10-Q 1 hubs-10q_20190331.htm 10-Q hubs-10q_20190331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED March 31, 2019

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 001-36680

 

HubSpot, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-2632791

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

25 First Street

Cambridge, Massachusetts, 02141

(Address of principal executive offices)

(888) 482-7768

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES      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      NO  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

 

  

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  

There were 42,103,120 shares of the registrant’s Common Stock issued and outstanding as of May 1, 2019.

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

HUBS

 

New York Stock Exchange

 

 

 

 


 

HUBSPOT, INC.

Table of Contents

 

Part I — Financial Information

 

 

 

 

Item 1.

 

Unaudited Consolidated Financial Statements:

 

 

 

Unaudited Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

5

 

 

Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018

6

 

 

Unaudited Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018

7

 

 

Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018

8

 

 

Notes to Unaudited Consolidated Financial Statements

9

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

29

Item 4.

 

Controls and Procedures

30

 

Part II — Other Information

 

 

 

 

Item 1.

 

Legal Proceedings

31

Item 1A.

 

Risk Factors

31

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 3.

 

Default Upon Senior Securities

51

Item 4.

 

Mine Safety Disclosures

51

Item 5.

 

Other Information

51

Item 6.

 

Exhibits

52

Signatures

 

 

 

EX-31.1

 

CERTIFICATION OF THE CEO PURSUANT TO SECTION 302

 

EX-31.2

 

CERTIFICATION OF THE CFO PURSUANT TO SECTION 302

 

EX-32.1

 

CERTIFICATION OF THE CEO AND CFO PURSUANT TO SECTION 906

 

 

 

 

 


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and these statements involve substantial risks and uncertainties. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q are forward-looking statements.  Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

 

our future financial performance, including our expectations regarding our revenue, cost of revenue, gross margin and operating expenses;

 

maintaining and expanding our customer base and increasing our average subscription revenue per customer;

 

the impact of competition in our industry and innovation by our competitors;

 

our anticipated growth and expectations regarding our ability to manage our future growth;

 

our anticipated areas of investments, including sales and marketing, research and development, customer service and support, data center infrastructure and service capabilities, and expectations relating to such investments;

 

our predictions about industry and market trends;

 

our ability to anticipate and address the evolution of technology and the technological needs of our customers, to roll-out upgrades to our existing software platform and to develop new and enhanced applications to meet the needs of our customers;

 

our ability to maintain our brand and inbound marketing, selling and servicing thought leadership position;

 

the impact of our corporate culture and our ability to attract, hire and retain necessary qualified employees to expand our operations;

 

the anticipated effect on our business of litigation to which we are or may become a party;

 

our ability to successfully acquire and integrate companies and assets;

 

the U.S. federal tax consequences due to dividends received as part of the move to a territorial tax system for foreign subsidiary earnings;

 

our plans regarding declaring or paying cash dividends in the foreseeable future; and

 

our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

3


 

In this Quarterly Report on Form 10-Q, the terms “HubSpot,” “we,” “us,” and “our” refer to HubSpot, Inc. and its subsidiaries, unless the context indicates otherwise.

4


 

PART I — Financial Information

 

 

Item 1.

Financial Statements

HubSpot, Inc.

Unaudited Consolidated Balance Sheets

(in thousands)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

285,126

 

 

$

111,489

 

Short-term investments

 

 

683,994

 

 

 

480,761

 

Accounts receivable — net of allowance for doubtful accounts of $1,464 and $1,317

   at March 31, 2019 and December 31, 2018, respectively

 

 

69,249

 

 

 

77,100

 

Deferred commission expense

 

 

26,370

 

 

 

23,664

 

Restricted cash

 

 

5,569

 

 

 

5,175

 

Prepaid expenses and other current assets

 

 

13,143

 

 

 

14,229

 

Total current assets

 

 

1,083,451

 

 

 

712,418

 

Long-term investments

 

 

14,548

 

 

 

11,450

 

Property and equipment, net

 

 

54,995

 

 

 

52,468

 

Capitalized software development costs, net

 

 

13,365

 

 

 

12,746

 

