0001401680-18-000026.txt : 20181109 0001401680-18-000026.hdr.sgml : 20181109 20181109160527 ACCESSION NUMBER: 0001401680-18-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 74 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181109 DATE AS OF CHANGE: 20181109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Cornerstone OnDemand Inc CENTRAL INDEX KEY: 0001401680 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-35098 FILM NUMBER: 181173109 BUSINESS ADDRESS: STREET 1: 1601 CLOVERFIELD BLVD STREET 2: SUITE 620 CITY: SANTA MONICA STATE: CA ZIP: 90404 BUSINESS PHONE: 310-752-0200 MAIL ADDRESS: STREET 1: 1601 CLOVERFIELD BLVD STREET 2: SUITE 620 CITY: SANTA MONICA STATE: CA ZIP: 90404 10-Q 1 csod2018093010-q.htm FORM 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 (Mark One)
ý
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
¨
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 001-35098
 
 Cornerstone OnDemand, Inc.
(Exact name of registrant as specified in its charter)
Delaware
13-4068197
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
1601 Cloverfield Blvd.
Suite 620 South
Santa Monica, CA 90404
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code:
(310) 752-0200
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.    Yes  ý    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).    Yes  ý    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
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
 
 
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.    Yes  ¨    No  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date
Class
Outstanding as of November 2, 2018
Common Stock
58,612,222







CORNERSTONE ONDEMAND, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
 
 
Page No.
 
 
 
 
 
 
 
 
 
TRADEMARKS
© Copyright 2018 Cornerstone OnDemand, Inc. All rights reserved. “Cornerstone,” “Cornerstone OnDemand,” the Cornerstone OnDemand logo, “CyberU” and other trademarks or service marks of Cornerstone OnDemand, Inc. appearing in this Quarterly Report on Form 10-Q are the property of Cornerstone OnDemand, Inc. Trade names, trademarks and service marks of other companies appearing in this Quarterly Report on Form 10-Q are the property of their respective holders and should be treated as such.

2



PART I. FINANCIAL INFORMATION

ITEM 1.
Condensed Consolidated Financial Statements

CORNERSTONE ONDEMAND, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
(unaudited)
 
September 30, 2018 *
 
December 31, 2017
Assets
 
 
 
Cash and cash equivalents
$
136,558

 
$
393,576

Short-term investments
254,439

 
169,551

Accounts receivable, net
97,439

 
154,428

Deferred commissions, current portion
24,880

 
42,806

Prepaid expenses and other current assets
31,558

 
21,754

Total current assets
544,874

 
782,115

Capitalized software development costs, net
43,826

 
37,431

Property and equipment, net
24,647

 
20,817

Deferred commissions, net of current portion
37,313

 

Long-term investments
2,000

 
96,949

Intangible assets, net
7,292

 

Goodwill
36,270

 
25,894

Other assets, net
3,539

 
3,984

Total Assets
$
699,761

 
$
967,190

Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Accounts payable
$
11,294

 
$
17,637

Accrued expenses
61,346

 
57,528

Deferred revenue, current portion
266,209

 
311,997

Convertible notes, net

 
248,025

Other liabilities
4,377

 
9,051

Total current liabilities
343,226

 
644,238

Convertible notes, net
287,956

 
285,168

Other liabilities, non-current
2,416

 
1,498

Deferred revenue, net of current portion
11,744

 
14,166

Total liabilities
645,342

 
945,070

Commitments and contingencies (Note 12)

 

Stockholders’ Equity:
 
 
 
Common stock, $0.0001 par value; 1,000,000 shares authorized, 58,812 and 57,512 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
6

 
6

Additional paid-in capital
580,690

 
536,951

Accumulated deficit
(526,789
)
 
(515,054
)
Accumulated other comprehensive income
512

 
217

Total stockholders’ equity
54,419

 
22,120

Total Liabilities and Stockholders’ Equity
$
699,761

 
$
967,190


*See Note 1 for summary of adjustments.

See accompanying notes to unaudited condensed consolidated financial statements.

3



CORNERSTONE ONDEMAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018 *
 
2017
 
2018 *
 
2017
Revenue
$
134,014

 
$
121,796

 
$
399,644

 
$
350,029

Cost of revenue
36,171

 
35,708

 
109,556

 
104,978

Gross profit
97,843

 
86,088

 
290,088

 
245,051

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
53,215

 
60,554

 
172,281

 
179,521

Research and development
19,705

 
16,389

 
52,014

 
44,484

General and administrative
23,128

 
21,249

 
67,214

 
64,866

Restructuring
221

 

 
8,946

 

Total operating expenses
96,269

 
98,192

 
300,455

 
288,871

Income (loss) from operations
1,574

 
(12,104
)
 
(10,367
)
 
(43,820
)
Other income (expense):
 
 
 
 
 
 
 
Interest income
1,659

 
749

 
6,143

 
2,021

Interest expense
(5,335
)
 
(3,373
)
 
(22,826
)
 
(10,015
)
Other, net
177

 
376

 
(2,029
)
 
921

Other income (expense), net
(3,499
)
 
(2,248
)
 
(18,712
)
 
(7,073
)
Loss before income tax provision
(1,925
)
 
(14,352
)
 
(29,079
)
 
(50,893
)
Income tax provision
(522
)
 
(503
)
 
(1,591
)
 
(1,438
)
Net loss
$
(2,447
)
 
$
(14,855
)
 
$
(30,670
)
 
$
(52,331
)
Net loss per share, basic and diluted
$
(0.04
)
 
$
(0.26
)
 
$
(0.53
)
 
$
(0.92
)
Weighted average common shares outstanding, basic and diluted
58,699

 
57,627

 
57,994

 
57,072


*See Note 1 for summary of adjustments.

See accompanying notes to unaudited condensed consolidated financial statements.

4



CORNERSTONE ONDEMAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018 *
 
2017
 
2018 *
 
2017
Net loss
$
(2,447
)
 
$
(14,855
)
 
$
(30,670
)
 
$
(52,331
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
33

 
(1,490
)
 
36

 
(3,540
)
Net change in unrealized gains (losses) on investments
202

 
70

 
259

 
2

Other comprehensive income (loss), net of tax
235

 
(1,420
)
 
295

 
(3,538
)
Total comprehensive loss
$
(2,212
)
 
$
(16,275
)
 
$
(30,375
)
 
$
(55,869
)

*See Note 1 for summary of adjustments.

See accompanying notes to unaudited condensed consolidated financial statements.

5



CORNERSTONE ONDEMAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended
 
September 30,
 
2018 *
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(30,670
)
 
$
(52,331
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
25,351

 
27,028

Accretion of debt discount and amortization of debt issuance costs
7,918

 
7,148

Purchased investment premium, net of amortization
428

 
527

Net foreign currency gain
(522
)
 
(1,368
)
Stock-based compensation expense
51,042

 
51,029

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
55,757

 
14,631

Deferred commissions
(7,104
)
 
(357
)
Prepaid expenses and other assets
(9,492
)
 
(4,033
)
Accounts payable
(6,258
)
 
(8,276
)
Accrued expenses
21

 
(2,107
)
Deferred revenue
(38,695
)
 
(16,323
)
Other liabilities
(2,511
)
 
359

Net cash provided by operating activities
45,265

 
15,927

Cash flows from investing activities:
 
 
 
Purchases of investments
(125,109
)
 
(231,384
)
Maturities of investments
135,183

 
219,846

Capital expenditures
(10,161
)
 
(6,682
)
Capitalized software costs
(18,943
)
 
(15,826
)
Cash paid for acquisition, net of cash acquired
(18,093
)
 

Net cash used in investing activities
(37,123
)
 
(34,046
)
Cash flows from financing activities:
 
 
 
Payments of debt issuance costs
(152
)
 

Repayment of convertible notes
(253,000
)
 

Proceeds from employee stock plans
43,474

 
9,722

Repurchases of common stock
(54,751
)
 

Net cash (used in) provided by financing activities
(264,429
)
 
9,722

Effect of exchange rate changes on cash and cash equivalents
(731
)
 
1,530

Net decrease in cash and cash equivalents
(257,018
)
 
(6,867
)
Cash and cash equivalents at beginning of period
393,576

 
83,300

Cash and cash equivalents at end of period
$
136,558

 
$
76,433

Supplemental cash flow information:
 
 
 
Cash paid for interest
$
13,628

 
$
3,841

Cash paid for income taxes
1,573

 
1,800

Proceeds from employee stock plans received in advance of stock issuance
2,152

 
1,998

Non-cash investing and financing activities:
 
 
 
Assets acquired under capital leases and other financing arrangements
$
970

 
$
3,467

Capitalized assets financed by accounts payable and accrued expenses
2,796

 
631

Capitalized stock-based compensation
3,747

 
3,721


*See Note 1 for additional information.

See accompanying notes to unaudited condensed consolidated financial statements.

6



CORNERSTONE ONDEMAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Overview
Cornerstone OnDemand, Inc. (“Cornerstone” or the “Company”) was incorporated on May 24, 1999 in the state of Delaware and began its principal operations in November 1999.
The Company is a leading global provider of learning and human capital management software, delivered as Software-as-a-Service (“SaaS”). The Company helps organizations around the globe recruit, train and manage their employees. It is one of the world’s largest cloud computing companies. The Company’s human capital management platform combines the world’s leading unified talent management solutions with state-of-the-art analytics and HR administration solutions to enable organizations to manage the entire employee lifecycle. Its focus on continuous learning and development helps organizations to empower employees to realize their potential and drive success.
The Company works with clients across all geographies, verticals and market segments. Its Recruiting, Learning, Performance and HR Administration suites help with sourcing, recruiting and onboarding new hires; managing training and development requirements; nurturing knowledge sharing and collaboration among employees; goal setting, reviews, competency management and continuous feedback; linking compensation to performance; identifying development plans based on performance gaps; streamlining employee data management, self-service and compliance reporting; and then utilizing state-of-the-art analytics capabilities to make smarter, more-informed decisions using data from across the platform for talent mobility, engagement and development so that HR and leadership can focus on strategic initiatives to help their organization succeed.
The Company’s management has determined that the Company operates in one segment as it only reports financial information on an aggregate and consolidated basis to the Company’s chief executive officer, who is the Company’s chief operating decision maker.
Office Locations
The Company is headquartered in Santa Monica, California and has offices in Amsterdam, Netherlands; Auckland, New Zealand; Bangalore, India; Düsseldorf, Germany; Hong Kong; London, United Kingdom; Madrid, Spain; Mumbai, India; Munich, Germany; Paris, France; São Paulo, Brazil; Stockholm, Sweden; Sunnyvale, United States; Sydney, Australia; Tel Aviv, Israel; and Tokyo, Japan.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements are presented in accordance with (i) accounting standards generally accepted in the United States of America (“GAAP”) for interim financial information and (ii) the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, such financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the financial statements include all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the interim periods presented. Results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018, for any other interim period or for any other future year.
The condensed consolidated balance sheet at December 31, 2017 has been derived from the audited financial statements at that date, but does not include all of the disclosures required by GAAP.
The Company’s significant accounting policies are described in “Note 2. Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The Company follows the same accounting policies for interim reporting. The financial information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Effective January 1, 2018, the Company adopted the requirements of Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, as discussed further in Note 1. All amounts and disclosures set forth in this Quarterly Report on Form 10-Q have been updated to comply with this new standard with results for reporting periods beginning after January 1, 2018 presented under ASU No. 2014-09, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.

