apti-10q_20180331.htm

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ 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.:

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 2, 2018, 32,375,302 shares of the registrant’s Class A common stock and 11,116,834 shares of the registrant’s Class B common stock were outstanding, respectively.

	March 31,			December 31,
	2018			2017
				*As Adjusted
Assets
Current assets
Cash and cash equivalents	$	190,066		$	55,069
Short-term investments		55,394			93,901
Accounts receivable, net of allowance for doubtful accounts
of $317 and $413		56,022			68,782
Deferred costs		14,906			11,898
Prepaid expenses and other current assets		4,786			5,079
Total current assets		321,174			234,729
Long-term assets
Property and equipment, net of accumulated depreciation
of $23,161 and $21,924		9,876			10,437
Long-term investments		7,979			—
Deferred costs, net of current portion		15,792			17,182
Acquisition-related intangible assets, net		19,517			—
Goodwill		30,572			—
Other long-term assets		1,036			983
Total assets	$	405,946		$	263,331
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	8,100		$	5,598
Accrued payroll and other expenses		21,450			16,481
Deferred revenue		116,610			116,831
Deferred rent		919			892
Capital leases		24			21
Total current liabilities		147,103			139,823
Long-term liabilities
Convertible senior notes, net		106,574			—
Deferred revenue, net of current portion		6,834			2,470
Deferred rent, net of current portion		3,237			3,483
Capital leases, net of current portion		117			26
Asset retirement obligation		205			199
Total liabilities		264,070			146,001
Commitments and contingencies (Note 14)
Stockholders’ equity
Class A and Class B Common stock		5			4
Additional paid-in capital		346,888			314,301
Accumulated other comprehensive loss		(53	)		(110	)
Accumulated deficit		(204,964	)		(196,865	)
Total stockholders’ equity		141,876			117,330
Total liabilities and stockholders' equity	$	405,946		$	263,331

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


	Three Months Ended March 31,
	2018			2017
				*As Adjusted

Revenue
Subscription	$	45,471		$	36,187
Professional services		8,599			7,744
Total revenue		54,070			43,931
Cost of revenue
Subscription		8,949			7,850
Professional services		8,465			7,569
Total cost of revenue		17,414			15,419
Gross profit		36,656			28,512
Operating expenses
Research and development		11,897			9,658
Sales and marketing		22,678			19,617
General and administrative		10,154			6,534
Total operating expenses		44,729			35,809
Loss from operations		(8,073	)		(7,297	)
Other income (expense)
Interest income and other, net		128			236
Foreign exchange gain (loss)		114			(53	)
Loss before provision for income taxes		(7,831	)		(7,114	)
Provision for income taxes		(268	)		(25	)
Net loss	$	(8,099	)	$	(7,139	)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.19	)	$	(0.19	)
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted		42,762			38,407

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


	Three Months Ended March 31,
	2018			2017
				*As Adjusted
Cash flows from operating activities
Net loss	$	(8,099	)	$	(7,139	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization		1,376			1,530
(Accretion of discounts)/amortization of premiums on investments		(42	)		23
Amortization of acquisition-related intangible assets		583			—
Amortization of deferred costs		3,936			3,268
Amortization of debt discount and issuance costs		176			—
Loss (gain) on disposal of property and equipment		47			(7	)
Stock-based compensation		4,952			3,625
Impairment of acquired assets		573			—
Accretion of capitalized loan fees		—			9
Foreign exchange gain		(114	)		(174	)
Change in operating assets and liabilities
Accounts receivable		19,015			20,098
Prepaid expenses and other assets		1,747			290
Deferred costs		(2,908	)		(2,672	)
Accounts payable		2,263			1,795
Accrued expenses		(2,792	)		(958	)
Deferred revenue		(10,713	)		(7,570	)
Deferred rent		(224	)		(200	)
Net cash provided by operating activities		9,776			11,918
Cash flows from investing activities
Business combinations, net of cash acquired		(34,569	)		—
Purchases of property and equipment		(680	)		(1,545	)
Proceeds from sales of equipment		—			9
Proceeds from maturities of investments		49,400			6,800
Purchases of investments		(18,793	)		(21,445	)
Payments for security deposits		(31	)		(9	)
Net cash used in investing activities		(4,673	)		(16,190	)
Cash flows from financing activities
Proceeds from borrowings on convertible notes, net of issuance costs		139,438			—
Purchase of capped call		(17,092	)		—
Proceeds from exercises of common stock options		7,515			558
Payment of initial public offering costs		—			(243	)
Principal payments on capital lease obligations		(6	)		(11	)
Net cash provided by financing activities		129,855			304
Foreign currency effect on cash, cash equivalents and restricted cash		39			(135	)
Net increase (decrease) in cash, cash equivalents and restricted cash		134,997			(4,103	)
Cash, cash equivalents and restricted cash
Beginning of period		55,069			42,007
End of period	$	190,066		$	37,904
Supplemental non-cash disclosures
Business acquisition working capital adjustment	$	4,295			—
Class A Common stock issued in business combination		4,617			—
Debt issuance costs in accounts payable and accrued expenses		444			—
Purchases under capital lease obligations		144			—
Property and equipment additions in accounts payable and accrued expenses		376			545

