Notes to Consolidated Financial Statements
1.
|
Nature
of the Business
|
LogMeIn, Inc., which is referred to herein as LogMeIn or the Company, provides a portfolio of cloud-based unified communications and collaboration, identity and access management, and customer engagement and support solutions designed to simplify how people connect with each other and the world around them to drive meaningful interactions, deepen relationships, and create better outcomes for individuals and businesses. The Company is headquartered in Boston, Massachusetts with additional locations in North America, South America, Europe, Asia and Australia.
On January 31, 2017, the Company completed a merger with a wholly-owned subsidiary of Citrix Systems, Inc., or Citrix, pursuant to which the Company combined with Citrix’s GoTo family of service offerings known as the GoTo Business, in a Reverse Morris Trust transaction which is referred to herein as the Merger. On April 3, 2018, the Company completed its acquisition of Jive Communications, Inc., or Jive, a provider of cloud-based phone systems and unified communications services. For additional information regarding the Jive acquisition and the Merger, see Note 4 to the Consolidated Financial Statements.
2.
|
Summary
of Significant Accounting Policies
|
Principles of Consolidation
— The accompanying Consolidated Financial Statements include the results of operations of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company has prepared the accompanying Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America, or GAAP.
Use of Estimates
— The preparation of Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board, or FASB, issued ASU 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, referred to herein as ASU 2017-04, which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units related to an entity’s testing of reporting units for goodwill impairment, and that an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The guidance is effective for annual reporting periods beginning after January 1, 2020 and interim periods within those fiscal years. The Company elected to early adopt this standard as of April 1, 2018. The adoption of this guidance did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows.
On January 1, 2018, the Company adopted ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB’s EITF)
, referred to herein as ASU 2016-18, which requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending amounts on the statement of cash flows. The adoption of ASU 2016-18 impacted the presentation of the consolidated statement of cash flows with the inclusion of restricted cash for each of the presented periods.
57
Cash
and cash equivalents subject to contractual restrictions and not readily available for use are classified as restricted cash. The Company’s restricted cash balances are primarily made up of cash posted as collateral for its worldwide facility leases. The
following table provides a reconciliation of cash, cash equivalents and restricted cash as reported in the consolidated balance sheet
s
, to the total of the amounts reported in the consolidated statement
s
of cash flows included herein (in thousands):
|
|
December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
123,143
|
|
|
$
|
140,756
|
|
|
$
|
252,402
|
|
|
$
|
148,652
|
|
Restricted cash, current, included in prepaid
expenses and other current assets
|
|
|
—
|
|
|
|
98
|
|
|
|
12
|
|
|
|
—
|
|
Restricted cash, net of current portion
|
|
|
2,468
|
|
|
|
2,481
|
|
|
|
1,795
|
|
|
|
1,840
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
125,611
|
|
|
$
|
143,335
|
|
|
$
|
254,209
|
|
|
$
|
150,492
|
|
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, and has since issued several additional amendments thereto (collectively referred to herein as ASC 606) which became effective for the Company on January 1, 2018. ASC 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes Accounting Standards Codification Topic 605,
Revenue Recognition
, including industry-specific guidance. The new standard requires entities to apportion consideration from contracts to performance obligations on a relative standalone selling price basis, based on a five-step model. Under ASC 606, revenue is recognized when a customer obtains control of a promised good or service and is recognized in an amount that reflects the consideration that the entity expects to receive in exchange for the good or service. In addition, ASC 606 also includes subtopic ASC 340-40,
Other Assets and Deferred Costs—Contracts with Customers
, referred to herein as ASC 340-40, which provides guidance on accounting for certain revenue related costs including costs associated with obtaining and fulfilling a contract, discussed further below.
Revenue recognition from the Company’s primary revenue streams remained substantially unchanged following adoption of ASC 606 and therefore did not have a material impact on its revenues. The Company also considered the impact of ASC 606 subtopic ASC 340-40. Prior to the adoption of ASC 606, the Company expensed commission costs and related fringe benefits as incurred. Under ASC 340-40, the Company is required to capitalize and amortize incremental costs of obtaining a contract, such as sales commissions and related fringe benefits, over the period of benefit, which the Company has calculated to be three years. Incremental costs of obtaining a contract are recognized as an asset if the costs are expected to be recovered. The period of benefit was determined based on an average customer contract term, technology changes, and the company’s ability to retain customers. Sales commissions for renewal contracts are deferred and amortized on a straight-line basis over the related contractual renewal period. Amortization expense is included in sales and marketing expense on the consolidated statements of operations.
On January 1, 2018, the Company adopted ASC 606 using the modified retrospective transition method which resulted in an adjustment to retained earnings for the cumulative effect of applying the standard to all contracts not completed as of the adoption date. Upon adoption, prepaid expenses and other current assets increased by $10.7 million due to the capitalization of the current portion of sales commissions and other assets increased by $17.3 million due to the capitalization of the noncurrent portion of sales commissions. Deferred tax liabilities increased by $6.6 million due to temporary differences between the accounting and tax carrying values of the capitalized commissions. Retained earnings increased by $21.4 million as a net result of these adjustments. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
The Company has elected the use of practical expedients in its adoption of the new standard, which includes continuing to record revenue reported net of applicable taxes imposed on the related transaction and the application of the standard to all contracts not completed as of the adoption date.
58
The following tables summarize the impact of adopting ASC 606 on the Company’s
C
onsolidated
F
inancial
S
tatements during the
year ended December 31, 2018
(in thousands, except per share data):
|
|
December 31, 2018
|
|
|
|
As
Reported
|
|
|
Adjustments
|
|
|
Balance
Without
Adoption of
ASC 606
|
|
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
$
|
83,887
|
|
|
$
|
(33,675
|
)
|
|
$
|
50,212
|
|
Other assets
|
|
|
41,545
|
|
|
|
(31,181
|
)
|
|
|
10,364
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
$
|
201,212
|
|
|
$
|
(15,429
|
)
|
|
$
|
185,783
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings (accumulated deficit)
|
|
$
|
84,043
|
|
|
$
|
(49,427
|
)
|
|
$
|
34,616
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
As
Reported
|
|
|
Adjustments
|
|
|
Balance
Without
Adoption of
ASC 606
|
|
Consolidated Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
382,997
|
|
|
$
|
37,734
|
|
|
$
|
420,731
|
|
(Provision for) benefit from income taxes
|
|
$
|
(6,425
|
)
|
|
$
|
9,016
|
|
|
$
|
2,591
|
|
Net income (loss)
|
|
$
|
74,371
|
|
|
$
|
(28,718
|
)
|
|
$
|
45,653
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.44
|
|
|
$
|
(0.55
|
)
|
|
$
|
0.88
|
|
Diluted
|
|
$
|
1.42
|
|
|
$
|
(0.55
|
)
|
|
$
|
0.87
|
|
The adoption of ASC 606 did not affect the Company's reported total amounts of cash flows from operating, investing or financing activities in its consolidated statements of cash flows.
Costs to Obtain and Fulfill a Contract —
The Company’s incremental costs of obtaining a contract consist of sales commissions and their related fringe benefits. Sales commissions and fringe benefits paid on renewals are not commensurate with sales commissions paid on the initial contract, but they are commensurate with each other. Sales commissions and fringe benefits are deferred and amortized on a straight-line basis over the period of benefit, which the Company has estimated to be three to four years, for initial contracts and amortized over the renewal period for renewal contracts, typically one year. The period of benefit was determined based on an average customer contract term, expected contract renewals, changes in technology and the Company’s ability to retain customers. Deferred commissions are classified as current or noncurrent assets based on the timing the expense will be recognized. The current and noncurrent portions of deferred commissions are included in prepaid expenses and other current assets and other assets, respectively, in the Company’s consolidated balance sheets. As of December 31, 2018, the Company had $33.7 million of current deferred commissions and $31.2 million of noncurrent deferred commissions. Commissions expense is primarily included in sales and marketing expense on the consolidated statements of operations. The Company had amortization expense of $20.6 million related to deferred commissions during the year ended December 31, 2018. Other costs incurred to fulfill contracts have been immaterial to date.
Revenue Recognition
— The Company derives its revenue primarily from subscription fees for its premium subscription software services and, to a lesser extent, usage fees from audio services. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction including mandatory government charges that are passed through to the Company’s customers. Revenue is recognized when control of
these services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.
The Company determines revenue recognition through the following five steps:
|
•
|
Identification of the contract, or contracts, with a customer
|
|
•
|
Identification of the performance obligations in the contract
|
59
|
•
|
Determination of the transaction price
|
|
•
|
Allocation of the transaction price to the performance obligations in the contract
|
|
•
|
Recognition of revenue when, or as, performance obligations are satisfied
|
The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Disaggregated Revenue
— The Company disaggregates revenue from contracts with customers by geography and product grouping, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
The Company’s revenue by geography (based on customer address) is as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
240,469
|
|
|
$
|
755,220
|
|
|
$
|
933,135
|
|
United Kingdom
|
|
|
25,738
|
|
|
|
51,328
|
|
|
|
55,799
|
|
International — all other
|
|
|
69,861
|
|
|
|
183,238
|
|
|
|
215,058
|
|
Total revenue
|
|
$
|
336,068
|
|
|
$
|
989,786
|
|
|
$
|
1,203,992
|
|
The Company’s revenue by product grouping is as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unified communications and collaboration
|
|
$
|
40,616
|
|
|
$
|
527,412
|
|
|
$
|
672,339
|
|
Identity and access management
|
|
|
196,952
|
|
|
|
289,181
|
|
|
|
353,887
|
|
Customer engagement and support
|
|
|
98,500
|
|
|
|
173,193
|
|
|
|
177,766
|
|
Total revenue
|
|
$
|
336,068
|
|
|
$
|
989,786
|
|
|
$
|
1,203,992
|
|
Performance Obligations
Premium Subscription Services
— Revenue from the Company’s premium subscription services represents a single promise to provide continuous access (i.e., a stand-ready obligation) to its software solutions and their processing capabilities in the form of a service through one of the Company’s data centers. The Company’s software cannot be run on another entity’s hardware and customers do not have the right to take possession of the software and use it on their own or another entity’s hardware.
As each day of providing access to the software is substantially the same and the customer simultaneously receives and consumes the benefits as access is provided, the Company has determined that its premium subscription services arrangements include a single performance obligation comprised of a series of distinct services. Revenue from the Company’s premium subscription services is recognized over time on a ratable basis over the contract term beginning on the date that the Company’s service is made available to the customer. Subscription periods range from monthly to multi-year, are typically billed in advance and are non-cancelable.