7



Recently Adopted Accounting Pronouncements
In June 2018, the Financial Accounting Standards Board (“FASB”) issued a new ASU, which aligns the accounting for share-based compensation for non-employees with employees. The guidance is effective for interim and annual reporting periods beginning after December 15, 2018. The Company early adopted this ASU in the second quarter of 2018, and the adoption did not have a material impact on its financial statements.
In May 2017, the FASB issued a new ASU, which amends the scope of modification accounting for share-based payment arrangements. It provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards Codification (“ASC”) 718, Compensation - Stock compensation. The Company implemented this requirement as of the beginning of the first quarter of 2018. The adoption did not have a material impact on its financial statements.
In January 2017, the FASB issued a new ASU, which clarifies the definition of a business, which affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The Company implemented this requirement as of the beginning of the first quarter of 2018. The adoption did not have a material impact on its financial statements.
In August 2016, the FASB issued a new ASU to clarify how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The Company implemented this requirement as of the beginning of the first quarter of 2018. The adoption did not have a material impact on its financial statements.
In January 2016, the FASB issued a new ASU that provides guidance for the recognition, measurement, presentation and disclosure of financial assets and liabilities. The Company implemented this requirement as of the beginning of the first quarter of 2018. The adoption did not have a material impact on its financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”). Topic 606 supersedes the revenue recognition requirement in ASC Topic 605, Revenue Recognition (“Topic 605”), and requires the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the expected consideration entitled in exchange for those goods or services. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer.
The Company adopted the requirements of Topic 606 utilizing the modified retrospective method of transition to contracts as of January 1, 2018. The accumulated deficit balance was reduced, thus stockholders' equity was increased by $18.9 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606. The impact was primarily related to:
$15.5 million increase in deferred commissions. Such costs are considered to be costs to acquire a contract under Topic 606, and primarily relate to the execution of software subscription contracts. In addition, upon adoption, these incremental commission costs to obtain a contract are now amortized over a period of benefit, which is generally six years.
$2.7 million of additional liability offsets the impact to retained earnings from the increase of the deferred commission above. The liability is to accrue commission costs earned but not yet paid.
$6.1 million reduction in deferred revenue related to additional contract value being allocated to professional services delivered prior to adoption. Previously such amounts were not recognized based on contractual payment limitations. Upon adoption, revenue for professional services is based on the relative standalone selling price without any such limitation.
The adoption had no impact to net cash provided by or used in operating, investing or financing activities in the Company’s Condensed Consolidated Statements of Cash Flows.
Recent Accounting Pronouncements
In February 2016, the FASB issued a new ASU, that was updated in 2018, amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. This guidance is effective for the Company’s interim and annual reporting periods beginning January 1, 2019. Upon adoption, the Company expects to recognize additional assets and related lease liabilities on the consolidated balance sheets. The Company is currently evaluating the impact of the adoption of this ASU on its financial statements.

8



In June 2016, the FASB issued a new ASU, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This guidance replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. This ASU is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, and requires a cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. The Company is currently in the process of evaluating the impact of the adoption of this ASU on its consolidated financial statements.
In January 2017, The FASB issued a new ASU which simplifies the accounting for goodwill impairments by eliminating step 2 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. This ASU will be applied prospectively and is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. The Company is currently currently in the process of evaluating the impact of the adoption of ASU on its consolidated financial statements.
In March 2018, the FASB issued a new ASU, which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset. This guidance is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. The Company is currently in the process of evaluating the impact of the adoption of this ASU on its consolidated financial statements.
In August 2018, the SEC issued a final rule that amends certain of its disclosure requirements. The changes are generally intended to reduce or eliminate certain disclosures that have become redundant, duplicative, overlapping, outdated or superseded in light of other disclosure requirements or changes in the information environment. The rule also requires SEC registrants to present changes in stockholders' equity and the amount of dividends per share for each class of shares on a quarterly basis for the current and prior-year periods. The final rule is effective for SEC filings made on or after November 2, 2018.
In August 2018, the FASB issued a new ASU that provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The amendments in this update also provide additional disclosure requirements to disclose the nature of an entity's hosting arrangements that are service contracts. This ASU is effective for annual and interim periods beginning after December 15, 2019. The Company is evaluating the impact of the adoption of this ASU on its consolidated financial statements.
Summary of Significant Accounting Policies
Except for changes to the Company's revenue recognition policy and the accounting for commission payments, there have been no changes to the Company’s significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 27, 2018. See below for additional accounting policy and transition disclosures.
Revenue Recognition
Effective January 1, 2018, the Company adopted the guidance under Topic 606.
The Company derives its revenue from the following sources:
Subscriptions to the Company’s products and other offerings on a recurring basis
Clients pay subscription fees for access to the Company’s enterprise human capital management platform, other products and support on a recurring basis. Fees are based on a number of factors, including the number of products purchased, which may include e-learning content, and the number of users having access to a product. The Company generally recognizes revenue from subscriptions ratably over the term of the agreements beginning on the date the subscription service is made available to the client. Subscription agreements are typically three years, billed annually in advance, and non-cancelable, with payment due within 30 days of the invoice date.

9



Professional services and other
The Company offers its clients and implementation partners assistance in implementing its products and optimizing their use. Professional services include application configuration, system integration, business process re-engineering, change management and training services. Services are generally billed up-front on a fixed fee basis and to a lesser degree on a time-and-material basis. These services are generally purchased as part of a subscription arrangement and are typically performed within the first several months of the arrangement. Clients may also purchase professional services at any other time. The Company generally recognizes revenue from fixed fee professional services contracts as services are performed based on the proportion performed to date relative to the total expected services to be performed. Revenue associated with time-and-material contracts are recorded as such time-and-materials are incurred.
The Company recognizes revenue from contracts with customers based on the following five steps:
1)
Identification of the contract, or contracts, with a customer
2)
Identification of all performance obligations in the contract
3)
Determination of the transaction price
4)
Allocation of the transaction price to the performance obligations in the contract
5)
Recognition of revenue as we satisfy a performance obligation
The Company identifies enforceable contracts with a customer when the agreement is signed. The Company accounts for individual performance obligations separately if they are distinct. The transaction price is generally based on fixed fees stated in the contract. The Company excludes from the transaction price any amounts relating to taxes from product sales which are collected from customers and remitted to governmental authorities. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. The Company is not able to directly observe a standalone selling price for its performance obligations, as the performance obligations are sold separately and within a sufficiently narrow price range only infrequently, and because management has determined that there are no third-party offerings reasonably comparable to the Company’s products. Accordingly, total contract values are allocated to subscriptions to the products and professional services based on the standalone selling price (“SSP”). The determination of SSP requires the Company to make significant estimates and judgments. The Company considers numerous factors, including the nature and complexity of the performance obligations themselves; the geography, market conditions and competitive landscape for the sale; internal costs; and pricing and discounting practices. The Company updates its estimates of SSP on an ongoing basis through internal periodic reviews and as events or circumstances may require. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer. The Company satisfies performance obligations over time.
In a limited number of cases, the client’s intended use of a product requires contractually specified enhancements to its underlying features and functionality. In some of these cases, revenue is recognized as a combined single performance obligation on a straight-line basis from the point at which access to the enhanced product(s) have been provided, through the remaining term of the agreement. In other cases where the enhancement is not contractually specified by the customer for its initial use and revenue is recognized separately for the enhancement and the product as a second distinct performance obligation. In such cases where a second performance obligation exists, the enhancement revenue is recognized based on a SSP allocation on a straight-line basis once access to the enhancement has been provided, through the remaining term of the agreement.
For arrangements in which the Company resells third-party e-learning training content to clients, revenue is recognized in accordance with accounting guidance as to when to report gross revenue as a principal or report net revenue as an agent. The Company typically recognizes third-party content revenue at the gross amount invoiced to clients as (i) the Company is primarily responsible for hosting the content on our platform for the term of the agreement, (ii) the Company controls the content before access is provided to the customer, and (iii) the Company typically has discretion to establish the price charged.

10



Deferred Revenue
The Company records amounts that have been invoiced to its clients in accounts receivable and in either deferred revenue or revenue depending on whether the revenue recognition criteria described above have been met. Deferred revenue that will be recognized during the succeeding twelve-month period from the respective balance sheet date is recorded as current deferred revenue and the remaining portion is recorded as noncurrent. The decrease in the deferred revenue balance for the nine months ended September 30, 2018 is primarily driven by $271.7 million of revenue recognized that were included in the deferred revenue balances as of January 1, 2018 offset by invoices billed in advance of satisfying performance obligations in accordance with contract payment terms.
Transaction Price Allocated to Remaining Performance Obligations
As of September 30, 2018, approximately $837.0 million of revenue is expected to be recognized from remaining performance obligations. This amount mainly comprises subscription revenue, with less than 10% attributable to professional services and other revenue. The Company expects to recognize revenue on approximately two thirds of these remaining performance obligations over the next 18 months, with the balance recognized thereafter.
The estimated revenues from the remaining performance obligations do not include uncommitted contract amounts such as (i) amounts which are cancelable by the client without any significant penalty, (ii) future billings for time and material contracts, and (iii) amounts associated with optional renewal periods.
Commission Payments
The Company defers commissions paid to its sales force and related payroll taxes as these amounts are incremental costs of obtaining a contract with a customer and are recoverable from future revenue due to the non-cancelable client agreements that gave rise to the commissions. Commissions for initial contracts are deferred on the balance sheet and amortized on a straight-line basis over a period of benefit that has been determined to be six years. The Company took into consideration technology and other factors in estimating the benefit period. Sales commissions for renewal contracts are deferred and amortized on a straight-line basis over the related contract renewal period. Amortization expense is included in sales and marketing expenses in the accompanying condensed consolidated statements of operations. For the three and nine months ended September 30, 2018, the amount of amortization expense was $8.0 million and $25.8 million, respectively, and there was no impairment loss in relation to the costs capitalized.
Impact of New Standard on Financial Statement Line Items
The following tables summarize the effect of the adoption of Topic 606 on the Company’s select line items, included in the unaudited consolidated condensed financial statements as of and for the quarter ended September 30, 2018, as if the previous accounting was in effect (in thousands).

