liability of
$3.7 million
as of
December 31, 2018
.
The Company expects to complete facility exit cost payments related to the 2016 Restructuring Plan during the year ended December 31, 2022.
The following table provides a summary of the aggregate activity for the year ended
December 31, 2018
related to the Company’s combined severance accrual for the 2018, 2017 and 2016 Restructuring Plans (together, the "Restructuring Plans"):
|
|
|
|
|
|
Employee Severance
|
|
(in thousands)
|
Balance at December 31, 2017
|
$
|
3,668
|
|
Severance charges
|
2,978
|
|
Cash paid
|
(6,238
|
)
|
Balance at December 31, 2018
|
$
|
408
|
|
The following table provides a summary of the aggregate activity for the year ended
December 31, 2018
related to the Company’s combined Restructuring Plans facilities exit accrual:
|
|
|
|
|
|
Facilities
|
|
(in thousands)
|
Balance at December 31, 2017
|
$
|
6,005
|
|
Facility charges
|
390
|
|
Sublease income
|
321
|
|
Cash paid
|
(2,616
|
)
|
Balance at December 31, 2018
|
$
|
4,100
|
|
The following table presents restructuring charges recorded in the consolidated statement of operations and comprehensive income (loss) for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
2016
|
|
2017
|
|
2018
|
|
(in thousands)
|
Cost of revenue
|
$
|
8,986
|
|
|
$
|
4,100
|
|
|
$
|
1,385
|
|
Sales and marketing
|
6,550
|
|
|
3,586
|
|
|
110
|
|
Engineering and development
|
4,288
|
|
|
1,469
|
|
|
348
|
|
General and administrative
|
4,400
|
|
|
6,655
|
|
|
1,525
|
|
Total restructuring charges
|
$
|
24,224
|
|
|
$
|
15,810
|
|
|
$
|
3,368
|
|
17. 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, 2018
:
|
|
|
|
|
Year Ending December 31,
|
Amount
|
|
(in thousands)
|
2019
|
$
|
20,770
|
|
2020
|
20,629
|
|
2021
|
17,577
|
|
2022
|
14,959
|
|
2023
|
14,606
|
|
Thereafter
|
25,600
|
|
Total minimum lease payments
|
$
|
114,141
|
|
Total net rent expense incurred under non-cancellable operating leases for the years ended
December 31, 2016
,
2017
and
2018
, were
$20.0 million
,
$22.1 million
and
$20.8 million
, respectively. Total sublease income for the years ended December 31, 2016,
2017
and
2018
was
$0.4 million
,
$0.5 million
and
$1.0 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
Machado
and
McGee
shareholder litigation matters listed below nor an estimate of any probable losses or any reasonably possible losses (other than the reserves specifically discussed below) can be assessed at this time.
Endurance
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. On June 5, 2018, the Company announced that it had resolved both this investigation and the Constant Contact investigation discussed below by consenting to the SEC's entry of a cease and desist order (the "Order"), without admitting or denying the SEC's findings set forth in the Order, and by paying a civil monetary penalty. The Company accrued the penalty in the fiscal quarter ended September 30, 2017 and paid the penalty in the fiscal quarter ended June 30, 2018.
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 former chief executive officer and former chief financial officer, captioned Machado v. Endurance International Group Holdings, Inc., et al., Civil Action No. 1:15-cv-11775-GAO. The plaintiff filed an amended complaint on December 8, 2015, a second amended complaint on March 18, 2016, and a third amended complaint on June 30, 2017. In the third amended complaint, plaintiffs Christopher Machado and Michael Rubin allege claims for violations of Section 10(b) and 20(a) of the Exchange Act, and Sections 11, 12(a)(2), and 15 of the Securities Act, on behalf of a purported class of purchasers of the Company’s securities between October 25, 2013 and December 16, 2015, including persons or entities who purchased or acquired the Company's shares pursuant or traceable to the registration statement and prospectus issued in connection with the Company's October 25, 2013 initial public offering. The plaintiffs challenge as false or misleading certain of the Company’s disclosures about the total number of subscribers, average revenue per subscriber, the number of customers paying over
$500
per year for the Company’s products and services, and the average number of products sold per subscriber. The plaintiffs seek, on behalf of themselves and the purported class, compensatory damages, rescissory damages as to class members who purchased shares pursuant to the offering and the plaintiffs' costs and expenses of litigation. On January 12, 2018, the parties filed a joint motion to stay all proceedings pending the outcome of a mediation between the parties. The court granted the stay on February 21, 2018 and later extended the stay to allow the parties to discuss a potential resolution of this matter. The parties then negotiated the terms and conditions of a stipulation and agreement of settlement and related papers, which, among other things, provide for the release of all claims asserted against the Company and its former chief executive officer and former chief financial officer. On July 6, 2018, the plaintiffs filed an unopposed motion seeking preliminary approval of the proposed settlement, certification of a proposed settlement class, and approval of notice to the settlement class. On January 2, 2019, the court entered an order preliminarily approving the settlement and scheduling a hearing for September 13, 2019 to determine whether the proposed settlement is fair, reasonable and adequate and whether the case should therefore be dismissed with prejudice. The Company's contribution to the settlement pool under the proposed settlement would be approximately equal to the
$7.3 million
it reserved during the year ended December 31, 2018 in connection with a possible settlement of both this action and the
McGee
litigation discussed below. The Company cannot make any assurances as to whether or when the settlement will be approved by the court.
Constant Contact
On February 9, 2016, the Company acquired all of the outstanding shares of common stock of Constant Contact.
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. As discussed above, on June 5, 2018, the Company announced that it had settled both this investigation and the Endurance investigation discussed above by consenting to the SEC's entry of the Order, without admitting or denying the SEC's findings set forth in the Order, and by paying a civil monetary penalty. The
Company accrued the penalty in its fiscal quarter ended September 30, 2017 and paid the penalty in the fiscal quarter ended June 30, 2018.
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 non-disclosure 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. The parties mediated the claims on March 27, 2018, and as a result of that mediation reached an agreement in principle with the lead plaintiff to settle the action. The parties then negotiated the terms and conditions of a stipulation and agreement of settlement and related papers, which, among other things, provide for the release of all claims asserted against Constant Contact and its former officers. On May 18, 2018, the plaintiffs filed an unopposed motion seeking preliminary approval of the proposed settlement, certification of the proposed settlement class for settlement purposes only, and approval of notice to the settlement class. The court has not yet ruled on this motion. The Company's contribution to the settlement pool under the proposed settlement would be approximately equal to the
$7.3 million
it reserved during the year ended December 31, 2018 in connection with a possible settlement of both this action and the Endurance
Machado
litigation discussed above. The Company cannot make any assurances as to whether or when the settlement will be approved by the court.
