Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

or

o     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____ to ____

Commission File Number: 001-35925

TABLEAU SOFTWARE, INC.
(Exact name of Registrant as specified in its charter)

    
Delaware
 
47-0945740
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
1621 North 34th Street
Seattle, Washington 98103
(Address of principal executive offices and zip code)

(206) 633-3400
(Registrant's telephone number, including area code)
                    
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). x Yes o No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
 
Accelerated filer
o
Non-accelerated filer
o
 
 
Smaller reporting company
o
Emerging growth company
o
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No


 
 


As of November 6, 2018, there were approximately 71,551,528 shares of the Registrant's Class A common stock and 12,016,296 shares of the Registrant's Class B common stock outstanding.

 
 


TABLEAU SOFTWARE, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2018
Table of Contents

 
PART I. FINANCIAL INFORMATION
Page
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
PART II. OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 6.
 


 
 

Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Tableau Software, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)

September 30, 2018
 
December 31, 2017

(in thousands, except share data)
Assets

 
 
Current assets
 
 
 
Cash and cash equivalents
$
639,254

 
$
627,878

Short-term investments
317,505

 
226,787

Accounts receivable, net of allowance for doubtful accounts of $1,401 and $1,003
187,424

 
203,366

Prepaid expenses and other current assets
136,828

 
30,514

Income taxes receivable
1,363

 
673

Total current assets
1,282,374

 
1,089,218

Long-term investments
63,551

 
148,364

Property and equipment, net
91,265

 
106,753

Goodwill
42,530

 
35,083

Deferred income taxes
4,007

 
5,287

Other long-term assets
46,271

 
14,090

Total assets
$
1,529,998

 
$
1,398,795

Liabilities and stockholders' equity

 

Current liabilities

 

Accounts payable
$
3,817

 
$
4,448

Accrued compensation and employee-related benefits
96,091

 
96,390

Other accrued liabilities
66,313

 
37,722

Income taxes payable
7,547

 
4,743

Deferred revenue
328,187

 
419,426

Total current liabilities
501,955

 
562,729

Deferred revenue
15,851

 
28,058

Other long-term liabilities
52,447

 
54,385

Total liabilities
570,253

 
645,172

Commitments and contingencies (Note 10)

 

Stockholders' equity

 
 
Preferred stock, $0.0001 par value, 10,000,000 shares authorized; none issued
—

 
—

Class B common stock, $0.0001 par value, 75,000,000 shares authorized; 12,016,296 and 14,492,846 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
1

 
1

Class A common stock, $0.0001 par value, 750,000,000 shares authorized; 71,530,794 and 65,969,499 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
7

 
7

Additional paid-in capital
1,290,077

 
1,168,563

Accumulated other comprehensive loss
(11,914
)
 
(11,991
)
Accumulated deficit
(318,426
)
 
(402,957
)
Total stockholders' equity
959,745

 
753,623

Total liabilities and stockholders' equity
$
1,529,998

 
$
1,398,795


The accompanying notes are an integral part of these condensed consolidated financial statements.

4
Table of Contents

Tableau Software, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands, except per share amounts)
Revenues

 
 
 
 
 
 
License
$
138,127

 
$
99,424

 
$
384,768

 
$
299,964

Maintenance and services
152,453

 
115,493

 
434,308

 
327,739

Total revenues
290,580

 
214,917

 
819,076

 
627,703

Cost of revenues
 
 
 
 
 
 
 
License
5,230

 
3,265

 
13,810

 
9,474

Maintenance and services
29,549

 
26,664

 
88,619

 
73,775

Total cost of revenues (1)
34,779

 
29,929

 
102,429

 
83,249

Gross profit
255,801

 
184,988

 
716,647

 
544,454

Operating expenses
 
 
 
 
 
 
 
Sales and marketing (1)
142,129

 
123,842

 
424,685

 
366,020

Research and development (1)
97,939

 
84,494

 
285,477

 
249,863

General and administrative (1)
30,959

 
25,697

 
93,055

 
76,017

Total operating expenses
271,027

 
234,033

 
803,217

 
691,900

Operating loss
(15,226
)
 
(49,045
)
 
(86,570
)
 
(147,446
)
Other income, net
4,381

 
3,677

 
12,709

 
8,931

Loss before income tax expense
(10,845
)
 
(45,368
)
 
(73,861
)
 
(138,515
)
Income tax expense
10,492

 
1,185

 
6,014

 
5,207

Net loss
$
(21,337
)
 
$
(46,553
)
 
$
(79,875
)
 
$
(143,722
)
 
 
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.26
)
 
$
(0.59
)
 
$
(0.97
)
 
$
(1.83
)
Diluted
$
(0.26
)
 
$
(0.59
)
 
$
(0.97
)
 
$
(1.83
)
 
 
 
 
 
 
 
 
Weighted average shares used to compute net loss per share:
 
 
 
 
 
 
 
Basic
83,264

 
79,440

 
82,191

 
78,463

Diluted
83,264

 
79,440

 
82,191

 
78,463


(1) Includes stock-based compensation expense as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Cost of revenues
$
3,488

 
$
2,885

 
$
9,774


$
8,252

Sales and marketing
22,357

 
18,603

 
64,522


55,221

Research and development
29,926

 
27,337

 
81,920


76,500

General and administrative
6,175

 
5,489

 
19,805


15,650


The accompanying notes are an integral part of these condensed consolidated financial statements.

5
Table of Contents

Tableau Software, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Net loss
$
(21,337
)
 
$
(46,553
)
 
$
(79,875
)
 
$
(143,722
)
Other comprehensive income (loss), net of tax:

 

 
 
 
 
Foreign currency translation
(282
)
 
(3,455
)
 
(1,010
)
 
(10,663
)
Net unrealized gain (loss) on available-for-sale securities
179

 
(119
)
 
(596
)
 
(119
)
Comprehensive loss
$
(21,440
)
 
$
(50,127
)
 
$
(81,481
)
 
$
(154,504
)

The accompanying notes are an integral part of these condensed consolidated financial statements.


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Table of Contents

Tableau Software, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
 
 (in thousands)
Operating activities

 
 
Net loss
$
(79,875
)
 
$
(143,722
)
Adjustments to reconcile net loss to net cash provided by operating activities

 

Depreciation and amortization expense
27,783

 
34,174

Amortization (accretion) on investments, net
(32
)
 
162

Stock-based compensation expense
176,021

 
155,623

Deferred income taxes
(3,810
)
 
(226
)
Changes in operating assets and liabilities
 
 
 
Accounts receivable, net
14,232

 
80,030

Prepaid expenses and other assets
(71,671
)
 
(138
)
Income taxes receivable
(728
)
 
(297
)
Deferred revenue
4,666

 
45,109

Accounts payable and accrued liabilities
38,477

 
9,452

Income taxes payable
2,866

 
26

Net cash provided by operating activities 
107,929

 
180,193

Investing activities

 

Purchases of property and equipment
(13,983
)
 
(43,179
)
Business combination, net of cash acquired
(10,947
)
 
(23,966
)
Purchases of investments
(206,454
)
 
(198,144
)
Maturities of investments
199,885

 
—

Sales of investments
99

 
—

Net cash used in investing activities
(31,400
)
 
(265,289
)
Financing activities

 

Proceeds from issuance of common stock
26,864

 
24,305

Repurchases of common stock
(90,019
)
 
(59,986
)
Net cash used in financing activities
(63,155
)
 
(35,681
)
Effect of exchange rate changes on cash and cash equivalents
(1,998
)
 
3,005

Net increase (decrease) in cash and cash equivalents
11,376

 
(117,772
)
Cash and cash equivalents

 

Beginning of period
627,878

 
908,717

End of period
$
639,254

 
$
790,945

 
 
 
 
Non-cash activities
 
 
 
Accrued purchases of property and equipment
$
3,589

 
$
14,375

Asset retirement obligations recognized, net
—

 
983


The accompanying notes are an integral part of these condensed consolidated financial statements.