Audio Services
— Revenue from the Company’s audio services represent a single promise to stand-ready to provide access to the Company’s platform. As each day of providing audio services is substantially the same and the customer simultaneously receives and consumes the benefits as access is provided, the Company has determined that its audio services arrangements include a single performance obligation comprised of a series of distinct services. These audio services may include fixed consideration, variable consideration or a combination of the two. Variable consideration in these arrangements is typically a function of the corresponding rate per minute. The Company allocates the variable amount to each distinct service period within the series and recognizes revenue as each distinct service period is performed (i.e., recognized as incurred).
60
Accounts Receivable, Net
— Accounts receivable, net, are amounts due from customers where there is an unconditional right to consideration. Unbilled receivables of $
5.1
million and $
5.4
million are included in this balance at
December 31, 2017
and
2018
,
respectively. The payment of consideration related to these unbilled receivables is subject only to the passage of time.
The Company reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. Estimates are used to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable to its estimated net realizable value. The estimates are based on an analysis of past due receivables, historical bad debt trends, current economic conditions, and customer specific information. After the Company has exhausted all collection efforts, the outstanding receivable balance relating to services provided is written off against the allowance and the balance related to services not yet delivered is charged as an offset to deferred revenue. Additions to the provision for bad debt are charged to expense.
Activity in the provision for bad debt accounts was as follows for the years ended December 31, 2016, 2017 and 2018 (in thousands):
|
|
December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Balance beginning of period
|
|
$
|
274
|
|
|
$
|
245
|
|
|
$
|
631
|
|
Provision for bad debt
|
|
|
37
|
|
|
|
614
|
|
|
|
1,206
|
|
Uncollectible accounts written off
|
|
|
(66
|
)
|
|
|
(228
|
)
|
|
|
(1,269
|
)
|
Balance end of period
|
|
$
|
245
|
|
|
$
|
631
|
|
|
$
|
568
|
|
As of December 31, 2017 and 2018, the Company also had a sales returns allowance of $1.4 million and $2.2 million, respectively. Additions to the provision for sales returns are charged against revenues. For the years ended December 31, 2017 and 2018, the provision for sales returns was $4.1 million and $3.9 million and write-offs were $2.7 million and $3.1 million, respectively.
Contract Assets and Contract Liabilities
— Contract assets and contract liabilities (deferred revenue) are reported net at the contract level for each reporting period.
Contract Assets
— Contract assets primarily relate to unbilled amounts typically resulting from sales contracts when revenue recognized exceeds the amount billed to the customer, and right to payment is not just subject to the passage of time. The contract assets are transferred to accounts receivable when the rights become unconditional. The Company had no contract assets as of December 31, 2017 and $2.3 million of contract assets as of December 31, 2018, of which $1.3 million is included in prepaid and other current assets and $1.0 million is included in other assets.
Contract Liabilities (Deferred Revenue)
— Deferred revenue primarily consists of billings and payments received in advance of revenue recognition. The Company primarily bills and collects payments from customers for its services in advance on a monthly and annual basis. The Company initially records subscription fees as deferred revenue and then recognizes revenue as performance obligations are satisfied over the subscription period. Typically, subscriptions automatically renew at the end of the subscription period unless the customer specifically terminates it prior to the end of the period. Deferred revenue to be recognized within the next twelve months is included in current deferred revenue, and the remaining amount is included in long-term deferred revenue in the consolidated balance sheets.
For the year ended December 31, 2018, revenue recognized related to deferred revenue at January 1, 2018 was approximately $341
million. As of December 31, 2018, approximately $527 million of revenue is expected to be recognized from remaining performance obligations, including backlog,
primarily over the next two years.
Changes in contract balances for the year ended December 31, 2018 are as follows (in thousands):
|
|
Deferred Revenue
|
|
|
|
Current
|
|
|
Non-
Current
|
|
|
Total
|
|
Balance as of January 1, 2018
|
|
$
|
340,570
|
|
|
$
|
6,735
|
|
|
$
|
347,305
|
|
Increase (decrease), net
|
|
|
29,210
|
|
|
|
2,783
|
|
|
|
31,993
|
|
Balance as of December 31, 2018
|
|
$
|
369,780
|
|
|
$
|
9,518
|
|
|
$
|
379,298
|
|
Concentrations of Credit Risk and Significant Customers
— The Company’s principal credit risk relates to its cash, cash equivalents, restricted cash and accounts receivable. Cash, cash equivalents and restricted cash are deposited primarily with financial institutions that management believes to be of high-credit quality. To manage accounts receivable credit risk, the Company regularly evaluates the creditworthiness of its customers and maintains allowances for potential credit losses. To date, losses resulting from uncollected receivables have not exceeded management’s expectations.
61
As of December 31, 2017 and 2018
, no customers accounted for more than 10% of accounts receivable and there were no customers that represented 10%
or more of revenue for the
years ended December 31, 2016, 2017 and 2018
.
Segment Data
— Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision-maker or decision-making group when making decisions regarding resource allocation and assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company, whose management uses consolidated financial information in determining how to allocate resources and assess performance, has determined that it operates in one segment.
The Company’s long-lived assets by geography are as follows (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2018
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
78,342
|
|
|
$
|
75,161
|
|
International
|
|
|
13,812
|
|
|
|
23,077
|
|
Total long-lived assets
|
|
$
|
92,154
|
|
|
$
|
98,238
|
|
Marketable Securities
— The Company’s marketable securities are classified as available-for-sale and are carried at fair value with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive loss in equity. Realized gains and losses and declines in value judged to be other than temporary are included as a component of earnings based on the specific identification method. Fair value is determined based on quoted market prices. The Company did not have any marketable securities as of December 31, 2017 or 2018.
Restricted Cash —
In April 2012, the Company entered into a lease for its corporate headquarters located in Boston, Massachusetts. The lease required a security deposit of $3.3 million in the form of an irrevocable standby letter of credit which was collateralized by a bank deposit in the amount of $3.5 million or 105 percent of the security deposit in accordance with the lease, which was classified as restricted cash. In 2015 and 2017, $1.5 million and $2.0 million, respectively, of the security deposit was returned to the Company due to a planned decrease in the security deposit obligation. In addition, the Company has made security deposits for various other leased facilities, which are also classified as restricted cash. As of December 31, 2017 and 2018, restricted cash totaled $1.8 million.
Property and Equipment
— Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are eliminated from the accounts, and any resulting gain or loss is reflected in the consolidated statements of operations. Expenditures for maintenance and repairs are charged to expense as incurred. Estimated useful lives of assets are as follows:
Buildings
|
|
30 years
|
Site and building improvements
|
|
5 — 10 years
|
Computer equipment
|
|
2 — 3 years
|
Software
|
|
2 — 5 years
|
Office equipment
|
|
3 years
|
Furniture and fixtures
|
|
5 years
|
Leasehold improvements
|
|
Shorter of lease term
or estimated useful life
|
Goodwill
— Goodwill is the excess of the acquisition price over the fair value of the tangible and identifiable intangible net assets acquired. The Company does not amortize goodwill, but performs an impairment test of goodwill annually or whenever events and circumstances indicate that the carrying amount of goodwill may exceed its fair value. The Company operates as a single operating segment with one reporting unit and consequently evaluates goodwill for impairment based on an evaluation of the fair value of the Company as a whole. As of November 30, 2018, the Company’s measurement date, the fair value of the Company as a whole exceeded the carrying amount of the Company. Through December 31, 2018, no impairments have occurred.
Long-Lived Assets and Intangible Assets
— The Company records intangible assets at their respective estimated fair values at the date of acquisition. Intangible assets are being amortized based upon the pattern in which their economic benefit will be realized, or if this pattern cannot be reliably determined, using the straight-line method over their estimated useful lives, which range up to eleven years.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including intangible assets, may not be recoverable. When such events occur, the Company compares the carrying amounts of the assets to their undiscounted expected future cash flows. If this comparison indicates that there is impairment, the amount of the impairment is calculated as the difference between the carrying value and fair value. Through December 31, 2018, the Company recorded no material impairments.
Legal Costs
— Legal expenditures are expensed as incurred.
62
Research and Development
— Research and development expenditures are expensed as incurred.
Software Development Costs
— The Company capitalizes certain direct costs to develop functionality as well as certain upgrades and enhancements of its on-demand products that are probable to result in additional functionality. The costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized as part of intangible assets until the software is substantially complete and ready for its intended use. Internally developed software costs that are capitalized are classified as intangible assets and amortized over a period of two to three years.
Foreign Currency Translation
— The functional currency of operations outside the United States of America is deemed to be the currency of the local country, unless otherwise determined that the United States dollar would serve as a more appropriate functional currency given the economic operations of the entity. Accordingly, the assets and liabilities of the Company’s foreign subsidiaries are translated into United States dollars using the period-end exchange rate, and income and expense items are translated using the average exchange rate during the period. Cumulative translation adjustments are reflected as a separate component of equity. Foreign currency transaction gains and losses are charged to operations.
Derivative Financial Instruments —
The Company’s earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. The Company uses foreign currency forward contracts to manage exposure to fluctuations in foreign exchange rates that arise from receivables and payables denominated in foreign currencies. The Company does not designate foreign currency forward contracts as hedges for accounting purposes, and changes in the fair value of these instruments are recognized immediately in earnings. Because the Company enters into forward contracts only as an economic hedge, any gain or loss on the underlying foreign-denominated balance would be offset by the loss or gain on the forward contract. Gains and losses on forward contracts and foreign denominated receivables and payables are included in foreign currency net gains and losses.
As of December 31, 2017 and 2018, the Company had outstanding forward contracts with notional amounts equivalent to the following (in thousands):
|
|
December 31,
|
|
Currency Hedged
|
|
2017
|
|
|
2018
|
|
Euro / Canadian Dollar
|
|
$
|
556
|
|
|
$
|
537
|
|
Euro / U.S. Dollar
|
|
|
4,208
|
|
|
|
5,203
|
|
Euro / British Pound
|
|
|
5,926
|
|
|
|
3,809
|
|
British Pound / U.S. Dollar
|
|
|
—
|
|
|
|
563
|
|
Israeli Shekel / Hungarian Forint
|
|
|
8,008
|
|
|
|
—
|
|
U.S. Dollar / Canadian Dollar
|
|
|
—
|
|
|
|
4,504
|
|
Total
|
|
$
|
18,698
|
|
|
$
|
14,616
|
|
Net realized and unrealized foreign currency gains and losses were net losses of $0.5 million, $0.1 million and $0.6 million for the years ended December 31, 2016, 2017 and 2018, respectively, which are included in other income (expense), net in the consolidated statements of operations. Excluding the underlying foreign currency exposure being hedged, net realized and unrealized gains and losses on forward contracts included in foreign currency gains and losses was a net loss of $0.3 million for the year ended December 31, 2017 and a net gain of $0.5 million for the year ended December 31, 2018. The Company did not enter into any forward contracts in 2016.