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

Note 1. Description of Operations and Summary of Significant Accounting Policies

Apptio, Inc., or the Company, was incorporated on October 2, 2007 and is headquartered in Bellevue, Washington. The Company develops and sells Technology Business Management, or TBM, solutions. The Company’s cloud-based platform and SaaS applications enable IT leaders to analyze, optimize and plan technology investments, and benchmark their financial and operational performance against peers. The Company operates primarily in North America, Europe and Australia.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, or GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on February 21, 2018, or Form 10-K. The condensed consolidated balance sheet as of December 31, 2017, included herein, was derived from the audited annual financial statements as of that date, but does not include all disclosures including certain notes required by GAAP on an annual reporting basis.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to fairly state the financial position, results of operations, comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2018 or any future period.

The condensed consolidated financial statements include the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.

The Company continues to be subject to the risks and challenges associated with other companies at a similar stage of development, including risks associated with: dependence on key personnel; successful marketing and sale of its solutions and adaptation of such solutions to changing market dynamics and customer preferences; competition from alternative products and services, including from larger companies that have greater name recognition, longer operating histories, more and better established customer relationships and greater resources than the Company; and the ability to raise additional capital to support future growth.

Since inception through March 31, 2018, the Company has incurred losses from operations, has accumulated a deficit of $205.0 million, and has been dependent on equity and debt financing to fund operations.

There have been no material changes to the Company’s significant accounting policies and estimates as previously disclosed in the Company’s Form 10-K, except for the accounting policies for revenue recognition and deferred costs that were updated as a result of adopting Accounting Standard Update, or ASU, 2014-09, Revenue from Contracts with Customers (Topic 606) described within Recently Adopted Accounting Pronouncements below, and new policies added during the period related to the Company’s recent business combination and issuance of convertible senior notes.

The Company derives its revenue from two sources: (1) subscription revenue, which is comprised of subscription fees from customers utilizing the Company’s applications, fees for additional support beyond the standard support that is included in the basic subscription fees, which are referred to as premium support offerings, and fees for subscription based online training offerings, as well as term-based software license fees and support and maintenance fees related to customers of the acquired business; and (2) professional services, which consist of fees associated with the implementation and configuration of the Company’s applications, as well as fees for in-person training and TBM Council conference registration and sponsorship fees. Implementation and configuration services primarily consist of consultative services, such as data mapping and establishing best practices. Implementation and configuration services do not result in any significant customization or modification of the software platform or user interface. The Company presents revenue from both of these sources separately in its condensed consolidated statements of operations.

The Company follows a five-step approach to recognizing revenue: (1) identify the contract with a customer; (2) identify the separate performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the separate performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.

The Company enters into arrangements with multiple performance obligations that primarily include subscription and professional services, but may also include premium support, online training and in-person training. The Company’s arrangements do not contain general rights of return. The professional services are not considered essential to the functionality of the software. To qualify as a separate unit of accounting, the delivered item must have value to the customer on a stand-alone basis. The Company believes its subscription offerings and its professional services offerings have stand-alone value. The Company’s subscriptions have stand-alone value because such services are often sold separately from other professional services. The Company’s professional services have stand-alone value because those services may be sold separately by other vendors and there are trained third-party consultants capable of performing the professional services. Performance obligations that are accounted for separately consist of software subscription, support for on-premise licenses, professional services, premium support and online and in-person training.