7
Table of Contents

Tableau Software, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Description of Business
Tableau Software, Inc., a Delaware corporation, and its wholly-owned subsidiaries (the "Company," "we," "us" or "our") are headquartered in Seattle, Washington. Our software products put the power of data into the hands of everyday people, allowing a broad population of business users to engage with their data, ask questions, solve problems and create value. Based on innovative core technologies originally developed at Stanford University, our products dramatically reduce the complexity, inflexibility and expense associated with traditional business intelligence applications. We currently offer five key products: Tableau Desktop, a self-service, powerful analytics product for anyone with data; Tableau Server, a business intelligence platform for organizations; Tableau Online, a hosted software-as-a-service ("SaaS") version of Tableau Server; Tableau Prep, a data preparation product for combining, shaping and cleaning data; and Tableau Public, a free cloud-based platform for analyzing and sharing public data.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial information has been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") and applicable rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet data as of December 31, 2017 was derived from audited financial statements but does not include all disclosures required by GAAP. The condensed consolidated financial information should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 26, 2018.
In the opinion of management, the accompanying unaudited condensed consolidated financial information includes all normal recurring adjustments necessary for a fair statement of the Company's financial position, results of operations, comprehensive loss and cash flows for the interim periods, but is not necessarily indicative of the results that may be expected for the year ending December 31, 2018. All intercompany accounts and transactions have been eliminated in consolidation.
We adopted the new revenue recognition accounting standard, codified as Accounting Standards Codification (“ASC”) 606, effective January 1, 2018 on a modified retrospective basis (see Recently Adopted Accounting Pronouncements). Financial results for reporting periods during 2018 are presented in compliance with the new revenue recognition standard. Historical financial results for reporting periods prior to 2018 are presented in conformity with amounts previously disclosed under the prior revenue recognition standard, ASC 605. These financial statements include additional information regarding the impacts from the adoption of the new revenue recognition standard on our financial results for the three and nine months ended September 30, 2018. This includes the presentation of financial results during 2018 under ASC 605 for comparison to the prior year.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include but are not limited to: the collectability of our receivables; the useful lives of our property and equipment and other lease-related assets, liabilities and costs; the benefit period for deferred commissions; the valuation of investments and the determination of other-than-temporary impairments; and the reported amounts of accrued liabilities. For revenue, we make estimates and assumptions related to the standalone selling prices of our products and services and the nature and timing of the delivery of performance obligations from our contracts with customers. We also use estimates in stock-based compensation, income taxes and business combinations. Actual results could differ from those estimates.
Risks and Uncertainties
Inherent in our business are various risks and uncertainties, including our limited history of operating our business at its current scale and development of advanced technologies in a rapidly changing industry. These risks include our ability to manage our growth, to attract new customers, to expand sales to existing customers and to attract, integrate and retain qualified personnel, as well as other risks and uncertainties. In the event that we do not

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Table of Contents

successfully implement our business plan, certain assets may not be recoverable, certain liabilities may not be paid and investments in our capital stock may not be recoverable. Our success depends upon the acceptance of our technology, development of sales and distribution channels and our ability to generate significant revenues from the sale of our technology.
Segments
We follow the authoritative literature that establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products and services, geographic regions and major customers.
We operate our business as one operating segment. Our chief operating decision makers are our Chief Executive Officer and Chief Financial Officer, who review financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance and allocating resources.
Revenue Recognition - ASC 606
We generate revenues primarily in the form of software license fees and related maintenance and services fees. Software license revenues include fees from the sales of perpetual, term and subscription licenses. Maintenance and services revenues primarily consist of fees for maintenance services (including support and unspecified upgrades and enhancements if and when they are available), training and professional services.
We recognize revenues related to contracts with customers that meet the following criteria:
•
the contract contains reasonable evidence of approval and of both parties' commitment to perform their respective obligations;
•
the contract includes identifiable rights to goods and/or services to be transferred and payment terms related to the transfer of those goods and/or services;
•
the contract has commercial substance; and
•
collection of substantially all of the consideration we are entitled to under the contract is probable.
We identify performance obligations in our contracts with customers, which may include software licenses and/or related maintenance and services. We determine the transaction price based on the amount we expect to be entitled to in exchange for transferring the promised goods or services to the customer. We allocate the transaction price in the contract to each distinct performance obligation in an amount that depicts the relative amount of consideration we expect to receive in exchange for satisfying each performance obligation. Revenue is recognized when performance obligations are satisfied.
Our contract payment terms are typically net 30 days. We assess collectability based on a number of factors including collection history and creditworthiness of the customer, and we may mitigate exposures to credit risk by requiring payments in advance. If we determine that collectability related to a contract is not probable, we may not record revenue until collectability becomes probable at a later date.
Our revenues are recorded based on the transaction price excluding amounts collected on behalf of third parties. For example, indirect taxes which we collect and remit to governmental authorities are excluded from our revenues.
Nature of Products and Services
Our on-premises software licenses are sold through both perpetual and term-based license agreements. These licensing arrangements provide customers with the same product functionality and differ mainly in the duration over which the customer benefits from the software. We deliver our software licenses electronically. Electronic delivery occurs when we provide the customer with access to the software and license key via a secure portal. Revenue from on-premises software licenses is generally recognized upfront at the point in time when the software is made available to the customer.
Our contracts with customers for on-premises software licenses include maintenance services and may also include training and/or professional services. Maintenance services agreements consist of fees for providing software updates on an if and when available basis and for providing technical support for software products for a specified term. We believe that our software updates and technical support each have the same pattern of transfer to the customer and are substantially the same. Therefore, we consider these updates and technical support to be a single distinct performance obligation. Revenues allocated to maintenance services are recognized ratably as the maintenance services are provided. Revenues related to training services are billed on a fixed fee basis and are recognized as the services are delivered. Payments received in advance of services performed are deferred and recognized when the related services are performed. Revenues related to professional services are billed on a time and materials basis and are recognized as the services are performed.