Stock-Based Compensation
— The Company values all stock-based compensation, including grants of stock options and restricted stock units, at fair value on the date of grant and recognizes the expense over the requisite service period, which is generally the vesting period of the award on a straight-line basis.
Income Taxes
— Deferred income taxes are provided for the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss carryforwards and credits using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. At each balance sheet date, the Company assesses the likelihood that deferred tax assets will be realized and recognizes a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction.
The Company evaluates its uncertain tax positions based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings is more likely than not to be realized. Potential interest and penalties associated with any uncertain tax positions are recorded as a component of income tax expense.
Advertising Costs
— The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2016, 2017 and 2018 was approximately $29.2 million, $100.2 million and $112.8 million,
63
respectively, which consisted primarily of online paid searches, banner advertising and other online marketing and is included in sales and marketing expense in the accompanying consolidated statements of operations.
Net Income Per Share
— Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per share is computed by dividing net income by the sum of the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of potential common shares outstanding from the assumed exercise of stock options and the vesting of restricted stock units.
The Company excluded the following options to purchase common shares and restricted stock units from the computation of diluted net income per share because they had an anti-dilutive impact (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Options to purchase common shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Restricted stock units
|
|
|
114
|
|
|
|
65
|
|
|
|
150
|
|
Total options and restricted stock units
|
|
|
114
|
|
|
|
65
|
|
|
|
150
|
|
Basic and diluted net income per share was calculated as follows (in thousands, except per share data):
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,638
|
|
|
$
|
99,523
|
|
|
$
|
74,371
|
|
Weighted average common shares outstanding, basic
|
|
|
25,305
|
|
|
|
50,433
|
|
|
|
51,814
|
|
Net income per share, basic
|
|
$
|
0.10
|
|
|
$
|
1.97
|
|
|
$
|
1.44
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,638
|
|
|
$
|
99,523
|
|
|
$
|
74,371
|
|
Weighted average common shares outstanding
|
|
|
25,305
|
|
|
|
50,433
|
|
|
|
51,814
|
|
Add: Common stock equivalents
|
|
|
859
|
|
|
|
1,030
|
|
|
|
682
|
|
Weighted average common shares outstanding,
diluted
|
|
|
26,164
|
|
|
|
51,463
|
|
|
|
52,496
|
|
Net income per share, diluted
|
|
$
|
0.10
|
|
|
$
|
1.93
|
|
|
$
|
1.42
|
|
Guarantees and Indemnification Obligations
— As permitted under Delaware law, the Company has agreements whereby the Company indemnifies certain of its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. As permitted under Delaware law, the Company also has similar indemnification obligations under its certificate of incorporation and by-laws. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has director’s and officer’s insurance coverage that the Company believes limits its exposure and enables it to recover a portion of any future amounts paid.
64
In the ordinary course of business, the Company enters into agreements with certain customers that contractually obligate the Company to provide indemnifications of varying scope and terms with respect to certain matters including, but not limited to, loss
es arising out of the breach of such agreements, from the services provided by the Company or claims alleging that the Company’s products infringe third-party patents, copyrights, or trademarks. The term of these indemnification obligations is generally pe
rpetual. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is, in many cases, unlimited. Through
December 31, 2018
, the Company has not experienced any losses related to these inde
mnification obligations
.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases
, referred to herein as ASU 2016-02, which will require lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. In general, lease arrangements exceeding a twelve-month term must now be recognized as assets and liabilities on the balance sheet. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases, whether
operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. This guidance is effective for the Company as of January 1, 2019. Along with ASU 2016-02, the Company is also evaluating Accounting Standards Update 2018-10,
Codification Improvements to Topic 842 Leases
and Accounting Standards Update 2018-11,
Targeted Improvements to Topic 842 Leases
which allows the new lease standard to be applied as of the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings rather than retroactive restatement of all periods presented. Upon adoption, the Company also expects to elect the transition package of practical expedients permitted within the new standard, which among other things, allows the carryforward of the historical lease classification. The Company has formed a project team focused on the implementation of the new accounting standard. The Company continues to evaluate which other, if any, practical expedients will be elected and is currently formalizing processes and controls to identify, classify, and measure its leases in accordance with ASU 2016-02. While the Company continues to evaluate the effect of adopting this guidance on its Consolidated Financial Statements and related disclosures, it is expected that at a minimum, the obligations under existing operating leases, as disclosed in Note 12 to the Consolidated Financial Statements, will be reported in the consolidated balance sheet upon adoption.
In August 2018, the FASB issued ASU 2018-15,
Intangibles – Goodwill and Other – Internal-Use Software: Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
, referred to herein as ASU 2018-15. The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. The provisions may be adopted prospectively or retrospectively. ASU 2018-15 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted.
The Company is currently assessing the potential impact of the adoption of ASU 2018-15 on its Consolidated Financial Statements.
3.
|
Fair Value of Financial Instruments
|
The carrying value of the Company’s financial instruments, including cash equivalents, restricted cash, accounts receivable and accounts payable, approximate their fair values due to their short maturities and the debt outstanding under the credit facility approximates fair value. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. 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. The three levels are as follows:
|
•
|
Level 1: Unadjusted quoted prices for identical assets or liabilities in active markets accessible by the Company at the measurement date.
|
|
•
|
Level 2: Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
•
|
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
65
Money market funds and time deposits are classified within Level 1 of the fair value hierarchy because they are valued bas
ed on quoted market prices in active markets.
Certificates of deposit, commercial paper and certain U.S. government agency securities are classified within Level 2 of the fair value hierarchy. These instruments are valued based on quoted prices in markets that are not active or based on other observable inputs consisting of market yields, reported trades and broker/dealer quotes.
The principal market in which the Company executes foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants are usually large financial institutions. The Company’s foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.
The Company’s significant financial assets and liabilities are measured at fair value in the table below (in thousands), which excludes cash on hand and assets and liabilities that are measured at historical cost or any basis other than fair value.
|
|
Fair Value Measurements
December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
148,120
|
|
|
$
|
10,000
|
|
|
$
|
—
|
|
|
$
|
158,120
|
|
Forward contracts ($18.7 million notional amount)
|
|
$
|
—
|
|
|
$
|
29
|
|
|
$
|
—
|
|
|
$
|
29
|
|
|
|
Fair Value Measurements
December 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
7,207
|
|
|
$
|
19,943
|
|
|
$
|
—
|
|
|
$
|
27,150
|
|
Forward contracts ($14.6 million notional amount)
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
5
|
|
In 2018, the Company completed the acquisition of Jive Communications, Inc., or Jive, on April 3, 2018. In 2017, the Company completed its Merger with Citrix Systems, Inc.’s wholly-owned subsidiary on January 31, 2017 and the acquisition of Nanorep Technologies Ltd, or Nanorep, on July 31, 2017. In 2016, the Company completed the acquisition of AuthAir, Inc., or AuthAir, on October 31, 2016.
The results of operations of these acquired businesses have been included in the Company’s Consolidated Financial Statements beginning on their respective acquisition dates.
These acquisitions have been accounted for as business combinations. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the respective acquisition date. The fair values of intangible assets were based on valuations using an income approach, with estimates and assumptions provided by management of the acquired companies and the Company. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.
In the years ended December 31, 2016, 2017 and 2018, acquisition-related costs were $25.1 million, $59.8 million and $22.9 million, respectively. Acquisition-related costs are associated with the acquisitions of businesses and intellectual property and include transaction, transition and integration-related charges (including legal, accounting and other professional fees, severance and retention bonuses) and subsequent adjustments to the Company’s initial estimated amount of contingent consideration associated with acquisitions. Acquisition-related costs for the year ended December 31, 2016 were primarily related to the Merger and also included $8.2 million of retention-based bonus expense related to the Company’s acquisitions, which are typically earned over the first two years following the acquisition. Acquisition-related costs for the year ended December 31, 2017 were also primarily related to the Merger and included $29.4 million in transaction, transition and integration-related expenses, $12.8 million in integration-related severance costs, and $16.6 million of retention-based bonuses, of which $10.0 million was related to the Merger. Acquisition-related costs for the year ended December 31, 2018 consisted of $8.2 million of transaction, transition and integration-related expenses, primarily for the acquisition of Jive, $3.5 million of integration-related severance costs, and $11.2 million of retention-based bonuses primarily related to the Jive and Nanorep acquisitions described below.
66
2018 Acquisition
Jive Communications, Inc.
On April 3, 2018, the Company acquired all of the outstanding equity of Jive Communications, Inc., or Jive, a provider of cloud-based phone systems and unified communications services for $342.1 million, net of cash acquired. The Company funded the purchase price through a combination of existing cash on-hand and a $200.0 million revolving loan borrowed pursuant to its existing credit agreement.
Additionally, the Company expects to pay up to $15 million in contingent cash retention payments to certain employees of Jive upon the achievement of specified retention milestones over the two-year period following the closing of the transaction, of which $0.7 million has been paid as of December 31, 2018. At the time of closing, Jive had approximately 700 employees and fiscal year 2017 revenue was approximately $80 million. The operating results of Jive have been included in the Company’s results since the date of the acquisition. During the year ended December 31, 2018, the Company recorded revenue of approximately $78 million, including a $0.7 million effect of acquisition accounting on the fair value of acquired deferred revenue, and expenses of $114.1 million, including amortization of acquired intangibles of $9.9 million, acquisition-related transaction, transition and integration-related costs of $7.4 million, integration-related severance costs of $1.2 million and retention-based bonus expense of $7.7 million. The Company continues to integrate Jive into its business and has begun selling new bundled product offerings.
The acquisition is being accounted for under the acquisition method of accounting. The acquisition method of accounting requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The fair value of assets acquired and liabilities assumed has been recognized based on management’s estimates and assumptions using the information about facts and circumstances that existed at the acquisition date. The Company finalized the allocation of purchase price in the fourth quarter of 2018.