The Company typically invoices customers for subscription fees in annual increments upon execution of the initial contract or subsequent renewal. The Company recognizes revenue for subscription fees from customers utilizing its applications ratably over the subscription term, which are typically one to three years. The Company’s subscription arrangements generally do not allow the customer the contractual right to take possession of the software; as such, the arrangements are considered to be service contracts. Fees for premium support offerings and subscription-based online training are generally one-year agreements billed upfront, and are recognized ratably over the term of the support or training agreement. The Company’s premium support offerings include all of the Company’s standard incident support services, with enhanced response times, dedicated support resources, access to architecture and configuration experts and other services not included with standard support. The Company’s subscription-based online training provides self-directed training for customers via access to recorded training sessions.

Professional services revenue consists of fees associated with application configuration, integration, change management, education and training services, and conference registration and sponsorship fees. The Company’s professional services engagements are priced either on a time-and-materials basis or on a fixed-fee basis. The duration of the Company’s professional services engagements varies based on the scope of services requested, but typically ranges between three and six months. For time-and-materials arrangements, the Company recognizes revenue as hours are worked. For fixed-fee arrangements, the Company recognizes professional services revenue as delivered using the percentage of completion, or POC, method measured on an hours incurred basis. Under the POC method of accounting, revenue and expenses are recognized as work is performed based on the relationship between actual hours incurred and total estimated hours at the completion of the project. Changes to the original estimates may be required during the life of the project. Estimates of both hours and costs to complete a project are reviewed periodically and the effect of any change in the estimated hours to complete a project is reflected as an adjustment to revenue in the period the change becomes known.

If current estimated costs to fulfill a contract exceed the revenue expected from the contract, a loss equal to the amount of estimated excess costs will be recognized in the period the change becomes known. The use of the POC method of accounting involves considerable use of estimates in determining revenue, costs and profits, and in assigning the amounts to accounting periods. Associated out-of-pocket travel expenses related to the delivery of professional services are typically reimbursed by the customer. Out-of-pocket expense reimbursements are recognized as revenue and cost of service expense.

Fees for in-person training are billed in advance of the training and are recognized in the period the training occurs. Conference registration and sponsorship fees are for TBM Council conferences and related TBM Council activities. Registration fees for TBM Council conferences are billed in advance of the conference and are recognized in the period the conference occurs. TBM Council

sponsorship fees are paid in advance and are recognized in the period the sponsorship activities occur, or ratably over the contractual period if the sponsorship entails ongoing activities beyond a single event.

The Company also sells applications through third-party resellers. These arrangements typically call for the reseller to retain a portion of the subscription fee paid by the customer as compensation. Since the Company is responsible for the fulfillment of the goods and services and have primary responsibility for the good or service meeting customer expectations, the Company is the principal in these transactions and, therefore, records revenue on a gross basis based on the amount billed to the reseller. Reseller fees are capitalized and amortized through sales and marketing expense as discussed under Deferred Costs below.

All subscription and support fees that are billed in advance are recorded as a contract liability, presented in the condensed consolidated statements of operations as deferred revenue. Deferred revenue represents the unearned revenue on cash receipts or accounts receivable for the sale of subscriptions and for professional services for which services have not yet been provided. The substantial majority of deferred revenue relates to subscription revenue.

Deferred costs consist of sales commissions earned by the Company’s sales force and fees paid to third-party resellers and are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for subscription contracts are deferred and then amortized on a straight-line basis over a period of benefit that the Company has determined to be between one and four years, and over one year for service contracts. The Company determined the period of benefit by taking into consideration our customer contracts, our technology and other factors. These costs are classified as current or noncurrent based on the timing of when the Company expects to recognize the expense. Periodically, the Company reviews the deferred costs for impairment and will recognize such impairment in the current period when and if the carrying amount of the asset exceeds future consideration less costs that relate directly to providing service that have not been recognized. Amortization expense is included in Sales and marketing expenses in the condensed consolidated statements of operations.