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 sought 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, Constant Contact 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. Meanwhile, RPost asserted the same patents it asserted against Constant Contact in litigation against GoDaddy. In June 2016, GoDaddy succeeded in invalidating all of those RPost patents, with Endurance filing an amicus brief in the Federal Circuit in support of GoDaddy’s position in November 2016. RPost’s efforts to appeal, including filing a writ of certiorari with the United States Supreme Court, which was denied on December 11, 2017, were unsuccessful. All claims asserted by RPost against Constant Contact in December 2012 thus remain invalid except for one claim from one patent which RPost did not assert against GoDaddy. Constant Contact has notified RPost that Constant Contact believes the remaining claim is invalid in light of the other litigation that RPost lost. On December 12, 2017, Constant Contact moved to lift the stay in the District Court order to file a Motion for Judgment on the Pleadings invalidating all of the RPost patents-in-suit. While this motion was pending, RPost voluntarily dismissed all of its patent claims against Constant Contact and the defendant marketing partners of Constant Contact on December 29, 2017. On January 19, 2018, the district court entered an order dismissing the lawsuit.
18. 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
$18,500
in
2018
, 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
2016
,
2017
, and
2018
plan years were approximately
$5.7 million
,
$6.3 million
, and
$5.9 million
respectively.
19. Variable Interest Entity
The Company, through a subsidiary formed in China, entered into various agreements with Shanghai Xiao Lan Network Technology Co., Ltd ("Shanghai Xiao") and its shareholders that allowed the Company to effectively control Shanghai Xiao, making it a variable interest entity ("VIE"). Shanghai Xiao has a technology license that allows it to provide local hosting services to customers located in China. During fiscal year 2018, the Company ceased operations of the VIE, and has begun the process to liquidate the entity.
From inception of Shanghai Xiao and through December 31, 2018, 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.
20. 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, 2016
,
2017
and
2018
.
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 former chief executive officer, who is also a holder of more than
5.0%
of the Company's capital stock.
The following table includes the amounts of related party transactions recorded in the consolidated statements of operations and comprehensive income (loss) for the years ended
December 31, 2016
,
2017
and
2018
relating to services provided by Tregaron and its affiliates under these agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
|
(in thousands)
|
Cost of revenue
|
$
|
12,200
|
|
|
$
|
12,100
|
|
|
$
|
14,255
|
|
Sales and marketing
|
500
|
|
|
1,200
|
|
|
755
|
|
Engineering and development
|
1,300
|
|
|
1,300
|
|
|
1,260
|
|
General and administrative
|
300
|
|
|
200
|
|
|
115
|
|
Total related party transaction expense
|
$
|
14,300
|
|
|
$
|
14,800
|
|
|
$
|
16,385
|
|
As of
December 31, 2017
and
2018
, approximately
$1.5 million
and
$2.4 million
, respectively, was included in accounts payable and accrued expenses 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. During the year ended December 31, 2018, a director of the Company and the Company’s former chief executive officer, who is a holder of more than
5.0%
of the Company's capital stock, continued to hold a material financial interest in IBS.
During the year ended December 31, 2017, the Company’s principal agreement with this entity was amended to permit the Company to purchase a specific IBS website performance product at no charge, and in exchange, to increase the revenue share to IBS on certain website performance products. The Company records revenue on the sale of IBS products on a net basis, since the Company views IBS as the primary obligor to deliver these services. As a result, the revenue share paid by the Company to IBS is recorded as contra-revenue. Further, IBS pays the Company a fee on sales made by IBS directly to customers of the Company. The Company records these fees as revenue.
The following table includes the revised amounts of related party transactions recorded in the consolidated statements of operations and comprehensive income (loss) for the years ended
December 31, 2016
,
2017
and
2018
relating to services provided by IBS under these agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
|
(in thousands)
|
Revenue
|
$
|
(3,100
|
)
|
|
$
|
(4,250
|
)
|
|
$
|
(5,450
|
)
|
Revenue (contra)
|
7,500
|
|
|
7,850
|
|
|
7,965
|
|
Total related party transaction impact to revenue
|
$
|
4,400
|
|
|
$
|
3,600
|
|
|
$
|
2,515
|
|
Cost of revenue
|
700
|
|
|
675
|
|
|
640
|
|
Total related party transaction expense, net
|
$
|
5,100
|
|
|
$
|
4,275
|
|
|
$
|
3,155
|
|
As of
December 31, 2017
and
2018
, 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, 2017
and
2018
, approximately
$1.3 million
and
$0.6 million
, respectively was included in accounts payable and accrued expenses relating to the Company’s agreements with IBS.
As of
December 31, 2017
and
2018
, approximately
$0.7 million
and
$0.9 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"). The Company paid
$3.0 million
to the Goldman Sachs subsidiary as a premium for the interest rate cap during the year ended December 31, 2016. No further premiums are payable under this interest rate cap. Goldman Sachs is a significant shareholder of the Company. Refer to
Note 4: Fair Value Measurements,
for further details.
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 Senior 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 Senior 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 Senior Notes, the Company agreed to assist the initial purchasers, including Goldman Sachs, in marketing the Senior Notes. Through December 31, 2016, the Company incurred expenses on behalf of the initial purchasers of approximately
$0.8 million
.
Goldman Sachs Lending Partners LLC, a subsidiary of Goldman Sachs, was one of the joint bookrunners and joint lead arrangers for the 2017 Refinancing and 2018 Refinancing. In that capacity, Goldman Sachs Lending Partners LLC received an arrangement fee of
$0.5 million
and
$0.3 million
, respectively, and was reimbursed for an immaterial amount of expenses.
21
.
Segment Information
The Company has three reportable segments: web presence, domain and email marketing. The products and services included in each of the
three
reportable segments are as follows:
Web Presence
. The web presence segment consists primarily of the Company's web hosting brands, the largest of which are Bluehost and HostGator. This segment also includes related products such as domain names, website security, website design tools and services, and e-commerce products.