11



 
September 30, 2018
Condensed Consolidated Balance Sheet
As Reported
(ASC 606)
 
Impacts of Adoption
 
Without Adoption
(ASC 605)
Assets
 
 
 
 
 
Deferred commissions, current portion
$
24,880

 
$
19,317

 
$
44,197

Deferred commissions, non-current
37,313

 
(37,313
)
 

Liabilities
 
 
 
 
 
Accrued expenses
61,346

 
(2,333
)
 
59,013

Deferred revenue, current portion
266,209

 
6,374

 
272,583

Stockholders’ Equity
 
 
 
 
 
Accumulated deficit
(526,789
)
 
(22,037
)
 
(548,826
)
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2018
Condensed Consolidated Statement of Operations
As Reported
(ASC 606)
 
Impacts of Adoption
 
Without Adoption
(ASC 605)
 
As Reported
(ASC 606)
 
Impacts of Adoption
 
Without Adoption
(ASC 605)
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
134,014

 
$
(349
)
 
$
133,665

 
$
399,644

 
$
(314
)
 
$
399,330

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
53,215

 
(1,050
)
 
52,165

 
172,281

 
(950
)
 
171,331

Net loss
(2,447
)
 
701

 
(1,746
)
 
(30,670
)
 
636

 
(30,034
)
Net loss per share, basic and diluted
(0.04
)
 
 
 
(0.03
)
 
(0.53
)
 
 
 
(0.52
)
Weighted average common shares outstanding, basic and diluted
58,699

 
 
 
58,699

 
57,994

 
 
 
57,994

The adoption of Topic 606 had no impact to net cash provided by or used in operating, investing or financing activities in the Company’s unaudited condensed statement of cash flows for the nine months ended September 30, 2018.
2. BUSINESS ACQUISITION
On September 10, 2018, the Company completed the acquisition of Workpop Inc. (“Workpop”), a privately held company. Workpop is a robust web and mobile solution for candidates and hiring managers in service-based industries. The acquisition was completed pursuant to a merger whereby Workpop became a wholly-owned subsidiary of the Company. In connection with the merger, the Company paid cash consideration of approximately $18.2 million.
The Company had a $0.5 million cost basis investment in Workpop prior to the acquisition. As part of the acquisition of Workpop, the Company received a return of our investment with an insignificant loss, which is included in general and administrative expenses in the consolidated statement of operations.
The acquisition has been accounted for under the acquisition method of accounting for business combinations with the Company as the accounting acquirer in accordance with ASC 805, Business Combinations. As such, the Workpop assets acquired and liabilities assumed are recorded at their acquisition-date fair values. Acquisition-related transaction costs of $0.4 million are not included as a component of consideration transferred, but are accounted for as an expense in the period in which the costs are incurred. Accordingly, these acquisition-related transaction costs have been included in general and administrative expenses in the consolidated statement of operations. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill. Goodwill is attributable primarily to expected benefits, including the acquired workforce, from combining Workpop with the Company. The Company acquired Workpop to leverage and develop new web and mobile recruiting products as part of the Cornerstone Recruiting suite.

12



The Company’s allocation of the total purchase price consideration as of September 10, 2018 is summarized below (in thousands):
 
Fair Value
Cash and cash equivalents
$
115

Other assets
68

Intangible assets - developed technology
7,500

Goodwill
10,525

Total purchase price
$
18,208

The fair value of the developed technology is being amortized on a straight-line basis over 3 years, which is the expected useful life of such asset.
 Pro forma results of operations have not been presented because the effects of this acquisition is not material to our financial results.

3. NET LOSS PER SHARE
The following table presents the Company’s basic and diluted net loss per share (in thousands, except per share amounts): 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(2,447
)
 
$
(14,855
)
 
$
(30,670
)
 
$
(52,331
)
Weighted-average shares of common stock outstanding
58,699

 
57,627

 
57,994

 
57,072

Net loss per share – basic and diluted
$
(0.04
)
 
$
(0.26
)
 
$
(0.53
)
 
$
(0.92
)
The potential shares of common stock that would have a dilutive impact are computed using the treasury stock method or the if-converted method, as applicable. At September 30, 2018 and 2017, the following potential shares were excluded from the computation of diluted net loss per share because their effect would have been anti-dilutive (in thousands):
 
September 30,
 
2018
 
2017
Options to purchase common stock, restricted stock units and performance-based restricted stock units
10,575

 
11,112

Shares issuable pursuant to employee stock purchase plan
89

 
98

Convertible notes
7,143

 
4,682

Common stock warrants
4,682

 
4,682

Total shares excluded from net loss per share
22,489

 
20,574

4. INVESTMENTS
Investments in Marketable Securities
The Company’s investments in available-for-sale marketable securities are made pursuant to its investment policy, which has established guidelines relative to the diversification of the Company’s investments and their maturities, with the principal objective of capital preservation and maintaining liquidity that is sufficient to meet cash flow requirements.

13



 The following is a summary of investments in marketable securities, including those that meet the definition of a cash equivalent, as of September 30, 2018 (in thousands):
 
September 30, 2018
 
Amortized Cost Basis
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Cash Equivalent
 
Investments
Money market funds
$
93,789

 
$

 
$

 
$
93,789

 
$
93,789

 
$

Certificate of deposit
10,000

 

 

 
10,000

 
10,000

 

Corporate bonds
67,614

 
5

 
(121
)
 
67,498

 

 
67,498

U.S. treasury securities
187,217

 

 
(276
)
 
186,941

 

 
186,941

 
$
358,620

 
$
5

 
$
(397
)
 
$
358,228

 
$
103,789

 
$
254,439

The following is a summary of investments in marketable securities, including those that meet the definition of a cash equivalent, as of December 31, 2017 (in thousands):
 
December 31, 2017
 
Amortized Cost Basis
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Cash Equivalent
 
Investments
Money market funds
$
358,859

 
$

 
$

 
$
358,859

 
$
358,859

 
$

Certificate of deposit
10,000

 

 

 
10,000

 
10,000

 

Corporate bonds
74,868

 

 
(220
)
 
74,648

 

 
74,648

U.S. treasury securities
189,310

 

 
(430
)
 
188,880

 

 
188,880

 
$
633,037

 
$

 
$
(650
)
 
$
632,387

 
$
368,859

 
$
263,528

As of September 30, 2018, the Company’s investment in corporate bonds, agency bonds and U.S. treasury securities had a weighted-average maturity date of approximately six months. Unrealized gains and losses on investments were not significant and the Company does not believe the unrealized losses represent other-than-temporary impairments as of September 30, 2018 and December 31, 2017. No marketable securities held have been in a continuous unrealized loss position for more than 12 months as of September 30, 2018 and December 31, 2017.
Strategic Investments
As of September 30, 2018, the Company had aggregate strategic investments of $2.0 million. The Company accounted for each of these investments using the cost method of accounting, as the Company does not have significant influence or a controlling financial interest over these entities.
During the three and nine months ended September 30, 2018, the Company sold $0.5 million and $1.0 million, respectively, of its strategic investments at approximately their carrying value. The 0.5 million return on investment received during the three and nine months ended September 30, 2018, was received as part of our acquisition of Workpop.
These investments are subject to periodic impairment reviews and are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Other than the impairment loss of $0.6 million during the nine months ended September 30, 2017, there have not been any other impairment losses recorded.
5. INTANGIBLE ASSETS AND GOODWILL
Finite-lived Intangibles
The Company has finite-lived intangible assets which are amortized over their estimated useful lives on a straight line basis. The following table presents the gross carrying amount and accumulated amortization of finite-lived intangible assets as of September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Developed technology
$
7,500

 
$
(208
)
 
$
7,292

 
$
29,984

 
$
(29,984
)
 
$

Software license rights

 

 

 
1,654

 
(1,654
)
 

 
$
7,500

 
$
(208
)
 
$
7,292

 
$
31,638

 
$
(31,638
)
 
$

In September 2018, the Company recorded additional finite-lived intangible assets totaling $7.5 million, related to developed technology from the acquisition of Workpop (see Note 2).

14



Total amortization expense from finite-lived intangible assets was $0.2 million for the three and nine months ended September 30, 2018 and $2.2 million and $6.6 million for the three and nine months ended September 30, 2017, respectively, and was recorded in cost of revenue in the accompanying Consolidated Statements of Operations.
The following table presents the Company’s estimate of remaining amortization expense, which will be recorded in cost of revenue, for each of the succeeding fiscal years ending December 31 for finite-lived intangible assets that existed at September 30, 2018 (in thousands):
Remainder of 2018
$
625

2019
2,500

2020
2,500

2021
1,667

Total future amortization
$
7,292

The Company evaluates the recoverability of its long-lived assets with finite useful lives, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Based on the assessment of various factors in connection with the preparation of the Company’s financial statements for the three months ended September 30, 2018, the Company does not believe there were any negative qualitative factors impacting the recoverability of the carrying values. There were no impairment charges related to identifiable intangible assets in the nine months ended September 30, 2018 and the year ended December 31, 2017.
Goodwill
The following table presents the changes in the carrying amount of goodwill for the nine months ended September 30, 2018 and the year ended December 31, 2017 (in thousands):
Goodwill as of December 31, 2017
$
25,894

Goodwill from Workpop acquisition
10,376

Goodwill as of September 30, 2018
$
36,270


6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Observable inputs are based on market data obtained from independent sources. The fair value hierarchy is based on the following three levels of inputs, of which the first two are considered observable and the last one is considered unobservable:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 – Unobservable inputs.
Assets and liabilities measured at fair value on a recurring basis included the following as of September 30, 2018 and December 31, 2017 (in thousands):
 
 
September 30, 2018
 
December 31, 2017
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Cash equivalents
$
103,789

 
$
93,789

 
$
10,000

 
$


$
368,859

 
$
358,859

 
$
10,000

 
$

Corporate bonds
67,498

 

 
67,498

 

 
74,648

 

 
74,648

 

U.S. treasury securities
186,941

 

 
186,941

 

 
188,880

 

 
188,880

 

 
$
358,228

 
$
93,789

 
$
264,439

 
$

 
$
632,387

 
$
358,859

 
$
273,528

 
$


15



At September 30, 2018 and December 31, 2017, cash equivalents of $93.8 million and $358.9 million, respectively, consisted of money market funds with original maturity dates of three months or less backed by U.S. Treasury bills. At September 30, 2018 and December 31, 2017, cash equivalents of $10.0 million and $10.0 million, respectively, consisted of certificate of deposits with original maturity dates of three months or less.
As of September 30, 2018, corporate bonds, agency bonds, U.S. treasury securities and commercial paper were classified within Level 2 of the fair value hierarchy. The bonds were valued using information obtained from pricing services, which obtained quoted market prices from a variety of industry data providers, security master files from large financial institutions, and other third-party sources. The Company performed supplemental analysis to validate information obtained from its pricing services. As of September 30, 2018, no adjustments were made to such pricing information.
Convertible Notes
The Company’s 2021 Notes described below, are shown in the accompanying Condensed Consolidated Balance Sheets at their original issuance value, net of unamortized discount and debt issuance costs, and are not remeasured to fair value each period. The approximate fair value of the Company’s 2021 Notes as of September 30, 2018 was $370.0 million. The fair value of the 2021 Notes was estimated on the basis of quoted market prices of similar instruments, which, due to the lack of trading activity, are considered Level 2 in the fair value hierarchy.