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Table of Contents

We also provide cloud-based subscriptions, which allow customers to access our software during a contractual period without taking possession of the software. We recognize revenue related to these cloud-based subscriptions ratably over the life of the subscription agreement beginning when the customer first has access to the software. Revenues from our cloud-based subscriptions are included in license revenues.
Judgments and Estimates
Our contracts with customers often include promises to transfer multiple products and services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately from one another sometimes requires judgment.
Judgment is also required to determine standalone selling prices (“SSP”) for each distinct performance obligation. We typically have more than one SSP for each of our products and services based on customer stratification, which is based on the size of the customer, their geographic region and market segment. We use other comparable software license sales to determine SSPs for perpetual software licenses. For our cloud-based subscriptions and for maintenance services, training and professional services, SSPs are generally observable using standalone sales and/or renewals. Our on-premises term-based software licenses generally do not have directly observable inputs for determining SSP. Therefore, we determine SSP using other observable inputs including customer-buying patterns, renewal rates, cumulative spend comparisons and other industry data.
We evaluate contracts with customers that include options to purchase additional goods or services to determine whether the options give rise to a separate performance obligation that is material. If we determine the options give rise to a separate performance obligation that is material, the revenue allocated to such options is not recognized until the option is exercised or the option expires.
Our revenue recognition accounting policy for ASC 605 is included in our Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the SEC on February 26, 2018. We applied the revenue recognition accounting policy for ASC 605 to our disclosures in Note 7, which include amounts presented for 2018. There were no changes to the ASC 605 policy during the nine months ended September 30, 2018.
Assets Recognized from the Costs to Obtain a Contract with a Customer
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain costs related to our sales incentive programs meet the requirements to be capitalized and deferred. Assets recorded are included in other current assets and other long-term assets. We amortize these deferred costs proportionate with related revenues over the benefit period, currently estimated to be four years. We consider the benefit period to exceed the initial contract term for certain costs because of anticipated renewals and because our sales commission rates for renewal contracts are not commensurate with sales commissions for initial contracts.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investments and accounts receivable.
Our investment portfolio consists of investment-grade securities diversified among security types, industries and issuers. Our cash and cash equivalents and investments are held and managed by recognized financial institutions that follow our investment policy. Our policy limits the amount of credit exposure to any one security issue or issuer.
We extend credit to customers based upon an evaluation of the customer's financial condition. As of September 30, 2018 and December 31, 2017, no individual customer accounted for 10% or more of total accounts receivable. For the three and nine months ended 2018 and 2017, no individual customer represented 10% or more of our total revenues.
Recently Adopted Accounting Pronouncements
We adopted the new revenue recognition accounting standard, ASC 606, effective January 1, 2018. The new revenue recognition standard changed the way we recognize revenue, including the identification of contractual performance obligations and the allocation of transaction price, to depict the transfer of promised goods or services to customers at the amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. We adopted the new revenue recognition standard on a modified retrospective basis and applied the new revenue recognition standard only to contracts that were not completed contracts prior to January 1, 2018. Upon adoption, we recorded an adjustment of $146.8 million to our accumulated deficit. The adjustment was offset by a $105.9 million reduction to deferred revenue, which was primarily related to on-premises term licenses, and the addition of a $40.9 million contract asset.

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The new revenue recognition standard materially impacts the timing of revenue recognition related to our on-premises term license agreements. Prior to our adoption of the new revenue recognition standard, we historically recognized revenue related to on-premises term license agreements ratably over the term of the licensing agreement. Under the new revenue recognition standard, revenue allocable to the license portion of the arrangement is recognized upon delivery of the license. Maintenance revenues related to on-premises term license agreements continue to be recognized ratably over the term of the licensing agreement. Under the new revenue recognition standard, we allocate total transaction price to performance obligations based on estimated standalone selling prices, which impacts the timing of revenue recognition depending on when each performance obligation is recognized. These impacts to the timing of revenue recognition also affect our deferred revenue balances.
The new revenue recognition standard requires the capitalization of certain incremental costs of obtaining a contract, which impacts the periods in which we record our sales commissions expense. Prior to our adoption of the new revenue recognition standard, we recognized sales commissions expense as incurred. Under the new revenue recognition standard, we are required to recognize these expenses over the period of benefit associated with these costs. This results in a deferral of sales commissions expense each period and subsequent amortization of those costs over the estimated benefit period. Upon adoption of the new revenue recognition standard, we reduced our accumulated deficit by $25.5 million and recognized an offsetting asset for deferred sales commissions related to contracts that were not completed contracts prior to January 1, 2018.
For further discussion regarding the impacts of adopting the new revenue recognition standard, see Note 7.
In October 2016, the FASB issued ASU 2016-16 related to the accounting for income tax effects on intra-entity asset transfers of assets other than inventory. The new guidance requires reporting entities to recognize tax expense from the sale of assets when the transfer occurs, even though the pre-tax effects of the transaction are eliminated in consolidation. We adopted the new standard in the first quarter of 2018 on a modified retrospective basis. The adoption resulted in the recognition of a U.S. deferred tax asset, which was fully offset by a corresponding increase to the valuation allowance on our U.S. federal and state deferred income tax assets, and therefore did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02 related to lease accounting. The new guidance will require lessees to recognize right-of-use assets and lease liabilities on the balance sheet for operating leases that do not meet the definition of a short-term lease. ASU 2016-02 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. We will adopt the new lease accounting standard using the modified retrospective transition method and apply a cumulative-effect balance sheet adjustment at the beginning of the first quarter of 2019. Under the new standard we anticipate that our current real estate leases will continue to be classified as operating leases and a significant amount of our currently outstanding operating lease commitments will be recorded to the balance sheet as right-of-use assets with corresponding lease liabilities. We expect the adoption of the new lease accounting standard to have a material impact on our balance sheet on the date of adoption. Our evaluation of the new standard will extend into future periods and we will update our disclosures as we progress towards the required adoption date.
In June 2016, the FASB issued ASU 2016-13, related to credit losses. The new guidance replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. ASU 2016-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact that this standard will have on our consolidated financial statements.

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Note 3. Short-Term and Long-Term Investments
The following tables represent our short-term and long-term investments in available-for-sale securities as of September 30, 2018 and December 31, 2017, based on remaining contractual years to maturity:
 
September 30, 2018
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
(in thousands)
Short-term investments
 
 
 
 
 
 
 
Commercial paper
$
1,976

 
$
—

 
$
—

 
$
1,976

U.S. treasury securities
171,643

 
—

 
(438
)
 
171,205

U.S. agency securities
24,976

 
—

 
(109
)
 
24,867

Corporate bonds
119,684

 
—

 
(227
)
 
119,457

Total short-term investments
318,279

 
—

 
(774
)
 
317,505

Long-term investments

 

 

 

U.S. treasury securities
44,585

 
—

 
(376
)
 
44,209

Corporate bonds
19,452

 
3

 
(113
)
 
19,342

Total long-term investments
64,037

 
3

 
(489
)
 
63,551

Total short-term and long-term investments
$
382,316

 
$
3

 
$
(1,263
)
 
$
381,056

 
December 31, 2017
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
(in thousands)
Short-term investments
 
 
 
 
 
 
 
Commercial paper
$
9,970


$
—


$
—


$
9,970

U.S. treasury securities
160,206

 
—

 
(121
)
 
160,085

U.S. agency securities
9,917

 
—

 
(24
)
 
9,893

Corporate bonds
46,901

 
3

 
(65
)
 