Domain
. The domain segment consists of domain-focused brands such as Domain.com, ResellerClub and LogicBoxes as well as certain web hosting brands that are under common management with domain-focused brands. This segment sells domain names and domain management services to resellers and end users, as well as premium domain names, and also generates advertising revenue from domain name parking. It also resells domain names and domain management services to the web presence segment.
Email Marketing
. The email marketing segment consists of Constant Contact email marketing tools and related products and our SinglePlatform digital storefront solution.
The Company measures profitably of these segments based on revenue, gross profit, and adjusted EBITDA. The Company's segments share certain resources, primarily related to sales and marketing, engineering and general and administrative functions. Management allocates these costs to each respective segment based on a consistently applied methodology.
The CODM does not use asset information to allocate resources or make operating decisions.
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 years ended December 31,
2016
,
2017
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
Web presence
|
Email marketing
|
Domain
|
Total
|
|
(in thousands)
|
Revenue
(1)
|
$
|
648,732
|
|
$
|
326,808
|
|
$
|
135,602
|
|
$
|
1,111,142
|
|
Gross profit
|
312,067
|
|
173,163
|
|
41,921
|
|
527,151
|
|
|
|
|
|
|
Net loss
|
(22,161
|
)
|
(55,857
|
)
|
(3,211
|
)
|
(81,229
|
)
|
Interest expense, net
(2)
|
68,617
|
|
81,469
|
|
2,226
|
|
152,312
|
|
Income tax expense (benefit)
|
(78,901
|
)
|
(33,543
|
)
|
2,586
|
|
(109,858
|
)
|
Depreciation
|
33,590
|
|
23,747
|
|
3,023
|
|
60,360
|
|
Amortization of other intangible assets
|
72,733
|
|
64,679
|
|
6,150
|
|
143,562
|
|
Stock-based compensation
|
41,481
|
|
12,403
|
|
4,383
|
|
58,267
|
|
Restructuring expenses
|
1,625
|
|
22,379
|
|
220
|
|
24,224
|
|
Transaction expenses and charges
|
31,260
|
|
984
|
|
40
|
|
32,284
|
|
Gain of unconsolidated entities
(3)
|
(565
|
)
|
—
|
|
—
|
|
(565
|
)
|
Impairment of other long-lived assets
(4)
|
9,039
|
|
—
|
|
—
|
|
9,039
|
|
Adjusted EBITDA
|
$
|
156,718
|
|
$
|
116,261
|
|
$
|
15,417
|
|
$
|
288,396
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Web presence
|
Email marketing
|
Domain
|
Total
|
|
(in thousands)
|
Revenue
(1)
|
$
|
641,993
|
|
$
|
401,250
|
|
$
|
133,624
|
|
$
|
1,176,867
|
|
Gross profit
|
305,588
|
|
254,941
|
|
12,408
|
|
572,937
|
|
|
|
|
|
|
Net income (loss)
|
(64,962
|
)
|
(10,615
|
)
|
(24,207
|
)
|
(99,784
|
)
|
Interest expense, net
(2)
|
67,491
|
|
86,914
|
|
2,001
|
|
156,406
|
|
Income tax expense (benefit)
|
4,063
|
|
5,152
|
|
(26,496
|
)
|
(17,281
|
)
|
Depreciation
|
37,634
|
|
13,912
|
|
3,639
|
|
55,185
|
|
Amortization of other intangible assets
|
60,277
|
|
74,467
|
|
5,610
|
|
140,354
|
|
Stock-based compensation
|
46,641
|
|
6,934
|
|
6,426
|
|
60,001
|
|
Restructuring expenses
|
9,131
|
|
5,581
|
|
1,098
|
|
15,810
|
|
Transaction expenses and charges
|
—
|
|
773
|
|
—
|
|
773
|
|
(Gain) loss of unconsolidated entities
|
(110
|
)
|
—
|
|
—
|
|
(110
|
)
|
Impairment of other long-lived assets
|
600
|
|
—
|
|
30,860
|
|
31,460
|
|
SEC investigations reserve
|
4,323
|
|
2,751
|
|
926
|
|
8,000
|
|
Shareholder litigation reserve
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
165,088
|
|
$
|
185,869
|
|
$
|
(143
|
)
|
$
|
350,814
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
Web presence
|
Email marketing
|
Domain
|
Total
|
|
(in thousands)
|
Revenue
(1)
|
$
|
605,315
|
|
$
|
410,052
|
|
$
|
129,924
|
|
$
|
1,145,291
|
|
Gross profit
|
297,590
|
|
288,023
|
|
38,941
|
|
624,554
|
|
|
|
|
|
|
Net (loss) income
|
(22,534
|
)
|
38,628
|
|
(11,560
|
)
|
4,534
|
|
Interest expense, net
(2)
|
70,956
|
|
68,317
|
|
9,118
|
|
148,391
|
|
Income tax expense (benefit)
|
(4,961
|
)
|
115
|
|
(1,400
|
)
|
(6,246
|
)
|
Depreciation
|
32,915
|
|
11,497
|
|
3,795
|
|
48,207
|
|
Amortization of other intangible assets
|
47,020
|
|
53,100
|
|
3,028
|
|
103,148
|
|
Stock-based compensation
|
16,000
|
|
9,638
|
|
3,426
|
|
29,064
|
|
Restructuring expenses
|
2,135
|
|
589
|
|
644
|
|
3,368
|
|
Transaction expenses and charges
|
—
|
|
—
|
|
—
|
|
—
|
|
Gain of unconsolidated entities
|
267
|
|
—
|
|
—
|
|
267
|
|
Impairment of other long-lived assets
|
—
|
|
—
|
|
—
|
|
—
|
|
SEC investigation reserve
|
—
|
|
—
|
|
—
|
|
—
|
|
Shareholder litigation reserve
|
4,780
|
|
1,500
|
|
1,045
|
|
7,325
|
|
Adjusted EBITDA
|
$
|
146,578
|
|
$
|
183,384
|
|
$
|
8,096
|
|
$
|
338,058
|
|
|
|
(1)
|
Revenue excludes intercompany sales of domain sales and domain services from the domain segment to the web presence segment of
$7.6 million
,
$10.3 million
and
$10.0 million
, for fiscal years
2016
,
2017
and
2018
, respectively.