7. DEBT
2018 Convertible Notes
In 2013, the Company issued convertible notes (the “2018 Notes”) raising gross proceeds of $253.0 million. On July 1, 2018, the 2018 Notes matured and the $253.0 million principal amount due was repaid. The 2018 Notes are no longer outstanding.
The 2018 Notes were governed by an Indenture, dated June 17, 2013, between the Company and U.S. Bank National Association, as trustee (the “2013 Indenture”). The 2018 Notes matured on July 1, 2018 and bore interest at a rate of 1.50% per year payable semi-annually in arrears on January 1 and July 1 of each year, commencing January 1, 2014.
In accounting for the 2018 Notes at issuance, the Company separated the 2018 Notes into debt and equity components pursuant to the accounting standards for convertible debt instruments that may be fully or partially settled in cash upon conversion. The fair value of the debt component was estimated using an interest rate for nonconvertible debt, with terms similar to the 2018 Notes, excluding the conversion feature. The excess of the principal amount of the 2018 Notes over the fair value of the debt component was recorded as a debt discount and a corresponding increase in additional paid-in capital. The debt discount was accreted to interest expense over the term of the 2018 Notes using the interest method. The amount recorded to additional paid-in capital was not remeasured since it met the conditions for equity classification over the term of the 2018 Notes. Upon issuance of the $253.0 million of 2018 Notes, the Company recorded $214.3 million to debt and $38.7 million to additional paid-in capital for the debt discount.
The Company incurred transaction costs of approximately $7.3 million related to the issuance of the 2018 Notes. In accounting for these costs, the Company allocated the costs to the debt and equity components in proportion to the allocation of proceeds from the issuance of the 2018 Notes to such components. Transaction costs allocated to the debt component of $6.2 million were deferred and amortized to interest expense over the term of the 2018 Notes. The transaction costs allocated to the equity component of $1.1 million were recorded to additional paid-in capital.

16



2021 Senior Convertible Notes
In December 2017, the Company issued $300.0 million principal amount of 5.75% senior convertible notes (the “2021 Notes”) for a purchase price equal to 98% of the principal amount, raising net proceeds of $294.0 million.
The 2021 Notes are governed by an Indenture, dated December 8, 2017 between the Company and U.S. Bank National Association, as trustee (the “2017 Indenture”). The 2021 Notes mature on July 1, 2021, unless earlier repurchased or converted, and bear interest at a rate of 5.75% per year payable semi-annually in arrears on January 1 and July 1 of each year, commencing January 1, 2018.
The 2021 Notes are convertible at an initial conversion rate of 23.8095 shares of the Company’s common stock per $1,000 principal amount of the 2021 Notes, which represents an initial conversion price of $42.00 per share, subject to adjustment for anti-dilutive issuances, voluntary increases in the conversion rate and make-whole adjustments upon a fundamental change. A fundamental change includes a change in control, delisting of the Company’s common stock and a liquidation of the Company. Upon conversion, the Company will deliver the applicable number of the Company’s common stock and cash in lieu of any fractional shares. Holders of the 2021 Notes may convert their 2021 Notes at any time prior to the close of business on the scheduled trading day immediately preceding the maturity date, subject to a restricted period through December 2018.
The holders of the 2021 Notes may require the Company to repurchase all or a portion of their 2021 Notes at a cash repurchase price equal to 100% of the principal amount of the Notes being repurchased, plus the remaining scheduled interest through and including the maturity date, upon a fundamental change and events of default, including non-payment of interest or principal and other obligations under the 2017 Indenture.
The 2021 Notes were issued at a two percent discount and accounted for as debt upon issuance. The Company recorded $300.0 million of debt and $6.0 million for the debt discount. The debt discount is accreted to interest expense over the term of the 2021 Notes using the interest method.
The Company incurred debt issuance costs of $9.2 million that were deferred and will be amortized to interest expense over the term of the 2021 Notes.
The Company agreed to register the resale of the 2021 Notes and the shares of common stock issuable upon conversion of the 2021 Notes. A registration statement on Form S-3 relating to such securities was filed with the U.S. Securities and Exchange Commission by the Company on August 7, 2018.
2018 Notes and 2021 Notes
The net carrying amounts of the liability components of the 2018 Notes and 2021 Notes as of September 30, 2018 and December 31, 2017 consists of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Principal amount
$
300,000

 
$
553,000

Unamortized debt discount
(4,746
)
 
(10,190
)
Net carrying amount before unamortized debt issuance costs
295,254

 
542,810

Unamortized debt issuance costs
(7,298
)
 
(9,617
)
Net carrying value
$
287,956

 
$
533,193

The effective interest rate of the liability component is 6.4% for the 2021 Notes.
The following table presents the interest expense recognized related to the 2018 Notes and the 2021 Notes for the three and nine months ended months ended September 30, 2018 and 2017 (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Contractual interest expense at 1.5% and 5.75% per annum
$
4,313

 
$
949

 
$
14,835

 
$
2,847

Amortization of debt issuance costs
604

 
334

 
2,474

 
990

Accretion of debt discount
392

 
2,078

 
5,444

 
6,159

Total
$
5,309

 
$
3,361

 
$
22,753

 
$
9,996


17



Net proceeds were approximately $245.7 million and $284.9 million from the 2018 Notes and the 2021 Notes, respectively. The Company used approximately $49.5 million of the net proceeds from the 2018 Notes offering to pay the cost of the Note Hedges described below, which was partially offset by $23.2 million of the proceeds from the Company’s sale of the Warrants also described below.
Note Hedges
Concurrent with the 2018 Notes that were issued in 2013, the Company entered into note hedges (the “Note Hedges”) with certain bank counterparties, with respect to its common stock. The Company paid $49.5 million for the Note Hedges. The Note Hedges cover approximately 4.7 million shares of the Company’s common stock at a strike price of $54.04 per share and were exercisable by the Company upon conversion of the 2018 Notes. The Note Hedges were intended to reduce the potential economic dilution upon conversion of the 2018 Notes in the event that the fair value per share of the Company’s common stock at the time of exercise was greater than the conversion price of the 2018 Notes. On July 1, 2018, the Note Hedges expired upon the maturity of the 2018 Notes.
Warrants
Separately and concurrently with the entry by the Company into the Note Hedges in 2013, the Company entered into warrant transactions, whereby it sold warrants to the same bank counterparties as the Note Hedges to acquire up to 4.7 million shares of the Company’s common stock at a strike price of $80.06 per share (the “Warrants”), subject to anti-dilution adjustments. The Company received proceeds of $23.2 million from the sale of the Warrants. The Warrants expire at various dates during 2018 and 2019. If the fair value per share of the Company’s common stock exceeds the strike price of the Warrants, the Warrants will reduce diluted earnings per share to the extent that the calculation does not have an anti-dilutive effect.
The amounts paid and received for the Note Hedges and the Warrants have been recorded in additional paid-in capital. The fair value of the Note Hedges was not and the Warrants are not remeasured through earnings each reporting period.

8. STOCKHOLDERS EQUITY
Share Repurchase Program
In November 2017, the Company’s board of directors authorized a $100.0 million share repurchase program of its common stock. The Company may repurchase its common stock for cash in the open market in accordance with applicable securities laws. The timing and amount of any stock repurchase will depend on share price, corporate and regulatory requirements, economic and market conditions, and other factors. The stock repurchase authorization will expire in November 2019 and shares repurchased will be immediately retired.
The following is a summary of the Company's stock repurchases under its $100.0 million share repurchase program as of November 2, 2018 (in thousands, except per share information):
Period
 
# of Shares Repurchased
 
Average Price per Share
 
Total Expenditures
 
Amount Remaining Under Program
November 8, 2017 - December 31, 2017
 
635

 
$
35.55

 
$
22,599

 


January 1, 2018 - March 31, 2018
 
423

 
$
37.84

 
16,024

 


April 1, 2018 - June 30, 2018
 
444

 
$
46.66

 
20,718

 
 
July 1, 2018 - September 30, 2018
 
300

 
$
53.82

 
16,143

 
 
Subtotal
 
1,802

 
$
41.86

 
$
75,484

 
$
24,516

 
 
 
 
 
 
 
 
 
October 1, 2018 - November 2, 2018
 
307

 
$
51.62

 
15,867

 
 
Total
 
2,109

 
$
43.28

 
$
91,351

 
$
8,649


9. STOCK-BASED AWARDS
Stock Options
The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2018 (in thousands, except per share and term information):
 
 
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value (1)
Outstanding, December 31, 2017
5,432

 
$
32.73

 
5.3
 
$
42,282

Granted

 

 
 
 
 
Exercised
(1,173
)
 
33.04

 
 
 
 
Forfeited
(121
)
 
43.94

 
 
 
 
Outstanding, September 30, 2018
4,138

 
$
32.31

 
4.3
 
$
101,132

 
 
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value (1)
Exercisable at September 30, 2018
4,065

 
$
32.26

 
4.3
 
$
99,546

Vested and expected to vest at September 30, 2018
4,134

 
32.31

 
4.3
 
101,066

(1)
Based on the Company’s closing stock price of $56.75 on September 30, 2018 and $35.33 on December 31, 2017.
Unrecognized compensation expense relating to stock options was $0.9 million at September 30, 2018, which is expected to be recognized over a weighted-average period of 0.9 years.

Restricted Stock Units
The Company granted restricted stock units covering 1.7 million shares of its common stock during the nine months ended September 30, 2018. At September 30, 2018, there were 3.9 million shares of the Company’s common stock issuable upon the vesting of outstanding restricted stock units. Unrecognized compensation expense related to unissued shares of the Company’s common stock subject to unvested restricted stock units was $122.8 million at September 30, 2018, which is expected to be recognized as expense over the weighted-average period of 2.9 years.

18



Performance-Based Restricted Stock Units
The Compensation Committee designed an annual equity compensation structure to further align the compensation levels of certain executives to the performance of the Company through the issuance of performance-based restricted stock units. The number of shares of the Company’s common stock issuable upon the vesting of these performance-based restricted stock unit awards is based upon the Company meeting composite revenue and cash flow growth targets determined at the time of their grants. The total amount of compensation expense recognized is based on the number of shares that the Company determines are probable of vesting. The estimate will be made each reporting period and determined by the Company’s actual and projected revenue and cash flow performance and the compensation expense will be recognized over the vesting term of the awards.
The following table summarizes the Company’s issuances of awards under the new compensation award structure:
Grant Date
 
Performance Measures
 
Vesting Term
 
Performance Period
 
# of Shares at Target
 
# of Shares at Maximum
 
Grant Date Fair Value per share
July 2016
 
(a) the Company meeting certain revenue and cash flow targets through December 31, 2018 and (b) the recipient continuing to provide services to the Company through the end of June 2019
 
Three years
 
Fiscal years 2016, 2017 and 2018
 
166,600

 
499,800

 
$
38.67

March 2017
 
(a) the Company meeting certain revenue and cash flow targets through December 31, 2019 and (b) the recipient continuing to provide services to the Company through the end of March 2020
 
Three years
 
Fiscal years 2017, 2018 and 2019
 
185,270

 
555,810

 
$
41.73

February 2018
 
(a) the Company meeting certain combined subscription revenue and unlevered cash flow margin targets for the year ending December 31, 2020 and (b) the recipient continuing to provide services to the Company through the end of February 2021
 
Three years
 
Fiscal year 2020
 
121,764

 
304,410

 
$
40.64

February 2018
 
(a) the Company meeting certain combined subscription revenue and unlevered cash flow margin targets for each of the years ending December 31, 2020, December 31, 2021, and December 31, 2022 and (b) the recipient continuing to provide services to the Company through each respective vest date at the end of February 2020, 2021 and 2022
 
Five years
(1)
Fiscal years 2020, 2021 and 2022
 
411,412

 
1,028,530

 
$
40.64

April 2018
 
(a) the Company meeting certain combined subscription revenue and unlevered cash flow margin targets for the year ending December 31, 2020 and (b) the recipient continuing to provide services to the Company through the beginning of April 2021
 
Three years
 
Fiscal year 2020
 
3,572

 
8,930

 
$
39.54

April 2018
 
(a) the Company meeting certain combined subscription revenue and unlevered cash flow margin targets for each of the years ending December 31, 2020, December 31, 2021, and December 31, 2022 and (b) the recipient continuing to provide services to the Company through each respective vest date at the beginning of April 2020, 2021 and 2022
 
Five years
(1)
Fiscal years 2020, 2021 and 2022
 
53,572

 
133,930

 
$
39.54

(1)
One-third of the total eligible shares shall vest on each of the third, fourth and fifth anniversaries of the grant date. This award is a one-time equity award intended to cover expected grant levels over a three-year period. In exchange, the Compensation Committee does not plan to grant any additional equity awards to recipients of this award until 2021.