The following table summarizes the Company’s purchase price allocation (in thousands):
Cash
|
|
$
|
2,571
|
|
Accounts receivable
|
|
|
11,986
|
|
Property and equipment
|
|
|
2,492
|
|
Prepaid expenses and other current assets
|
|
|
2,511
|
|
Other assets
|
|
|
2,255
|
|
Intangible assets:
|
|
|
|
|
Completed technology (9 years)
(1)
|
|
|
35,200
|
|
Customer relationships (10 years)
(1)
|
|
|
117,500
|
|
Trade name (2 years)
|
|
|
900
|
|
Deferred revenue
|
|
|
(5,498
|
)
|
Accounts payable and accrued liabilities
(1)
|
|
|
(7,685
|
)
|
Deferred tax liabilities, net
(1)
|
|
|
(25,223
|
)
|
Goodwill
(1)
|
|
|
207,634
|
|
Total purchase consideration
|
|
|
344,643
|
|
Less: cash acquired
|
|
|
(2,571
|
)
|
Total purchase consideration, net of cash acquired
|
|
$
|
342,072
|
|
(1)
|
Since the second quarter of 2018, the Company identified measurement period adjustments that impacted the initial estimated fair value of the assets and liabilities assumed as of the date of acquisition. The table above, which summarizes the allocation of the purchase price for the entities acquired, has been updated to reflect these measurement period adjustments. The total measurement period adjustments resulted in an increase in intangible assets of $5.2 million ($2.4 million in completed technology and $2.8 million in customer relationships), an increase in accrued liabilities of $0.4 million, an increase in deferred tax liabilities, net, of $0.9 million, and a decrease in goodwill of $3.9 million. This change to the provisional fair value amounts of the assets and liabilities assumed occurred within the year ended December 31, 2018.
|
67
The useful lives of the identifiable intangible assets acquired range from 2 to 10 years with a weighted average useful life of 9.7 years. The goodwill recorded in connection with this transaction is primarily related to the expected opportunities to be ac
hieved as a result of the Company’s ability to leverage its customer base, sales force and business plan with Jive’s product, technical expertise and customer base. All goodwill and intangible assets acquired are not deductible for income tax purposes.
The Company recorded a long-term deferred tax liability, net, of $25.2 million primarily related to definite-lived intangible assets which cannot be deducted for tax purposes, partially offset by deferred tax assets primarily related to net operating losses acquired.
The unaudited financial information in the table below summarizes the combined results of operations of the Company, including Jive, on a pro forma basis, as though the acquisition had been consummated as of the beginning of 2017, including amortization charges from acquired intangible assets, interest expense on borrowings and lower interest income in connection with the Company’s funding of the acquisition with existing cash and cash equivalents and borrowings under its credit facility, the inclusion of expense related to retention-based bonuses assuming full achievement of the retention requirements, the reclassification of acquisition-related costs of the Company and Jive incurred up to the transaction closing date, the effect of acquisition accounting on the fair value of acquired deferred revenue and the related tax effects. Any impact on the Jive pro forma net deferred tax liabilities as a result of the reduction in the federal corporate tax rate resulting from the Tax Cuts and Jobs Act of 2017, or the U.S. Tax Act, enacted on December 22, 2017 has been excluded. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition taken place at the beginning of 2017.
Unaudited Pro Forma Financial Information (in millions except per share amounts)
|
|
Years Ended December 31,
|
|
|
|
(unaudited)
|
|
|
|
2017
|
|
|
2018
|
|
Pro forma revenue
|
|
$
|
1,067.7
|
|
|
$
|
1,227.9
|
|
Pro forma net income (loss)
|
|
$
|
68.7
|
|
|
$
|
65.0
|
|
Pro forma net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.36
|
|
|
$
|
1.26
|
|
Diluted
|
|
$
|
1.34
|
|
|
$
|
1.24
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
50.4
|
|
|
|
51.8
|
|
Diluted
|
|
|
51.5
|
|
|
|
52.5
|
|
2017 Acquisitions
Nanorep Technologies Ltd.
On July 31, 2017, the Company acquired all of the outstanding equity interests in Nanorep Technologies Ltd., or Nanorep, an Israeli provider of artificial intelligence, chatbot and virtual assistant services, for $43.2 million, net of cash acquired. Additionally, the Company expects to pay up to $5 million in cash to certain employees of Nanorep contingent upon their continued service over the two-year period following the closing of the acquisition and, in some cases, the achievement of specified performance conditions, of which $2.5 million has been paid as of December 31, 2018. At the time of the acquisition, Nanorep had approximately 55 employees and annualized revenue of approximately $5 million. The operating results of Nanorep, which have been included in the Company’s results since the date of the acquisition are not material. Accordingly, pro forma financial information for the business combination has not been presented.
68
GoTo
Busines
s
On January 31, 2017, the Company completed its Merger with a wholly-owned subsidiary of Citrix, pursuant to which the Company acquired Citrix’s GoTo Business. In connection with the Merger, the Company issued 26.9 million shares of its common stock to Citrix stockholders and an additional 0.4 million of the Company’s restricted stock units in substitution for certain outstanding Citrix restricted stock units held by the GoTo Business employees. Based on the Company’s closing stock price of $108.10 on January 31, 2017 as reported by the NASDAQ Global Select Market, the total value of the shares of LogMeIn common stock issued to Citrix stockholders in connection with the Merger was $2.9 billion. In October 2017, pursuant to the terms of the merger agreement, the Company paid $3.3 million of additional purchase price for final adjustments related to defined targets for cash and cash equivalents and non-cash working capital.
As of the date of the Merger, the operations of the GoTo Business have been included in the Company’s operating results. Since the Merger, the operating costs of the GoTo Business have been integrated with the operating costs of the Company and therefore, the Company has not provided operating income for the GoTo Business. Further, in 2018, stand-alone GoTo Business revenue was not reported because the Company’s continued integration of its go-to-market strategy made this metric incomparable to prior periods. During the years ended December 31, 2017 and 2018, the Company recorded amortization of acquired intangibles of $172.6 million and $224.1 million, respectively, and acquisition-related transaction, transition and integration-related costs directly attributable to the Merger of $46.0 million and $2.9 million, respectively, within its Consolidated Financial Statements.
The following table summarizes the fair value (in thousands) of the assets acquired and liabilities assumed at the date of acquisition:
Purchase consideration:
|
|
|
|
|
Company common shares issued
(1)
|
|
$
|
2,904,487
|
|
Restricted stock units issued
(2)
|
|
|
16,692
|
|
Cash consideration paid
(3)
|
|
|
3,317
|
|
Total purchase consideration
|
|
$
|
2,924,496
|
|
Estimated fair value of assets acquired and liabilities assumed:
|
|
|
|
|
Cash
|
|
|
24,215
|
|
Accounts receivable
|
|
|
48,957
|
|
Property and equipment
|
|
|
59,715
|
|
Prepaid expense and other current assets
|
|
|
21,824
|
|
Other assets
|
|
|
4,448
|
|
Intangible assets (weighted average useful life):
(4)
|
|
|
|
|
Completed technology (9 years)
|
|
|
385,600
|
|
Customer relationships (8 years)
|
|
|
756,700
|
|
Tradenames and trademark (9 years)
|
|
|
65,100
|
|
Accounts payable
|
|
|
(11,030
|
)
|
Accrued liabilities
|
|
|
(26,886
|
)
|
Deferred revenue, current and noncurrent
|
|
|
(82,643
|
)
|
Other long-term liabilities
|
|
|
(996
|
)
|
Deferred tax liabilities, net
|
|
|
(379,871
|
)
|
Goodwill
|
|
$
|
2,059,363
|
|
(
1)
|
Represents the fair value of the 26.9 million new shares of the Company’s common stock (plus cash in lieu of fractional shares) issued to Citrix stockholders, based on the fair value per share of the Company’s common stock of $108.10 per share, which was the closing price of the Company’s common stock on the NASDAQ Global Select Market on January 31, 2017.
|
(2)
|
Represents the fair value of the 0.4 million restricted stock units issued by the Company in substitution for certain outstanding Citrix restricted stock units held by the GoTo Business employees, pursuant to the terms of the Merger. These Company restricted stock units were issued on the same terms and conditions as were applicable to the outstanding Citrix restricted stock units held by the GoTo Business employees immediately prior to the Merger date (including the same vesting and forfeiture provisions). The aggregate fair value of those awards ($48.2 million) is based on the fair market value per share of the Company’s common stock of $108.10 per share, which was the closing price of the Company’s common stock on the NASDAQ Global Select Market on January 31, 2017. Of that amount, $18.0 million was related to pre-combination employee services and, after adjusting for known and estimated forfeitures, $16.7 million was allocated to purchase
|
69
|
consideration and $30.2 million was allocated to future employee services and will be expensed as stock-based compensation on a straight-line basis over the remaining service periods of those awards.
|
(3)
|
Represents $3.3 million of additional purchase price paid by the Company to Citrix, pursuant to the terms of the merger agreement, for final adjustments related to defined targets for cash and cash equivalents and non-cash working capital, resulting in an increase of $3.3 million to goodwill.
|
(
4
)
|
The weighted average useful life of identifiable intangible assets acquired in the Merger is 8.4 years
.
|
The completion of the Merger and the acquisition of the GoTo Business has resulted in a combined company with the scale, employees, products and customer base needed to lead large markets, support a more global customer base and compete against a variety of different solution providers of all sizes. Goodwill of $2.1 billion was recognized for the excess purchase consideration over the estimated fair value of the assets acquired. Goodwill and intangible assets recorded as part of the acquisition are not deductible for tax purposes. The Company recorded a deferred tax liability, net of deferred tax assets, of $379.9 million, which was primarily related to the amortization of intangible assets which cannot be deducted for tax purposes and which was partially offset by deferred tax assets primarily related to the pre-combination services of the Company’s restricted stock units issued in substitution for the outstanding Citrix restricted stock units pursuant to the Merger agreement.
The unaudited financial information in the table below summarizes the combined results of operations of the Company, including the GoTo Business, on a pro forma basis, as though the Merger had been consummated as of the beginning of 2016, including amortization charges from acquired intangible assets, the effect of acquisition accounting on the fair value of acquired deferred revenue, the inclusion of expense related to retention-based bonuses assuming full achievement of the retention requirements, the reclassification of all acquisition-related costs incurred by the Company and the GoTo Business as of the beginning of 2016 through the first quarter of 2017 (the quarter the Merger was completed), and the related tax effects. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of 2016.