|
|
|
(2)
|
Interest expense includes impact of amortization of deferred financing costs, original issue discounts and interest income. For the years ended
December 31, 2017
and
2018
, it also includes
$6.5 million
and
$1.2 million
, respectively, of deferred financing costs and OID immediately expensed upon the 2017 Refinancing and 2018 Refinancing.
|
|
|
(3)
|
The (gain) loss of unconsolidated entities is reported on a net basis for the years ended
December 31, 2017
and
2018
. The year ended December 31, 2016 includes an
$11.4 million
gain on the Company's investment in WZ UK, Ltd. This gain was generated on January 6, 2016, when the Company increased its ownership stake in WZ UK from
49%
to
57.5%
, which required a revaluation of its existing investment to its implied fair value. This gain was offset by the following: a loss of
$4.8 million
on an investment in AppMachine, which was generated on July 27, 2016, when the Company increased its ownership stake in AppMachine from
40%
to
100%
, which required a revaluation of the existing investment to its implied fair value; a loss of
$4.7 million
on the impairment of the Company's
33%
equity investment in Fortifico Limited; and the Company's proportionate share of net losses from unconsolidated entities of
$1.3 million
.
|
|
|
(4)
|
The impairment of other long-lived assets for the year ended December 31, 2016 includes
$7.0 million
of impairment charges related to developed and in-process technology related to the Webzai acquisition, and
$2.0 million
of internally developed software that was abandoned. The impairment of other long-lived assets for the year ended December 31, 2017 includes
$13.8 million
related to certain domain name intangible assets,
$0.6 million
to write off a debt investment in a privately held entity,
$12.1 million
related to impairment of goodwill associated with the domain segment, and
$4.9 million
related to developed technology and customer relationships associated with the Directi acquisition.
|
The Company has revised amounts reported for gross profit, net loss and adjusted EBITDA for the web presence and the domain segments in the segment disclosures, which impacted fiscal years 2016 and 2017. The amounts reported for the email marketing segment were not impacted. The revisions arose because of an error in the classification of certain domain registration expenses. Domain segment gross profit, net income (loss) and adjusted EBITDA were overstated by
$3.0 million
for fiscal year 2016, and by
$6.9 million
for fiscal year 2017, and web presence segment gross profit, net income (loss) and adjusted EBITDA were understated by equal amounts. Consolidated results were not impacted by this misstatement. The following table reflects the differences between the amounts as reported and the amounts as revised for gross profit, net loss and adjusted EBITDA for the web presence and domain segments for the years ended December 31, 2016 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Web presence
|
|
Domain
|
|
(in thousands)
|
|
(as reported)
|
|
(as revised)
|
|
(as reported)
|
|
(as revised)
|
Gross profit
|
$
|
309,116
|
|
|
$
|
312,067
|
|
|
$
|
44,872
|
|
|
$
|
41,921
|
|
Net loss
|
(24,382
|
)
|
|
(22,161
|
)
|
|
(990
|
)
|
|
(3,211
|
)
|
Adjusted EBITDA
|
153,766
|
|
|
156,718
|
|
|
18,369
|
|
|
15,417
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Web presence
|
|
Domain
|
|
(in thousands)
|
|
(as reported)
|
|
(as revised)
|
|
(as reported)
|
|
(as revised)
|
Gross profit
|
$
|
298,687
|
|
|
$
|
305,588
|
|
|
$
|
19,309
|
|
|
$
|
12,408
|
|
Net loss
|
(70,375
|
)
|
|
(64,962
|
)
|
|
(18,794
|
)
|
|
(24,207
|
)
|
Adjusted EBITDA
|
158,187
|
|
|
165,088
|
|
|
6,758
|
|
|
(143
|
)
|
22
. Geographic and Other Information
Revenue, classified by the major geographic areas in which the Company's customers are located, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
|
(in thousands)
|
United States
|
$
|
787,915
|
|
|
$
|
845,305
|
|
|
$
|
833,657
|
|
International
|
323,227
|
|
|
331,562
|
|
|
311,634
|
|
Total
|
$
|
1,111,142
|
|
|
$
|
1,176,867
|
|
|
$
|
1,145,291
|
|
The following table presents the amount of tangible long-lived assets by geographic area:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2018
|
|
(in thousands)
|
United States
|
$
|
89,325
|
|
|
$
|
87,301
|
|
International
|
6,127
|
|
|
4,974
|
|
Total
|
$
|
95,452
|
|
|
$
|
92,275
|
|
The Company’s revenue is 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 revenue through domain monetization and marketing development funds. Non-subscription revenue
decreased
from
$41.5 million
, or
4%
of total revenue for the year ended
December 31, 2016
to
$39.4 million
, or
3%
of total revenue for the year ended
December 31, 2017
, and
decreased
to
$35.1 million
, or
3%
of total revenue for the year ended
December 31, 2018
. The majority of the Company's non-subscription revenue is included in its domain 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 United States.
23. Quarterly Financial Data (unaudited)
The following table presents the Company’s unaudited quarterly financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
March 31,
2017
|
|
June 30,
2017
|
|
Sept. 30,
2017
|
|
Dec. 31,
2017
|
|
March 31,
2018
|
|
June 30,
2018
|
|
Sept. 30,
2018
|
|
Dec. 31,
2018
|
|
(in thousands, except per share data)
|
Revenue
|
$
|
295,137
|
|
|
$
|
292,258
|
|
|
$
|
295,222
|
|
|
$
|
294,250
|
|
|
$
|
291,356
|
|
|
$
|
287,770
|
|
|
$
|
283,770
|
|
|
$
|
282,395
|
|
Gross profit
|
146,388
|
|
|
145,675
|
|
|
136,357
|
|
|
144,517
|
|
|
157,450
|
|
|
157,024
|
|
|
154,825
|
|
|
155,255
|
|
Income (loss) from operations
|
13,594
|
|
|
12,647
|
|
|
(1,070
|
)
|
|
14,660
|
|
|
31,402
|
|
|
37,775
|
|
|
42,618
|
|
|
35,151
|
|
Net income (loss) attributable to Endurance International Group Holdings, Inc.
|
$
|
(35,388
|
)
|
|
$
|
(39,129
|
)
|
|
$
|
(40,264
|
)
|
|
$
|
7,473
|
|
|
$
|
(2,528
|
)
|
|
$
|
627
|
|
|
$
|
(6,335
|
)
|
|
$
|
12,770
|
|
Basic net income (loss) per share attributable to Endurance International Group Holdings, Inc.