19



The Company recognized compensation expense related to all performance-based awards in the aggregate amount of $1.7 million and $3.9 million for the three and nine months ended September 30, 2018, respectively. There was no unrecognized compensation expense related to unvested 2016 and 2017 performance-based restricted stock unit awards at September 30, 2018. Unrecognized compensation expense related to unvested 2018 performance-based restricted stock units was $20.1 million at September 30, 2018, based on the probable performance target at that date, which is expected to be recognized as expense over the weighted average period of 3.6 years.
Employee Stock Purchase Plan
Under the Company’s 2010 Employee Stock Purchase Plan (“ESPP”), eligible employees are granted the right to purchase shares at the lower of 85% of the fair market value of the stock at the time of grant or 85% of the fair market value at the time of exercise. The right to purchase shares is granted twice yearly for six month offering periods in June and December and exercisable on or about the succeeding December and June, respectively, on each year.
Stock-Based Compensation
Stock-based compensation expense related to stock options, restricted stock units, the ESPP and performance-based restricted stock units is included in the following line items in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended months ended September 30, 2018 and 2017 (in thousands): 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Cost of revenue
$
1,082

 
$
1,216

 
$
3,105

 
$
3,629

Sales and marketing
5,927

 
7,988

 
18,718

 
21,534

Research and development
3,212

 
2,641

 
7,937

 
7,140

General and administrative
5,268

 
5,737

 
15,055

 
18,726

Restructuring
42

 

 
6,227

 

Total
$
15,531

 
$
17,582

 
$
51,042

 
$
51,029

10. INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code of 1986, as amended. The Tax Act did not result in any material tax expense during nine months ended September 30, 2018.
The Company’s income tax provision was approximately $0.5 million and $1.6 million with an effective income tax rate of (27.1)% and (5.5)% for the three and nine months ended September 30, 2018, respectively. The Company’s income tax provision was approximately $0.5 million and $1.4 million with an effective income tax rate of (3.5)% and (2.8)% for the three months nine months ended September 30, 2017, respectively. The Company’s effective tax rate differs from the statutory rate primarily due to the change in the valuation allowance on the Company’s deferred tax assets and foreign income taxes.
The income tax provision is related to domestic income, certain foreign income and withholding taxes. The Company does not have a material tax provision in the significant jurisdictions it operates in, such as the United States and United Kingdom, as it has historically generated losses. The Company has recorded a full valuation allowance against the net deferred tax assets and the Company does not currently anticipate recording an income tax benefit related to these deferred tax assets or current year losses. The Company will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent that the financial results of these operations improve and it becomes more likely than not that the deferred tax assets are realizable.

20



The Company is subject to United States federal income tax as well as to income tax in multiple state and foreign jurisdictions, including the United Kingdom. Federal income tax returns of the Company are subject to IRS examination for the 2015 through 2017 tax years. State income tax returns are subject to examination for the 2014 through 2017 tax years. Foreign income tax returns are subject to examination for the 2007 through 2017 tax years. The Company believes it is reasonably possible that within the next twelve months it may resolve certain matters related to the years under examination, which may result in reductions of its unrecognized tax benefits and income tax expense of up to $1.1 million.
At September 30, 2018, the Company was not able to reasonably estimate, and therefore have not recorded, deferred taxes for the Global Intangible Low-Taxed Income (“GILTI”) provisions. The Company has not yet determined its policy election with respect to whether to record deferred taxes for basis differences expected to reverse as a result of the GILTI provisions in future periods or use the period cost method. The Company has, however, included an estimate of the current GILTI impact in its tax provision for 2018.
11. RESTRUCTURING COSTS
In December 2017, as part of the Company’s new strategic plan to focus on recurring revenue growth and increase operating margins, the Company approved a restructuring plan to reduce the headcount of the Company’s global service delivery team, as well as the headcount of some of its sales teams, representing a total workforce reduction of approximately six percent. The restructuring is part of the Company’s renewed focus on recurring, or subscription-based, revenue growth and driving cost reductions to accelerate the growth of its operating margins and free cash flow.
During the three and nine months ended September 30, 2018, the Company continued with strategic plan with the reduction of the professional service and sales headcount, resulting in $0.2 million and $8.9 million of restructuring expense, respectively, which was recorded in “Restructuring” in the accompanying Consolidated Statements of Operations. For the three months ended September 30, 2018, the restructuring expense of $0.2 million consisted primarily of payroll-related costs, such as severance, outplacement costs and continuing healthcare coverage, associated with employee terminations. For the nine months ended September 30, 2018, the restructuring expense consisted primarily of stock-based compensation expense of $6.2 million, and $2.7 million of payroll-related costs. The stock-based compensation expense relates to accelerated vesting for impacted employees. As of September 30, 2018, the Company incurred an aggregate total of $10.5 million of restructuring expense since December 2017, which consisted primarily of $6.2 million of stock-based compensation expense and $4.3 million of payroll related costs.
12. COMMITMENTS AND CONTINGENCIES
Guarantees and Indemnifications
The Company has made guarantees and indemnities under which it may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions, including revenue transactions in the ordinary course of business. The Company is obligated to indemnify its directors and officers to the maximum extent permitted under the laws of the State of Delaware. However, the Company has a directors and officers insurance policy that may reduce its exposure in certain circumstances and may enable it to recover a portion of future amounts that may be payable, if any. The duration of the guarantees and indemnities varies and, in many cases, is indefinite but subject to statutes of limitations. To date, the Company has made no payments related to these guarantees and indemnities. The Company estimates the fair value of its indemnification obligations as insignificant based on this history and the Company’s insurance coverage and therefore has not recorded any liability for these guarantees and indemnities in the accompanying condensed consolidated balance sheets.
Lease Commitments
During the nine months ended September 30, 2018, the Company entered into an operating lease agreement with remaining obligations of approximately $0.5 million in 2018, $6.9 million in 2019, $7.2 million in 2020, $7.5 million in 2021, $7.8 million in 2022 and $8.5 million thereafter.
Litigation
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. If the Company determines that it is probable that a loss has been incurred and the amount is reasonably estimable, the Company will record a liability. The Company has determined that it does not have a potential liability related to any legal proceedings or claims that would individually or in the aggregate materially adversely affect its financial condition or operating results.

21



13. RELATED PARTY TRANSACTIONS
The Cornerstone OnDemand Foundation (the “Foundation”) empowers communities in the United States and internationally by increasing the impact of the non-profit sector through the utilization of human capital management technology including the Company’s products. The Company’s chief executive officer is on the board of directors of the Foundation. The Company does not direct the Foundation’s activities, and accordingly, the Company does not consolidate the Foundation’s statement of activities with its financial results. During the three months ended September 30, 2018 and 2017, the Company provided at no charge certain resources to the Foundation, with approximate values of $0.9 million and $0.9 million, respectively. During the nine months ended September 30, 2018 and 2017, the Company provided at no charge certain resources to the Foundation, with approximate values of $2.8 million and $2.6 million, respectively.
14. SUBSEQUENT EVENTS
During October and November 2018, the Compensation Committee granted restricted stock units covering an aggregate of 420,757 shares of the Company’s common stock which generally vest annually over four years.
In November 2018, the Company entered into a definitive agreement to acquire Grovo Learning, Inc., a leading provider of microlearning content, for approximately $24.0 million in an all-cash transaction. The determination of the final purchase price is subject to certain working capital and other post-closing adjustments. Certain disclosures required for business combinations, including the allocation of purchase price, have been omitted because the initial accounting for the business combination was incomplete as of the filing date of this report. This information will be included in our subsequent Form 10-K.

ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are any statements that look to future events and consist of, among other things, statements regarding our business strategies; anticipated future operating results and operating expenses; our ability to attract new clients to enter into subscriptions for our solutions; our ability to service those clients effectively and induce them to renew and upgrade their deployments of our solutions; our ability to expand our sales organization to address effectively the new industries, our ability to optimize the efficiency of our operations and scalability of our business; geographies and types of organizations we intend to target; our ability to accurately forecast revenue and appropriately plan our expenses; market acceptance of enhancements to our solutions; alternate ways of addressing human capital management needs or new technologies generally by us and our competitors; continued acceptance of SaaS as an effective method for delivering human capital management solutions and other business management applications; the attraction and retention of qualified employees and key personnel; our ability to protect and defend our intellectual property; costs associated with defending intellectual property infringement and other claims; events in the markets for our solutions and alternatives to our solutions, as well as in the United States and global markets generally; future regulatory, judicial and legislative changes in our industry; the timing and amount of capital expenditures and share repurchases; and changes in the competitive environment in our industry and the markets in which we operate. In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as “may,” “believe,” “could,” “anticipate,” “would,” “might,” “plan,” “expect,” and similar expressions or the negative of such terms or other comparable terminology. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth below in Part II, Item 1A, “Risk Factors,” and in our other reports filed with the Securities and Exchange Commission. We assume no obligation to update the forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.
Overview
Cornerstone is a leading global provider of learning and human capital management software, delivered as Software-as-a-Service (“SaaS”). We are one of the world’s largest cloud computing companies with approximately 38.5 million users across 3,428 clients in 192 countries and 43 different languages. We help organizations around the globe recruit, train and manage their employees.