Unaudited Pro Forma Financial Information (in millions except per share amounts)
|
|
Years Ended December 31,
|
|
|
|
(unaudited)
|
|
|
|
2016
|
|
|
2017
|
|
Pro forma revenue
|
|
$
|
983.6
|
|
|
$
|
1,060.7
|
|
Pro forma net income (loss)
|
|
$
|
(95.4
|
)
|
|
$
|
129.3
|
|
Pro forma net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.83
|
)
|
|
$
|
2.46
|
|
Diluted
|
|
$
|
(1.83
|
)
|
|
$
|
2.41
|
|
Pro forma weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
52.2
|
|
|
|
52.7
|
|
Diluted
|
|
|
52.2
|
|
|
|
53.7
|
|
2016 Acquisition
AuthAir, Inc.
On October 31, 2016, the Company acquired all of the outstanding equity interests in AuthAir, Inc., or AuthAir, a Woodbridge, Connecticut-based provider of proximity-based security and wireless authentication solutions, for $6.0 million plus contingent retention-based bonuses totaling up to $0.5 million which was paid to former AuthAir employees over a two-year period following the date of the acquisition. The results of operations of AuthAir have been included in the Company’s consolidated financial results since the acquisition date and have not been material.
Divestiture of Xively
On February 9, 2018, the Company and certain of its subsidiaries entered into an agreement to sell its Xively business. On March 20, 2018, the Company completed the sale for consideration of $49.9 million, comprised of $42.4 million of cash received in the first quarter of 2018 and $7.5 million of receivables held back as an escrow by the buyer, as an exclusive security in the event of the Company’s breach of any of the representations and warranties in the definitive agreement. The $7.5 million receivable, due in September 2019, was recorded at a net present value of $7.3 million, and is included in prepaids and other current assets on the December 31, 2018 consolidated balance sheet.
70
The Xively disposition resulted in a gain of $33.9 million recorded in 2018, comprised of the present value of the $49.6 million received as consideration less
net assets disposed of $13.3 million and transaction costs of $2.4 million. The net assets disposed are primarily comprised of $14.0 million of goodwill allocated to the Xively business. In fiscal year 2017, the Company recorded approximately $3 million o
f revenue and $13 million of operating expense directly related to its Xively business. The sale of the Xively business does not constitute a significant strategic shift that will have a material impact on the Company’s ongoing operations and financial res
ults. Accordingly, pro forma information for the divestiture of Xively has not been presented.
6.
|
Goodwill and Intangible Assets
|
The changes in the carrying amounts of goodwill for the years ended December 31, 2017 and 2018 are primarily due to the Merger with the GoTo Business and the acquisition of Nanorep in 2017, and the acquisition of Jive and the reduction of goodwill resulting from the divestiture of the Xively business in 2018. For additional information regarding the acquisitions, see Note 4 to the Consolidated Financial Statements. For additional information regarding the Xively divestiture, see Note 5 to the Consolidated Financial Statements.
Changes in goodwill for the years ended December 31, 2017 and 2018 are as follows (in thousands):
Balance, January 1, 2017
|
|
$
|
121,760
|
|
Goodwill related to the Merger
|
|
|
2,059,363
|
|
Goodwill related to the acquisition of Nanorep
|
|
|
26,933
|
|
Foreign currency translation adjustments
|
|
|
669
|
|
Balance, December 31, 2017
|
|
|
2,208,725
|
|
Goodwill resulting from the divestiture of Xively
|
|
|
(14,000
|
)
|
Goodwill related to the acquisition of Jive
|
|
|
207,634
|
|
Foreign currency translation adjustments
|
|
|
(1,969
|
)
|
Balance, December 31, 2018
|
|
$
|
2,400,390
|
|
Intangible assets consist of the following (in thousands):
|
|
December 31, 2017
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Weighted
Average Life
Remaining
(in years)
|
|
Identifiable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
810,779
|
|
|
$
|
135,715
|
|
|
$
|
675,064
|
|
|
$
|
920,265
|
|
|
$
|
294,362
|
|
|
$
|
625,903
|
|
|
|
6.6
|
|
Technology
|
|
|
453,372
|
|
|
|
64,021
|
|
|
|
389,351
|
|
|
|
481,776
|
|
|
|
132,895
|
|
|
|
348,881
|
|
|
|
7.0
|
|
Trade names and trademarks
|
|
|
70,630
|
|
|
|
10,073
|
|
|
|
60,557
|
|
|
|
70,985
|
|
|
|
20,685
|
|
|
|
50,300
|
|
|
|
7.0
|
|
Other
|
|
|
1,360
|
|
|
|
1,323
|
|
|
|
37
|
|
|
|
3,577
|
|
|
|
1,319
|
|
|
|
2,258
|
|
|
|
7.0
|
|
Internally developed
software
|
|
|
38,153
|
|
|
|
13,565
|
|
|
|
24,588
|
|
|
|
66,361
|
|
|
|
33,715
|
|
|
|
32,646
|
|
|
|
1.4
|
|
|
|
$
|
1,374,294
|
|
|
$
|
224,697
|
|
|
$
|
1,149,597
|
|
|
$
|
1,542,964
|
|
|
$
|
482,976
|
|
|
$
|
1,059,988
|
|
|
|
|
|
In 2018, the Company capitalized $0.9 million for trade names, $117.5 million for customer relationships and $35.2 million for technology as intangible assets in connection with the acquisition of Jive and acquired a domain name for $2.5 million. The Company also capitalized $29.8 million and $31.4 million during the years ended December 31, 2017 and 2018, respectively, of costs related to internally developed software to be sold as a service incurred during the application development stage which are being amortized over the expected lives of the related services.
71
The Company is amortizing its intangible assets based upon the pattern in which their economic benefit will be realized, or if this pattern cannot be reliably determined, using the straight-line method over their estimated useful lives. Am
ortization relating to technology, documented know-how (other) and internally developed software is
recorded within cost of revenue
and the amortization of trade name
s
and trademark
s
, customer relationships,
and
domain names (other) is recorded within oper
ating expenses. Amortization expense for intangible assets consisted of the following (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of internally developed software
|
|
$
|
1,778
|
|
|
$
|
8,540
|
|
|
$
|
22,723
|
|
Amortization of acquired intangibles
(1)
|
|
|
4,604
|
|
|
|
48,676
|
|
|
|
72,705
|
|
Sub-Total amortization of intangibles in cost of revenue
|
|
|
6,382
|
|
|
|
57,216
|
|
|
|
95,428
|
|
Amortization of acquired intangibles
(1)
|
|
|
5,457
|
|
|
|
134,342
|
|
|
|
172,539
|
|
Total amortization of intangibles
|
|
$
|
11,839
|
|
|
$
|
191,558
|
|
|
$
|
267,967
|
|
(1)
|
Total amortization of acquired intangibles was $10.1 million, $183.0 million and $245.2 million for the years ended December 31, 2016, 2017 and 2018, respectively.
|
Future estimated amortization expense for intangible assets at December 31, 2018 is as follows (in thousands):
Amortization Expense (Years Ending December 31)
|
|
Amount
|
|
2019
|
|
$
|
264,886
|
|
2020
|
|
|
218,948
|
|
2021
|
|
|
179,070
|
|
2022
|
|
|
142,684
|
|
2023
|
|
|
112,655
|
|
Thereafter
|
|
|
141,745
|
|
Total
|
|
$
|
1,059,988
|
|
7.
|
Property and Equipment
|
Property and equipment consisted of the following (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2018
|
|
Land, buildings and site improvements
|
|
$
|
34,050
|
|
|
$
|
34,394
|
|
Computer equipment and software
|
|
|
62,478
|
|
|
|
83,261
|
|
Office equipment
|
|
|
9,491
|
|
|
|
10,189
|
|
Furniture & fixtures
|
|
|
17,965
|
|
|
|
19,214
|
|
Construction in progress
|
|
|
34
|
|
|
|
6,080
|
|
Leasehold improvements
|
|
|
26,499
|
|
|
|
30,785
|
|
Total property and equipment
|
|
|
150,517
|
|
|
|
183,923
|
|
Less accumulated depreciation
|
|
|
(58,363
|
)
|
|
|
(85,685
|
)
|
Property and equipment, net
|
|
$
|
92,154
|
|
|
$
|
98,238
|
|
Depreciation expense for property and equipment was $9.7 million, $29.8 million and $33.1 million for the years ended December 31, 2016, 2017 and 2018, respectively.
72
Accrued liabilities consisted of the following (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2018
|
|
Marketing programs
|
|
$
|
6,883
|
|
|
$
|
13,857
|
|
Payroll and payroll-related
|
|
|
30,204
|
|
|
|
42,024
|
|
Acquisition-related
(1)
|
|
|
6,783
|
|
|
|
6,407
|
|
Other accrued liabilities
|
|
|
38,556
|
|
|
|
57,091
|
|
Total accrued liabilities
|
|
$
|
82,426
|
|
|
$
|
119,379
|
|
(1)
|
Acquisition-related costs include transaction, transition and integration-related fees and expenses and contingent retention-based bonus costs.