|
$
|
(0.26
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.09
|
|
Diluted net income (loss) per share attributable to Endurance International Group Holdings, Inc.
|
$
|
(0.26
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.09
|
|
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 (refer to
Note 9: Notes Payables,
for further details), which it exchanged for new
10.875%
Senior Notes due 2024 pursuant to a registration statement on Form S-4. The registered exchange offer for the Senior Notes was completed on January 30, 2017. The Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Company and the Issuer, 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 Senior 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, 2017 and December 31, 2018, and supplemental condensed consolidating results of operations and cash flow information for the years ended December 31, 2016, 2017 and 2018:
Condensed Consolidating Balance Sheets
December 31, 2017
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Issuer
|
Guarantor Subsidiaries
|
Non-Guarantor Subsidiaries
|
Eliminations
|
Consolidated
|
Assets:
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
92
|
|
$
|
2
|
|
$
|
54,473
|
|
$
|
11,926
|
|
$
|
—
|
|
$
|
66,493
|
|
Restricted cash
|
|
—
|
|
—
|
|
2,472
|
|
153
|
|
—
|
|
2,625
|
|
Accounts receivable
|
|
—
|
|
—
|
|
12,386
|
|
3,559
|
|
—
|
|
15,945
|
|
Prepaid domain name registry fees
|
|
—
|
|
—
|
|
28,291
|
|
25,514
|
|
—
|
|
53,805
|
|
Prepaid expenses & other current assets
|
|
(12
|
)
|
84
|
|
18,500
|
|
9,703
|
|
—
|
|
28,275
|
|
Total current assets
|
|
80
|
|
86
|
|
116,122
|
|
50,855
|
|
—
|
|
167,143
|
|
Intercompany receivables, net
|
|
33,637
|
|
606,834
|
|
(498,213
|
)
|
(142,258
|
)
|
—
|
|
—
|
|
Property and equipment, net
|
|
—
|
|
—
|
|
81,693
|
|
13,759
|
|
—
|
|
95,452
|
|
Goodwill
|
|
—
|
|
—
|
|
1,673,851
|
|
176,731
|
|
—
|
|
1,850,582
|
|
Other intangible assets, net
|
|
—
|
|
—
|
|
450,778
|
|
4,662
|
|
—
|
|
455,440
|
|
Investment in subsidiaries
|
|
49,288
|
|
1,355,013
|
|
37,200
|
|
—
|
|
(1,441,501
|
)
|
—
|
|
Other assets
|
|
—
|
|
3,639
|
|
21,374
|
|
6,404
|
|
—
|
|
31,417
|
|
Total assets
|
|
$
|
83,005
|
|
$
|
1,965,572
|
|
$
|
1,882,805
|
|
$
|
110,153
|
|
$
|
(1,441,501
|
)
|
$
|
2,600,034
|
|
Liabilities and stockholders' equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
—
|
|
$
|
—
|
|
$
|
9,532
|
|
$
|
1,526
|
|
—
|
|
$
|
11,058
|
|
Accrued expenses and other current liabilities
|
|
—
|
|
24,508
|
|
74,257
|
|
8,662
|
|
—
|
|
107,427
|
|
Deferred revenue
|
|
—
|
|
—
|
|
309,395
|
|
52,545
|
|
—
|
|
361,940
|
|
Current portion of notes payable
|
|
—
|
|
33,945
|
|
—
|
|
—
|
|
—
|
|
33,945
|
|
Current portion of financed equipment
|
|
—
|
|
—
|
|
7,630
|
|
—
|
|
—
|
|
7,630
|
|
Deferred consideration, short-term
|
|
—
|
|
—
|
|
4,365
|
|
—
|
|
—
|
|
4,365
|
|
Total current liabilities
|
|
—
|
|
58,453
|
|
405,179
|
|
62,733
|
|
—
|
|
526,365
|
|
Deferred revenue, long-term
|
|
—
|
|
—
|
|
81,199
|
|
9,773
|
|
—
|
|
90,972
|
|
Notes payable
|
|
—
|
|
1,858,300
|
|
—
|
|
—
|
|
—
|
|
1,858,300
|
|
Financed equipment—long term
|
|
—
|
|
—
|
|
7,719
|
|
—
|
|
—
|
|
7,719
|
|
Deferred consideration
|
|
—
|
|
—
|
|
3,551
|
|
—
|
|
—
|
|
3,551
|
|
Other long-term liabilities
|
|
—
|
|
(469
|
)
|
30,144
|
|
447
|
|
—
|
|
30,122
|
|
Total liabilities
|
|
—
|
|
1,916,284
|
|
527,792
|
|
72,953
|
|
—
|
|
2,517,029
|
|
Equity
|
|
83,005
|
|
49,288
|
|
1,355,013
|
|
37,200
|
|
(1,441,501
|
)
|
83,005
|
|
Total liabilities and equity
|
|
$
|
83,005
|
|
$
|
1,965,572
|
|
$
|
1,882,805
|
|
$
|
110,153
|
|
$
|
(1,441,501
|
)
|
$
|
2,600,034
|
|
Condensed Consolidating Balance Sheets
December 31, 2018
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Issuer
|
Guarantor Subsidiaries
|
Non-Guarantor Subsidiaries
|
Eliminations
|
Consolidated
|
Assets:
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21
|
|
$
|
2
|
|
$
|
61,649
|
|
$
|
26,972
|
|
$
|
—
|
|
$
|
88,644
|
|
Restricted cash
|
|
—
|
|
—
|
|
1,932
|
|
—
|
|
—
|
|
1,932
|
|
Accounts receivable
|
|
—
|
|
—
|
|
10,515
|
|
1,690
|
|
—
|
|
12,205
|
|
Prepaid domain name registry fees
|
|
—
|
|
—
|
|
32,118
|
|
24,661
|
|
—
|
|
56,779
|
|
Prepaid commissions
|
|
—
|
|
—
|
|
40,804
|
|
654
|
|
—
|
|
41,458
|
|
Prepaid expenses & other current assets
|
|
—
|
|
422
|
|
26,617
|
|
8,051
|
|
—
|
|
35,090
|
|
Total current assets
|
|
21
|
|
424
|
|
173,635
|
|
62,028
|
|
—
|
|
236,108
|
|
Intercompany receivables, net
|
|
34,595
|
|
401,342
|
|
(321,124
|
)
|
(114,813
|
)
|
—
|
|
—
|
|
Property and equipment, net
|
|
—
|
|
—
|
|
79,090
|
|
13,185
|
|
—
|
|
92,275
|
|
Goodwill
|
|
—
|
|
—
|
|
1,695,451
|
|
153,614
|
|
—
|
|
1,849,065
|
|
Other intangible assets, net
|
|
—
|
|
—
|
|
351,920
|
|
596
|
|
—
|
|
352,516
|
|