22



Following a strategic review process undertaken by our board of directors during 2017, the board determined that the optimal way to maximize shareholder value is to execute a plan to transform our operations and support that plan with a capital infusion and new strategic partnerships. As a result, we entered into an agreement with Silver Lake, one of the world's leading technology private equity investors, and LinkedIn, under which Silver Lake and LinkedIn invested $300.0 million in Cornerstone in the form of convertible senior notes. In November 2017, we announced our strategic plan with the objective of better positioning us for long-term growth and increasing shareholder value. Our plan is to (i) sharpen our focus on recurring revenue growth; (ii) drive operating margin and free cash flow improvement; (iii) develop new recurring revenue streams, including e-learning content subscriptions; (iv) bolster our leadership team; and (v) strengthen our governance to help us best execute on this strategic transformation.
Our human capital management platform combines the world’s leading unified talent management solutions with state-of-the-art analytics and HR administration solutions to enable organizations to manage the entire employee lifecycle. Our focus on continuous learning and development helps organizations to empower employees to realize their potential and drive success.
We work with clients across all geographies, verticals and market segments. Our clients include multi-national corporations, large domestic and foreign-based enterprises, mid-market companies, public sector organizations, healthcare providers, higher education institutions, non-profit organizations and small businesses. We sell our platform domestically and internationally through both direct and indirect channels, including direct sales teams throughout North and South America, Europe and Asia-Pacific and distributor relationships with payroll companies, human resource consultancies and global system integrators.
Our enterprise human capital management platform is composed of four product suites:
Our Recruiting suite helps organizations to source and attract candidates, assess and select applicants, onboard new hires and manage the entire recruiting process;
Our Learning suite enables clients to manage training and development programs, knowledge sharing and collaboration among employees, track compliance requirements and support career development for employees. Our content offering delivers fresh, modern content, fueling employee curiosity and inspiring growth;
Our Performance suite provides tools to manage goal setting, performance reviews, competency assessments, development plans, continuous feedback, compensation management and succession planning; and
Our HR Administration suite supports employee records administration, organizational management, employee and manager self-service, workforce planning and compliance reporting.
Our clients can supplement the product suites with our state-of-the-art analytics capabilities to make more-informed decisions using data from across the platform for talent mobility, engagement and development so that HR and leadership can focus on strategic initiatives to help their organization succeed.
In addition to our enterprise human capital management platform, we offer PiiQ, formerly known as Cornerstone Growth Edition, which is a cloud-based talent management solution with performance and learning products targeted to organizations with 500 or fewer employees. We currently do not include the number of clients and users of our Cornerstone for Salesforce, PiiQ, and Workpop Inc. products in our client and user count metrics as they are not significant and we believe the client and user count metrics for our human capital management platform give a better indication of our overall performance.
Our Client Success team supports our clients’ ongoing optimization of their talent processes and use of our platform. In addition, our Cornerstone Edge solutions allow our clients and partners to more easily integrate with a growing marketplace of service providers. After the initial purchase of our platform, we continue to market and sell to our existing clients, who may renew their subscriptions, add additional products, broaden the deployment of the platform across their organizations and increase usage of the platform over time.
We generate most of our revenue from the sale of our products pursuant to multi-year client agreements. Client agreements for our human capital management platform typically have terms of three years. Our sales processes are typically competitive, and sales cycles generally vary in duration from two to nine months depending on the size of the potential client. We generally price our human capital management platform based on the number of products purchased and the permitted number of users with access to each product.
We sell our products through our direct sales teams and, to a lesser extent, indirectly through our distributors. We intend to continue to invest in our direct sales and distribution activities to address our market opportunity.

23



We generally recognize revenue from subscriptions ratably over the term of the client agreement and revenue from professional services as the services are performed. In certain instances, our clients request enhancements to the underlying features and functionality of our human capital management platform, and in these instances, revenue from subscriptions is recognized over the remaining term of the agreement once access to the enhanced features is made available to the client. We generally invoice our clients upfront for annual subscription fees for multi-year subscriptions and upfront for professional services. We record amounts invoiced for annual subscription periods that have not occurred or services that have not been performed as deferred revenue on our balance sheet. With the growth in the number of clients, our revenue grew to $134.0 million and $399.6 million for the three and nine months ended September 30, 2018, respectively, from $121.8 million and $350.0 million for the three and nine months ended September 30, 2017, respectively.
We have historically experienced seasonality in terms of when we enter into client agreements. We usually sign a significantly higher percentage of agreements with new clients, as well as renewal agreements with existing clients, in the fourth quarter of each year. In addition, within a given quarter, we typically sign a large portion of these agreements during the last month, and often the last two weeks, of that quarter. We believe this seasonality is driven by several factors, most notably the tendency of procurement departments at our enterprise clients to purchase technology at the end of a quarter or calendar year, possibly in order to use up their available quarterly or annual funding allocations. As the terms of most of our client agreements are full year increments, agreements initially entered into the fourth quarter or last month of any quarter will generally come up for renewal at that same time in subsequent years. This seasonality is reflected to a much lesser extent, and sometimes is not immediately apparent, in our revenue, due to the fact that we recognize subscription revenue over the term of the client agreement, which is generally three years. In addition, this seasonality is reflected in changes in our deferred revenue balance, which generally is impacted by the timing of when we enter into agreements with new clients, invoice new clients, invoice existing clients for annual subscription periods and recognize revenue. We expect this seasonality to continue, which may cause fluctuations in certain of our operating results and financial metrics, and thus limit our ability to predict future results.
We believe the market for human capital management remains large and underpenetrated, providing us with significant growth opportunities. We expect businesses and other organizations to continue to increase their spending on human capital management platforms in order to maximize the productivity of their employees, manage changing workforce demographics and ensure compliance with global regulatory requirements. Historically, many of these software solutions have been human resource applications running on hardware located on organizations’ premises. We have seen many of these organizations increasingly choose SaaS for their human capital management platform and we anticipate that trend will continue.
We have focused on growing our business to pursue what we believe is a significant market opportunity, and we plan to continue to invest in building for growth. As a result, we expect our cost of revenue and operating expenses to increase in future periods. Over time, we expect our sales and marketing expenses to increase, as we continue to expand our direct sales teams, increase our marketing activities and grow our international operations; however, we are focused on optimizing our investment in sales and marketing and expect to obtain operating leverage into future years similar to what we have achieved over the last couple of years. Research and development expenses are expected to increase as we continue to improve the existing functionality for our products. We also believe that we must invest in maintaining a high degree of client service and support that is critical for our continued success. We plan to continue our policy of implementing best practices across our organization, expanding our technical operations and investing in our network infrastructure and service capabilities in order to support continued future growth. While we expect to increase our level of investment in the business, we also expect that these increased levels of spending will drive improved profitability over time, such that we should obtain incremental leverage in categories like general and administrative expenses.
Our quarterly operating results have fluctuated in the past and may continue to fluctuate in the future based on a number of factors, many of which are beyond our control, including those described in the “Risk Factors” section of this Quarterly Report on Form 10-Q. One or more of these factors may cause our operating results to vary widely. As such, we believe that our quarterly results of operations may vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful and should not be relied upon as an indication of future performance.
Metrics
We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.
Revenue. We generally recognize subscription revenue over the contract period, and as a result of our revenue recognition policy and the seasonality of when we enter into new client agreements, revenue from client agreements signed in the current period may not be fully reflected in the current period.
Subscription revenue. Revenue as defined above on a recurring basis.

24



Unlevered free cash flow. We define unlevered free cash flow, a non-GAAP financial measure, as cash provided by operating activities minus capital expenditures and capitalized software costs plus cash paid for interest. We present this metric because it is a liquidity measure that provides useful information to management and investors about the amount of cash generated by our business that can be used for strategic opportunities, including investing in our business and strengthening our balance sheet.
Constant currency results. We present constant currency information, a non-GAAP financial measure, to provide a framework for assessing how our underlying business performed excluding the effect of foreign currency fluctuations. Due to our legal and operating structure, our international revenues are favorably impacted as the U.S. Dollar weakens relative to the British pound and Euro, and unfavorably impacted as the U.S. Dollar strengthens relative to the British pound and Euro. We believe the presentation of results on a constant currency basis in addition to reported results helps improve the ability to understand our performance because they exclude the effects of foreign currency volatility that are not indicative of our core operating results. To present this information, current period results for entities reporting in British pounds and Euros are translated into U.S. Dollars at the prior period exchange rates as opposed to the actual exchange rates in effect for the current period. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not a measure of performance presented in accordance with GAAP.
Number of clients. We believe that our ability to expand our client base is an indicator of our market penetration and the growth of our business as we continue to invest in our direct sales teams and distributors. Our client count includes contracted clients for our enterprise human capital management platform as of the end of the period and excludes clients of our Cornerstone for Salesforce, PiiQ, and Workpop Inc.
Number of users. Our user count includes active users for our enterprise human capital management platform and excludes users of our Cornerstone for Salesforce, PiiQ, and Workpop Inc. User count is no longer relevant in the assessment of our performance and beginning in the first quarter 2019, the we will no longer report user count on a quarterly basis.
Key Components of Our Results of Operations
Sources of Revenue and Revenue Recognition
Our platform is designed to enable organizations to meet the challenges they face in maximizing the productivity of their human capital. We generate revenue from the following sources:
Subscriptions to Our Products and Other Offerings on a Recurring Basis. Clients pay subscription fees for access to our enterprise human capital management platform, other products and support on a recurring basis. Fees are based on a number of factors, including the number of products purchased, which may include e-learning content, and the number of users having access to a product. We generally recognize revenue from subscriptions ratably over the term of the agreements beginning on the date the subscription service is made available to the client. Subscription agreements are typically three years, billed annually in advance, and non-cancelable.
Professional Services and Other. We offer our clients and implementation partners assistance in implementing our products and optimizing their use. Professional services include application configuration, system integration, business process re-engineering, change management and training services. Services are generally billed upfront on a fixed fee basis and to a lesser degree on a time-and-material basis. These services are generally purchased as part of a subscription arrangement and are typically performed within the first several months of the arrangement. Clients may also purchase professional services at any other time. We generally recognize revenue from fixed fee professional services contracts as services are performed based on the proportion performed to date relative to the total expected services to be performed. Revenue associated with time-and-material contracts are recorded as such time-and-materials are incurred.
Our client agreements generally include both subscriptions to access our products and related professional services. Our agreements generally do not contain any cancellation or refund provisions other than in the event of our default.