Right-of-use assets

 

 

159,096

 

 

 

 

Deferred commission expense, net of current portion

 

 

18,535

 

 

 

18,114

 

Other assets

 

 

7,066

 

 

 

6,888

 

Intangible assets, net

 

 

4,119

 

 

 

4,919

 

Goodwill

 

 

14,950

 

 

 

14,950

 

Total assets

 

$

1,370,125

 

 

$

833,953

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

14,859

 

 

$

7,810

 

Accrued compensation costs

 

 

21,360

 

 

 

23,589

 

Accrued expenses and other current liabilities

 

 

25,284

 

 

 

22,305

 

Lease liabilities

 

 

15,928

 

 

 

 

Deferred revenue

 

 

191,193

 

 

 

183,305

 

Total current liabilities

 

 

268,624

 

 

 

237,009

 

Lease liabilities, net of current portion

 

 

171,200

 

 

 

 

Deferred rent, net of current portion

 

 

 

 

 

26,445

 

Deferred revenue, net of current portion

 

 

2,263

 

 

 

2,179

 

Other long-term liabilities

 

 

4,993

 

 

 

4,897

 

Convertible senior notes

 

 

324,042

 

 

 

318,782

 

Total liabilities

 

 

771,122

 

 

 

589,312

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock

 

 

43

 

 

 

40

 

Additional paid-in capital

 

 

955,045

 

 

 

589,708

 

Accumulated other comprehensive loss

 

 

(601

)

 

 

(723

)

Accumulated deficit

 

 

(355,484

)

 

 

(344,384

)

Total stockholders’ equity

 

 

599,003

 

 

 

244,641

 

Total liabilities and stockholders’ equity

 

$

1,370,125

 

 

$

833,953

 

 

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

5


 

HubSpot, Inc.

Unaudited Consolidated Statements of Operations

(in thousands, except per share data)

 

 

For the Three Months Ended March 31,

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

Subscription

$

144,226

 

 

$

108,602

 

Professional services and other

 

7,572

 

 

 

5,954

 

Total revenue

 

151,798

 

 

 

114,556

 

Cost of revenues:

 

 

 

 

 

 

 

Subscription

 

21,301

 

 

 

15,235

 

Professional services and other

 

8,277

 

 

 

7,142

 

Total cost of revenues

 

29,578

 

 

 

22,377

 

Gross profit

 

122,220

 

 

 

92,179

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

35,177

 

 

 

26,352

 

Sales and marketing

 

74,905

 

 

 

59,910

 

General and administrative

 

21,174

 

 

 

17,241

 

Total operating expenses

 

131,256

 

 

 

103,503

 

Loss from operations

 

(9,036

)

 

 

(11,324

)

Other expense:

 

 

 

 

 

 

 

Interest income

 

4,174

 

 

 

1,824

 

Interest expense

 

(5,513

)

 

 

(5,174

)

Other expense

 

(12

)

 

 

(283

)

Total other expense

 

(1,351

)

 

 

(3,633

)

Loss before income tax expense

 

(10,387

)

 

 

(14,957

)

Income tax expense

 

(713

)

 

 

(491

)

Net loss

$

(11,100

)

 

$

(15,448

)

Net loss per share, basic and diluted

$

(0.27

)

 

$

(0.41

)

Weighted average common shares used in computing basic

   and diluted net loss per share:

 

40,568

 

 

 

37,832

 

 

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

6


 

HubSpot, Inc.

Unaudited Consolidated Statements of Comprehensive Loss

(in thousands)

 

 

For the Three Months Ended March 31,

 

 

2019

 

 

2018

 

Net loss

$

(11,100

)

 

$

(15,448

)

Other comprehensive loss:

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(304

)

 

 

298

 

Changes in unrealized gain (loss) on investments, net of income taxes of $113 thousand for the three months ended March 31, 2019 and $0 for the three months ended March 31, 2018, respectively

 

426

 

 

 

(379

)

Comprehensive loss

$

(10,978

)

 

$

(15,529

)

 

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

7


 

HubSpot, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(11,100

)

 

$

(15,448

)