Investment in subsidiaries
|
|
139,838
|
|
1,559,255
|
|
53,089
|
|
—
|
|
(1,752,182
|
)
|
—
|
|
Prepaid commissions, net of current portion
|
|
—
|
|
—
|
|
41,746
|
|
726
|
|
—
|
|
42,472
|
|
Other assets
|
|
—
|
|
5,239
|
|
22,276
|
|
6,556
|
|
—
|
|
34,071
|
|
Total assets
|
|
$
|
174,454
|
|
$
|
1,966,260
|
|
$
|
2,096,083
|
|
$
|
121,892
|
|
$
|
(1,752,182
|
)
|
$
|
2,606,507
|
|
Liabilities and stockholders' equity:
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
—
|
|
$
|
—
|
|
$
|
11,896
|
|
$
|
553
|
|
$
|
—
|
|
$
|
12,449
|
|
Accrued expenses and other current liabilities
|
|
—
|
|
25,373
|
|
76,586
|
|
8,224
|
|
—
|
|
110,183
|
|
Deferred revenue
|
|
—
|
|
—
|
|
322,296
|
|
49,462
|
|
—
|
|
371,758
|
|
Current portion of notes payable
|
|
—
|
|
31,606
|
|
—
|
|
—
|
|
—
|
|
31,606
|
|
Current portion of financed equipment
|
|
—
|
|
—
|
|
8,379
|
|
—
|
|
—
|
|
8,379
|
|
Deferred consideration, short-term
|
|
—
|
|
—
|
|
2,425
|
|
—
|
|
—
|
|
2,425
|
|
Total current liabilities
|
|
—
|
|
56,979
|
|
421,582
|
|
58,239
|
|
—
|
|
536,800
|
|
Deferred revenue, long-term
|
|
—
|
|
—
|
|
85,531
|
|
10,609
|
|
—
|
|
96,140
|
|
Notes payable
|
|
—
|
|
1,770,055
|
|
—
|
|
—
|
|
—
|
|
1,770,055
|
|
Financed equipment—long term
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Deferred consideration
|
|
—
|
|
—
|
|
1,364
|
|
—
|
|
—
|
|
1,364
|
|
Other long-term liabilities
|
|
—
|
|
(612
|
)
|
28,349
|
|
(43
|
)
|
—
|
|
27,694
|
|
Total liabilities
|
|
—
|
|
1,826,422
|
|
536,826
|
|
68,805
|
|
—
|
|
2,432,053
|
|
Equity
|
|
174,454
|
|
139,838
|
|
1,559,257
|
|
53,087
|
|
(1,752,182
|
)
|
174,454
|
|
Total liabilities and equity
|
|
$
|
174,454
|
|
$
|
1,966,260
|
|
$
|
2,096,083
|
|
$
|
121,892
|
|
$
|
(1,752,182
|
)
|
$
|
2,606,507
|
|
Condensed Consolidating Statements of Operations and Comprehensive Income (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 & 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
|
)
|
Income (loss) before equity earnings of unconsolidated entities
|
|
—
|
|
(95,907
|
)
|
72,451
|
|
(56,716
|
)
|
240
|
|
(79,932
|
)
|
Equity (income) loss of unconsolidated entities, net of tax
|
|
73,071
|
|
(22,837
|
)
|
58,014
|
|
297
|
|
(107,248
|
)
|
1,297
|
|
Net income (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 income (loss) attributable to Endurance
|
|
$
|
(73,071
|
)
|
$
|
(73,070
|
)
|
$
|
22,835
|
|
$
|
(57,013
|
)
|
$
|
107,488
|
|
$
|
(72,831
|
)
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
—
|
|
—
|
|
—
|
|
(597
|
)
|
—
|
|
(597
|
)
|
Unrealized gain on cash flow hedge
|
|
—
|
|
(1,351
|
)
|
—
|
|
—
|
|
—
|
|
(1,351
|
)
|
Total comprehensive income (loss)
|
|
$
|
(73,071
|
)
|
$
|
(74,421
|
)
|
$
|
22,835
|
|
$
|
(57,610
|
)
|
$
|
107,488
|
|
$
|
(74,779
|
)
|
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Year Ended December 31, 2017
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Issuer
|
Guarantor Subsidiaries
|
Non-Guarantor Subsidiaries
|
Eliminations
|
Consolidated
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,055,013
|
|
$
|
128,350
|
|
$
|
(6,496
|
)
|
$
|
1,176,867
|
|
Cost of revenue
|
|
—
|
|
—
|
|
515,065
|
|
94,082
|
|
(5,217
|
)
|
603,930
|
|
Gross profit
|
|
—
|
|
—
|
|
539,948
|
|
34,268
|
|
(1,279
|
)
|
572,937
|
|
Operating expense:
|
|
|
|
|
|
|
|
Sales and marketing
|
|
—
|
|
—
|
|
256,902
|
|
20,561
|
|
(3
|
)
|
277,460
|
|
Engineering and development
|
|
—
|
|
—
|
|
66,051
|
|
12,721
|
|
—
|
|
78,772
|
|
General and administrative
|
|
—
|
|
207
|
|
155,339
|
|
9,054
|
|
(628
|
)
|
163,972
|
|
Transaction expenses
|
|
—
|
|
—
|
|
773
|
|
—
|
|
—
|
|
773
|
|
Impairment of goodwill
|
|
—
|
|
—
|
|
12,129
|
|
—
|
|
—
|
|
12,129
|
|
Total operating expense
|
|
—
|
|
207
|
|
491,194
|
|
42,336
|
|
(631
|
)
|
533,106
|
|
Income (loss) from operations
|
|
—
|
|
(207
|
)
|
48,754
|
|
(8,068
|
)
|
(648
|
)
|
39,831
|
|
Interest expense and other income —net
|
|
—
|
|
156,144
|
|
1,338
|
|
(476
|
)
|
—
|
|
157,006
|
|
Income (loss) before income taxes and equity earnings of unconsolidated entities
|
|
—
|
|
(156,351
|
)
|
47,416
|
|
(7,592
|
)
|
(648
|
)
|
(117,175
|
)
|
Income tax expense (benefit)
|
|
—
|
|
(57,504
|
)
|
39,125
|
|
1,098
|
|
—
|
|
(17,281
|
)
|
Income (loss) before equity earnings of unconsolidated entities
|
|
—
|
|
(98,847
|
)
|
8,291
|
|
(8,690
|
)
|
(648
|
)
|
(99,894
|
)
|
Equity (income) loss of unconsolidated entities, net of tax
|
|
99,137
|
|
290
|
|
8,581
|
|
(17
|
)
|
(108,101
|
)
|
(110
|
)
|
Net income (loss)
|
|
$
|
(99,137
|
)
|
$
|
(99,137
|
)
|
$
|
(290
|
)
|
$
|
(8,673
|
)
|
$
|
107,453
|
|
$
|
(99,784
|
)
|
Net income (loss) attributable to non-controlling interest
|
|
—
|
|
—
|
|
7,524
|
|
—
|
|
—
|
|
7,524
|
|
Net income (loss) attributable to Endurance International Group Holdings, Inc.