The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed as of the acquisition date. The estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the period identified in the condensed consolidated statements of operations.

Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. The Company evaluates and tests the recoverability of goodwill for impairment at least annually, or more frequently if circumstances indicate that goodwill may not be recoverable. The Company performs the impairment testing by first assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of its reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a goodwill impairment test is performed. To calculate any potential impairment, the Company compares the fair value of a reporting unit with its carrying amount, including goodwill. Any excess of the carrying amount of the reporting unit's goodwill over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down. For purposes of goodwill impairment testing, there is one reporting unit.

The Company periodically reviews the carrying amounts of acquired intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company measures the recoverability of these assets by comparing the carrying amount of each asset to the future undiscounted cash flows it expects the asset to generate. If the Company considers any of these assets to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair value. In addition, the Company periodically evaluates the estimated remaining useful lives of long-lived assets to determine whether events or changes in circumstances warrant a revision to the remaining period of amortization. Intangible assets are amortized over their useful lives ranging from two to ten years.

The functional currency for most of the Company’s foreign subsidiaries is the U.S. dollar, while one uses local currency. The results of operations for the Company’s international subsidiaries whose functional currency is the U.S. dollar are remeasured from the local currency into U.S. dollars using the average exchange rates during each period. The majority of the assets and liabilities are remeasured using exchange rates at the end of each period. All equity transactions and certain assets are remeasured using historical rates. The Company translates the foreign functional currency financial statements to U.S dollars for the entity that does not have U.S. dollars as their functional currency using the exchange rates at the balance sheet date for assets and liabilities, the period average exchange rates for revenues and expenses, and the historical exchange rates for equity transactions and certain assets. The effects of foreign currency translation adjustments are recorded in other comprehensive income as a component of stockholders' equity, and related periodic movements are summarized as a line item in the condensed consolidated statements of comprehensive loss.

The Company accounts for the issued Convertible Senior Notes, or the Notes, as separate liability and equity components. The Company determined the carrying amount of the liability component based on the fair value of a similar debt instrument excluding the embedded conversion option. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes as a whole. This difference represents a debt discount that is amortized to interest expense over the term of the Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The Company has allocated issuance costs incurred to the liability and equity components. Issuance costs attributable to the liability component are being amortized to interest expense over the respective term of the Notes, and issuance costs attributable to the equity components were netted with the respective equity component in additional paid in capital. In connection with the issuance of the Notes, the Company entered into capped call transactions with certain counterparties affiliated with the initial purchasers and others. By entering into the capped call transactions, the Company mitigates potential dilution resulting from the issuance of the Notes, effectively increasing the conversion price of the Notes.

In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers that supersedes most current revenue recognition guidance with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. The standard also provides guidance on the recognition of costs related to obtaining customer contracts.

The Company adopted the requirements of the new standard as of January 1, 2018, utilizing the full retrospective transition method. Adoption of the new standard resulted in changes to our policies for revenue recognition and sales commissions as detailed above.

The impact of adopting the new standard on 2017 revenues in the consolidated financial statements is not material. The primary impact of adopting the new standard is the requirement for the Company to capitalize certain contract costs, such as commissions, which were previously being expensed as incurred. These costs are now capitalized and amortized over a period of benefit that the Company has determined to be between one and four years for subscription agreements. Commissions on service arrangements are now capitalized and amortized over a period of benefit that the Company has determined to be one year.

The Company has adjusted its condensed consolidated financial statements from amounts previously reported due to the adoption of ASU No. 2014-09. Select unaudited condensed consolidated balance sheet line items, which reflect the adoption of ASU No. 2014-09, are as follows (in thousands):

Select unaudited condensed consolidated statement of operations line items, which reflect the adoption of ASU No. 2014-09, are as follows (in thousands):

Select unaudited condensed consolidated statement of cash flows line items, which reflect the adoption of ASU No. 2014-09, are as follows (in thousands):