25



Cost of Revenue
Cost of revenue consists primarily of costs related to hosting our products; personnel and related expenses, including stock-based compensation, for network infrastructure, IT support, delivery of contracted professional services and on-going client support; payments to external service providers contracted to perform implementation services; depreciation of data centers; amortization of capitalized software costs; amortization of developed technology and software license rights; content and licensing fees; and referral fees. In addition, we allocate a portion of overhead, such as rent, IT costs, depreciation and amortization and employee benefits costs, to cost of revenue based on headcount. The costs associated with providing professional services are significantly higher, as a percentage of revenue, than the costs associated with providing access to our products due to the labor costs to provide the consulting services. We expect gross margin to increase over time as we optimize the efficiency of our operations, continue to scale our business and deemphasize the sale of professional services.
Operating Expenses
Our operating expenses are as follows:
Sales and Marketing. Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including salaries, benefits, bonuses, stock-based compensation and commissions; costs of marketing and promotional events, corporate communications, online marketing, product marketing and other brand-building activities; and allocated overhead.
During the third quarter of 2018, we completed certain aspects of our strategic transformation plan to position us for long-term growth. The completion of this transformation phase resulted in the reallocation of certain resources. The primary reallocation resulted in some sales and marketing headcount that were moved to research and development activities to better align the organization with their job functions. During the third quarter and on a go-forward basis, this will have the impact of reducing sales and marketing and increasing research and development, as a percentage of revenue, by approximately 4%. The same impact would be approximately 3% excluding stock based compensation expense.
We intend to continue to invest in sales and marketing strategically to expand our business both domestically and internationally. We expect over time sales and marketing expenses, as a percentage of revenue, to decrease.
Research and Development. Research and development expenses consist primarily of personnel and related expenses for our research and development staff, including salaries, benefits, bonuses and stock-based compensation; the cost of certain third-party service providers; and allocated overhead. Research and development costs, other than software development costs qualifying for capitalization, are expensed as incurred.
As described above, during the third quarter of 2018, we reallocated certain resources from sales and marketing to research and development.
We have focused our research and development efforts on continuously improving our products. We believe that our research and development activities are efficient because we benefit from maintaining a single software code base for each of our products. We expect research and development expenses to increase proportionately with our business.
General and Administrative. General and administrative expenses consist primarily of personnel and related expenses for administrative, legal, finance and human resource staff, including salaries, benefits, bonuses and stock-based compensation; professional fees; insurance premiums; other corporate expenses; and allocated overhead. We expect our general and administrative expenses to increase in absolute dollars but decrease as a percentage of revenue.
Restructuring. Restructuring consists of stock-based compensation, payroll-related costs, such as severance, outplacement costs and continuing healthcare coverage, associated with employee terminations.
Amortization of Certain Acquired Intangible Assets. Amortization of certain acquired intangible assets consists of amortization of acquisition-related intangibles for customer relationships.
Other Income (Expense)
Interest Income. Interest income consists primarily of interest income from investment securities partially offset by amortization of investment premiums. We expect interest income to vary depending on the level of our investments in marketable securities, which include corporate bonds, agency bonds, U.S. treasury securities and commercial paper.
Interest Expense. Interest expense consists primarily of interest expense from our convertible notes, accretion of debt discount and amortization of debt issuance costs.
Other, Net. Other, net consists of income and expense associated with fluctuations in foreign currency exchange rates, fair value adjustments to strategic investments and other non-operating expenses. We expect other income (expense) to vary depending on the movement in foreign currency exchange rates and the related impact on our foreign exchange gain (loss).

26



Income Tax (Provision) Benefit
The income tax provision is related to foreign income, state income and withholding taxes. Given our historical losses, we have not recorded a provision, except for state minimum taxes and withholding taxes, for United States, United Kingdom, New Zealand, Hong Kong and Brazil income taxes as we have recorded a full valuation allowance against the net deferred tax assets for each of these countries. Other foreign subsidiaries and branches provide intercompany services and are compensated on a cost-plus basis, and therefore, have incurred liabilities for foreign income taxes in their respective jurisdictions.
Critical Accounting Policies and Estimates
Information with respect to our critical accounting policies that we believe have the most significant effect on our reported results and require subjective or complex judgments of management are contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 27, 2018.
For information regarding recent changes to our critical accounting policies, refer to Note 1 of Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 1 of Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Results of Operations
The following table sets forth our results of operations for each of the periods indicated (in thousands). The period-to-period comparison of financial results is not necessarily indicative of future results. The adoption of ASC 606 had an inconsequential impact on the comparability of our financial results for the periods ended September 30, 2018 and 2017.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018 *
 
2017
 
2018 *
 
2017
Revenue
$
134,014

 
$
121,796

 
$
399,644

 
$
350,029

Cost of revenue
36,171

 
35,708

 
109,556

 
104,978

Gross profit
97,843

 
86,088

 
290,088

 
245,051

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
53,215

 
60,554

 
172,281

 
179,521

Research and development
19,705

 
16,389

 
52,014

 
44,484

General and administrative
23,128

 
21,249

 
67,214

 
64,866

Restructuring
221

 

 
8,946

 

Total operating expenses
96,269

 
98,192

 
300,455

 
288,871

Income (loss) from operations
1,574

 
(12,104
)
 
(10,367
)
 
(43,820
)
Other income (expense):
 
 
 
 
 
 
 
Interest income
1,659

 
749

 
6,143

 
2,021

Interest expense
(5,335
)
 
(3,373
)
 
(22,826
)
 
(10,015
)
Other, net
177

 
376

 
(2,029
)
 
921

Other income (expense), net
(3,499
)
 
(2,248
)
 
(18,712
)
 
(7,073
)
Loss before income tax provision
(1,925
)
 
(14,352
)
 
(29,079
)
 
(50,893
)
Income tax provision
(522
)
 
(503
)
 
(1,591
)
 
(1,438
)
Net loss
$
(2,447
)
 
$
(14,855
)
 
$
(30,670
)
 
$
(52,331
)

27



The following table sets forth our results of operations as a percentage of total revenue for each of the periods indicated.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018 *
 
2017
 
2018 *
 
2017
Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenue
27.0
 %
 
29.3
 %
 
27.4
 %
 
30.0
 %
Gross profit
73.0
 %
 
70.7
 %
 
72.6
 %
 
70.0
 %
Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
39.7
 %
 
49.7
 %
 
43.1
 %
 
51.3
 %
Research and development
14.7
 %
 
13.5
 %
 
13.0
 %
 
12.7
 %
General and administrative
17.3
 %
 
17.4
 %
 
16.8
 %
 
18.5
 %
Restructuring
0.2
 %
 
 %
 
2.2
 %
 
 %
Total operating expenses
71.8
 %
 
80.6
 %
 
75.2
 %
 
82.5
 %
Income (loss) from operations
1.2
 %
 
(9.9
)%
 
(2.6
)%
 
(12.5
)%
Other income (expense):
 
 
 
 
 
 
 
Interest income
1.2
 %
 
0.6
 %
 
1.5
 %
 
0.6
 %
Interest expense
(4.0
)%
 
(2.8
)%
 
(5.7
)%
 
(2.9
)%
Other, net
0.1
 %
 
0.3
 %
 
(0.5
)%
 
0.3
 %
Loss before income tax provision
(1.4
)%
 
(11.8
)%
 
(7.3
)%
 
(14.5
)%
Income tax provision
(0.4
)%
 
(0.4
)%
 
(0.4
)%
 
(0.4
)%
Net loss
(1.8
)%
 
(12.2
)%
 
(7.7
)%
 
(15.0
)%

*See Note 1 for summary of adjustments.
The following table sets forth our revenue and key metrics that we use to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions:
Metrics 
 
At or For Three Months Ended
September 30,
 
At or For Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Revenue (in thousands)
$
134,014


$
121,796


$
399,644


$
350,029

Subscription revenue (in thousands)
$
118,844

 
$
101,130

 
$
346,749

 
$
290,478

Unlevered free cash flow (in thousands)
$
32,067

 
$
16,075

 
29,789

 
(2,740
)
Number of clients
3,428


3,146


3,428


3,146

Number of users (in millions)
38.5


33.5


38.5


33.5


Revenue increased by $12.2 million, or 10%, for the three months ended September 30, 2018 as compared to the same period in 2017 and increased by $49.6 million, or 14%, for the nine months ended September 30, 2018 as compared to the same period in 2017. Revenue growth on a constant currency basis was 10% for the three months ended September 30, 2018 as compared to the same period in 2017 and 12% for the nine months ended September 30, 2018 as compared to the same period in 2017. The rate of our revenue increase can be impacted by the mix and timing of new client agreements signed, the success of our focus on recurring revenue and reducing our professional services business, fluctuations in foreign exchange rates, as well as the growth rate of our emerging markets.

28



The following table sets forth our sources of revenue for each of the periods indicated (dollars in thousands): 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Subscription revenue
$
118,844

 
$
101,130

 
$
346,749

 
$
290,478

Percentage of subscription revenue to total revenue
88.7
%
 
83.0
%
 
86.8
%
 
83.0
%
Professional services revenue
$
15,170

 
$
20,666

 
$
52,895

 
$
59,551

Percentage of professional services revenue to total revenue
11.3
%
 
17.0
%
 
13.2
%
 
17.0
%
 
$
134,014

 
$
121,796

 
$
399,644

 
$
350,029

Subscription revenue increased by $17.7 million, or 18%, for the three months ended September 30, 2018 as compared to the same period in 2017, and increased by $56.3 million, or 19%, for the nine months ended September 30, 2018 as compared to the same period in 2017. Subscription revenue growth on a constant currency basis was 18% for the three months ended September 30, 2018 as compared to the same period in 2017 and 17% for the nine months ended ended September 30, 2018 as compared to the same period in 2017. The increase was attributable to new business, which includes new clients, upsells, cross-sells and renewals from existing clients.
Professional services revenue decreased by $5.5 million, or 27%, for the three months ended September 30, 2018 as compared to the same period in 2017 and decreased by $6.7 million, or 11%, for the nine months ended September 30, 2018 as compared to the same period in 2017. The decrease of professional services revenue is attributed to the continued execution of the strategic initiative announced in the fourth quarter of 2017, which is to sharpen our focus on recurring revenue growth and migrate much of our implementation services to our global partners.
Revenue by geography is generally based on the address of the customer as defined in our master subscription agreement with each customer. The following table sets forth our revenue by geographic area for each of the periods indicated (dollars in thousands): 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Revenue for United States
$
86,507

 
$
78,341

 
$
253,774

 
$
229,428

Percentage of total revenue for United States
64.6
%
 
64.3
%
 
63.5
%
 
65.5
%
Revenue for all other countries
$
47,507

 
$
43,455

 
$
145,870

 
$
120,601

Percentage of total revenue for all other countries
35.4
%
 
35.7
%
 
36.5
%
 
34.5
%
 
$
134,014

 
$
121,796

 
$
399,644

 
$
350,029


Unlevered free cash flow for the three months ended September 30, 2018 was $32.1 million, resulting in an unlevered cash flow margin of 23.9%, as compared to unlevered free cash flow of $16.1 million and unlevered cash flow margin of 13.2% for the same period in 2017. Unlevered free cash flow for the nine months ended September 30, 2018 was $29.8 million, resulting in an unlevered cash flow margin of 7.5%, as compared to unlevered free cash flow of $(2.7) million and unlevered cash flow margin of (0.8)% for the same period in 2017.
Our number of clients grew 9% at September 30, 2018 compared to September 30, 2017 and our number of users increased 15% at September 30, 2018 compared to September 30, 2017.
Cost of Revenue, Gross Profit and Gross Margin
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(dollars in thousands)
Cost of revenue
$
36,171