|
|
(99,137
|
)
|
(99,137
|
)
|
(7,814
|
)
|
(8,673
|
)
|
107,453
|
|
(107,308
|
)
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
—
|
|
—
|
|
—
|
|
3,091
|
|
—
|
|
3,091
|
|
Unrealized loss on cash flow hedge
|
|
|
34
|
|
—
|
|
—
|
|
—
|
|
34
|
|
Total comprehensive income (loss)
|
|
$
|
(99,137
|
)
|
$
|
(99,103
|
)
|
$
|
(7,814
|
)
|
$
|
(5,582
|
)
|
$
|
107,453
|
|
$
|
(104,183
|
)
|
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Year Ended December 31, 2018
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Issuer
|
Guarantor Subsidiaries
|
Non-Guarantor Subsidiaries
|
Eliminations
|
Consolidated
|
|
|
|
|
|
|
|
Revenue
|
$
|
—
|
|
$
|
—
|
|
$
|
1,041,334
|
|
$
|
109,912
|
|
$
|
(5,955
|
)
|
$
|
1,145,291
|
|
Cost of revenue
|
—
|
|
—
|
|
448,922
|
|
77,770
|
|
(5,955
|
)
|
520,737
|
|
Gross profit
|
—
|
|
—
|
|
592,412
|
|
32,142
|
|
—
|
|
624,554
|
|
Operating expense:
|
|
|
|
|
|
|
Sales and marketing
|
—
|
|
—
|
|
251,558
|
|
13,866
|
|
—
|
|
265,424
|
|
Engineering and development
|
—
|
|
—
|
|
80,055
|
|
7,925
|
|
—
|
|
87,980
|
|
General and administrative
|
(11
|
)
|
227
|
|
164,578
|
|
(40,590
|
)
|
—
|
|
124,204
|
|
Total operating expense
|
(11
|
)
|
227
|
|
496,191
|
|
(18,799
|
)
|
—
|
|
477,608
|
|
Income (loss) from operations
|
11
|
|
(227
|
)
|
96,221
|
|
50,941
|
|
—
|
|
146,946
|
|
Interest expense and other income —net
|
—
|
|
148,411
|
|
507
|
|
(527
|
)
|
—
|
|
148,391
|
|
Income (loss) before income taxes and equity earnings of unconsolidated entities
|
11
|
|
(148,638
|
)
|
95,714
|
|
51,468
|
|
—
|
|
(1,445
|
)
|
Income tax expense (benefit)
|
—
|
|
(35,381
|
)
|
25,257
|
|
3,878
|
|
—
|
|
(6,246
|
)
|
Income (loss) before equity earnings of unconsolidated entities
|
11
|
|
(113,257
|
)
|
70,457
|
|
47,590
|
|
—
|
|
4,801
|
|
Equity (income) loss of unconsolidated entities, net of tax
|
(4,523
|
)
|
(117,780
|
)
|
(47,321
|
)
|
18
|
|
169,873
|
|
267
|
|
Net income (loss)
|
$
|
4,534
|
|
$
|
4,523
|
|
$
|
117,778
|
|
$
|
47,572
|
|
$
|
(169,873
|
)
|
$
|
4,534
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
—
|
|
—
|
|
—
|
|
(2,233
|
)
|
—
|
|
(2,233
|
)
|
Unrealized gain (loss) on cash flow hedge
|
|
(437
|
)
|
—
|
|
—
|
|
—
|
|
(437
|
)
|
Total comprehensive income (loss)
|
$
|
4,534
|
|
$
|
4,086
|
|
$
|
117,778
|
|
$
|
45,339
|
|
$
|
(169,873
|
)
|
$
|
1,864
|
|
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
|
|
—
|
|
—
|
|
(887,937
|
)
|
—
|
|
—
|
|
(887,937
|
)
|
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 cash used in investing activities
|
|
—
|
|
—
|
|
(925,398
|
)
|
(4,749
|
)
|
—
|
|
(930,147
|
)
|
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 financed equipment
|
|
—
|
|
—
|
|
(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 and restricted cash
|
|
—
|
|
—
|
|
—
|
|
1,610
|
|
—
|
|
1,610
|
|
Net increase (decrease) in cash and cash equivalents and restricted cash
|
|
(9
|
)
|
(63
|
)
|
19,792
|
|
3,100
|
|
—
|
|
22,820
|
|
Cash and cash equivalents and restricted cash:
|
|
|
|
|
|
|
|
Beginning of period
|
|
12
|
|
67
|
|
21,862
|
|
12,137
|
|
—
|
|
34,078
|
|
End of period
|
|
$
|
3
|
|
$
|
4
|
|
$
|
41,654
|
|
$
|
15,237
|
|
$
|
—
|
|
$
|
56,898
|
|
Condensed Consolidating Statements of Cash Flows
Year Ended December 31, 2017
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Issuer
|
Guarantor Subsidiaries
|
Non-Guarantor Subsidiaries
|
Eliminations
|
Consolidated
|
Net cash provided by (used in) operating activities
|
|
$
|
12
|
|
$
|
(82,189
|
)
|
$
|
284,912
|
|
$
|
(1,462
|
)
|
$
|
—
|
|
$
|
201,273
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Businesses acquired in purchase transaction, net of cash acquired
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Purchases of property and equipment
|
|
—
|
|
—
|
|
(38,731
|
)
|
(4,331
|
)
|
—
|
|
(43,062
|
)
|
Cash paid for minority investments
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Proceeds from sale of property and equipment
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Proceeds from note receivable
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Proceeds from sale of assets
|
|
—
|
|
—
|
|
530
|
|
—
|
|
—
|
|
530
|
|
Purchases of intangible assets
|
|
—
|