	Three Months Ended March 31, 2017
	As Previously Reported			Adjustments			As Adjusted
Cash flows from operating activities:
Net loss	$	(6,547	)		(592	)	$	(7,139	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization of deferred costs		—			3,268			3,268
Foreign exchange (gain) loss		(175	)		1			(174	)
Change in operating assets and liabilities
Deferred costs		—			(2,672	)		(2,672	)
Net cash provided by operating activities		11,913			5			11,918
Foreign currency effect on cash, cash equivalents and restricted cash		(130	)		(5	)		(135	)
Net decrease in cash, cash equivalents and restricted cash		(4,103	)		—			(4,103	)
Cash, cash equivalents and restricted cash
End of period	$	37,904		$	—		$	37,904

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and early adoption is permitted for impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 is to be applied on a prospective basis. The Company is currently evaluating the impact this guidance will have on the Company’s financial statements and the timing of adoption.

In October 2016, the FASB issued ASU 2016-16, Inter-Entity Transfers of Assets other than Inventory. This guidance requires entities to recognize the income tax impact of an intra-entity sale or transfer of an asset other than inventory when the sale or transfer occurs, rather than when the asset has been sold to an outside party. The guidance will require a modified retrospective application with a cumulative catch-up adjustment to opening retained earnings at the beginning of the first quarter of fiscal 2019, but permits adoption in an earlier period. The Company is currently evaluating the impact this guidance will have on the Company’s financial statements and the timing of adoption.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The objective of the update is to improve financial reporting by increasing transparency and comparability among organizations by recognizing lease assets and lease liabilities on the

balance sheet and disclosing key information about leasing arrangements. For public entities, the new standard is effective for interim and annual reporting periods beginning after December 15, 2018. For all other entities, the new standard is effective for annual reporting periods beginning after December 15, 2019, and for interim periods within those annual periods beginning after December 15, 2020. Early application of the amendments is permitted for all entities. The Company is currently evaluating the impact this guidance will have on the Company’s financial statements and the timing of adoption.

The following tables present information about the Company’s financial assets and liabilities that have been measured at fair value as of March 31, 2018 and December 31, 2017 , and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):

At March 31, 2018 and December 31, 2017 , the Company utilized the market approach to value its money market mutual funds and U.S. government treasury securities using Level 1 valuation inputs which include quoted prices in active markets for identical assets or liabilities. The Company’s Level 2 marketable securities are valued using the market approach based on broker or dealer quotations, actual trade data, recent observable transaction information for similar securities, benchmark yields or alternative pricing sources with reasonable levels of price transparency, and include the Company’s investments in U.S. agency securities and corporate notes and obligations, as applicable.

Available-for-sale securities consist of fixed-income securities that are accounted for at fair value. Available-for-sale securities with an original maturity of 90 days or less are classified within cash and cash equivalents in the condensed consolidated balance sheets. Premiums and discounts paid on securities at the time of purchase are recorded as accrued interest and amortized over the period of maturity. The amortized cost and fair value on the available-for-sale investments and unrealized gains and losses as of March 31, 2018 and December 31, 2017 were as follows (in thousands):

	March 31, 2018
	Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		Losses			Value
Amounts maturing in one year or less
Corporate notes and obligations	$	23,486	$	—	$	(17	)	$	23,469
U.S. government treasury securities		31,968		1		(44	)		31,925
Total short-term available-for-sale debt securities	$	55,454	$	1	$	(61	)	$	55,394

Amounts maturing in greater than one year
Corporate notes and obligations	$	7,992	$	2	$	(15	)	$	7,979
U.S. government treasury securities		—		—		—			—
Total short-term available-for-sale debt securities	$	7,992	$	2	$	(15	)	$	7,979

	December 31, 2017
	Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		Losses			Value
Amounts maturing in one year or less
Corporate notes and obligations	$	38,044	$	—	$	(24	)	$	38,020
U.S. government treasury securities		55,967		—		(86	)		55,881
Total short-term available-for-sale debt securities	$	94,011	$	—	$	(110	)	$	93,901

As interest rates increase, those securities purchased at a lower yield show a mark-to-market unrealized loss. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. The unrealized losses are due primarily to changes in interest rates. The Company regularly reviews investments for other-than-temporary impairment using both qualitative and quantitative criteria.