 
$
35,708

 
$
109,556

 
$
104,978

Gross profit
$
97,843

 
$
86,088

 
$
290,088

 
$
245,051

Gross margin
73.0
%
 
70.7
%
 
72.6
%
 
70.0
%

29



Cost of revenue increased $0.5 million, or 1%, for the three months ended September 30, 2018 as compared to the same period in 2017. The increase in cost of revenue was primarily due to $1.6 million in increased capitalized software amortization, $1.5 million in increased data center and network infrastructure costs and $1.1 million in increased content costs. These increased costs were partially offset by a $2.0 million decrease in amortization of intangible assets and a $1.3 million decrease in external implementation service costs.
Cost of revenue increased $4.6 million, or 4%, for the nine months ended September 30, 2018 as compared to the same period in 2017. The increase in cost of revenue was primarily due to $4.5 million in increased capitalized software amortization, $3.4 million in increased data center and network infrastructure costs, $3.3 million in increased content costs and $1.3 million in increased third-party implementation costs. These increased costs were partially offset by a $6.4 million decrease in amortization of intangible assets and a $1.4 million decrease in employee-related costs.
The improvement in gross margin was primarily due to a higher mix of subscription revenue, which carries a higher gross margin. Aside from the improvement in gross margin from the higher mix of subscription revenue, we expect gross margin to increase over time as we optimize the efficiency of our operations and continue to scale our business.
Sales and Marketing
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(dollars in thousands)
Sales and marketing
$
53,215

 
$
60,554

 
$
172,281

 
$
179,521

Percent of revenue
39.7
%
 
49.7
%
 
43.1
%
 
51.3
%
Sales and marketing expenses decreased $7.3 million, or 12% for the three months ended September 30, 2018 as compared to the same period in 2017. As a percentage of revenue, sales and marketing expense decreased by approximately ten percentage points, primarily resulting from a combination of increased cost efficiency, reduction in headcount as part of our planned restructuring and leverage realized from changes to our sales commission plans, as we continued our efforts to strategically scale our sales teams and improve their productivity.
Sales and marketing expenses decreased $7.2 million, or 4%, for the nine months ended September 30, 2018 as compared to the same period in 2017. As a percentage of revenue, sales and marketing expense decreased by approximately eight percentage points, primarily resulting from a combination of increased cost efficiency, reduction in headcount as part of our planned restructuring and leverage realized from changes to our sales commission plans, as we continued our efforts to strategically scale our sales teams and improve their productivity.
We assess our investments in new and existing markets strategically and we believe we have gained leverage through our operational excellence initiatives. We expect over time sales and marketing expense, as a percentage of revenue, to continue to decrease as we gain efficiency throughout the various sales teams. Additionally, as described above, during the third quarter of 2018, we reallocated certain resources from sales and marketing to research and development.
Research and Development
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(dollars in thousands)
Research and development
$
19,705

 
$
16,389

 
$
52,014

 
$
44,484

Percent of revenue
14.7
%
 
13.5
%
 
13.0
%
 
12.7
%
Research and development expenses increased by $3.3 million, or 20%, for the three months ended September 30, 2018 as compared to the same period in 2017. The increase was principally due to an increase in research and development headcount.
Research and development expenses increased by $7.5 million, or 17%, for the nine months ended September 30, 2018 as compared to the same period in 2017. The increase was principally due to an increase in research and development headcount.

30



We continue to develop and release new products and new features within existing products and, as a result, we expect research and development expense to increase proportionately with revenue. Additionally, as described above, during the third quarter of 2018, we reallocated certain resources from sales and marketing to research and development.
We capitalize a portion of our software development costs related to the development and enhancements of our products, which are then amortized to cost of revenue. The timing of our capitalizable development and enhancement projects may affect the amount of development costs expensed in any given period. We capitalized $8.4 million and $6.1 million of software development costs and amortized $6.0 million and $4.4 million in the three months ended September 30, 2018 and 2017, respectively and capitalized $23.4 million and $19.3 million of software development costs and amortized $17.0 million and $12.5 million in the nine months ended September 30, 2018 and 2017.
General and Administrative
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(dollars in thousands)
General and administrative
$
23,128

 
$
21,249

 
$
67,214

 
$
64,866

Percent of revenue
17.3
%
 
17.4
%
 
16.8
%
 
18.5
%
General and administrative expenses increased by $1.9 million, or 9%, for the three months ended September 30, 2018 as compared to the same period in 2017. The increase was primarily due to $1.4 million of increased professional and consulting expenses.
General and administrative expenses increased by $2.3 million, or 4%, for the nine months ended September 30, 2018 as compared to the same period in 2017. The increase was primarily due to $2.9 million of increased professional and consulting expenses and $1.1 of increased dues and licenses. This increase was offset by $2.7 million of decreased employee-related costs.
We expect over time our general and administrative expense to increase in absolute dollars but decrease as a percentage of revenue as we continue our cost containment measures.
Restructuring
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Restructuring
$
221

 
$

 
$
8,946

 
$

Percent of revenue
0.2
%
 
%
 
2.2
%
 
%
Restructuring expenses of $0.2 million and $8.9 million were recorded in the three months and nine months ended September 30, 2018, respectively, which consisted primarily of payroll-related costs, such as stock compensation, severance, outplacement costs and continuing healthcare coverage, associated with employee terminations. As of September 30, 2018, the Company incurred an aggregate total of $10.5 million of restructuring expense since December 2017, which consisted primarily of stock-based compensation expense of $6.2 million and payroll related costs of $4.3 million.
Other Income (Expense)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Interest income
$
1,659

 
$
749

 
$
6,143

 
$
2,021

Interest expense
(5,335
)
 
(3,373
)
 
(22,826
)
 
(10,015
)
Other, net
177

 
376

 
(2,029
)
 
921

Total
$
(3,499
)
 
$
(2,248
)
 
$
(18,712
)
 
$
(7,073
)

31



Interest income for the three months and nine months ended September 30, 2018 increased $0.9 million and $4.1 million, respectively, as compared to the same periods in 2017 due to the increase in interest income earned on the increased cash balance in the money market account.
Interest expense for the three months and nine months ended September 30, 2018 increased by $2.0 million and $12.8 million, respectively, as compared to the same periods in 2017 due to an increase in interest expense for our convertible notes. Refer to the section titled “Liquidity and Capital Resources” below for additional information on the convertible notes.
Other, net is primarily comprised of foreign exchange gains and losses related to transactions denominated in foreign currencies and foreign exchange gains and losses related to our intercompany loans and certain cash accounts. Foreign exchange gains and losses for the three months and nine months ended September 30, 2018 and 2017, respectively, were primarily driven by fluctuations in the Euro and U.S. Dollar in relation to the British Pound.
Income Tax Provision
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Income tax provision
$
(522
)
 
$
(503
)
 
$
(1,591
)
 
$
(1,438
)
For the three and nine months ended September 30, 2018, we recorded an income tax provision related to certain foreign and state income taxes.
Liquidity and Capital Resources
At September 30, 2018, our principal sources of liquidity were $136.6 million of cash and cash equivalents, investments in marketable securities of $254.4 million and $97.4 million of accounts receivable. In June 2013, we issued $253 million of 1.5% convertible notes due July 1, 2018 (the “2018 Notes”) and concurrently entered into convertible note hedges and separate warrant transactions. The 2018 Notes matured on July 1, 2018. On July 2, 2018, we repaid the $253.0 million in principal amount of the 2018 Notes, which are no longer outstanding.
In December 2017, we issued $300.0 million principal amount of 5.75% senior convertible notes due July 1, 2021 (the “2021 Notes”) for a purchase price equal to 98% of the principal amount, to certain entities affiliated with Silver Lake and LinkedIn. Holders of the 2021 Notes may convert their 2021 Notes at any time prior to the close of business on the scheduled trading day immediately preceding the maturity date.
In September 2018, we used approximately $18.2 million of cash in connection with our acquisition of Workpop Inc.
In November 2018, we entered into a definitive agreement to acquire Grovo Learning, Inc., a leading provider of microlearning content, for approximately $24.0 million in an all-cash transaction. The determination of the final purchase price is subject to certain working capital and other post-closing adjustments.
We intend to use our cash for general corporate purposes, potential future acquisitions or other transactions. Depending on certain growth opportunities, we may choose to accelerate investments in sales and marketing, research and development, technology and services, which may require the use of proceeds for such additional expansion and expenditures. Based on our current level of operations and anticipated growth, we believe our future cash flows from operating activities and existing cash and cash equivalents will provide adequate funds for our ongoing operations and general corporate purposes for at least the next twelve months. Our future capital requirements will depend on many factors, including our rate of revenue growth and collections, the level of our sales and marketing efforts, the timing and extent of spending to support product development efforts and expansion into new territories, the timing of introductions of new services and enhancements to existing services, the timing of general and administrative expenses as we grow our administrative infrastructure and the continuing market acceptance of our products. To the extent that existing cash and cash from operations are not sufficient to fund our future activities, we may need to raise additional funds. In addition, we may enter into agreements or letters of intent with respect to potential investments in, or acquisitions of, complementary businesses, services or technologies in the future, which could also require us to seek additional financing or utilize our cash resources.

32



The following table sets forth a summary of our cash flows for the periods indicated (in thousands):
 
 
Nine Months Ended
September 30,
 
2018
 
2017
Net cash provided by operating activities
$
45,265

 
$
15,927

Net cash used in investing activities
(37,123
)
 
(34,046
)
Net cash (used in) provided by financing activities
(264,429
)
 
9,722

Our cash flows from operating activities are significantly influenced by our growth, ability to maintain our contractual billing and collection terms, and our investments in headcount and infrastructure to support anticipated growth. Given the seasonality and continued growth of our business, our cash flows from operations will vary from period to period.
Cash provided by operating activities was $45.3 million for the nine months ended September 30, 2018 compared to $15.9 million for the nine months ended September 30, 2017. The increase in operating cash flow was primarily due to improved profitability, improved collections and other working capital changes in 2018 when compared to 2017.
Our primary investing activities have consisted of investments, capital expenditures to develop our capitalized software as well as to purchase software, computer equipment, leasehold improvements and furniture and fixtures in support of expanding our infrastructure and workforce.
Cash used in investing activities was $37.1 million for the nine months ended September 30, 2018, compared to $34.0 million for the nine months ended September 30, 2017. The increase in cash used in investing activities was primarily due to the acquisition of Workpop Inc., which is partially offset by an increase in the maturities of investments.
Cash used in financing activities was $264.4 million for the nine months ended September 30, 2018, compared to cash provided by financing activities of $9.7 million for the nine months ended September 30, 2017. The decrease in financing cash flows was primarily due to the repayment of the 2018 Notes.
Share Repurchase Program
In November 2017, our board of directors authorized a $100.0 million share repurchase program of our common stock. We may repurchase our common stock for cash in the open market in accordance with applicable securities laws. The timing and amount of any stock repurchase will depend on share price, corporate and regulatory requirements, economic and market conditions, and other factors. The repurchase authorization will expire in November 2019.
The following is a summary of our stock repurchases under our $100.0 million share repurchase program as of November 2, 2018 (in thousands, except per share information):
Period
 
# of Shares Repurchased
 
Average Price per Share
 
Total Expenditures
 
Amount Remaining Under Program
November 8, 2017 - December 31, 2017
 
635

 
$
35.55

 
$
22,599

 
 
January 1, 2018 - March 31, 2018
 
423

 
$
37.84

 
16,024

 
 
April 1, 2018 - June 30, 2018
 
444

 
$
46.66

 
20,718

 
 
July 1, 2018 - September 30, 2018
 
300