|
—
|
|
(1,932
|
)
|
(34
|
)
|
—
|
|
(1,966
|
)
|
Net cash used in investing activities
|
|
—
|
|
—
|
|
(40,133
|
)
|
(4,365
|
)
|
—
|
|
(44,498
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds from issuance of notes payable and draws on revolver
|
|
—
|
|
1,693,007
|
|
—
|
|
—
|
|
—
|
|
1,693,007
|
|
Repayment of notes payable and revolver
|
|
—
|
|
(1,797,634
|
)
|
—
|
|
—
|
|
—
|
|
(1,797,634
|
)
|
Payment of financing costs
|
|
—
|
|
(6,304
|
)
|
—
|
|
—
|
|
—
|
|
(6,304
|
)
|
Payment of deferred consideration
|
|
—
|
|
—
|
|
(4,550
|
)
|
(883
|
)
|
—
|
|
(5,433
|
)
|
Payment of redeemable non-controlling interest liability
|
|
—
|
|
—
|
|
(25,000
|
)
|
—
|
|
—
|
|
(25,000
|
)
|
Principal payments on financed equipment
|
|
—
|
|
—
|
|
(7,390
|
)
|
—
|
|
—
|
|
(7,390
|
)
|
Proceeds from exercise of stock options
|
|
2,049
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2,049
|
|
Capital investments from minority partner
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Intercompany loans and investments
|
|
(1,972
|
)
|
193,118
|
|
(192,548
|
)
|
1,402
|
|
—
|
|
—
|
|
Net cash provided by (used in) financing activities
|
|
77
|
|
82,187
|
|
(229,488
|
)
|
519
|
|
—
|
|
(146,705
|
)
|
Net effect of exchange rate on cash and cash equivalents and restricted cash
|
|
—
|
|
—
|
|
—
|
|
2,150
|
|
—
|
|
2,150
|
|
Net increase (decrease) in cash and cash equivalents and restricted cash
|
|
89
|
|
(2
|
)
|
15,291
|
|
(3,158
|
)
|
—
|
|
12,220
|
|
Cash and cash equivalents and restricted cash:
|
|
|
|
|
|
|
|
Beginning of period
|
|
3
|
|
4
|
|
41,654
|
|
15,237
|
|
—
|
|
56,898
|
|
End of period
|
|
$
|
92
|
|
$
|
2
|
|
$
|
56,945
|
|
$
|
12,079
|
|
$
|
—
|
|
$
|
69,118
|
|
Condensed Consolidating Statements of Cash Flows
Year Ended December 31, 2018
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Issuer
|
Guarantor Subsidiaries
|
Non-Guarantor Subsidiaries
|
Eliminations
|
Consolidated
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
—
|
|
$
|
(103,123
|
)
|
$
|
241,362
|
|
$
|
44,313
|
|
$
|
—
|
|
$
|
182,552
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
Businesses acquired in purchase transaction, net of cash acquired
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Purchases of property and equipment
|
|
—
|
|
—
|
|
(45,696
|
)
|
(184
|
)
|
—
|
|
(45,880
|
)
|
Cash paid for minority investments
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Proceeds from sale of property and equipment
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Proceeds from note receivable
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Proceeds from sale of assets
|
|
—
|
|
—
|
|
6
|
|
—
|
|
—
|
|
6
|
|
Purchases of intangible assets
|
|
—
|
|
—
|
|
(8
|
)
|
—
|
|
—
|
|
(8
|
)
|
Net cash used in investing activities
|
|
—
|
|
—
|
|
(45,698
|
)
|
(184
|
)
|
—
|
|
(45,882
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds from issuance of notes payable and draws on revolver
|
|
—
|
|
1,580,305
|
|
—
|
|
—
|
|
—
|
|
1,580,305
|
|
Repayment of notes payable and revolver
|
|
—
|
|
(1,681,094
|
)
|
—
|
|
—
|
|
—
|
|
(1,681,094
|
)
|
Payment of financing costs
|
|
—
|
|
(1,580
|
)
|
—
|
|
—
|
|
—
|
|
(1,580
|
)
|
Payment of deferred consideration
|
|
—
|
|
—
|
|
(4,500
|
)
|
—
|
|
—
|
|
(4,500
|
)
|
|
|
|
|
|
|
|
|
Principal payments on financed equipment
|
|
—
|
|
—
|
|
(7,439
|
)
|
—
|
|
—
|
|
(7,439
|
)
|
Proceeds from exercise of stock options
|
|
887
|
|
—
|
|
—
|
|
—
|
|
—
|
|
887
|
|
|
|
|
|
|
|
|
|
Intercompany loans and investments
|
|
(958
|
)
|
205,492
|
|
(177,089
|
)
|
(27,445
|
)
|
—
|
|
—
|
|
Net cash provided by (used in) financing activities
|
|
(71
|
)
|
103,123
|
|
(189,028
|
)
|
(27,445
|
)
|
—
|
|
(113,421
|
)
|
Net effect of exchange rate on cash and cash equivalents and restricted cash
|
|
—
|
|
—
|
|
—
|
|
(1,791
|
)
|
—
|
|
(1,791
|
)
|
Net increase (decrease) in cash and cash equivalents and restricted cash
|
|
(71
|
)
|
—
|
|
6,636
|
|
14,893
|
|
—
|
|
21,458
|
|
Cash and cash equivalents and restricted cash:
|
|
|
|
|
|
|
|
Beginning of period
|
|
92
|
|
2
|
|
56,945
|
|
12,079
|
|
—
|
|
69,118
|
|
End of period
|
|
$
|
21
|
|
$
|
2
|
|
$
|
63,581
|
|
$
|
26,972
|
|
$
|
—
|
|
$
|
90,576
|
|