Adjustments to reconcile net loss to net cash and cash equivalents provided

   by operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,973

 

 

 

5,110

 

Stock-based compensation

 

 

21,205

 

 

 

16,046

 

Benefit for deferred income taxes

 

 

(28

)

 

 

 

Amortization of debt discount and issuance costs

 

 

5,260

 

 

 

4,908

 

Accretion of bond discount

 

 

(2,751

)

 

 

(1,164

)

Noncash lease expense

 

 

 

 

 

794

 

Unrealized currency translation

 

 

(281

)

 

 

36

 

Changes in assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

7,758

 

 

 

6,863

 

Prepaid expenses and other assets

 

 

886

 

 

 

1,880

 

Deferred commission expense

 

 

(3,334

)

 

 

(5,068

)

Right-of-use assets

 

 

5,505

 

 

 

 

Accounts payable

 

 

4,911

 

 

 

166

 

Accrued expenses and other liabilities

 

 

(2,071

)

 

 

1,674

 

Lease liabilities

 

 

(4,110

)

 

 

 

Deferred rent

 

 

 

 

 

(48

)

Deferred revenue

 

 

8,893

 

 

 

10,973

 

Net cash and cash equivalents provided by operating activities

 

 

37,716

 

 

 

26,722

 

Investing Activities:

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(386,501

)

 

 

(210,886

)

Maturities of investments

 

 

183,460

 

 

 

256,250

 

Purchases of property and equipment

 

 

(4,265

)

 

 

(6,239

)

Capitalization of software development costs

 

 

(2,821

)

 

 

(2,616

)

Purchases of strategic investments

 

 

 

 

 

(250

)

Net cash and cash equivalents (used in) provided by investing activities

 

 

(210,127

)

 

 

36,259

 

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from common stock offering, net of offering costs paid of $256

 

 

342,739

 

 

 

 

Employee taxes paid related to the net share settlement of stock-based awards

 

 

(1,084

)

 

 

(2,344

)

Proceeds related to the issuance of common stock under stock plans

 

 

5,690

 

 

 

6,113

 

Repayments of finance lease obligations

 

 

(118

)

 

 

(212

)

Net cash and cash equivalents provided by financing activities

 

 

347,227

 

 

 

3,557

 

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

 

 

(784

)

 

 

677

 

Net increase in cash, cash equivalents and restricted cash

 

 

174,032

 

 

 

67,215

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

117,114

 

 

 

92,784

 

Cash, cash equivalents and restricted cash, end of period

 

$

291,146

 

 

$

159,999

 

Supplemental cash flow disclosure:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

 

$

15

 

Cash paid for income taxes

 

$

1,027

 

 

$

45

 

Right of use assets obtained in exchange for operating lease liabilities

 

$

12,410

 

 

$

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Common stock offering costs, incurred but not yet paid

 

$

109

 

 

$

 

Capital expenditures incurred but not yet paid

 

$

2,802

 

 

$

1,382

 

Asset retirement obligations

 

$

 

 

$

101

 

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

8


 

HubSpot, Inc.

Notes to Unaudited Consolidated Financial Statements

 

 

1. Organization and Operations

HubSpot, Inc. (the “Company”) provides a cloud-based inbound marketing, sales and customer service platform, which we refer to in this document as our Growth Platform, that enables businesses to grow better. Our Growth Platform, comprised of Marketing Hub, Sales Hub, Service Hub, and a free customer relationship management, or CRM system, features integrated applications and tools that enable businesses to create a cohesive and adaptable customer experience throughout the customer lifecycle.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) applicable to interim periods, under the rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of management, the Company has prepared the accompanying unaudited consolidated financial statements on a basis substantially consistent with the audited consolidated financial statements of the Company as of and for the year ended December 31, 2018, and these consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation.   

The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2019. The year-end balance sheet data was derived from audited financial statements, but this Form 10-Q does not include all disclosures required under GAAP. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted under the rules and regulations of the SEC.

These interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 12, 2019. There have been no changes in the Company’s significant accounting policies from those that were disclosed in the Company’s Annual Report on Form 10-K that have had a material impact on our consolidated financial statements and related notes, except the adoption of updated guidance related to accounting for leases as described within Note 2 of these consolidated financial statements.

On February 19, 2019, the Company closed a common stock offering whereby 2.2 million shares of common stock were sold. The Company received aggregate proceeds of approximately $343.0 million from the offering, net of underwriters’ discounts and commissions, but before deduction of offering expenses of approximately $0.4 million.

Recent Accounting Pronouncements

Recent accounting standards not included below are not expected to have a material impact on our consolidated financial position and results of operations.

In June 2018, the Financial Accounting Standards Board (“FASB”) issued guidance for stock-based compensation to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance was adopted on January 1, 2019 and did not have a material impact on the consolidated financial statements.

In January 2017, the FASB issued guidance simplifying the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. Under current guidance, Step 2 of the goodwill impairment test requires entities to calculate the implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair value is recognized as goodwill impairment. Under the new standard, goodwill impairment is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the reporting unit’s fair value. The new standard is effective beginning in January 2020, with early adoption permitted. The Company does not believe the adoption of this guidance will have a material impact on the consolidated financial statements.

In June 2016, the FASB issued guidance that introduces a new methodology for accounting for credit losses on financial instruments. The guidance establishes a new forward-looking "expected loss model" that requires entities to estimate current expected credit losses on accounts receivable and financial instruments by using all practical and relevant information. The guidance will be effective for the Company on January 1, 2020. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.

9


 

In February 2016, the FASB issued guidance related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use assets and lease liabilities on the balance sheet, while maintaining consistency with historical accounting for the recognition of expense on their income statements. Most prominent among the changes in the guidance is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases. Additional disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.  The Company adopted the updated guidance as of January 1, 2019 using a modified retrospective transition method with a cumulative-effect adjustment as of the adoption date, as permitted by the guidance. Comparative periods are not adjusted.  See Note 2 of these consolidated financial statements for further details.

 

 

2. Leases

 

Adoption of Updated Leasing Guidance

 

On January 1, 2019, the Company adopted the new lease guidance using a modified retrospective transition method applied to those leases which were not completed as of January 1, 2019. Results for reporting periods beginning after December 31, 2018 are presented under the new guidance, while prior period comparative amounts are not adjusted and continue to be reported in accordance with historical guidance.  The Company applied the new standard using the package of practical expedients permitted under the transition guidance where the Company:

 

 

did not reassess whether any expired or existing contracts contain a lease;

 

did not reassess the classification of existing leases; and

 

did not reassess initial direct costs for any existing leases.

 

In addition, the Company elected the hindsight practical expedient to determine the lease term for existing leases.

 

The resulting impact, as of the adoption date, to the consolidated balance sheet of applying the new guidance in 2019 versus the prior guidance was an increase to right-of-use assets of $152.2 million, a decrease to other assets of $0.3 million, an increase to total assets of $151.9 million, an increase to short-term lease liabilities of $14.1 million, a decrease to accrued expenses and other current liabilities of $0.5 million, an increase to total current liabilities of $13.5 million, an increase to long-term lease liabilities of $164.8 million, a decrease to deferred rent, net of current portion of $26.4 million and an increase to total liabilities of $151.9 million. There was no impact to stockholders’ equity or the consolidated statements of operations as a result of adopting the new guidance.  There was no impact to total operating or financing cash flows of applying the new guidance in 2019 versus the prior guidance other than renaming or adding line items to the statements of cash flows to conform to the accounting for, and presentation of, the new standard.

 

The Company determines if an arrangement contains a lease at inception and does not separate lease and non-lease components of an arrangement determined to contain a lease. Operating and finance leases with a duration of less than 12 months are excluded from right-of-use-assets and lease liabilities and related expense is recorded as incurred.

The Company leases its office facilities under non-cancelable operating leases that expire at various dates through May 2031. Certain leases contain optional termination dates. The table below only considers lease obligations through the optional termination dates, as the Company is not reasonably certain to extend lease agreements beyond those dates.