The following table presents gross unrealized losses and fair values for those investments that were in an unrealized loss position as of March 31, 2018 aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):

The Company did not consider any of the unrealized losses on its investments to be other-than-temporarily impaired based on its evaluation of available evidence, which includes the Company’s intent as of March 31, 2018 to hold these investments until the cost basis is recovered. Realized gains and losses on sales of available-for-sale securities were immaterial for all periods presented.

Deferred costs, which primarily consist of deferred sales commissions, were $30.7 million and $29.1 million as of March 31, 2018 and December 31, 2017, respectively. The Company capitalized $2.8 million and $2.7 million, during the three months ended March 31, 2018 and 2017, respectively. In addition, the Company acquired $2.7 million in connection with the business combination

noted below. Amortization expense for the deferred costs was $3.9 million and $3.3 million, for the three months ended March 31, 2018 and 2017, respectively. Impairment losses related to deferred costs were immaterial for all periods presented.

On February 2, 2018, the Company acquired all outstanding membership interests of Digital Fuel SV, LLC, or Digital Fuel, a provider of IT business management tools, to extend its leadership role of the Technology Business Management market and broaden the Company’s customer base.

The Company allocated the purchase price of the acquisition to identifiable assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The excess of the purchase price over the aggregate fair values was recorded as goodwill. The Company calculated the fair value of the assets acquired using the income and cost approaches (or a combination thereof). Fair values were determined based on Level 3 inputs including estimated future cash flows, discount rates, royalty rates, growth rates, sales projections, retention rates and terminal values, all of which require significant management judgment.

The purchase price allocation is based upon preliminary information and is subject to change if additional information about the facts and circumstances that existed at the acquisition date becomes available. Additional information is being gathered to finalize these preliminary measurements, particularly with respect to intangible assets, and deferred revenue. Further adjustments may be necessary as a result of the Company’s on-going assessment of additional information related to the fair value of assets acquired and liabilities assumed, including goodwill, during the measurement period.

The total estimated consideration for this acquisition, subject to certain post-closing adjustments provided for in the Purchase Agreement was approximately (in thousands, except share data):

The following table summarizes the preliminary fair values of the tangible and intangible assets acquired and liabilities assumed as of the acquisition date (in thousands):

	Purchase Consideration			Useful life (in years)

Cash	$	97
Accounts receivable		6,093
Other tangible assets		3,636
Acquired developed technology		7,800			4
Customer contracts and related relationships		11,300			10
Order backlog		500			2
Trademarks and trade name		500			3
Accounts payable, deferred revenue and other liabilities		(16,920	)
Net assets acquired		13,006
Goodwill		30,572
Total	$	43,578

The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The Company believes the goodwill resulting from these business combinations represents the synergies expected from expanded market opportunities when integrating the acquired technologies with our offerings. The goodwill balance is deductible for U.S. income tax purposes.

The acquired entity's results of operations have been included in the condensed consolidated financial statements of the Company from the date of acquisition. The Company incurred costs related to this acquisition of $2.5 million, including $0.6 million related to the impairment of acquisition-related assets. All acquisition-related costs were expensed as incurred and have been recorded in general and administrative expenses in the condensed consolidated statements of operations.

Pro forma results of operations for this acquisition are not presented as the financial impact to the Company's condensed consolidated financial statements is immaterial.

Intangible assets acquired through business combinations are as follows (in thousands):

The weighted average remaining useful life of the intangible assets is seven years. The expected future amortization expense for intangible assets as of March 31, 2018 is as follows (in thousands):

In March 2018, the Company issued and sold $143.8 million aggregate principal amount of 0.875% convertible senior notes, or the Notes, in a private placement exempt from the registration requirements of the Securities Act of 1933. The Notes mature on April 1, 2023, unless earlier repurchased by the Company or converted by the holder pursuant to the terms of the Notes. Interest is payable semiannually in arrears on April 1 and October 1 of each year, commencing on October 1, 2018. The Company received net proceeds from the offering of approximately $139.4 million, net of initial purchase discounts and debt issuance costs.