46,839

Total short-term investments
226,994

 
3

 
(210
)
 
226,787

Long-term investments
 
 
 
 
 
 
 
U.S. treasury securities
79,371

 
—

 
(202
)
 
79,169

U.S. agency securities
18,570

 
—

 
(102
)
 
18,468

Corporate bonds
50,880

 
—

 
(153
)
 
50,727

Total long-term investments
148,821

 
—

 
(457
)
 
148,364

Total short-term and long-term investments
$
375,815

 
$
3

 
$
(667
)
 
$
375,151


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The following table presents the fair values and the gross unrealized losses related to our investments in available-for-sale securities, summarized by the length of time that the investments have been in a continuous unrealized loss position:
 
September 30, 2018
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
(in thousands)
Short-term investments
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
$
161,300

 
$
(351
)
 
$
9,905

 
$
(87
)
 
$
171,205

 
$
(438
)
U.S. agency securities
5,042

 
(35
)
 
19,825

 
(74
)
 
24,867

 
(109
)
Corporate bonds
93,716

 
(144
)
 
15,470

 
(83
)
 
109,186

 
(227
)
Total short-term investments
260,058

 
(530
)

45,200


(244
)

305,258


(774
)
Long-term investments
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
44,209

 
(376
)
 
—

 
—

 
44,209

 
(376
)
Corporate bonds
15,345

 
(113
)
 
—

 
—

 
15,345

 
(113
)
Total long-term investments
59,554

 
(489
)
 
—

 
—

 
59,554

 
(489
)
Total short-term and long-term investments
$
319,612

 
$
(1,019
)
 
$
45,200

 
$
(244
)
 
$
364,812

 
$
(1,263
)
The unrealized losses on investments as of September 30, 2018 were primarily caused by increases in interest rates. None of the unrealized losses represent other than temporary impairments based on our evaluation of available evidence as of September 30, 2018. As of December 31, 2017, there were no investments that had been in a continuous net loss position for 12 months or greater.
Note 4. Fair Value Measurements
We categorize assets and liabilities recorded at fair value based upon the level of judgment associated with inputs used to measure their fair value. The levels of the fair value hierarchy are as follows:
•
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
•
Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
•
Level 3—Inputs are unobservable inputs based on our own assumptions and valuation techniques used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.
Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
We value our investments using quoted prices for identical instruments in active markets when available. If we are unable to obtain quoted prices for identical instruments in active markets, we value our investments using quoted market prices for comparable instruments. To date, all of our investments can be valued using one of these two methodologies.

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The following tables present the fair value of our financial assets using the fair value hierarchy as of September 30, 2018 and December 31, 2017:


September 30, 2018


Level 1

Level 2

Level 3

Total


(in thousands)
Cash and cash equivalents

 
 
 
 
 
 
 
Money market funds

$
555,773


$
—


$
—


$
555,773

Short-term investments

 
 
 
 
 
 
 
Commercial paper
 
—

 
1,976

 
—

 
1,976

U.S. treasury securities
 
—

 
171,205

 
—

 
171,205

U.S. agency securities
 
—

 
24,867

 
—

 
24,867

Corporate bonds
 
—

 
119,457

 
—

 
119,457

Long-term investments
 
 
 
 
 
 
 
 
U.S. treasury securities

—


44,209


—


44,209

Corporate bonds
 
—

 
19,342

 
—

 
19,342

Total

$
555,773


$
381,056


$
—


$
936,829

 
 
December 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in thousands)
Cash and cash equivalents
 
 
 
 
 
 
 
 
Money market funds
 
$
582,835

 
$
—

 
$
—

 
$
582,835

Commercial paper
 
—

 
8,984

 
—

 
8,984

Short-term investments
 
 
 
 
 
 
 
 
Commercial paper
 
—

 
9,970

 
—

 
9,970

U.S. treasury securities
 
—

 
160,085

 
—

 
160,085

U.S. agency securities
 
—

 
9,893

 
—

 
9,893

Corporate bonds
 
—

 
46,839

 
—

 
46,839

Long-term investments
 
 
 
 
 
 
 
 
U.S. treasury securities
 
—

 
79,169

 
—

 
79,169

U.S. agency securities
 
—

 
18,468

 
—

 
18,468

Corporate bonds
 
—

 
50,727

 
—

 
50,727

Total
 
$
582,835

 
$
384,135

 
$
—

 
$
966,970

We did not have any investments in prime money market funds as of September 30, 2018 or December 31, 2017. We had no financial assets or liabilities measured using Level 3 inputs as of September 30, 2018 or December 31, 2017.

14
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Note 5. Stockholders' Equity
Common Stock
Our certificate of incorporation, as amended and restated, authorizes us to issue 75,000,000 shares of Class B common stock at $0.0001 par value per share, and 750,000,000 shares of Class A common stock at $0.0001 par value per share. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each holder of Class B common stock is entitled to ten votes per share and each holder of Class A common stock is entitled to one vote per share. Shares of Class B common stock may be converted into Class A common stock at any time at the option of the stockholder and are automatically converted upon sale or transfer to Class A common stock, subject to certain limited exceptions. At its discretion, the board of directors may declare dividends on shares of common stock, subject to the rights of our preferred stockholders, if any. Upon liquidation or dissolution, holders of common stock will receive distributions only after preferred stock preferences have been satisfied.
Preferred Stock
Our certificate of incorporation, as amended and restated, authorizes us to issue 10,000,000 shares of preferred stock at $0.0001 par value per share. Our board of directors has the authority to provide for the issuance of all the shares in one or more series. At its discretion, our board of directors may designate the voting rights and preferences of the preferred stock. As of September 30, 2018 and December 31, 2017, no shares of preferred stock were outstanding.
Stock Repurchase Program
On November 1, 2016, we announced that our board of directors approved a stock repurchase program, under which we were authorized to repurchase up to $200 million of our outstanding Class A common stock. On April 26, 2018, our board of directors authorized us to repurchase up to an additional $300 million of our outstanding Class A common stock under our previously announced stock repurchase program. The repurchase program has no expiration date and may be modified, suspended or discontinued at any time. Repurchases under the program may be made from time to time on the open market at prevailing market prices, in privately negotiated transactions, in transactions structured through investment banking institutions or a combination of the foregoing, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.
During the nine months ended September 30, 2018, we repurchased 961,468 shares of our outstanding Class A common stock at an average price of $93.63 per share for $90.0 million. During the nine months ended September 30, 2017, we repurchased 979,577 shares of our outstanding Class A common stock at an average price of $61.24 per share for $60.0 million. All repurchases were made in open market transactions using cash on hand, and all of the shares repurchased were retired. As of September 30, 2018, we were authorized to repurchase a remaining $310.0 million of our Class A common stock under our repurchase program.
Note 6. Business Combinations
Empirical Systems, Inc.
On June 7, 2018, we acquired all issued and outstanding stock of Empirical Systems, Inc., a privately-held Delaware corporation, for $11.0 million in cash. Empirical Systems, Inc. is a startup specializing in automated statistical analysis. As a result of this acquisition, we acquired all of the assets and assumed all of the liabilities of Empirical Systems, Inc., and we accounted for this transaction as a business combination. Pro forma results of operations for this acquisition have not been presented as the effects were not material to our financial results. The following table summarizes the purchase price allocation based on the estimated fair value of the net assets acquired:
 