The following table provides a summary of lease assets and liabilities as of March 31, 2019:

 

10


 

Leases

 

Balance sheet classification

 

Amount

(in thousands)

 

Assets:

 

 

 

 

 

 

Operating lease assets

 

Right-of-use assets

 

$

159,096

 

Finance lease assets

 

Fixed assets

 

 

229

 

Total leased assets

 

 

 

$

159,325

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Current

 

 

 

 

 

 

Operating

 

Lease liabilities

 

$

15,928

 

Finance

 

Accrued expenses and other current liabilities

 

 

194

 

Noncurrent

 

 

 

 

 

 

Operating

 

Lease liabilities, net of current portion

 

 

171,200

 

Total lease liabilities

 

 

 

$

187,322

 

 

Operating lease costs were $6.8 million for the three months ended March 31, 2019, net of $0.6 million of operating sublease income related to certain office facilities subleased to third parties. Finance lease costs consisted of $0.1 million related to the amortization finance lease assets and $0 of interest expense for the three months ended March 31, 2019.

 

 

The following table provides a reconciliation between non-cancelable lease commitments and lease liabilities as of March 31, 2019:

 

 

 

Operating leases

 

 

Finance Leases

 

Lease commitments (Note 10)

 

$

346,241

 

 

$

208

 

Less: Legally binding minimum lease payments for

   leases signed but not yet commenced

 

 

(104,259

)

 

 

 

Less: Present value discount

 

 

(54,854

)

 

 

 

Less: Portion representing interest

 

 

 

 

 

(14

)

Total lease liabilities

 

$

187,128

 

 

$

194

 

 

Lease Term and Discount Rate

 

The Company uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of operating lease payments. To determine the estimated incremental borrowing rate, the Company uses publicly available credit ratings for peer companies. The Company estimates the incremental borrowing rate using yields for maturities that are in line with the duration of the lease payments.

 

The following table provides weighted average remaining lease terms and weighted average discount rate for operating and finance leases as of March 31, 2019:

 

Weighted-average remaining lease term:

 

 

Operating leases

 

9.2 years

Finance leases

 

0.7 years

Weighted-average discount rate:

 

 

Operating leases

 

5.8%

Finance leases

 

3.8%

Other Information

Cash payments related to our operating lease liabilities were $5.6 million for the three months ended March 31, 2019. Cash payments related to our financing lease liabilities were $0.1 million for the three months ended March 31, 2019.

 

 

 

 

 

 

11


 

3. Revenues

 

Disaggregation of Revenue

 

The Company provides disaggregation of revenue based on geographic region (Note 14) and based on the subscription versus professional services and other classification on the consolidated statements of operations as it believes these best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

Deferred Revenue, Deferred Commission Expense, and Accrued Expenses and Other Current Liabilities

 

Amounts that have been invoiced are recorded in accounts receivable and deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. Deferred revenue represents amounts billed for which revenue has not yet been recognized. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current deferred revenue, and the remaining portion is recorded as long-term deferred revenue.  Deferred revenue during the three months ended March 31, 2019 increased by $8.0 million resulting from $159.8 million of additional invoicing and was offset by revenue recognized of $151.8 million during the same period. $94.4 million of revenue was recognized during the three month period ended March 31, 2019 that was included in deferred revenue at the beginning of the period. $134.4 million of revenue is expected to be recognized from remaining performance obligations for contracts with original performance obligations that exceed one year.  The Company expects to recognize revenue on approximately 94% of these remaining performance obligations over the next 24 months, with the balance recognized thereafter.  

 

Additional contract liabilities of $1.3 million and $1.6 million were included in accrued expenses and other current liabilities on the consolidated balance sheet as of March 31, 2019 and December 31, 2018.