The Notes are governed by an Indenture between the Company and U.S. Bank, National Association, as trustee. The Notes are unsecured and rank senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to the Company’s existing and future indebtedness that is not so subordinated; effectively subordinated in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all existing and future indebtedness and other liabilities incurred by the Company’s subsidiaries.

Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s Class A common stock or a combination of cash and shares of Class A common stock, at the Company’s election.

The Notes have an initial conversion rate of 25.4544 shares of Class A common stock per $1,000 principal amount of Notes. This represents an initial effective conversion price of approximately $39.29 per share of Class A common stock and approximately 3.7 million shares issuable upon conversion. Throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events. Holders of the Notes will not receive any cash payment representing accrued and unpaid interest, if any, upon conversion of a Note, except in limited circumstances. Accrued but unpaid interest will be deemed to be paid by cash, shares of the Company’s Class A common stock or a combination of cash and shares of the Company’s Class A common stock paid or delivered, as the case may be, to the holder upon conversion of a Note.

Prior to the close of business on the business day immediately preceding January 1, 2023, the Notes will be convertible at the option of holders during certain periods, only upon satisfaction of certain conditions set forth below. On or after January 1, 2023, until the close of business on the scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes at the conversion rate at any time regardless of whether the conditions set forth below have been met.

Holders may convert all or a portion of their Notes prior to the close of business on the business day immediately preceding January 1, 2023, in multiples of $1,000 principal amount, only under the following circumstances:

The Company may not redeem the Notes prior to April 5, 2021. The Company may redeem for cash all or any portion of the Notes, at the Company’s option, on or after April 5, 2021 if the last reported sale price of our Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending not more than three trading days preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus any accrued and unpaid interest to, but excluding the redemption date. No sinking fund is provided for the Notes.

The Company estimated the implied interest rate of its Notes to be approximately 6.34%, assuming no conversion option. Assumptions used in the estimate were a five-year LIBOR swap rate plus the Company’s credit spread as the borrowing rate of a similar nonconvertible debt instrument to determine the present value of the liability component. The estimated implied interest rate was applied to the Notes, which resulted in a fair value of the liability component of $110.0 million upon issuance, calculated as the present value of implied future payments based on the $143.8 million aggregate principal amount. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense over the term of the Notes. The $33.8 million difference between the aggregate principal amount of $143.8 million and the estimated fair value of the liability component was recorded in additional paid-in capital as the Notes were not considered redeemable.

In accounting for the transaction costs related to the issuance of the Notes, the Company allocated the total amount incurred to the liability and equity components based on their estimated relative fair values. Issuance costs attributable to the liability component, totaling $3.6 million, are being amortized to interest expense over the term of the Notes, and issuance costs attributable to the equity component, totaling $1.1 million, were netted with the equity component in shareholders’ equity.

Delaware	26-1175252
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
11100 NE 8^th Street, Suite 600 Bellevue, WA	98004
(Address of principal executive offices)	(Zip Code)

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐
Emerging growth company	☒

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Comprehensive Loss	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	33
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 6.	Exhibits	56
Signatures		57

	March 31, 2018
	Less than 12 months					12 months or greater
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss

Corporate notes and obligations	$	18,623	$	(32	)	$	—	$	—
U.S. government treasury securities		12,449		(32	)		16,488		(11	)
Total available-for-sale debt securities	$	31,072	$	(64	)	$	16,488	$	(11	)

	March 31, 2018
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Acquired developed technology	$	7,800	$	(325	)	$	7,475
Customer contracts and related relationship assets		11,300		(188	)	$	11,112
Order backlog		500		(42	)	$	458
Trademarks and trade name		500		(28	)		472
Total	$	20,100	$	(583	)	$	19,517

	March 31, 2018
	Level 1		Level 2		Total

Money market funds	$	26,267	$	—	$	26,267
Corporate notes and obligations		—		31,448		31,448
U.S. government treasury securities		31,925		—		31,925
	$	58,192	$	31,448	$	89,640

Years Ending December 31,
2018	$	2,623
2019		3,497
2020		3,267
2021		3,094
2022		1,292
Thereafter		5,744
Total future amortization expense	$	19,517

	March 31, 2018		December 31, 2017
Liability component:
Principal	$	143,750	$	—
Less: debt discount, net of amortization