June 7, 2018
 
(in thousands)
Cash
$
53

Technology asset
3,500

Goodwill
7,447

Net assets acquired
$
11,000

The technology asset acquired in this business combination is being amortized on the straight-line method over a period of five years. Goodwill generated from this business combination is primarily attributable to expected

15
Table of Contents

synergies between the technology asset acquired and our key products. None of the goodwill recognized with this transaction is expected to be deductible for U.S. income tax purposes.
Certain employees hired in conjunction with the acquisition of Empirical Systems, Inc. received restricted stock units ("RSUs") that are subject to service conditions as well as the completion of certain technology milestones. We account for these awards as a post-business combination expense.
Additional information existing as of the acquisition date but unknown to us may become known at a later time, such as matters related to income taxes or other contingencies. In accordance with GAAP, if this occurs during the 12 month period subsequent to the acquisition date, we may update the amounts and allocations recorded as of the acquisition date, which are presented in the table above.
Argo Technologies Corp.
On August 1, 2017, we acquired all issued and outstanding stock of Argo Technologies Corp., a privately-held Delaware corporation doing business as ClearGraph ("ClearGraph"), for $24.1 million in cash. ClearGraph was a startup that enables smart data discovery and data analysis through natural language query technology. As a result of this acquisition, we acquired all of the assets and assumed all of the liabilities of ClearGraph, and we accounted for this transaction as a business combination. Pro forma results of operations for this acquisition were not presented as the effects were not material to our financial results. The following table summarizes the purchase price allocation based on the estimated fair value of the net assets acquired:
 
August 1, 2017
 
(in thousands)
Cash
$
161

Technology asset
5,000

Goodwill
19,552

Other liabilities, net
(586
)
Net assets acquired
$
24,127

The technology asset acquired in this business combination is being amortized on the straight-line method over a period of five years. Goodwill generated from this business combination was primarily attributable to expected synergies between the technology asset acquired and our key products. None of the goodwill recognized with this transaction is expected to be deductible for U.S. income tax purposes.
Note 7. Revenue
We adopted the new revenue recognition accounting standard, ASC 606, effective January 1, 2018 on a modified retrospective basis and applied the new standard only to contracts that were not completed contracts prior to January 1, 2018. See Note 2 for a description of our ASC 606 revenue recognition accounting policy. Financial results for reporting periods during 2018 are presented in compliance with the new revenue recognition standard. Historical financial results for reporting periods prior to 2018 have not been retroactively restated and are presented in conformity with amounts previously disclosed under ASC 605. This note includes additional information regarding the impacts from the adoption of the new revenue recognition standard on our financial results for the three and nine months ended September 30, 2018. This includes the presentation of financial results during 2018 under ASC 605 for comparison to the prior year. Our revenue recognition accounting policy for ASC 605 is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the SEC on February 26, 2018. There were no changes to our ASC 605 policy during the nine months ended September 30, 2018.

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Condensed Consolidated Balance Sheets (Unaudited) - Reconciliation of the Impacts from the Adoption of the New Revenue Recognition Standard
The following schedule summarizes the impacts from the adoption of the new revenue recognition standard on our condensed consolidated balance sheets as of September 30, 2018:
 
September 30, 2018
 
December 31, 2017
 
As Reported
(ASC 606)

Impacts from Adoption

Without Adoption
(ASC 605)

As Reported
(ASC 605)
 
(in thousands)
Assets
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
639,254

 
$
—

 
$
639,254

 
$
627,878

Short-term investments
317,505

 
—

 
317,505

 
226,787

Accounts receivable, net
187,424

 
—

 
187,424

 
203,366

Prepaid expenses and other current assets
136,828

 
(103,176
)
 
33,652

 
30,514

Income taxes receivable
1,363

 
—

 
1,363

 
673

Total current assets
1,282,374

 
(103,176
)
 
1,179,198

 
1,089,218

Long-term investments
63,551

 
—

 
63,551

 
148,364

Property and equipment, net
91,265

 
—

 
91,265

 
106,753

Goodwill
42,530

 
—

 
42,530

 
35,083

Deferred income taxes
4,007

 
1,485

 
5,492

 
5,287

Other long-term assets
46,271

 
(29,940
)
 
16,331

 
14,090

Total assets
$
1,529,998

 
$
(131,631
)
 
$
1,398,367

 
$
1,398,795

Liabilities and stockholders' equity

 
 
 
 
 

Current liabilities

 

 
 
 

Accounts payable
$
3,817

 
$
—

 
$
3,817

 
$
4,448

Accrued compensation and employee-related benefits
96,091

 
—

 
96,091

 
96,390

Other accrued liabilities
66,313

 
—

 
66,313

 
37,722

Income taxes payable
7,547

 
(4,381
)
 
3,166

 
4,743

Deferred revenue
328,187

 
154,435

 
482,622

 
419,426

Total current liabilities
501,955

 
150,054

 
652,009

 
562,729

Deferred revenue
15,851

 
12,693

 
28,544

 
28,058

Other long-term liabilities
52,447

 
(833
)
 
51,614

 
54,385

Total liabilities
570,253

 
161,914

 
732,167

 
645,172

Stockholders' equity
 
 
 
 
 
 
 
Common stock
8

 
—

 
8

 
8

Additional paid-in capital
1,290,077

 
—

 
1,290,077

 
1,168,563

Accumulated other comprehensive loss
(11,914
)
 
876

 
(11,038
)
 
(11,991
)
Accumulated deficit
(318,426
)
 
(294,421
)
 
(612,847
)
 
(402,957
)
Total stockholders' equity
959,745

 
(293,545
)
 
666,200

 
753,623

Total liabilities and stockholders' equity
$
1,529,998

 
$
(131,631
)
 
$
1,398,367

 
$
1,398,795



17
Table of Contents

Condensed Consolidated Statements of Operations (Unaudited) - Reconciliation of the Impacts from the Adoption of the New Revenue Recognition Standard
The following schedules summarize the impacts from the adoption of the new revenue recognition standard on our condensed consolidated statement of operations for the three and nine months ended September 30, 2018:

Three Months Ended September 30,

2018

2017

As Reported
(ASC 606)

Impacts from Adoption

Without Adoption
(ASC 605)

As Reported
(ASC 605)

(in thousands)
Revenues







License
$
138,127


$
(20,095
)

$
118,032


$
99,424

Maintenance and services
152,453


(30,894
)

121,559


115,493

Total revenues
290,580


(50,989
)

239,591


214,917

Cost of revenues







License
5,230


(121
)

5,109


3,265

Maintenance and services
29,549


148


29,697


26,664

Total cost of revenues
34,779


27


34,806


29,929

Gross profit
255,801


(51,016
)

204,785


184,988

Operating expenses







Sales and marketing
142,129


7,828


149,957


123,842

Research and development
97,939


—


97,939


84,494

General and administrative
30,959


—


30,959


25,697

Total operating expenses
271,027


7,828


278,855


234,033

Operating loss
(15,226
)