|
The domestic and foreign components of total income (loss) before provision for (benefit from) income taxes are as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Domestic
|
|
$
|
(15,748
|
)
|
|
$
|
(25,027
|
)
|
|
$
|
52,152
|
|
Foreign
|
|
|
18,956
|
|
|
|
13,050
|
|
|
|
28,644
|
|
Total income (loss) before provision for (benefit
from) income taxes
|
|
$
|
3,208
|
|
|
$
|
(11,977
|
)
|
|
$
|
80,796
|
|
The provision for (benefit from) income taxes is as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,264
|
|
|
$
|
33,474
|
|
|
$
|
42,962
|
|
State
|
|
|
647
|
|
|
|
3,701
|
|
|
|
11,690
|
|
Foreign
|
|
|
1,963
|
|
|
|
6,568
|
|
|
|
9,159
|
|
Total
|
|
|
3,874
|
|
|
|
43,743
|
|
|
|
63,811
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,705
|
)
|
|
|
(150,038
|
)
|
|
|
(36,286
|
)
|
State
|
|
|
(428
|
)
|
|
|
4,558
|
|
|
|
(9,042
|
)
|
Foreign
|
|
|
(171
|
)
|
|
|
(9,763
|
)
|
|
|
(12,058
|
)
|
Total
|
|
|
(3,304
|
)
|
|
|
(155,243
|
)
|
|
|
(57,386
|
)
|
Total provision for (benefit from) income taxes
|
|
$
|
570
|
|
|
$
|
(111,500
|
)
|
|
$
|
6,425
|
|
73
A reconciliation of the Company’s effective tax rate to the statutory federal income tax rate is as follows:
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Statutory tax rate
|
|
|
35.0
|
%
|
|
|
(35.0
|
)%
|
|
|
21.0
|
%
|
Change in valuation allowance
|
|
|
—
|
|
|
|
8.0
|
|
|
|
0.1
|
|
Impact of permanent differences
|
|
|
27.1
|
|
|
|
27.4
|
|
|
|
17.6
|
|
Non-deductible stock-based compensation
|
|
|
27.4
|
|
|
|
9.2
|
|
|
|
1.6
|
|
Non-deductible transaction related costs
|
|
|
82.1
|
|
|
|
19.5
|
|
|
|
0.6
|
|
Foreign tax rate differential
|
|
|
(165.3
|
)
|
|
|
(71.3
|
)
|
|
|
(11.7
|
)
|
Research and development credits
|
|
|
(10.6
|
)
|
|
|
(36.4
|
)
|
|
|
(4.5
|
)
|
State taxes, net of federal benefit
|
|
|
0.4
|
|
|
|
(21.1
|
)
|
|
|
(0.3
|
)
|
Impact of uncertain tax positions
|
|
|
18.6
|
|
|
|
29.3
|
|
|
|
0.2
|
|
Effect of U.S. Tax Act
|
|
|
—
|
|
|
|
(714.9
|
)
|
|
|
(5.3
|
)
|
Section 199 deduction
|
|
|
(0.1
|
)
|
|
|
(20.0
|
)
|
|
|
—
|
|
Excess benefit on stock compensation
|
|
|
—
|
|
|
|
(133.6
|
)
|
|
|
(9.1
|
)
|
Other
|
|
|
3.2
|
|
|
|
7.9
|
|
|
|
(2.2
|
)
|
Effective tax rate
|
|
|
17.8
|
%
|
|
|
(931.0
|
)%
|
|
|
8.0
|
%
|
As a result of the U.S. Tax Act enacted in December 2017, the U.S. statutory tax rate was lowered from 35% to 21%, effective January 1, 2018. In the fourth quarter of 2017, the Company recorded a significant tax benefit for the remeasurement of its U.S. net deferred tax liabilities primarily associated with indefinite-lived intangible assets that will reverse at the new 21% rate.
The Company’s effective tax rates for the years ended December 31, 2016, 2017 and 2018 were impacted by the following:
|
•
|
All three years benefitted from profits earned in certain foreign jurisdictions, primarily the Company’s Irish subsidiaries, which are subject to significantly lower tax rates than the U.S. federal statutory rate.
|
|
•
|
During the years ended December 31, 2017 and 2018, $16.0 million and $7.3 million, respectively, of excess tax deductions on stock compensation was recorded as a tax benefit in conjunction with the adoption of ASU 2016-09 in 2017 (described in more detail below).
|
|
•
|
During the year ended December 31, 2017, in conjunction with the U.S. Tax Act, the Company recorded a one-time mandatory transition tax estimate of $14.8 million and a net tax benefit of $100.4 million in order to remeasure and reassess the net realizability of the Company’s U.S. deferred tax assets and liabilities (described in more detail below).
|
|
•
|
During the year ended December 31, 2018, the Company revised its one-time transition tax liability to $12.2 million and recorded a tax benefit of $2.6 million.
|
|
•
|
During the year ended December 31, 2018, the Company recorded an income tax provision of $9.2 million on a pre-tax gain on disposition of assets of $33.9 million as a result of the divestiture of the Xively business.
|
|
•
|
During the fourth quarter of 2018, the Company realigned some of its intellectual property amongst three of the Company’s entities (two wholly-owned foreign entities and one United States entity). This realignment streamlined and simplified the Company’s global tax structure. As of December 31, 2018, the Company recorded a net tax benefit of $11.1 million due to this intellectual property realignment, primarily due to future tax deductions in various jurisdictions related to the transfer of the intellectual property, partially offset by approximately $7 million of cash taxes incurred.
|
As a result of the U.S. Tax Act, in the fourth quarter of 2017, the Company calculated its best estimation of the impact of the U.S. Tax Act and recognized a one-time mandatory transition tax of $14.8 million on cumulative foreign subsidiary earnings, remeasured the Company’s U.S. deferred tax assets and liabilities, which resulted in a benefit from income taxes of $105.1 million, and reassessed the net realizability of the Company’s deferred tax assets and liabilities, which resulted in a tax provision of $4.7 million. During the year ended December 31, 2018, the Company decreased the transition tax estimate and recorded a tax benefit of $2.6 million to decrease its one-time mandatory transition tax estimate to $12.2 million from $14.8 million recorded in the fourth quarter of 2017.
74
On December 22, 2017, Staff Accounting Bulletin No. 118, or SAB 118, was issued to address the application of GAAP in situations when a registrant does not have the necessary information availabl
e, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the U.S. Tax Act.
As of December 22, 2018, the Company finalized its analysis of the provisions for the U.S. Tax Act and rec
orded all adjustments to estimated amounts to income tax expense. The Company has elected to record Global Intangible Low-Taxed Income tax
, or
GILTI tax
,
as a period cost in the period incurred. For the year ended December 31, 2018, the Company recorded a
net tax provision of $1.7 million related to GILTI tax which will be offset by utilizing foreign tax credits generated of $1.6 million.
The Company has deferred tax assets related to temporary differences and operating loss carryforwards as follows (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
8,117
|
|
|
$
|
11,549
|
|
Deferred revenue
|
|
|
709
|
|
|
|
829
|
|
Amortization
|
|
|
3,808
|
|
|
|
23,770
|
|
Stock-based compensation
|
|
|
9,165
|
|
|
|
8,540
|
|
Accrued bonus
|
|
|
717
|
|
|
|
1,820
|
|
Other
|
|
|
11,611
|
|
|
|
13,089
|
|
Total deferred tax assets
|
|
|
34,127
|
|
|
|
59,597
|
|
Deferred tax asset valuation allowance
|
|
|
(3,112
|
)
|
|
|
(3,237
|
)
|
Net deferred tax assets
|
|
|
31,015
|
|
|
|
56,360
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(3,247
|
)
|
|
|
(2,369
|
)
|
Goodwill amortization
|
|
|
(2,838
|
)
|
|
|
(4,296
|
)
|
Intangible assets not deductible
|
|
|
(241,517
|
)
|
|
|
(225,413
|
)
|
Deferred commissions
|
|
|
—
|
|
|
|
(13,285
|
)
|
Other
|
|
|
(4,290
|
)
|
|
|
(6,150
|
)
|
Total deferred tax liabilities
|
|
|
(251,892
|
)
|
|
|
(251,513
|
)
|
Total
|
|
$
|
(220,877
|
)
|
|
$
|
(195,153
|
)
|
Deferred tax assets, related valuation allowances, current tax liabilities, and deferred tax liabilities are determined separately by tax jurisdiction. In making these determinations, the Company estimates deferred tax assets, current tax liabilities, and deferred tax liabilities, and the Company assesses temporary differences resulting from differing treatment of items for tax and accounting purposes. As of December 31, 2018, the Company maintained a full valuation allowance against the deferred tax assets of its Hungarian subsidiary. This entity has historical tax losses and the Company concluded it was not more likely than not that these deferred tax assets are realizable. During 2016, the valuation allowance decreased by $0.2 million as a result of a tax return provision adjustment, which decreased the Hungarian subsidiary’s net operating loss carryforwards. During 2017, as a result of the Merger, the valuation allowance increased by $1.4 million primarily due to the recording of a valuation allowance for certain Massachusetts and California state net operating losses. During 2018, the valuation allowance increased by $0.1 million as a result of a tax return provision adjustment which increased the net operating loss carryforward.
For U.S. tax return purposes, net operating losses and tax credits are normally available to be carried forward to future years, subject to limitations as discussed below. As of December 31, 2018, the Company had federal and state net operating loss carryforwards of $32.6 million and $71.4 million, respectively, which expire on various dates from 2021 through 2038.
75
The Company has performed an analysis of its ownership changes as defined by Section 382 of the Internal Revenue Code
, or Section 382,
and has determined the portion of
net operating loss carryforwards acquired from its 2016 through 2018 acquisitions that are subject to limitation, if any
. The Company also analyzed the historical LogMeIn net operating loss carryforwards due to the Merger
in 2017
. As of December 31, 201
8
,
all net operating loss carryforwards (except for Massachusetts and California) generated by the Company, including those subject to limitation, are available for utilization. Subsequent ownership changes as defined by Section 382 could potentially limit t
he amount of net operating loss carryforwards that can be utilized annually to offset future taxable income.
As of December 31, 2018, the Company had foreign net operating loss carryforwards of $23.0 million, of which $15.6 million are related to the Company’s Hungarian subsidiary, which are not subject to expiration, and the Company has recognized a full valuation allowance against these carryforwards. The remaining $7.4 million of foreign net operating loss carryforwards are related to the Company’s Israel subsidiary. The Company expects to fully realize these net operating loss carryforwards prior to their expiration.
As of December 31, 2018, it is management’s assertion that the earnings and profits of foreign entities may not be reinvested in the overseas businesses indefinitely however, the outside basis differences in the international subsidiaries will be permanently reinvested.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company and its subsidiaries are examined by various tax authorities, including the Internal Revenue Service in the United States. As of December 31, 2018, the Company remained subject to examination in the following major tax jurisdictions for the years indicated:
Major Tax Jurisdictions
|
|
Open Tax Years
|
United States (Federal)
|
|
2017-2018
|
United States (State)
|
|
2013-2018
|
Hungary
|
|
2014-2018
|
Ireland
|
|
2014-2018
|
The Company incurred expenses related to stock-based compensation for the years ended December 31, 2016, 2017 and 2018 of $38.4 million, $67.3 million and $65.7 million, respectively. Accounting for the tax effects of stock-based awards requires the recording of a deferred tax asset as the compensation is recognized for financial reporting prior to recognizing the tax deductions. Upon the settlement of the stock-based awards (i.e., exercise, vesting, forfeiture or cancellation), the actual tax deduction is compared with the cumulative financial reporting compensation cost, and any excess tax deduction is considered an excess tax benefit. In 2016, the excess tax benefits were tracked in a “windfall tax benefit pool” to offset any future tax deduction shortfalls and were recorded as increases to additional paid-in capital in the period when the tax deduction reduced income taxes payable. Historically, the Company has followed the with-and-without approach for the direct effects or excess tax deductions to determine the timing of the recognition of benefits for excess tax deductions. In 2016, the Company recorded excess tax benefits to additional paid-in capital of $2.3 million.