The incremental direct costs of obtaining a contract, which primarily consist of sales commissions paid for new subscription contracts, are deferred and amortized on a straight-line basis over a period of approximately one to three years.  The one to three-year period has been determined by taking into consideration the type of product sold, the commitment term of the customer contract, the nature of the Company’s technology development life-cycle, and an estimated customer relationship period.  Sales commissions for upgrade contracts are deferred and amortized on a straight-line basis over the remaining estimated customer relationship period of the related customer.  Deferred commission expense that will be recorded as expense during the succeeding 12-month period is recorded as current deferred commission expense, and the remaining portion is recorded as long-term deferred commission expense. Deferred commission expense during the three months ended March 31, 2019 increased by $3.1 million as a result of deferring incremental costs of obtaining a contract of $9.9 million and was offset by amortization of $6.8 million during the same period.

 

4. Net Loss per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, options to purchase common stock, restricted stock units (“RSUs”), Employee Stock Purchase Plan (“ESPP”), common stock warrants, and the Conversion Option of the 2022 Notes are considered to be potential common stock equivalents.

A reconciliation of the denominator used in the calculation of basic and diluted net loss per share is as follows:

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

 

2018

 

Net loss

$

(11,100

)

 

$

(15,448

)

Weighted-average common shares

   outstanding — basic

 

40,568

 

 

 

37,832

 

Dilutive effect of share equivalents resulting

   from stock options, RSUs, ESPP,

   common stock warrants and the Conversion

   Option of the 2022 Notes

 

 

 

 

 

Weighted-average common shares,

   outstanding — diluted

 

40,568

 

 

 

37,832

 

Net loss per share, basic and diluted

$

(0.27

)

 

$

(0.41

)

 

Additionally, since the Company incurred net losses for each of the periods presented, diluted net loss per share is the same as basic net loss per share. The Company’s outstanding stock options, RSUs, ESPP, common stock warrants, and Conversion Option of

12


 

the 2022 Notes were not included in the calculation of diluted net loss per share as the effect would be anti-dilutive. The following table contains all potentially dilutive common stock equivalents.

 

 

 

As of March 31,

 

 

 

 

2019

 

 

 

2018

 

 

 

(in thousands)

 

Options to purchase common shares

 

 

1,734

 

 

 

2,142

 

RSUs

 

 

1,911

 

 

 

2,284

 

Conversion option of the 2022 Notes

 

 

1,696

 

 

 

383

 

Common stock warrants

 

 

1,134

 

 

 

 

ESPP

 

 

8

 

 

 

8

 

 

The Company expects to settle the principal amount of the 2022 Notes (Note 9) in cash, and therefore, the Company uses the treasury stock method for calculating any potential dilutive effect of the Conversion Option on diluted net income per share, if applicable. The Conversion Option will have a dilutive impact on net income per share of common stock when the average market price of the Company’s common stock for a given period exceeds the conversion price of the 2022 Notes of $94.77 per share. Because the last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the calendar quarter ended March 31, 2019 was equal to or greater than 130% of the applicable conversion price on each applicable trading day, the 2022 Notes are convertible at the option of the holders thereof during the calendar quarter ending June 30, 2019. As of May 3, 2019, no holders have converted or indicated their intention to convert the 2022 Notes.

 

5. Fair Value of Financial Instruments

The Company measures certain financial assets at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 — Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

The following table details the fair value measurements within the fair value hierarchy of the Company’s financial assets and liabilities at March 31, 2019 and December 31, 2018:

 

 

 

March 31, 2019

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

Cash equivalents and investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

2,809

 

 

$

 

 

$

 

 

$

2,809

 

Commercial paper

 

 

 

 

 

6,801

 

 

 

 

 

 

6,801

 

Corporate bonds

 

 

 

 

 

61,191

 

 

 

 

 

 

61,191

 

U.S. Treasury securities

 

 

 

 

 

785,382

 

 

 

 

 

 

785,382

 

Restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

 

 

 

6,020

 

 

 

 

 

 

6,020

 

Total

 

$

2,809

 

 

$

859,394

 

 

$

 

 

$

862,203

 

13


 

 

 

 

December 31, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

Cash equivalents and investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

1,579

 

 

$

 

 

$

 

 

$

1,579

 

Commercial paper

 

 

 

 

 

8,242

 

 

 

 

 

 

8,242

 

Corporate bonds

 

 

 

 

 

70,728

 

 

 

 

 

 

70,728

 

U.S. Treasury securities

 

 

 

 

 

413,241

 

 

 

 

 

 

413,241

 

Restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

 

 

 

5,625

 

 

 

 

 

 

5,625

 

Total

 

$

1,579

 

 

$

497,836

 

 

$

 

 

$

499,415

 

 

The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. The fair value of the Company’s investments in certain money market funds is their face value and such instruments are classified as Level 1 and are included in cash and cash equivalents on the consolidated balance sheets. At March 31, 2019 and December 31, 2018, our Level 2 securities were priced by pricing vendors. These pricing vendors utilize the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs like market transactions involving identical or comparable securities.