(58,844
)

(74,070
)

(49,045
)
Other income, net
4,381


32


4,413


3,677

Loss before income tax expense
(10,845
)

(58,812
)

(69,657
)

(45,368
)
Income tax expense
10,492


(8,852
)

1,640


1,185

Net loss
$
(21,337
)

$
(49,960
)

$
(71,297
)

$
(46,553
)

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Table of Contents


Nine Months Ended September 30,

2018

2017

As Reported
(ASC 606)

Impacts from Adoption

Without Adoption
(ASC 605)

As Reported
(ASC 605)

(in thousands)
Revenues







License
$
384,768


$
(38,489
)

$
346,279


$
299,964

Maintenance and services
434,308


(73,386
)

360,922


327,739

Total revenues
819,076


(111,875
)

707,201


627,703

Cost of revenues
 
 
 
 
 
 
 
License
13,810


(264
)

13,546


9,474

Maintenance and services
88,619


315


88,934


73,775

Total cost of revenues
102,429


51


102,480


83,249

Gross profit
716,647


(111,926
)

604,721


544,454

Operating expenses
 
 
 
 
 
 
 
Sales and marketing
424,685


18,787


443,472


366,020

Research and development
285,477


—


285,477


249,863

General and administrative
93,055


—


93,055


76,017

Total operating expenses
803,217


18,787


822,004


691,900

Operating loss
(86,570
)

(130,713
)

(217,283
)

(147,446
)
Other income, net
12,709


112


12,821


8,931

Loss before income tax expense
(73,861
)

(130,601
)

(204,462
)

(138,515
)
Income tax expense
6,014


(586
)

5,428


5,207

Net loss
$
(79,875
)

$
(130,015
)

$
(209,890
)

$
(143,722
)


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Table of Contents

Condensed Consolidated Statements of Comprehensive Loss (Unaudited) - Reconciliation of the Impacts from the Adoption of the New Revenue Recognition Standard
The following schedules summarize the impacts from the adoption of the new revenue recognition standard on our condensed consolidated statement of comprehensive loss for the three and nine months ended September 30, 2018:
 
Three Months Ended September 30,
 
2018
 
2017
 
As Reported
(ASC 606)

Impacts from Adoption

Without Adoption
(ASC 605)

As Reported
(ASC 605)
 
(in thousands)
Net loss
$
(21,337
)
 
$
(49,960
)
 
$
(71,297
)
 
$
(46,553
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation
(282
)
 
465

 
183

 
(3,455
)
Net unrealized gain (loss) on available-for-sale securities
179

 
—

 
179

 
(119
)
Comprehensive loss
$
(21,440
)
 
$
(49,495
)
 
$
(70,935
)
 
$
(50,127
)
 
Nine Months Ended September 30,
 
2018
 
2017
 
As Reported
(ASC 606)
 
Impacts from Adoption
 
Without Adoption
(ASC 605)
 
As Reported
(ASC 605)
 
(in thousands)
Net loss
$
(79,875
)
 
$
(130,015
)
 
$
(209,890
)
 
$
(143,722
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation
(1,010
)
 
2,559

 
1,549

 
(10,663
)
Net unrealized loss on available-for-sale securities
(596
)
 
—

 
(596
)
 
(119
)
Comprehensive loss
$
(81,481
)
 
$
(127,456
)
 
$
(208,937
)
 
$
(154,504
)



20
Table of Contents

Condensed Consolidated Statements of Cash Flows (Unaudited) - Reconciliation of the Impacts from the Adoption of the New Revenue Recognition Standard
The following schedule summarizes the impacts from the adoption of the new revenue recognition standard on our condensed consolidated statement of cash flows for the nine months ended September 30, 2018:
 
Nine Months Ended September 30,
 
2018
 
2017
 
As Reported
(ASC 606)
 
Impacts from Adoption
 
Without Adoption
(ASC 605)
 
As Reported
(ASC 605)
 
(in thousands)
Operating activities
 
 
 
 
 
 
 
Net loss
$
(79,875
)
 
$
(130,015
)
 
$
(209,890
)
 
$
(143,722
)
Adjustments to reconcile net loss to net cash provided by operating activities
 
 
 
 
 
 
 
Depreciation and amortization expense
27,783

 
—

 
27,783

 
34,174

Amortization (accretion) on investments, net
(32
)
 
—

 
(32
)
 
162

Stock-based compensation expense
176,021

 
—

 
176,021

 
155,623

Deferred income taxes
(3,810
)
 
3,673

 
(137
)
 
(226
)
Changes in operating assets and liabilities
 
 

 
 
 
 
Accounts receivable, net
14,232

 
—

 
14,232

 
80,030

Prepaid expenses and other assets
(71,671
)
 
68,002

 
(3,669
)
 
(138
)
Income taxes receivable
(728
)
 
—

 
(728
)
 
(297
)
Deferred revenue
4,666

 
62,974

 
67,640

 
45,109

Accounts payable and accrued liabilities
38,477

 
—

 
38,477

 
9,452

Income taxes payable
2,866

 
(4,381
)
 
(1,515
)
 
26

Net cash provided by operating activities 
107,929

 
253

 
108,182

 
180,193

Investing activities
 
 
 
 
 
 
 
Purchases of property and equipment
(13,983
)
 
—

 
(13,983
)
 
(43,179
)
Business combination, net of cash acquired
(10,947
)
 
—

 
(10,947
)
 
(23,966
)
Purchases of investments
(206,454
)
 
—

 
(206,454
)
 
(198,144
)
Maturities of investments
199,885

 
—

 
199,885

 
—

Sales of investments
99

 
—

 
99

 
—

Net cash used in investing activities
(31,400
)
 
—

 
(31,400
)
 
(265,289
)
Financing activities
 
 
 
 
 
 
 
Proceeds from issuance of common stock
26,864

 
—

 
26,864

 
24,305

Repurchases of common stock
(90,019
)
 
—

 
(90,019
)
 
(59,986
)
Net cash used in financing activities
(63,155
)
 
—

 
(63,155
)
 
(35,681
)
Effect of exchange rate changes on cash and cash equivalents
(1,998
)
 
(253
)
 
(2,251
)
 
3,005

Net increase (decrease) in cash and cash equivalents
11,376

 
—

 
11,376

 
(117,772
)
Cash and cash equivalents
 
 
 
 
 
 
 
Beginning of period
627,878

 
—

 
627,878

 
908,717

End of period
$
639,254

 
$
—

 
$
639,254

 
$
790,945



21
Table of Contents

Disclosures Related to our Contracts with Customers
Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to our contracts with customers. We record assets for amounts related to performance obligations that are satisfied but not yet billed and/or collected. These assets are recorded as contract assets rather than receivables when receipt of the consideration is conditional on something other than the passage of time. Liabilities are recorded for amounts that are collected in advance of the satisfaction of performance obligations. These liabilities are classified as current and non-current deferred revenue.
Contract Assets and Contract Liabilities
A summary of the activity impacting our contract assets during the nine months ended September 30, 2018 is presented below:
 