On January 1, 2017, the Company adopted ASU 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,
referred to herein as ASU 2016-09, and recorded, using the modified retrospective approach, a cumulative-effect adjustment to accumulated deficit of a credit of $4.9 million to record $6.8 million of previously unrecognized windfall tax benefits, partially offset by $1.9 million for the accounting policy election to account for forfeitures in compensation cost when they occurred. The Company recorded $2.7 million to additional paid-in capital for the differential between the amount of compensation cost previously recorded and the amount that would have been recorded without assuming forfeitures, partially offset by its tax effect of $0.8 million recorded to deferred tax assets. Upon the adoption of ASU 2016-09, the Company, on a prospective basis, records the recognition of excess tax benefits and deficits in its provision from income taxes in the consolidated statements of operations and treats those amounts as discrete items in the period in which they occur. For the years ended December 31, 2017 and 2018, the Company recorded a net tax benefit of $16.0 million and $7.3 million related to excess tax benefits.
76
The Company has provide
d liabilities for uncertain tax positions in other long-term liabilities on the consolidated balance sheets as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Balance beginning of period
|
|
$
|
884
|
|
|
$
|
1,480
|
|
|
$
|
5,059
|
|
Tax positions related to prior periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases
|
|
|
34
|
|
|
|
68
|
|
|
|
—
|
|
Decreases
|
|
|
—
|
|
|
|
(42
|
)
|
|
|
(176
|
)
|
Tax positions related to current period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases
|
|
|
588
|
|
|
|
3,661
|
|
|
|
1,514
|
|
Settlements
|
|
|
(26
|
)
|
|
|
(78
|
)
|
|
|
(1,605
|
)
|
Statute expiration
|
|
|
—
|
|
|
|
(30
|
)
|
|
|
—
|
|
Balance end of period
|
|
$
|
1,480
|
|
|
$
|
5,059
|
|
|
$
|
4,792
|
|
These uncertain tax positions would impact the Company’s effective tax rate if recognized. The Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes or unrecognized tax benefits as a component of its income tax provision. The Company recognized $42,000, $50,000 and $43,000 of interest expense during the years ended December 31, 2016, 2017 and 2018, respectively.
10.
|
Common Stock and Equity
|
Authorized Shares
— Pursuant to the Company’s restated certificate of incorporation, the Company is authorized to issue 150 million shares of common stock and 5 million shares of undesignated preferred stock, each $0.01 par value per share.
Common Stock Reserved —
As of December 31, 2017 and 2018, the Company reserved shares of common stock for the exercise of stock options and restricted stock units of 8.8 million and 7.9
million, respectively.
On February 23, 2017, the Company’s Board of Directors approved a three-year capital return plan intended to return up to $700 million to stockholders through a combination of share repurchases and dividends. During the year ended December 31, 2018, the Company paid a cash dividend of $0.30 per share in each of the four quarters, totaling $62.2 million. The Company’s Board of Directors will continue to review this capital return plan for potential modifications based on the Company’s financial performance, business outlook and other considerations. The timing and number of shares to be repurchased and/or the amount of cash dividends to be paid to the Company’s stockholders pursuant to the capital return plan will depend upon prevailing market conditions and other factors. Additionally, the Company’s credit facility contains certain financial and operating covenants that may restrict its ability to pay dividends in the future.
The Company paid cash dividends per share during the periods presented as follows:
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
Dividends
Per Share
|
|
|
Amount
(in millions)
|
|
|
Dividends
Per Share
|
|
|
Amount
(in millions)
|
|
First quarter
(1)
|
|
$
|
0.50
|
|
|
$
|
12.8
|
|
|
$
|
0.30
|
|
|
$
|
15.7
|
|
Second quarter
|
|
|
0.25
|
|
|
|
13.2
|
|
|
|
0.30
|
|
|
|
15.6
|
|
Third quarter
|
|
|
0.25
|
|
|
|
13.2
|
|
|
|
0.30
|
|
|
|
15.5
|
|
Fourth quarter
|
|
|
0.25
|
|
|
|
13.1
|
|
|
|
0.30
|
|
|
|
15.3
|
|
Total cash dividends paid
|
|
$
|
1.25
|
|
|
$
|
52.3
|
|
|
$
|
1.20
|
|
|
$
|
62.2
|
|
(1)
|
The dividend paid in the first quarter of fiscal 2017 was the third of three special cash dividends announced and paid in anticipation of the completion of the Merger. The first two special cash dividends were declared and paid in 2016.
|
77
During the
years ended December 31, 2016, 2017 and 2018
, t
he Company repurchased 443,159,
626,154
and
2,531,877
shares of its common stock
at an average price of $57.27,
$110.56
and $
98.32
per share, respectively, for a total cost of $25.4 m
illion,
$69.2 million
and $
248.9
million
, respectively.
1
1
.
|
Stock Incentive Plan
|
The Company’s 2009 Stock Incentive Plan, referred to herein as the 2009 Plan, is administered by the Board of Directors and Compensation Committee, which have the authority to designate participants and determine the number and type of awards to be granted and any other terms or conditions of the awards. The Company awards restricted stock units as its principal equity incentive award. Restricted stock units with time-based vesting conditions generally vest over a three-year period while restricted stock units with market-based or performance-based vesting conditions generally vest over two- or three-year periods. Until 2012, the Company generally granted stock options as the principal equity incentive award. Options generally vested over a four-year period and expire ten years from the date of grant. Certain stock-based awards provide for accelerated vesting if the Company experiences a change in control.
Effective on January 31, 2017, the Company’s stockholders approved an amendment and restatement of the Company’s 2009 Stock Incentive Plan, which increased the number of shares of the Company’s common stock that may be issued under the plan by an additional 4.5 million shares and extended the term of the plan to December 5, 2026. As of December 31, 2018, 7.9 million shares remained available for grant under the 2009 Plan.
The Company generally issues previously unissued shares of common stock for the exercise of stock options and restricted stock units. The Company received $11.8 million, $6.5 million and $3.8 million in cash from stock option exercises during the years ended December 31, 2016, 2017 and 2018, respectively.
The following table summarizes stock option activity (shares and intrinsic value in thousands):
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, January 1, 2018
|
|
|
172
|
|
|
$
|
30.33
|
|
|
|
3.7
|
|
|
$
|
14,520
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
(126
|
)
|
|
|
30.42
|
|
|
|
—
|
|
|
$
|
7,704
|
|
Forfeited
|
|
|
(1
|
)
|
|
|
39.13
|
|
|
|
—
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
45
|
|
|
$
|
29.92
|
|
|
|
3.3
|
|
|
$
|
2,364
|
|
The aggregate intrinsic value was calculated based on the positive differences between the fair value of the Company’s common stock of $114.50 and $81.57 per share on December 31, 2017 and 2018, respectively, or at time of exercise, and the exercise price of the options.
During the year ended December 31, 2018, the Company granted the following restricted stock unit awards (in thousands):
Type of Award
|
|
Number of
Restricted
Stock Units
|
|
Time-based
(1)
|
|
|
800
|
|
Market-based
(2)
|
|
|
95
|
|
Total granted
|
|
|
895
|
|
(1)
|
Time-based restricted stock units generally vest one-third every year for three years and are valued on the grant date using the grant date closing price of the underlying shares.
|
(2)
|
Market-based restricted stock units granted to certain key executives vest equally upon the achievement of a relative total shareholder return, or TSR, target as measured over a two- and three-year performance period versus the TSR realized for that same period by a specified stock index. The number of shares earned can range from 0% to 200% of the target shares awarded depending on the Company’s level of achievement. These market-based awards are referred to herein as TSR Units and are also tied to the individual executive’s continued employment with the Company throughout the applicable performance period.
|
78
The fair value of the TSR
U
nits was determined using a Monte Carlo simulation model including assumptions used (but not limited to) a risk-free interest rate, an expected volatility and an expected dividend yield as foll
ows:
|
|
2017 Grants
|
|
|
2018 Grants
|
Risk-free interest rate
|
|
1.43%
|
|
|
2.64% - 2.74%
|
Volatility
|
|
36%
|
|
|
34% - 38%
|
Dividend yield
|
|
0.88%
|
|
|
1.08% - 1.48%
|
The following table summarizes restricted stock unit activity, including performance-based and market-based units (shares in thousands):
|
|
Number of
Restricted
Stock Units
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
Unvested as of January 1, 2018
|
|
|
1,689
|
|
|
$
|
90.91
|
|
Restricted stock units granted
|
|
|
895
|
|
|
|
103.74
|
|
Restricted stock units earned
(1)
|
|
|
57
|
|
|
|
|
|
Restricted stock units vested
|
|
|
(803
|
)
|
|
|
83.21
|
|
Restricted stock units forfeited
|
|
|
(290
|
)
|
|
|
97.77
|
|
Unvested as of December 31, 2018
|
|
|
1,548
|
|
|
$
|
100.55
|
|
(1)
|
In February and May 2018, a total of 57,250 target TSR Units, which were awarded in 2015 and 2016, vested at 200% of the target TSR Units granted (an additional 57,250 were earned and vested). These TSR Units were measured against the Russell 2000 Index for that same period.
|
As of December 31, 2018, 154,063 TSR Units and 63,955 restricted stock units with performance-based vesting conditions were outstanding.
The Company recognizes stock compensation expense on a straight-line basis over the requisite service period of the restricted stock unit, which is generally three years. Compensation cost for TSR Units is recognized on a straight-line basis over the requisite service period and is recognized, regardless of the actual number of awards that are earned, based on the level of achievement of the market-based vesting condition.
The Company recognized stock-based compensation expense within the accompanying consolidated statements of operations as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Cost of revenue
|
|
$
|
2,289
|
|
|
$
|
5,222
|
|
|
$
|
4,997
|
|
Research and development
|
|
|
6,201
|
|
|
|
22,103
|
|
|
|
18,869
|
|
Sales and marketing
|
|
|
16,181
|
|
|
|
16,155
|
|
|
|
15,995
|
|
General and administrative
|
|
|
13,679
|
|
|
|
23,812
|
|
|
|
25,873
|
|
Total stock-based compensation expense
|
|
$
|
38,350
|
|
|
$
|
67,292
|
|
|
$
|
65,734
|
|
As of December 31, 2018, there was approximately $102 million of total unrecognized stock-based compensation cost related to unvested stock awards which are expected to be recognized over a weighted average period of 2.1
years.
12.
|
Commitments and Contingencies
|
Operating Leases
— As of December 31, 2018, the Company had operating lease agreements for offices in the United States, Hungary, Germany, Australia, the United Kingdom, Ireland, Israel, India, Canada, Brazil, Guatemala, and Mexico that expire at various dates through 2030.
Rent expense under all leases was $11.8 million, $21.5 million and $22.5 million for the years ended December 31, 2016, 2017 and 2018, respectively. The Company records rent expense on a straight-line basis for leases with scheduled escalation clauses or free rent periods.
79
The Company also enters into hosting services agreements with third-party data centers and internet service providers that are subject to annual renewal. Hosting fees incurr
ed under these arrangements totaled
$10.0 million,
$
34.4
million and $
40.0
million for the
years ended December 31, 2016, 2017 and 2018
, respectively
.
The Company is currently assessing the impact of the FASB’s new lease standard, ASU 2016-02, on its Consolidated Financial Statements and related disclosures, as described further in Note 2 to the Consolidated Financial Statements. The total commitment for non-cancelable operating leases was $153.7 million as of December 31, 2018 (in thousands):
Years Ending December 31
|
|
Lease
Commitments
|
|
2019
|
|
$
|
23,969
|
|
2020
|
|
|
24,079
|
|
2021
|
|
|
22,253
|
|
2022
|
|
|
20,165
|
|
2023
|
|
|
14,986
|
|
Thereafter
|
|
|
48,290
|
|
Total
|
|
$
|
153,742
|
|
Litigation
— The Company routinely assesses its current litigation and/or threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where the Company assesses the likelihood of loss as probable.
On August 20, 2018, a securities class action lawsuit (the “Securities Class Action”) was initiated by purported stockholders of the Company in the U.S. District Court for the Central District of California against the Company and certain of its officers, entitled
Wasson v. LogMeIn, Inc. et al.,
(Case No. 2:18-cv-07285). On November 6, 2018 the case was transferred to the District of Massachusetts (Case No. 1:18-cv-12330). The lawsuit asserts claims under Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 based on alleged misstatements or omissions concerning renewal rates for the Company’s subscription contracts. The Company believes the lawsuit lacks merit and intends to defend it vigorously.
On January 30, 2019, a derivative action (the “Derivative Action”) was filed in the District of Massachusetts against LogMeIn’s Board of Directors, entitled
Schlagel v. Wagner et al.
(Case No. 1:19-cv-10204) alleging breach of fiduciary duty, waste of corporate assets, and violation of Sections 10(b) and 14(a) of the Securities and Exchange Act of 1934 related to the same allegations as the Securities Class Action. The complaint seeks unspecified damages, fees and costs. The Company intends to defend the lawsuit vigorously.
Given the inherent unpredictability of litigation and the fact that the Securities Class Action and the Derivative Action are still in early stages, the Company is unable to predict the outcome of these actions or reasonably estimate a possible loss or range of loss associated with them at this time.
The Company is from time to time subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these other claims cannot be predicted with certainty, management does not believe that the outcome of any of these other legal matters will have a material adverse effect on the Company’s financial results of operations or financial condition.
On January 1, 2007, the Company established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. The plan is available to all employees upon employment and allows participants to defer a portion of their annual compensation on a pre-tax basis. On July 1, 2016, the Company implemented a 401(k) Employer Match program in which all employees who are making eligible 401(k) contributions will receive an employer match in which the Company contributes 50% of the amount contributed by the employee, up to a maximum of 6% of the employee’s earnings. The match vests over three years beginning from an employee’s hire date anniversary at 33.3% per year. Employees who joined the Company on or before July 1, 2013 were immediately 100% vested in their match as of the program launch date. The Company made matching contributions of $0.8 million, $4.7 million and $5.6 million for the years ended December 31, 2016, 2017 and 2018, respectively.
80
1
4
.
|
Accumulated Other Comprehensive Income (Loss)
|
Accumulated other comprehensive income (loss) consists of foreign currency translation adjustments and changes in unrealized losses and gains (net of tax) on marketable securities. The Company has determined that the undistributed earnings of all of its foreign subsidiaries, except for 100% of the current and prior year earnings and foreign currency translation adjustments related to those earnings, will continue to be indefinitely reinvested outside the United States for any additional outside basis differences inherent in these entities. Accumulated other comprehensive income (loss) is reported as a component of stockholders’ equity and, as of December 31, 2017 and 2018, was comprised of cumulative translation adjustment gains of $15.6 million and $2.1 million, respectively. There were no material reclassifications to earnings in the years ended December 31, 2017 or 2018.
On February 18, 2015, the Company entered into a multi-currency credit agreement with a syndicate of banks, financial institutions and other lending entities (the “Credit Agreement”), pursuant to which a secured revolving credit facility was made available to the Company. On January 22, 2016, the Company entered into the First Amendment to the Credit Agreement, pursuant to which the Company exercised its option to increase the credit facility to up to $150 million in the aggregate with the existing lenders and an additional lender.
On February 1, 2017, the Company entered into an Amended and Restated Credit Agreement, or the Amended Credit Agreement, which increased the Company’s secured revolving credit facility from $150 million to $400 million in the aggregate and permits the Company to increase the revolving credit facility and/or enter into one or more tranches of term loans up to an additional $200 million. On March 23, 2018, the Company entered into a borrower accession agreement with its wholly-owned subsidiary, LogMeIn USA, Inc. and JPMorgan Chase Bank, N.A. acting in its capacity as administrative agent, pursuant to which LogMeIn USA, Inc. became a borrower under the Company’s existing multi-currency Amended and Restated Credit Agreement.
The credit facility matures February 1, 2022. The Company may prepay the loans or terminate or reduce the commitments in whole or in part at any time, without premium or penalty. The Company and its subsidiaries expect to use the credit facility for general corporate purposes, including, but not limited to, the potential acquisition of complementary products or businesses, share repurchases, as well as for working capital. On April 2, 2018, the Company borrowed $200.0 million under the Amended Credit Agreement to partially fund the acquisition of Jive, described further in Note 4 to the Consolidated Financial Statements. The Company had an outstanding debt balance of $200.0 million as of December 31, 2018.
Loans under the Amended Credit Agreement bear interest at variable rates which reset every 30 to 180 days depending on the rate and period selected by the Company, as described below. As of December 31, 2018, the annual rate on the $200.0 million outstanding debt balance was 3.688%, which reset to 3.813% on January 10, 2019. The average interest rate on borrowings outstanding for the year ended December 31, 2018 was 3.4%. The quarterly commitment fee on the undrawn portion of the credit facility ranges from 0.15% to 0.30% per annum, based upon the Company’s total leverage ratio.
The Amended Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, change the nature of its business, make investments and acquisitions, pay dividends or make distributions, or enter into certain transactions with affiliates, in each case subject to customary and other exceptions for a credit facility of this size and type, each as further described in the Amended Credit Agreement. As of December 31, 2018, the Amended Credit Agreement also required the Company to maintain a maximum total leverage ratio (not greater than 4.00:1.00), a minimum interest coverage ratio (not less than 3.00:1.00), and a maximum senior secured leverage ratio (not greater than 3.00:1.00), each as further defined in the Amended Credit Agreement. As of December 31, 2018, the Company was in compliance with all financial and operating covenants of the Amended Credit Agreement.
Any failure to comply with the financial or operating covenants of the Amended Credit Agreement would prevent the Company from being able to borrow additional funds, and would constitute a default, permitting the lenders to, among other things, accelerate the amounts outstanding, including all accrued interest and unpaid fees, under the credit facility and to terminate the credit facility.
81
As of December 31, 2017 and 2018
, the Company had
$2.3 million and
$
1.7
million
, respectively,
of origination costs recorded in other assets
.
T
he Company presents debt issua
nce costs as an asset and subsequently amortizes the deferred debt issuance costs ratably over the term of the credit facility.
Restructuring Plan
On February 11, 2019, the Company’s Board of Directors approved a global restructuring plan, including a reduction in force which will result in the termination of approximately 4% of the Company’s workforce and the consolidation of certain leased facilities. By restructuring, the Company intends to streamline its organization and reallocate resources to better align with the Company’s current growth acceleration goals. The Company expects to incur pre-tax restructuring charges of approximately $17 million and to substantially complete the restructuring by the end of fiscal year 2019. The pre-tax restructuring charges are comprised of approximately $10 million in one-time employee termination benefits and $7 million for facilities-related and other costs.
Cash Dividend
On February 14, 2019, the Company announced that its Board of Directors declared a cash dividend of $0.325 per share of common stock. The dividend is payable on March 12, 2019 to stockholders of record as of February 25, 2019.
1
7
.
|
Quarterly Information (Unaudited)
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
2017
|
|
|
June 30,
2017
|
|
|
September 30,
2017
|
|
|
December 31,
2017
|
|
|
March 31,
2018
|
|
|
June 30,
2018
|
|
|
September 30,
2018
|
|
|
December 31,
2018
|
|
|
|
(in thousands, except for per share data)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
187,458
|
|
|
$
|
257,025
|
|
|
$
|
269,267
|
|
|
$
|
276,036
|
|
|
$
|
279,217
|
|
|
$
|
305,650
|
|
|
$
|
308,927
|
|
|
$
|
310,198
|
|
Gross profit
|
|
|
148,519
|
|
|
|
203,789
|
|
|
|
213,662
|
|
|
|
220,613
|
|
|
|
216,275
|
|
|
|
232,817
|
|
|
|
236,074
|
|
|
|
237,345
|
|
Income (loss) from operations
|
|
|
(34,182
|
)
|
|
|
293
|
|
|
|
7,161
|
|
|
|
14,911
|
|
|
|
42,328
|
|
|
|
7,101
|
|
|
|
17,104
|
|
|
|
19,490
|
|
Net income (loss)
|
|
|
(18,564
|
)
|
|
|
14,846
|
|
|
|
9,920
|
|
|
|
93,321
|
|
|
|
29,712
|
|
|
|
6,554
|
|
|
|
12,717
|
|
|
|
25,388
|
|
Net income (loss) per share-
basic
|
|
$
|
(0.43
|
)
|
|
$
|
0.28
|
|
|
$
|
0.19
|
|
|
$
|
1.77
|
|
|
$
|
0.57
|
|
|
$
|
0.13
|
|
|
$
|
0.25
|
|
|
$
|
0.50
|
|
Net income (loss) per share-
diluted
|
|
$
|
(0.43
|
)
|
|
$
|
0.28
|
|
|
$
|
0.19
|
|
|
$
|
1.74
|
|
|
$
|
0.56
|
|
|
$
|
0.12
|
|
|
$
|
0.24
|
|
|
$
|
0.49
|
|
82