 

As of March 31, 2019 the fair value of the 2022 Notes was $711.5 million.  The fair value was determined based on the quoted price of the 2022 Notes in an inactive market on the last trading day of the reporting period and has been classified as

Level 2 within the fair value hierarchy.

 

For certain other financial instruments, including accounts receivable, accounts payable, capital leases and other current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these balances.

 

Strategic investments consist of non-controlling equity investments in privately held companies. The Company elected the measurement alternative for these investments without readily determinable fair values and for which the Company does not have the ability to exercise significant influence. These investments are accounted for under the cost method of accounting. Under the cost method of accounting, the non-marketable equity securities are carried at cost less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer, which is recorded within the statement of operations. The Company holds $4.0 million of strategic investments without readily determinable fair values at March 31, 2019 and December 31, 2018. These investments are included in other assets on the consolidated balance sheets. There have been no adjustments to the carrying value of strategic investments resulting from impairments or observable price changes.

The following tables summarize the composition of our short- and long-term investments at March 31, 2019 and December 31, 2018.

 

 

 

March 31, 2019

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Aggregate

Fair Value

 

 

 

(in thousands)

 

Commercial paper

 

$

6,803

 

 

$

 

 

$

(2

)

 

$

6,801

 

Corporate bonds

 

 

61,252

 

 

 

14

 

 

 

(75

)

 

 

61,191

 

U.S. Treasury securities

 

 

630,276

 

 

 

292

 

 

 

(18

)

 

 

630,550

 

Total

 

$

698,331

 

 

$

306

 

 

$

(95

)

 

$

698,542

 

 

 

 

December 31, 2018

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Aggregate

Fair Value

 

 

 

(in thousands)

 

Commercial paper

 

$

8,256

 

 

$

 

 

$

(14

)

 

$

8,242

 

Corporate bonds

 

 

70,958

 

 

 

3

 

 

 

(233

)

 

 

70,728

 

U.S. Treasury securities

 

 

413,323

 

 

 

56

 

 

 

(138

)

 

 

413,241

 

Total

 

$

492,537

 

 

$

59

 

 

$

(385

)

 

$

492,211

 

 

14


 

For all of our securities for which the amortized cost basis was greater than the fair value at March 31, 2019, the Company has concluded that there is no plan to sell the security nor is it more likely than not that the Company would be required to sell the security before its anticipated recovery. In making the determination as to whether the unrealized loss is other-than-temporary, the Company considered the length of time and extent the investment has been in an unrealized loss position, the financial condition and near-term prospects of the issuers, the issuers’ credit rating and the time to maturity.

Contractual Maturities

The contractual maturities of short-term and long-term investments held at March 31, 2019 and December 31, 2018 are as follows:

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

Amortized

Cost Basis

 

 

Aggregate

Fair Value

 

 

Amortized

Cost Basis

 

 

Aggregate

Fair Value

 

 

 

(in thousands)

 

 

(in thousands)

 

Due within one year

 

$

683,783

 

 

$

683,994

 

 

$

481,071

 

 

$

480,761

 

Due after 1 year through 2 years

 

 

14,548

 

 

 

14,548

 

 

 

11,466

 

 

 

11,450

 

Total

 

$

698,331

 

 

$

698,542

 

 

$

492,537

 

 

$

492,211

 

 

 

6. Restricted cash

 

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows for the three months ended March 31, 2019 and 2018.

 

 

 

March 31, 2019

 

 

March 31, 2018

 

 

December 31, 2018

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

285,126

 

 

$

154,031

 

 

$

111,489

 

Restricted cash

 

 

5,569

 

 

 

5,968

 

 

 

5,175

 

Restricted cash, included in other assets

 

 

451

 

 

 

 

 

 

450

 

Total cash, cash equivalents, and restricted cash

 

$

291,146

 

 

$

159,999

 

 

$

117,114

 

 

Restricted cash is comprised of certificates of deposit related to landlord guarantees for our leased facilities. These restricted cash balances have been excluded from our cash and cash equivalents balance on our consolidated balance sheets.

 

 

7. Property and Equipment, Net

Property and equipment, net consists of the following:

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

(in thousands)

 

Computer equipment and purchased software

 

$

8,448

 

 

$

8,163

 

Employee computer equipment

 

 

9,727

 

 

 

8,972

 

Furniture and fixtures

 

 

13,162

 

 

 

13,019

 

Office equipment

 

 

2,549

 

 

 

2,551

 

Leasehold improvements

 

 

45,773

 

 

 

42,894

 

Equipment under capital lease

 

 

3,450

 

 

 

3,450

 

Internal-use software

 

 

5,807

 

 

 

5,363

 

Construction in progress

 

 

3,953

 

 

 

2,498

 

Total property and equipment

 

 

92,869

 

 

 

86,910

 

Less accumulated depreciation and amortization

 

 

(37,874

)

 

 

(34,442

)

Property and equipment, net

 

$

54,995

 

 

$

52,468

 

 

Depreciation and amortization expense on property and equipment was $3.7 million for the three months ended March 31 2019 and $3.1 million for the three months ended March 31, 2018.

 

15


 

 

8. Capitalized Software Development Costs

Capitalized software development costs, exclusive of those recorded within property and equipment, consisted of the following:

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

(in thousands)

 

Gross capitalized software development costs

 

$

49,447

 

 

$

46,169

 

Accumulated amortization

 

 

(36,082

)

 

 

(33,423

)

Capitalized software development costs, net

 

$

13,365

 

 

$

12,746

 

 

Capitalized software development costs are amortized on a straight-line basis over their estimated useful life of two years.

 

The following table summarizes software development costs capitalized, stock-based compensation included in capitalized software development costs, and amortization of capitalized software development costs.

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Software development costs capitalized

 

$

3,278

 

 

$

2,945

 

Stock-based compensation included in capitalized software development costs

 

$

508

 

 

$

550

 

Amortization of capitalized software development costs

 

$

2,495

 

 

$

1,975

 

 

 

9. 0.25% Convertible Senior Notes, Convertible Note Hedge and Warrant

 

In May 2017, the Company issued $350 million aggregate principal amount of 0.25% convertible senior notes due June 1, 2022 in a private offering and an additional $50 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment options of the initial purchasers (the “2022 Notes”). The 2022 Notes are convertible at the option of the holders prior to the close of business on the business day immediately preceding February 1, 2022 under certain conditions or upon the occurrence of certain events. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. Because the last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the calendar quarter ended March 31, 2019 was equal to or greater than 130% of the applicable conversion price on each applicable trading day, the 2022 Notes are convertible at the option of the holders thereof during the calendar quarter ending June 30, 2019. As of May 3, 2019 no holders have converted or indicated their intention to convert the 2022 Notes.

The net carrying amount of the liability component of the 2022 Notes is as follows:

 

 

As of March 31, 2019

 

 

As of December 31, 2018

 

 

(in thousands)

 

Principal

$

400,000

 

 

$

400,000

 

Unamortized debt discount

 

(70,681

)

 

 

(75,575

)

Unamortized issuance costs

 

(5,277

)

 

 

(5,643

)

Net carrying amount

$

324,042

 

 

$

318,782

 

 

 

Interest expense related to the 2022 Notes is as follows:

 

 

Three Months Ended March 31,

 

 

2019

 

 

2018

 

 

(in thousands)

 

Contractual interest expense

$

250

 

 

$

250

 

Amortization of debt discount

 

4,894

 

 

 

4,567

 

Amortization of issuance costs