Contract Assets
 
(in thousands)
Balances at December 31, 2017
$
—

Adoption of ASC 606
40,854

Contract assets transferred to receivables
(23,244
)
Additions to contract assets
72,233

Balances at September 30, 2018
$
89,843

As of September 30, 2018, our contract assets are expected to be transferred to receivables within the next 12 months and therefore are included in other current assets. There were no impairments of contract assets during the nine months ended September 30, 2018.
A summary of the activity impacting our deferred revenue balances during the nine months ended September 30, 2018 is presented below:
 
Deferred Revenue
 
(in thousands)
Balances at December 31, 2017
$
447,484

Adoption of ASC 606
(105,933
)
Deferred revenue recognized
(286,580
)
Additional amounts deferred
289,067

Balances at September 30, 2018
$
344,038

Assets Recognized from the Costs to Obtain our Contracts with Customers
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We amortize these deferred costs proportionate with related revenues over the benefit period, currently estimated to be four years.
A summary of the activity impacting our deferred contract costs during the nine months ended September 30, 2018 is presented below:
 
Deferred Contract Costs
 
(in thousands)
Balances at December 31, 2017
$
—

Adoption of ASC 606
25,489

Additional contract costs deferred
25,821

Amortization of deferred contract costs
(7,740
)
Balances at September 30, 2018
$
43,570

As of September 30, 2018, $13.6 million of our deferred contract costs are expected to be amortized within the next 12 months and therefore are included in other current assets. The remaining amount of our deferred contract costs are included in other long-term assets. There were no impairments of assets related to deferred

22
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contract costs during the nine months ended September 30, 2018. There were no assets recognized related to the costs to fulfill contracts during the nine months ended September 30, 2018 as these costs were not material.
Remaining Performance Obligations
Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. These amounts include additional performance obligations that are not yet recorded in the consolidated balance sheets. As of September 30, 2018, amounts allocated to these additional contractual obligations are $191.9 million, of which we expect to recognize $153.6 million as revenue over the next 24 months with the remaining amount thereafter.
Note 8. Stock-Based Compensation
Our 2004 Equity Incentive Plan (the "2004 Plan") authorized the granting of options to purchase shares of our Class B common stock, RSUs and other stock-based awards to our employees, consultants, officers and directors. Our 2013 Equity Incentive Plan, as amended, (the "2013 Plan" and, together with the 2004 Plan, the "Plans"), which is the successor to our 2004 Plan, authorizes the granting of options to purchase shares of our Class A common stock, RSUs and other stock-based awards to our employees, consultants, officers and directors. Options granted under the Plans may be incentive or nonstatutory stock options. Incentive stock options may only be granted to employees. The term of each option is stated in the award agreement but shall be no more than ten years from the date of grant. The board of directors determines the period over which options and RSUs become vested. Currently, the vesting period for our options and RSUs is typically four years.
Our 2013 Employee Stock Purchase Plan ("2013 ESPP") allows eligible employees to purchase shares of our Class A common stock, at a discount, through payroll deductions of up to 15% of their eligible compensation, subject to plan limitations. The 2013 ESPP currently includes purchase periods approximately six months in duration starting on the first trading date on or after June 1st and December 1st of each year. Participants are able to purchase shares of our common stock at 85% of the lower of its fair market value on (i) the first day of the purchase period or on (ii) the purchase date, which is the last day of the purchase period.
A summary of the option activity during the nine months ended September 30, 2018 follows:    
 
 
Options Outstanding
 
 
Shares
 
Weighted Average Exercise Price Per Share
 
Weighted Average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
 
 
 
 
 
(in years)
 
(in thousands)
Balances at December 31, 2017
 
3,017,113

 
$
10.13

 
 
 
 
Options exercised
 
(999,451
)
 
9.45

 
 
 
 
Balances at September 30, 2018
 
2,017,662

 
$
10.48

 
3.60
 
$
204,318

Vested and expected to vest at September 30, 2018
 
2,017,662

 
$
10.48

 
3.60
 
$
204,318

Exercisable at September 30, 2018
 
1,980,162

 
$
9.63

 
3.52
 
$
202,185

The intrinsic value is the difference between the fair value of our Class A common stock as of September 30, 2018 and the exercise price of each of the respective stock options.

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A summary of the RSU activity, including RSU awards subject to technology milestones, during the nine months ended September 30, 2018 follows:
 
 
Number of Shares Underlying Outstanding RSUs
 
Weighted Average Grant-Date Fair Value per RSU
Non-Vested outstanding at December 31, 2017
 
7,178,015

 
$
62.79

RSUs granted
 
3,909,099

 
89.22

RSUs vested
 
(2,755,315
)
 
67.20

RSUs forfeited
 
(579,741
)
 
67.27

Non-Vested outstanding at September 30, 2018
 
7,752,058

 
$
74.22

An RSU award entitles the holder to receive shares of our Class A common stock as the award vests, which is generally based on length of service. Our non-vested RSUs do not have nonforfeitable rights to dividends or dividend equivalents.
Stock-based compensation expense is amortized using the straight-line method over the requisite service period. We account for forfeitures as they occur. For RSU awards subject to technology milestones, we recognize compensation cost over the estimated requisite service period if we believe it is probable that the associated technology milestone will be met. If our assessment of the probability of the technology milestone being met changes, we recognize the impact of the change in estimate in the period of the change.
As of September 30, 2018, total unrecognized compensation expense related to stock options and non-vested RSUs was $525.4 million, which is expected to be recognized over a weighted average period of 2.9 years.
The summary of shares available for issuance of equity-based awards (including stock options, RSUs and shares issuable under our 2013 ESPP) during the nine months ended September 30, 2018 follows:
 
 
Shares Available for Grant
 
 
2013 Plan
 
2013 ESPP
Balances at December 31, 2017
 
7,207,291

 
3,666,392

Authorized
 
4,023,117

 
804,623

Granted
 
(3,909,099
)
 
(291,447
)
Forfeited
 
579,741

 
—

Balances at September 30, 2018
 
7,901,050

 
4,179,568

Note 9. Income Taxes
The income tax provision for interim periods is generally determined using an estimate of our annual effective tax rate, excluding jurisdictions for which no benefit can be recognized due to valuation allowance, and adjusted for discrete items, if any, in the relevant period. The impact of adjustments to our effective tax rate for discrete items and non-deductible expenses is greater in periods close to break-even. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.
Our effective tax rate is impacted by and differs from the federal statutory rate primarily due to the full valuation allowance on our U.S. federal and state deferred tax assets, the effect of income or losses incurred in foreign jurisdictions where the statutory tax rate differs from the federal statutory rate and non-deductible stock-based compensation.
We recognized income tax expense of $10.5 million and $6.0 million under ASC 606 for the three and nine months ended September 30, 2018, respectively, compared to income tax expense of $1.2 million and $5.2 million for three and nine months ended September 30, 2017, respectively. Our effective tax rate was (96.7)% and (8.1)% for the three and nine months ended September 30, 2018, respectively, compared to (2.6)% and (3.8)% for the three and nine months ended September 30, 2017, respectively. The difference in the effective tax rates for the three month periods is primarily attributable to the cumulative adjustment recorded during the three months ended September 30, 2018 for the current estimated annual effective tax rate. The difference in the effective tax rates for

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the nine month periods is primarily attributable to additional income as a result of our adoption of ASC 606 partially offset by the recognition of excess tax benefits of stock-based compensation during the period.
We recognized income tax expense of $1.6 million and $5.4 million under ASC 605 for the three and nine months ended September 30, 2018, respectively, compared to income tax expense of $1.2 million and $5.2 million for the three and nine months ended September 30, 2017, respectively. Our effective tax rate under ASC 605 was (2.4)% and (2.7)% for the three and nine months ended September 30, 2018, respectively, compared to (2.6)% and (3.8)% for the three and nine months ended September 30, 2017, respectively. The difference in the effective tax rates was primarily attributable to an increase in taxes in foreign jurisdictions, offset by an income tax benefit from the recognition of excess tax benefits of stock-based compensation during the three and nine months ended September 30, 2018. The difference in effective tax rates between ASC 606 and ASC 605 is primarily attributable to the differences in the amount of revenue recognized under ASC 606 compared to ASC 605.
As a result of adopting ASC 606 in the first quarter of 2018, we recognized an immaterial amount of net deferred tax liabilities, which reduced our opening adjustment to stockholders' equity. During the first quarter of 2018, we also adopted ASU 2016-16 and recognized a U.S. deferred tax asset, which was fully offset by a corresponding increase to the valuation allowance on our U.S. federal and state deferred income tax assets.
We periodically evaluate the realizability of our net deferred tax assets based on all available evidence, both positive and negative such as historic results, future reversals of existing deferred tax liabilities, projected future taxable income, as well as prudent and feasible tax-planning strategies. Generally, more weight is given to objectively verifiable evidence, such as the cumulative loss in recent years. As of September 30, 2018, we maintain a full valuation allowance on our U.S. federal and state deferred tax assets.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Act") was signed with an effective date of January 1, 2018. The Act, which significantly revised U.S. tax law, included many important changes. On the same day, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to assist in addressing uncertainty in applying GAAP to the accounting and reporting of tax reform changes related to the Act. We considered these changes, including all available guidance, in determining our income tax provision for the period ending December 31, 2017. As of September 30, 2018, we have not yet completed our analysis of historical foreign earnings as well as potential correlative adjustments. As we complete the analysis, any subsequent adjustment to these amounts may be recorded to current income tax expense in that period. We expect to complete our analysis within the measurement period in accordance with SAB 118. No adjustments to the provisional amount have been made.
Note 10. Commitments and Contingencies
Operating Lease Commitments and Expected Sublease Receipts    
As of September 30, 2018, our principal obligations consisted of obligations outstanding under non-cancellable operating leases that expire at various dates through 2029. The following table represents our non-cancellable minimum lease payments, net of future expected sublease payments to be received under non-cancellable subleases, remaining as of September 30, 2018:
Period Ending
 
Operating Lease Commitments
 
Expected Sublease Receipts
 
Net
 
 
(in thousands)
Remainder of 2018
 
$
11,796

 
$
(1,972
)
 
$
9,824

2019
 
41,849

 
(10,606
)
 
31,243

2020
 
43,051

 
(7,113
)
 
35,938

2021
 
43,600

 
(1,180
)
 
42,420

2022
 
42,987

 
(597
)
 
42,390

Thereafter
 
175,493

 
(121
)
 
175,372

Total
 
$
358,776

 
$
(21,589
)
 
$
337,187


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Contractual Commitments
Our contractual commitments are associated with agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included. The following table represents our contractual commitments as of September 30, 2018:
 
Payments Due by Period
 
Total
 
Remainder of 2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
(in thousands)
Contractual commitments
$
51,053

 
$
10,543

 
$
23,146

 
$
10,092

 
$
7,090

 
$
168

 
$
14

Legal Proceedings
We are subject to certain routine legal proceedings, as well as demands and claims that arise in the normal course of our business. We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter.
We are not aware of any pending legal proceedings that we believe, individually or in the aggregate, would be expected to have a material adverse effect on our business, operating results, or financial condition. We may, in the future, be party to litigation arising in the ordinary course of business, including claims that we allegedly infringe upon third party intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and management resources.
Note 11. Segments and Information about Revenues by Geographic Area
The following tables present our revenues by geographic region of end users who purchased products or services for the periods presented below:
 
Three Months Ended September 30,
 
2018
 
2017
 
As Reported
(ASC 606)
 
Impacts from Adoption
 
Without Adoption
(ASC 605)
 
As Reported
(ASC 605)
 
(dollars in thousands)
United States and Canada
$
207,166

 
$
(37,614
)
 
$
169,552

 
$
150,059

International
83,414

 
(13,375
)
 
70,039

 
64,858

Total revenues
$
290,580

 
$
(50,989
)
 
$
239,591

 
$
214,917

 
Nine Months Ended September 30,
 
2018
 
2017
 
As Reported
(ASC 606)
 
Impacts from Adoption
 
Without Adoption
(ASC 605)
 
As Reported
(ASC 605)
 
(dollars in thousands)
United States and Canada
$
571,957

 
$
(78,728
)
 
$
493,229

 
$
437,657

International
247,119

 
(33,147
)
 
213,972

 
190,046

Total revenues
$
819,076

 
$
(111,875
)
 
$
707,201

 
$
627,703

For the three and nine months ended September 30, 2018 and 2017, no individual country other than the United States represented 10% or more of our total revenues.

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Note 12. Net Loss Per Share
The following tables present the computation of basic and diluted net loss per share for the three and nine months ended September 30, 2018 and 2017 and include additional information regarding the impacts from the adoption of the new revenue recognition standard for the three and nine months ended September 30, 2018:
 
Three Months Ended September 30,
 
2018
 
2017
 
As Reported
(ASC 606)
 
Impacts from Adoption
 
Without Adoption
(ASC 605)
 
As Reported
(ASC 605)
 
(in thousands, except per share amounts)
Net loss per share - basic and diluted
 
 
 
 
 
 
 
Net loss
$
(21,337
)
 
$
(49,960
)
 
$
(71,297
)
 
$
(46,553
)
Weighted average shares outstanding used to compute basic and diluted net loss per share
83,264

 


 
83,264

 
79,440

Net loss per share - basic and diluted
$
(0.26
)
 


 
$
(0.86
)
 
$
(0.59
)
 
Nine Months Ended September 30,
 
2018
 
2017
 
As Reported
(ASC 606)
 
Impacts from Adoption
 
Without Adoption
(ASC 605)
 
As Reported
(ASC 605)
 
(in thousands, except per share amounts)
Net loss per share - basic and diluted
 
 
 
 
 
 
 
Net loss
$
(79,875
)
 
$
(130,015
)
 
$
(209,890
)
 
$
(143,722
)
Weighted average shares outstanding used to compute basic and diluted net loss per share
82,191

 
 
 
82,191

 
78,463

Net loss per share - basic and diluted
$
(0.97
)
 
 
 
$
(2.55
)
 
$
(1.83
)
The following shares were excluded from the computation of diluted net loss per share for the periods presented as their effect would have been antidilutive: