10-K 1 a10-k12312018.htm FORM 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-K
 _____________________________________
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-34387
_____________________________________

mdsologo.jpg

Medidata Solutions, Inc.
(Exact name of registrant as specified in its charter)
 _____________________________________
Delaware
13-4066508
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
350 Hudson Street, 9th Floor
New York, New York
10014

(Address of principal executive offices)
(Zip Code)
(212) 918-1800
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
The NASDAQ Stock Market LLC
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ý Yes    ¨  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨ Yes    ý  No
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.    ý  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).    ý  Yes    ¨  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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. (Check one)
Large accelerated filer
ý
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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes    ý  No
As of June 29, 2018, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $4,106,357,167 based on the closing sale price for the registrant's common stock on the NASDAQ Global Market on that date of $80.56 per share. For purposes of determining this number, all executive officers and directors of the registrant are considered to be affiliates of the registrant, as well as individual shareholders holding more than 10% of the registrant's outstanding common stock. This number is provided only for the purpose of this report on Form 10-K and does not represent an admission by either the registrant or any such person as to the status of such person.
As of February 25, 2019, the registrant had 62,276,965 shares of common stock outstanding.
Documents Incorporated by Reference:
Part III of this Annual Report on Form 10-K incorporates by reference certain information that will be set forth in the registrant's Proxy Statement in connection with the 2019 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2018. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part of this Form 10-K.


MEDIDATA SOLUTIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018
TABLE OF CONTENTS
 
 
Page
PART I
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
 
 
Item 15.
Item 16.
 
 





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PART I
For purposes of this Annual Report, the terms “Medidata,” “Company,” “we,” “us,” and “our” refer to Medidata Solutions, Inc. and its consolidated subsidiaries. This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act, and is subject to the “safe harbor” created by those sections. Forward-looking statements reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of management's goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects,” and similar expressions, as well as statements in the future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available as of the date of this Annual Report on Form 10-K and/or management's good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. We caution readers not to place undue reliance upon any such forward-looking statements. We urge you to consider the risks and uncertainties discussed in “Risk Factors” under Item 1A in this Annual Report on Form 10-K in evaluating our forward-looking statements.

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Item 1. Business
Company Overview
Medidata is a global life sciences technology provider, dedicated to improving the way clinical research is designed, conducted, analyzed, and commercialized. Our cloud-based platform of solutions, data analytics, and AI enables efficiency and improves quality throughout clinical development programs by accelerating processes, enhancing decision-making, minimizing operational risk, reducing costs, and transforming trial strategies.
Customers can utilize our entire platform or individual solutions, and can subscribe to our technology on a multi-study or single-study basis. Our revenue is comprised of subscription and professional services, which represent approximately 85% and 15% of our business, respectively. Our subscription business model provides us with a recurring revenue stream that we believe delivers greater revenue visibility than perpetual software licensing models.
Our Platform: The Medidata Cloud
The Medidata Cloud is the Intelligent Platform for Life Sciences, transforming clinical development and converting complex data into cutting-edge insights. It provides a unified platform for demonstrating treatment efficacy and safety, supporting regulatory approval, achieving peak revenue faster, improving outcomes for patients, providers, and payers, and paving the way for the increasingly more precise therapies of the future.
It Starts With Data Capture and Management
Our data capture, management, and reporting family of solutions is the cornerstone of the Medidata Cloud. Our technology captures data and patient feedback throughout the life cycle of a clinical trial.
Rich Data Capture Leads to Pioneering Analytics
Captured data goes on to inform the Medidata Enterprise Data Store ("MEDS") and AI family of solutions. MEDS and AI combine the industry's largest set of de-identified clinical data with the customer's own data to provide immediate metrics and benchmarking; use omics data and machine learning algorithms to detect quality issues and identify correlations in captured data; provide powerful and intuitive cross-study reporting capabilities; and enable customers to leverage historical controls from statistically similar indications and studies through synthetic control arm and synthetic control data solutions.
Pioneering Analytics Accelerates Trial Planning and Management
MEDS and AI power the trial planning and management family of solutions, which provides clinical operations capabilities. At the trial planning stage, study design, site feasibility, and grants budgeting and management tools leverage data from MEDS to optimize trial design, site selection, and budgeting. For ongoing trial management, our technology provides risk assessment and anomaly detection; regulated content creation, storage, and collaboration; and automation of site payments.
SHYFT Adds Commercial and Real-World Analytics
The SHYFT family of solutions provides actionable insights into sales activities, market composition and dynamics, and real-world patient outcomes to drive peak commercial performance.
Professional Services
Medidata offers tailored professional services to help life sciences companies optimize their processes and realize the full value of our platform.
Our professional services offerings include:
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Implementation services. We provide implementation of the Medidata Cloud with efficient, scalable configuration and support. Our methodology leverages both the industry-specific expertise of our employees and the specific capabilities of our platform to simplify, streamline, and expedite the implementation of our solutions.
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Sponsor enablement. Our tailored knowledge transfer enables customers to design, configure, implement, and manage their own studies. We believe that the resulting level of customer autonomy maximizes the benefits of our platform technology.
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Strategic consulting. Our industry and technology experts draw on Medidata's visibility into best practices and data-driven analytics to advise customers through the transformational internal changes that our platform drives- from re-engineering business processes across departments to changing governance models.
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Partner support. We offer services supporting successful clinical trials at our channel partners, aimed at maximizing the value of the partner/sponsor/technology collaboration.
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E-learning and training. We offer self-administered e-learning courses as well as a variety of additional training services through our training group, known as Medidata Academy, to facilitate the successful adoption of our cloud-based solutions throughout the customer or channel partner organization.

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•
Ongoing support. We take a consultative approach to ensure quality study design, ease of use, and productivity throughout the project life cycle. We have certified experts available to manage our customers' operational needs and ensure they are gaining maximum value from the Medidata platform within their unique environments.
Our Strategy
Our goal is to enable our customers to bring their new and enhanced medical treatments to the public quickly and safely and to enable them to successfully market these treatments by providing a platform that uses innovative technology to automate, streamline, support, and enhance clinical development activities. Key elements of our strategy include:
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Expand the number of products used by our existing customers. We refer to this footprint, measured by the number of Medidata products used by each of our customers, as "density." We seek to improve our density by demonstrating the significant efficiencies that our customer base can achieve by standardizing end-to-end clinical development and commercialization processes on our platform and by leveraging more of our solutions.
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Increase the level of product usage by existing customers. We refer to the level of usage of Medidata products that are already deployed by customers as "intensity." In cases where customers utilize our solutions for only a subset of their clinical trial activities, we seek to drive usage across more trials, therapeutic areas, geographies, and phases, and to convert single-study customers to multi-study customers.
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Continuously improve our platform. We continue to enhance our platform with regular releases, adding new functionality, integrations, and user benefits.
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Develop additional innovative technologies and services. We continue to build new innovative solutions that further transform the clinical development and commercialization process, and offer them to new and existing customers. We continue to develop our analytics and benchmarking capabilities, creating value for our customers by improving decision-making.
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Grow indirect sales partnership initiatives. We pursue strategic partnerships with channel partners, such as contract research organizations ("CROs") and systems integrators, to position the Medidata Cloud as the platform of choice for their outsourced clinical trial management services. Our well-established program of support, training, and certification enables partners to cost-effectively implement our solutions and services in sponsor studies as they provide their other services related to pharmaceutical development.
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Position the Medidata Cloud as a key player in the evolving clinical ecosystem. We seek opportunities for collaborative innovation, building strategic relationships with other leading technology and data firms. Partnerships enable us to enhance and complement our portfolio of offerings and achieve greater scale in the marketplace while helping to drive the evolution of life sciences.
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Expand our global customer base. We have offices in 7 countries and serve customers in over 30 countries. We will continue to expand our sales, marketing, technology, and support resources into new markets around the world where clinical development activity is accelerating.
Research and Development
We believe that our future success depends on our ability to continue to enhance and broaden the Medidata Cloud to meet the evolving needs of our current and future customers. Equally important is our ability to innovate, taking advantage of latest technologies and trends in life sciences. Our efforts are focused both on developing new, complementary technologies and on enhancing the existing solutions in our platform. Our research and development organization includes product managers that work with both internal and customer experts to plan new features and functionality; software project managers that oversee development teams and timeline; product engineers, data scientists, and user experience designers that build the technical components of our platform; and software quality assurance and technical documentation specialists that deliver a validated final product to our customers.
Sales and Marketing
Our sales and marketing efforts focus on enhancing the global recognition and reputation of our brand, increasing consideration of and preference for our platform and professional services, and generating qualified sales leads. We market and sell our cloud-based solutions through a direct sales force and through relationships with channel and strategic partners, focusing efforts on key executives and decision makers within our existing and prospective customer base.
Our direct sales force operates globally and is organized by both region and focus area. Sales through this direct channel currently represent the largest source of our total revenues.
Many sponsors of clinical trials outsource some or all of their clinical research activities as a means of expanding capacity, controlling costs, and focusing on core strengths. Our relationships with channel partners, such as CROs and systems integrators, help position the Medidata Cloud as the platform of choice for these sponsors' outsourced services. We train, certify, and support our partners on our solutions, enabling them to quickly and cost-effectively implement our technology in sponsors' studies.

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Customers
We serve pharmaceutical, biotechnology, medical device and diagnostics companies, institutions (which include academic research centers, government, and other non-profit organizations), CROs, and other entities engaged in conducting and/or sponsoring clinical trials and commercializing treatments. These customers range in size from the smallest of start-ups to the largest of global pharmaceutical companies. As of December 31, 2018, we had over one thousand customers.
We sell our solutions and provide services globally. Approximately 25%, 23%, and 23% of our revenues in each of the years ended December 31, 2018, 2017, and 2016, respectively, were derived from international operations. A summary of our domestic and international disaggregated revenues is set forth in Note 3, "Revenues," to our consolidated financial statements, which are included in Item 8 of this Annual Report on Form 10-K.
Our five largest customers accounted for 22%, 26%, and 26% of our revenues in 2018, 2017, and 2016, respectively. In 2018, 2017, and 2016, no single customer accounted for 10% or more of our total revenues. At December 31, 2018 and 2017, no one customer comprised 10% or more of our total accounts receivable.
Backlog
At December 31, 2018 and 2017, our total multi-year subscription backlog was $1,170 million and $1,036 million, respectively.
Total subscription backlog increases with the addition of new customer contracts, customer renewals, and contract modifications. It decreases with the recognition of revenue or contract modifications. The timing and duration of new contracts, renewals, contract modifications, and revenue recognition are variable and are not comparable year to year. Total subscription backlog is typically highest at the beginning of a contract and approaches zero prior to renewal. The level of total backlog is not an indicator of the likelihood of renewal or future revenue of that contract. The amount of total backlog associated with an existing multi-year contract may significantly vary year to year solely based on the status of renewal and have no significant impact on the amount of revenue attributable to that contract in a year-over-year comparison. Additionally, large multi-study deals may include provisions under which the customer contracts for a smaller amount of subscription services as they start the contract and the amount ramps up over the life of the contract; the result is an initial large increase in total subscription backlog that does not equate to a proportional increase in revenue in the subsequent period.
We also calculate a 12-month subscription backlog, which represents the future contract value of outstanding multi-study and single study arrangements, billed and unbilled, to be recognized in the next 12 months, excluding expected intra-year renewals and other adjustments. As of January 1, 2019 and 2018, we had 12-month subscription backlog of approximately $522 million and $446 million, respectively. We believe that 12-month subscription backlog is more easily reconciled to future revenues to be recognized than total backlog, and therefore is a more valuable metric for evaluation of expected future revenues.
Our presentation of backlog may differ from that of other companies in our industry.
Technology and Support Infrastructure
We have designed our platform to maximize ease of use, flexibility, data visibility, and scalability. Our solutions are deployed through the use of industry-standard web browsers and mobile devices, service-oriented architectures, three-tiered server architectures, or a web server, a proprietary application server, and a database server. End users can access our solutions through any web browser from anywhere in the world without downloading or installing any Medidata-specific software. We develop our solutions on a broad base of technologies, including Java, Scala, .NET, Ruby, Python, R, SQL Server, Business Objects, AWS, Chef, VMWare, and others. We utilize technologies such as firewalls, intrusion detection, and encryption, along with security monitoring, to ensure the privacy and security of our customers' data.
We manage a hybrid cloud, operating our solutions on a combination of private data center and public cloud. Monitoring services are provided on a 24/7 basis by trained Medidata staff to ensure consistent delivery and availability. Advanced backup and storage frameworks, regionally-diverse data centers, and trained engineering teams are in place to provide for quick reaction time in the event of a disaster.
We offer 24/7 support to our end users through a global array of multi-lingual help desks.
Competition
The market for clinical trial solutions is highly competitive and rapidly evolving. It is subject to continually changing technology, shifting customer needs, changes in laws and regulations, and frequent introductions of new products and services. The competitive landscape is intensified by new entrants and start-ups that bring a broad range of new solutions and offerings to the health care technology market.
In general, our competitors include a variety of entities such as information, analytics, technology and services companies, as well as in-house technologies developed by our clients. Our platform competes with firms such as BioClinica, Inc., IQVIA (formerly Quintiles IMS), Oracle, IBM (Clinical Development; Watson Group and/or Watson Health), Parexel Informatics, Veeva Systems, Inc. and other large-scale technology providers that offer a range of products and services that compete with Medidata's solutions. In the future, we may also compete with horizontal cloud-based providers that build platforms that support life sciences customers. On a product-by-product basis, we also compete with a number of vendors offering applications and systems competitive with Medidata in

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specific areas, such as eResearch Technology, Inc., CRF Health, Bracket, DataTrak International, Inc., Medrio, Inc., Merge Healthcare (an IBM Company), and OmniComm Systems, Inc.
We compete on the basis of several factors, including the following:
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innovation, breadth and depth of solution offerings;
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data privacy and security infrastructure;
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strategic partnerships with other companies in the life sciences and technology industries;
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platform capabilities and solution functionality and features, including analytics;
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workforce skill set;
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scalability and upgrade pathways and support;
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speed, performance, and ease of use of our solutions;
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product reliability and infrastructure accessibility and security;
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regulatory compliance;
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breadth and strength of partnerships;
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interoperability;
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financial stability;
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depth of expertise and quality of our global professional services and customer support; and
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sales and marketing capabilities, including the ability to create and communicate operational value.
Although some of our competitors and potential competitors may have greater name recognition, longer operating histories, more product offerings, and greater financial, technological, and other resources than we do, we believe that we compete favorably with our competitors on the basis of these factors and that the significant regulatory and industry expertise required for the development of life sciences solutions may hinder newer or less established participants in the market.
Intellectual Property
Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing the proprietary rights of others. We rely upon a combination of trademark, trade secret, copyright, patent and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we protect our intellectual property and proprietary information by requiring our employees and consultants to enter into confidentiality, non-competition, and assignment of inventions agreements. We have registered trademarks and service marks in the United States ("U.S.") and abroad, and filed applications for the registration of additional trademarks and service marks. Our principal trademarks are “Medidata,” "Medidata Solutions," "Medidata Clinical Cloud," "Medidata Patient Cloud," "Rave," and "Architecture of Hope." We also hold several domain names, including the domain names "medidata.com," “mdsol.com,” and “medidatasolutions.com.” As of December 31, 2018, we hold 33 patents as well as numerous published patent applications outstanding in the U.S. and certain foreign countries.
The legal protections described above afford only limited protection for our technology. Due to rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new product and service developments, and enhancements to existing products and services are more important than the various legal protections of our technology to establishing and maintaining a technology leadership position.
Government and Other Regulations
Regulation of Clinical Trials and Electronic Systems Used in Clinical Trials
The conduct of clinical trials is subject to regulation and regulatory guidance associated with the approval of new drugs, biological products and medical devices imposed upon the clinical trial process by the U.S. Food and Drug Administration ("FDA"), the Pharmaceuticals and Medical Devices Agency ("PDMA") in Japan, the Medicines and Healthcare Products Regulatory Agency ("MHRA") in the United Kingdom, the European Medicines Agency ("EMA") in EU/EEA, and other foreign governmental regulatory agencies and international non-governmental organizations, such as the International Conference on Harmonisation ("ICH").
The laws, regulations, and guidance from various countries and regions are often, but not always, harmonized. In those areas that are not yet harmonized, conflicting or even contradictory requirements may exist. Further, the regulatory environment and requirements for clinical trials and drug/biologic/device approvals are undergoing rapid change in the U.S., the European Union ("EU") (including the anticipated implementation of the new Regulation EU No. 536/2014 of the European Parliament and of the Council on clinical trials on medicinal products for human use, and repealing Directive 2001/20/EC) and other areas. We continue to monitor regulatory developments and industry best practices in these areas and make changes and introduce improvements as necessary to remain in compliance. In addition, the uncertainties around the United Kingdom's anticipated 2019 exit from the EU, as well as the move to the EMA from London to Amsterdam, may impact regulatory operations (including the development of new guidance) and the life sciences industry.
The use of our software products, services, and hosted solutions by customers engaged in clinical trials must be done in a manner that is compliant with a complex array of laws and regulations. Our applications have been designed to allow our customers to deploy such clinical trials as part of a validated, fit-for-purpose system, compliant with applicable laws and regulations.

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The use of software during the clinical trial process must adhere to the regulations and regulatory guidance known as Good Clinical Practice ("GCP"), guidance documents, and other various codified practices such as the Consolidated Guidance for Industry from the ICH Regarding Good Clinical Practices for Europe, the Asia Pacific region, and the Americas. The current amendment (ICH E6(R2)) encourages sponsors to implement improved oversight and management of clinical trials, while continuing to ensure protection of human subjects participating in trials and clinical trial data integrity.
In addition to these regulations and guidance documents, regulatory authorities have developed regulations and regulatory guidance concerning electronic records and electronic signatures. In general, regulatory guidance stipulates that computerized systems used to capture or manage clinical trial data must meet certain standards for attributability, legibility, contemporaneousness, originality, accuracy, completeness, consistency, and availability, as well as integrity and security. If our customers violate GCP or other regulatory requirements, both parties may run the risk that the violation will result in a regulatory citation, the suspension of the clinical trial, investigator disqualification or debarment, the rejection or withdrawal of a product marketing application, criminal prosecution, or civil penalties. Such risks not only impact our customers, but could also have a material adverse effect on our business, results of operations, or financial condition.
Regulation of Health Information
Government regulation of the use and disclosure of subject (patient) privacy and data protection imposes a number of requirements. In the U.S., regulations issued pursuant to the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") require certain “covered entities,” including facilities and providers that are involved in clinical trials, to comply with established standards regarding the privacy and security of protected health information, and to use standardized code sets when conducting certain electronic transactions. The regulations also require “business associates” that provide services on behalf of the covered entity to follow the same standards. Although we are not a “covered entity” or a “business associate,” and therefore technically are not subject to HIPAA regulations, many users of our products and services are directly regulated under HIPAA and our products cannot be utilized in a manner that is inconsistent with the users' HIPAA compliance requirements. In addition, to the extent we perform functions or activities on behalf of customers that are directly regulated by such health-related privacy laws, we may be required to comply with a number of the same HIPAA requirements. The breach of such requirements on our part may result in liability to our customers and us. In addition to HIPAA, most states within the U.S. have enacted or are considering their own privacy and data protection laws. Such state laws, if more stringent than HIPAA requirements, are not preempted by the federal requirements and we must comply with them as well.
In addition to complying with the privacy laws in the U.S., many foreign governments have data privacy and data protection laws that include additional protections for customer end-user information and for sensitive patient information, including clinical data. Because our services are available to customers in many foreign countries and to domestic customers using our services for multinational clinical trials, we must provide our services in a manner that supports our customers' compliance obligations. Foreign government data protection laws and regulations include the General Data Protection Regulation ("Regulation (EU) 2016/679" or the "GDPR"), and European country-specific laws and regulations that implement or will implement the GDPR, as well as the EU-U.S. Privacy Shield framework.
Employees
As of December 31, 2018, we had a total of 1,998 employees, of which 1,560 were located in the U.S., 252 in Europe, and 186 in the Asia Pacific region. As of December 31, 2018, we had 238 employees in customer services, support, and delivery, 348 employees in professional services, 744 employees in research and development, 420 employees in sales and marketing, and 248 employees in administrative and corporate functions. We also retain additional outside contractors to supplement our services and research and development staff on an as-needed basis. As of December 31, 2018, we had 599 independent contractors, the majority of which have been engaged in connection with help desk, customer service, and software development functions. None of our employees are covered by a collective bargaining agreement, and we consider our relationships with our employees to be good.
Available Information
We were organized as a New York corporation in June 1999 and reincorporated in the State of Delaware in May 2000. Our principal executive offices are located at 350 Hudson Street, 9th Floor, New York, New York 10014, and our telephone number is (212) 918-1800. Our website is located at www.medidata.com. No information contained on our web site is intended to be included as part of, or incorporated by reference into, this Annual Report on Form 10-K. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as well as reports relating to our securities filed by others pursuant to Section 16 of such act, are available through the investor relations page of our web site free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission ("SEC"). The SEC maintains a web site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.

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Item 1A. Risk Factors
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. The risks described below are those which we believe are the material risks we face. Any of the risk factors described below or additional risks and uncertainties not presently known to us, or that we currently deem immaterial, could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Business
Our quarterly and annual operating results fluctuate and may continue to fluctuate in the future, and if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.
Our quarterly and annual revenues and operating results have varied in the past and may vary significantly in the future depending on factors such as:
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budgeting cycles of our customers;
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the length of our sales cycle;
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increased competition;
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our ability to develop innovative products;
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the timing of new product releases by us or our competitors;
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market acceptance of our products;
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changes in our and our competitors' pricing policies;
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the financial condition of our current and potential customers;
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changes in the regulatory environment;
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changes in operating expenses and personnel changes;
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our ability to hire and retain qualified personnel;
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the effect of potential acquisitions and consequent integration;
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our ability to realize benefits from strategic partnerships, acquisitions or investments;
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equity issuances, including as consideration in acquisitions;
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variations in the revenue mix of our services and growth rates of our cloud subscription and professional services support offerings;
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changes in our business strategy;
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increases in our costs due to inflation; and
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general economic factors, including factors relating to disruptions in the world credit and equity markets and the related impact on our customers' access to capital.
Our future growth is dependent on the successful development and introduction of new products and enhancements to existing products. There can be no assurance that we will be successful in developing and marketing, on a timely basis, new products or product enhancements, that our new products will adequately address the changing needs of the marketplace, or that we will successfully manage the transition from existing technologies. Certain of these products require a higher level of sales and support expertise. The ability of our sales channel to obtain this expertise and to sell the new product offerings effectively could have an adverse impact on our sales and financial results in future periods. Any of these scenarios may result in the loss of or delay in customer acceptance, diversion of development resources, damage to our reputation, or increased service and warranty costs, any of which could have a material adverse effect on our business, financial position, results of operations, and cash flows.
In addition, a significant portion of our operating expenses is relatively fixed and planned expenditures are based in part on expectations regarding future revenues. Accordingly, unexpected revenue shortfalls may decrease our gross margins and could cause significant changes in our operating results from year to year. As a result, in future quarters our operating results could fall below the expectations of securities analysts or investors, in which event our stock price would likely decrease.
We derive a significant percentage of our revenues from a concentrated group of customers and the loss of one or more major customers could materially and adversely affect our business, results of operations or financial condition.
Our top five customers accounted for approximately 22%, 26%, and 26% of our revenues in 2018, 2017, and 2016, respectively. In 2018, 2017, and 2016, no single customer accounted for 10% or more of our total revenues. The loss of any of our major customers could have a material adverse effect on our results of operations and financial condition. We may not be able to maintain our customer relationships, and our customers may delay payment under, or fail to renew, their agreements with us, which could adversely affect our business, results of operations, or financial condition. Any reduction in the amount of revenues that we derive from these customers, without an offsetting increase in new sales to other customers, could have a material adverse effect on our operating results. A significant change in the liquidity or financial position of our customers could also have a material adverse effect on the collectability of our accounts receivable, our liquidity, and our future operating results.
If our customers cancel their contracts or terminate or delay their clinical trials, we may lose or delay revenues and our business may be harmed.
Certain of our customer contracts are subject to cancellation by our customers at any time with limited notice. Customers engaged in clinical trials may terminate or delay a clinical trial for various reasons, including the failure of the tested product to satisfy

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safety or efficacy requirements, unexpected or undesired clinical results, decisions to deemphasize a particular product or forgo a particular clinical trial, decisions to downsize clinical development programs, insufficient patient enrollment or investigator recruitment, and production problems resulting in shortages of required clinical supplies. In the case of our cloud-based solutions and services, any termination or delay in the clinical trials would likely result in a consequential delay or termination in those customers' service contracts. We have experienced terminations and delays of our customer service contracts in the past (although no such past terminations have had a significant impact on our results of operations) and we expect to experience additional terminations and delays in the future. The termination of single-study arrangements could result in decreased revenues and the delay of our customers' clinical trials could result in delayed professional services revenues, which could materially harm our business.
As our focus turns to selling additional cloud-based solutions and services to enterprise customers, our sales cycle may become more time-consuming and expensive and less predictable, and implementation challenges may arise, any of which could harm our business and operating results.
Our future success depends in part on our ability to sell additional cloud-based solutions and services to our current customers. This may also require increasingly sophisticated and costly sales efforts that are targeted at senior management. Similarly, the rate at which our customers purchase new or enhanced services depends on a number of factors. If our efforts to sell new solutions and expanded services to our existing customers are not successful, our growth prospects may suffer.
As we target more of our platform sales efforts at larger enterprise customers, we may face greater costs, longer sales cycles, and less predictability in our sales pipeline. The customer's decision to use our solutions and services may be an enterprise-wide decision and, if so, these types of sales would require us to provide prospective customers with greater levels of education regarding the use and benefits of our cloud-based solutions and services, as well as education regarding privacy and data protection laws. As a result of these factors, these sales opportunities may require us to devote greater sales support and professional services resources to individual customers, driving up costs and time required to complete sales and diverting our sales and professional services resources to a small number of large transactions.
Because we recognize revenue from subscriptions for our services over the term of the subscription, downturns or upturns in new business may not be immediately reflected in our operating results.
We generally recognize revenue from customers ratably over the terms of their subscription agreements, which typically range from one to five years. As a result, most of the revenue we report in each quarter is the result of subscription agreements entered into during previous quarters. Therefore, a decline in new or renewed subscriptions in any one quarter may not be reflected in our revenue results for that quarter. Any such decline, however, will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our services, and potential changes in our attrition rate, may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.
If our security is breached, our business could be disrupted, our operating results could be harmed, and customers could be deterred from using our products and services.
Our business relies on the secure electronic transmission, storage, and hosting of sensitive information, including clinical data, financial information, and other sensitive information relating to our customers, company, and workforce. We anticipate collecting more such information directly from patients as part of our Patient Cloud and mHealth initiatives, including via mobile devices and related systems provided by third parties. As a result, we face some risk of a deliberate or unintentional incident involving unauthorized access to our computer systems (including, among other methods, cyber attacks, or social engineering) that could result in misappropriation or loss of assets or sensitive information, data corruption, or other disruption of business operations. In light of this risk, we have devoted significant resources to protecting and maintaining the confidentiality of our information, including implementing security and privacy programs and controls, training our workforce, and implementing new technology. We have no guarantee that these programs and controls will be adequate to prevent all possible security threats. We believe that any compromise of our electronic systems, including the unauthorized access, use, or disclosure of sensitive information or a significant disruption of our computing assets and networks, would adversely affect our reputation and our ability to fulfill contractual obligations, would require us to devote significant financial and other resources to mitigate such problems, and could increase our future cyber security costs. Moreover, unauthorized access, use, or disclosure of such sensitive information could result in contractual or other liability. In addition, any real or perceived compromise of our security or disclosure of sensitive information may result in lost revenues by deterring customers from using or purchasing our products and services in the future or prompting them to use competing service providers.
Any failure by us to properly protect customer data, including any personal health information we possess or are deemed to possess in connection with the conduct of clinical trials, could subject us to significant liability.
Our customers use our solutions to collect, manage, and report information in connection with the conduct of clinical trials. This information may be considered our customers' proprietary information and/or personal health information of the clinical trial participants or patients. In addition, our Patient Cloud and mHealth initiatives are anticipated to result in our collecting more data (which may or may not be personal health information) directly from patients, including via mobile devices and related systems provided by third parties. Regulation related to the use and disclosure of personal health information continues to expand in scope and complexity. Increased focus on individuals' rights related to their personal information, including personal health information, could lead to an increase in existing and future legislative or regulatory initiatives giving direct legal remedies to individuals, including rights to damages, against

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entities deemed responsible for not adequately securing such personal information. In addition, courts may look to regulatory standards in identifying or applying a common law theory of liability. Since we receive and process our customers' proprietary information and/or personal information of clinical trial participants from customers utilizing our hosted solutions, there is a risk that we could be liable if there were a breach of an obligation to a protected person under contract, standard of practice, or regulatory requirement. If we fail to properly protect our customers' data or personal information that is in our possession or deemed to be in our possession, we could be subjected to significant liability and our reputation could be harmed.
We rely upon two internal hosting facilities and third party cloud computing services to deliver our solutions to our customers and any disruption of or interference with our hosting systems, operations, or third party cloud computing services would harm our business and results of operations.
Substantially all of the computer hardware necessary to deliver our solutions is located at our internal hosting facilities in Houston, Texas and Frankfurt, Germany. In addition to our dedicated hosting facilities, we utilize third-party cloud computing services from vendors such as Amazon Web Services ("AWS") to help us efficiently scale our cloud-based solutions. Because we cannot easily switch our AWS-serviced operations to another cloud provider, any disruption of or interference with our use of AWS would impact our operations, and our business would be adversely impacted. Our systems and operations or those of AWS could suffer damage or interruption from human error, fire, flood, power loss, telecommunications failure, break-ins, terrorist attacks, acts of war, and similar events. The occurrence of a natural disaster, an act of terrorism, or other unanticipated problems at our or AWS's hosting facilities could result in lengthy interruptions in our service. Although we and AWS maintain backup facilities and disaster recovery services in the event of a system failure, these may be insufficient or fail. Any system failure, including network, software, or hardware failure, that causes an interruption in our Houston or Frankfurt data centers or our use of AWS or that causes a decrease in responsiveness of our cloud-based solutions could damage our reputation and cause us to lose customers, which would harm our business and results of operations. Additionally, our business may be harmed if our customers and potential customers believe our service is unreliable.
Data protection laws and regulations may limit the use of our platform and give rise to operational interruption, liabilities, and reputational harm, which could have a materially adverse impact on our business.
Our customers can use our platform to collect, process, and transfer personal information globally, including sensitive personal information such as clinical information. As regulatory focus on privacy issues continues to increase and worldwide laws and regulations concerning the handling of personal information expand and become more complex, potential risks related to data collection and use for our customers and for our business will intensify. For example, the EU and the U.S. formally entered into a new framework in July 2016 that provides a mechanism for companies to transfer data from EU member states to the U.S. This new framework, called the Privacy Shield, is intended to address shortcoming identified by the Court of Justice of the EU in the previous EU-U.S. Safe Harbor Framework, which the Court of Justice invalidated in October 2015. The Privacy Shield and other data transfer mechanisms are likely to be reviewed by the European course, which may lead to uncertainty about the legal basis for data transfers to the U.S. or interruption of such transfers. In the event such court decisions block the transfers to or from a particular jurisdiction and in the event that no other transfer mechanisms, such as the model clauses, are legally adequate, this could give rise to operational interruption in the performance of our services for customers and internal processing of employee information, regulatory liabilities, and/or reputational harm. In addition, U.S. and foreign governments have enacted or are considering enacting legislation or regulations, or may in the future interpret existing legislation or regulations, in a manner that could significantly impact our ability and the ability of our customers and data partners to collect, augment, use, transfer, and share personal and other information that is integral to certain services we provide. These developments in Europe and elsewhere could harm our business, financial condition, and results of operations, including reducing demand for our platform or limiting its use, increasing our operating costs, and slowing or preventing the closing of sales transactions.
In addition, we may be subject to additional data privacy and security laws in the U.S., such as the California Consumer Privacy Act of 2018. The changes in laws or regulations associated with the enhanced protection of certain types of sensitive data, including health care data or other personal information, could greatly increase our cost of providing our products and services or even prevent us from offering certain services.
Regulators globally are also imposing greater compliance obligations and monetary fines for privacy violations. For example, in 2016 the EU adopted the GDPR, a law governing data practices and privacy, which became effective in May 2018. The law created a range of new compliance obligations, significantly increased financial penalties for non-compliance, and extended the scope of the EU data protection law to all companies processing data of EU residents, regardless of the company's location. If we are not compliant with GDPR requirements, we may be subject to significant fines and our business may be harmed. The GDPR and other privacy and data protection laws may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements with respect to our customers' use of our platform. We have incurred - and may continue to incur - significant expense to comply with mandatory privacy and security standards and protocols imposed by law, regulation, industry standards, or contractual obligations. In addition, the future enactment of more restrictive laws, rules or regulations, such as those requiring data localization, and/or future enforcement actions or investigations could have a materially adverse impact on us through increased costs or restrictions on our business and noncompliance could result in regulatory penalties, significant legal liability, and harm to our reputation.

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Defects or errors in our cloud-based solutions that significantly impact our customers could harm our reputation, result in significant cost to us, and impair our ability to market our solutions.
The software applications underlying our cloud-based solutions and services, including Medidata Rave, are inherently complex and may contain defects or errors, some of which may be material. Errors may result from our own technology or from the interface of our cloud-based solutions with legacy systems and data that we did not develop. The risk of errors is particularly significant when a new product is first introduced or when new versions or enhancements of existing products are released. The likelihood of errors is increased as a result of our commitment to the frequent release of new products and enhancements of existing products.
We have, from time to time, found defects in our solutions. Although these past defects have not resulted in any litigation against us to date, we have invested significant capital, technical, managerial, and other resources to investigate and correct these past defects, and we have needed to divert these resources from other development efforts. In addition, material performance problems or defects in our solutions may arise in the future. Material defects in our cloud-based solutions could result in a reduction in sales, delay in market acceptance of our solutions, or credits or refunds to our customers. In addition, such defects may lead to the loss of existing customers and difficulty in attracting new customers, diversion of development resources, or harm to our reputation.
Correction of defects or errors could prove to be impossible or impractical. The costs incurred in correcting any defects or errors or in responding to resulting claims or liability may be substantial and could adversely affect our operating results.
If we are not able to reliably meet our data storage and management requirements, or if we experience any failure or interruption in the delivery of our services over the Internet, customer satisfaction and our reputation could be harmed and customer contracts may be terminated.
As part of our current business model, we store and manage hundreds of terabytes of data for our customers, resulting in substantial information technology infrastructure and ongoing technological challenges, which we expect to continue to increase over time. If we do not reliably meet these data storage and management requirements, or if we experience any failure or interruption in the delivery of our services over the Internet, customer satisfaction and our reputation could be harmed, leading to reduced revenues and increased expenses. The services we provide to customers are subject to service level agreements and, in the event that we fail to meet guaranteed service or performance levels, we could be subject to issuance of customer credits or termination of these customer contracts. If the cost of meeting these data storage and management requirements increases, our results of operations could be harmed.
We are subject to risks associated with our strategic investments. Other-than-temporary impairments in the value of our investments could negatively impact our financial results.
We invest in early-to-late stage companies for strategic reasons to support key business initiatives, and may not realize a return on our strategic investments or realize benefits from such strategic business relationships. If any of the third parties with which we enter a strategic relationship fails to perform as expected, breaches or terminates their agreement with us, or becomes engaged in a dispute with us, our reputation could be adversely affected and our business could be harmed. These companies also generate net losses and the market for their products, services or technologies may be slow to develop; they are therefore dependent on the availability of later rounds of financing from banks or investors on favorable terms to continue their operations. The financial success of our investment in any company is typically dependent on a liquidity event, just as a public offering, acquisition, or other favorable market event reflecting appreciation to the cost of our initial investment. The capital markets for public offerings and acquisitions are dynamic and the likelihood of liquidity events for the companies we have invested in could significantly worsen. Further, valuations of privately held companies are inherently complex due to the lack of readily available market data. If we determine that any of our investments in such companies have experienced a decline in value, we may be required to record an impairment, which could negatively impact our financial results. All of our investments are subject to a risk of partial or total loss of investment capital.
We may expand our business through new acquisitions in the future. Any such acquisitions could disrupt our business, harm our financial condition and dilute current stockholders' ownership interests in our company.
We intend to pursue potential acquisitions of and investments in businesses, technologies, or products complementary to our business and periodically engage in discussions regarding such possible acquisitions. For example, we acquired Fast Track Systems, Inc. ("Fast Track") in March 2008; Clinical Force Limited ("Clinical Force") in July 2011; Patient Profiles, LLC ("Patient Profiles") in October 2014; Intelemage, LLC ("Intelemage") in April 2016; CHITA Inc. ("CHITA") in February 2017; Mytrus, Incorporated ("Mytrus") in April 2017; and SHYFT Analytics, Inc. ("SHYFT") in June 2018.
We may encounter difficulties in identifying and acquiring complementary products, technologies, or businesses, and in the case of executed acquisitions, may encounter numerous risks, including some or all of the following:
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substantial cash expenditures;
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incurrence of costs, debt, and contingent liabilities, some of which we may not identify at the time of acquisition or which may ultimately be greater than we anticipate;
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difficulties in integrating and assimilating the operations, products, and personnel of the acquired companies;
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diversion of management's attention away from other business concerns;
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risk associated with entering markets in which we have limited or no direct experience;

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potential loss of key employees, customers, and strategic alliances from either our current business or the target company's business;
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delays in customer purchases due to uncertainty and the inability to maintain relationships with customers of the acquired businesses; and
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failure to achieve anticipated business development benefits due to an inadequate evaluation of acquisitions or investments.
An acquisition may not result in short-term or long-term benefits to us. The failure to execute acquisitions or investments successfully or otherwise adequately address these risks could materially harm our business and financial results. We may incorrectly judge the value or worth of an acquired company or business. In addition, our future success will depend in part on our ability to manage the growth anticipated with these acquisitions.
Furthermore, the development or expansion of our business or any acquired business or companies may require a substantial capital investment by us. We may not have these necessary funds or they might not be available to us on acceptable terms or at all. We may also seek to raise funds for an acquisition by issuing equity securities or convertible debt, as a result of which our existing stockholders may be diluted or the market price of our stock may be adversely affected.
Supporting our existing and growing customer base could strain our personnel resources and infrastructure, and if we are unable to scale our operations and increase productivity, we may not be able to successfully implement our business plan.
We continue to experience significant growth in our business, operations, and personnel, which has placed a strain on our management, administrative, operational, and financial infrastructure. Our success will depend in part upon the ability of our senior management to manage our projected growth effectively. To do so, we must continue to increase the productivity of our existing employees and to hire, train, and manage new employees as needed. To manage the expected domestic and international growth of our operations and personnel, we will need to continue to improve our operational financial and management controls, our reporting systems and procedures, and our utilization of real estate. If we fail to successfully scale our operations and increase productivity, we will be unable to execute our business plan.
We regularly update or replace our various software systems. If the implementations of these new applications are delayed, or if we encounter unforeseen problems with our new systems or in migrating away from our existing applications and systems, our operations and our ability to manage our business could be negatively impacted.
Our revenues derived from international operations are subject to risks that could have an adverse effect on our results of operations.
We intend to continue our strategic expansion into new geographic areas and expect that international customers will continue to account for a substantial percentage of our revenues. International operations are subject to inherent risks. These risks include:
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the economic conditions in these various foreign countries and their trading partners, including conditions resulting from disruptions in the world credit and equity markets;
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political instability;
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longer payment cycles;
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greater difficulty in accounts receivable collection and enforcement of agreements;
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requirements to comply with foreign laws;
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data privacy laws and regulations which restrict the collection by our customers, processing or transfer into the U.S. of customer personal information or that require customer information to be collected or processed in a designated territory;
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changes in regulatory requirements;
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risk of non-compliance with the U.S. Foreign Corrupt Practices Act ("FCPA") or similar regulations in other jurisdictions;
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fewer legal protections for intellectual property and contract rights;
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tariffs or other trade barriers;
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difficulties in managing foreign operations;
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unavailability of staff with needed skills;
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exposure to interest rate fluctuations;
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transportation delays;
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potentially adverse tax consequences; and
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exposure to foreign currency exchange risk associated with transactions entered into in currencies other than the U.S. dollar.
Our failure to successfully mitigate these risks could have a material adverse effect on our business, results of operations, and financial condition. In addition, we are continuing to execute on our growth initiatives in Asia, where our strategy is to broaden adoption of our application services, especially in China and South Korea. We are subject to risks inherent in foreign trade, including increased credit risks, tariffs and duties, fluctuations in foreign currency exchange rates, and international political, regulatory and economic developments, all of which can have a significant influence on our operating results. Some of our international sales are made in local currencies, which could fluctuate against the dollar. Accordingly, our operating results could be adversely affected by unfavorable foreign currency fluctuations.

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Changes in the United Kingdom's economic and other relationships with the European Union could negatively impact us.
In June 2016, in a referendum vote commonly referred to as "Brexit," a majority of British voters voted to exit the EU. In March 2017, the United Kingdom ("U.K.") government officially triggered the process to formally initiate negotiations for the terms of separation from the EU. EU rules provide for a two-year negotiation period, ending on March 29, 2019, unless an extension is agreed to by the parties. The withdrawal negotiations began in 2017 and remain ongoing. The U.K.'s stated intention is to leave the EU's Single Market and Customs Union. The draft deal negotiated by the U.K. and EU was overwhelmingly rejected by the U.K. Parliament in a vote on January 15, 2019. Consequently, shortly before the U.K. is due to leave the EU, there is no agreement on what the terms of the U.K.'s future relationship with the EU will be. The options are: a new deal being struck; and/or the deadline of March 29, 2019 being extended; and/or the U.K. having a further referendum and voting to remain in the EU; or the U.K. leaving the EU without a deal. It is impossible at the moment to predict which outcome is most likely. The effects of Brexit will depend on any agreements the U.K. makes to retain access to the EU markets either during a transitional period or more permanently. Without access to the single EU market, it may be more challenging and costly to provide our services in Europe. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which EU laws to replace and replicate. If there are changes to U.K. immigration policy as a result of Brexit, this could affect our employees and their ability to move freely between the EU member states for work-related matters. It is unclear what long-term economic, financial, trade, and legal implications the withdrawal of the U.K. from the EU would have and how such withdrawal would affect our business globally and in the region. In addition, Brexit may lead other EU member countries to consider referenda regarding their EU membership. Any of these events, along with any political, economic, and regulatory changes that may occur as a result, could cause political and economic uncertainty in Europe and internationally, and harm our business and financial results.
Our inability to attract and retain highly skilled employees could adversely affect our business.
To execute our growth plan, we must attract and retain highly qualified employees. We do not have employment agreements with any of our executive officers, key management, development, or operations personnel and they could terminate their employment with us at any time. The loss of one or more of our key employees or groups could seriously harm our business. In the technology industry, there is substantial and continuous competition for engineers with high levels of expertise in designing, developing, and managing software and Internet-related services, as well as competition for sales executives, data scientists, and operations personnel. We may not be successful in attracting and retaining qualified personnel. We have from time to time experienced, and expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. These difficulties may be amplified by evolving restrictions on immigration, travel, or availability of visas for skilled technology workers. If we fail to attract new employees or fail to retain and motivate our current employees, our business and future growth prospects could be adversely affected.
We rely in part on third parties for our help desk support and technology partnerships, and our business may suffer if these relationships do not continue.
We currently outsource our help desk support functions, which involve important direct interactions with users of our products. In the event that our vendor becomes unable or unwilling to provide these services to us, we are not equipped to provide the necessary range of help desk support and service functions to our customers. We also work with third-party software companies to allow our cloud-based platform to interface with their products. If we are unable to develop and maintain effective relationships with appropriate technology partners, or if such companies adopt more restrictive policies with respect to, or impose unfavorable terms and conditions on, access to their products, we may not be able to continue to provide our customers with certain platform infrastructure, which could reduce our sales and adversely affect our business, operating results, and financial condition.
We rely on third-party SaaS vendors in connection with numerous critical functions of our business, which presents risks that, if realized, could adversely affect our business operations and financial results.
We currently rely on third-party SaaS vendors in connection with many critical functions of our business, including enterprise resource planning services, customer relationship management services, enterprise cloud applications for human resources, and electronic communication services. Further, some of our cloud-based solutions are hosted by AWS. If any of these services fail or become unavailable due to extended outages or interruptions, or the security of our data stored with the vendors is compromised, or our own access to our data stored with the vendors is restricted or terminated, or the cloud-based services we use are no longer available on commercially reasonable terms or prices, our revenue could be reduced, our reputation could be damaged, expenses could increase, our ability to manage our finances, sales opportunities and workforce could be interrupted, and our processes for delivering services and supporting our customers could be impaired until equivalent services are identified, obtained and implemented, all of which could adversely affect our business.
We have been, and may continue to be, subject to claims that we or our technologies infringe upon the intellectual property or other proprietary rights of a third party. Any such claims may require us to incur significant costs, to enter into royalty or licensing agreements, or to develop or license substitute technology.
We have been, and may in the future be, subject to claims that our technologies infringe upon the intellectual property or other proprietary rights of a third party.
We cannot assure you that our cloud-based solutions and the technologies used in our product offerings do not infringe upon patents held by others or that they will not so infringe in the future. Any future claim of infringement could cause us to incur substantial

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costs defending against the claim, even if the claim is without merit, and could distract our management from our business. Moreover, any settlement or adverse judgment resulting from the claim could require us to pay substantial amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. Any required licenses may not be available to us on acceptable terms, if at all. If we do not obtain any required licenses, we could encounter delays in product introductions if we attempt to design around the technology at issue or attempt to find another provider of suitable alternative technology to permit us to continue offering the applicable solution. In addition, we generally provide in our customer agreements that we will indemnify our customers against third-party infringement claims relating to our technology provided to the customer, which could obligate us to fund significant amounts. Infringement claims asserted against us or against our customers or other third parties that we are required or otherwise agree to indemnify may have a material adverse effect on our business, results of operations, or financial condition.
We may be unable to adequately enforce or defend our ownership and use of our intellectual property and other proprietary rights.
Our success is heavily dependent upon our intellectual property and other proprietary rights. We rely upon a combination of trademark, trade secret, copyright, patent, and unfair competition laws, as well as license and access agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we attempt to protect our intellectual property and proprietary information by requiring certain of our employees and consultants to enter into confidentiality, non-competition, and assignment of inventions agreements. The steps we take to protect these rights may not be adequate to prevent misappropriation of our technology by third parties, or may not be adequate under the laws of some foreign countries, which may not protect our intellectual property rights to the same extent as do the laws of the U.S.
Our attempts to protect our intellectual property may be challenged by others or invalidated through administrative process or litigation, and agreement terms that address non-competition are difficult to enforce in many jurisdictions and may not be enforceable in any particular case. In addition, there remains the possibility that others will “reverse engineer” our products in order to introduce competing products, or that others will develop competing technology independently.
If we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, the proceedings could be burdensome and expensive, even if we were to prevail. The failure to adequately protect our intellectual property and other proprietary rights may have a material adverse effect on our business, results of operations, or financial condition.
Our cloud-based solutions and services utilize open source software, and any failure to comply with the terms of one or more of these open source licenses could adversely affect our business.
Our cloud-based solutions utilize software covered by open source licenses. Open source software is typically freely accessible, usable and modifiable, and is used by our development team in an effort to reduce development costs and speed up the development process. Certain open source software licenses require a user who intends to distribute the open source software as a component of the user's software to disclose publicly part or all of the source code to the user's software. In addition, certain open source software licenses require the user of such software to make any derivative works of the open source code available to others on unfavorable terms or at no cost. This can subject previously proprietary software to open source license terms. While we monitor the use of all open source software in our products, processes, and technology and try to ensure that no open source software is used in such a way as to require us to disclose or make available the source code to the related product or solution, such use could inadvertently occur. This could harm our intellectual property position and have a material adverse effect on our business.
We could incur substantial costs resulting from product liability claims relating to our products or services or our customers' use of our products or services.
Any failure or errors in a customer's clinical trial caused or allegedly caused by our products or services could result in a claim for substantial damages against us by our customers or the clinical trial participants, regardless of our responsibility for the failure. Although we are generally entitled to indemnification under our customer contracts against claims brought against us by third parties arising out of our customers' use of our products, we might find ourselves entangled in lawsuits against us that, even if unsuccessful, may divert our resources and energy and adversely affect our business. Further, in the event we seek indemnification from a customer, a court may not enforce our indemnification right if the customer challenges it or the customer may not be able to fund any amounts for indemnification owed to us. In addition, our existing insurance coverage may not continue to be available on reasonable terms or may not be available in amounts sufficient to cover one or more large claims, or the insurer may disclaim coverage as to any future claim.
Current and future litigation against us, which may arise in the ordinary course of our business, could be costly and time consuming to defend.
We are from time to time subject to legal proceedings and claims that arise in the ordinary course of business, such as claims brought by our customers in connection with commercial disputes and employment claims made by our current or former employees. From time to time, third parties have asserted and may in the future assert intellectual property rights to technologies that are important to our business and have demanded and may in the future demand that we license their technology. Litigation may result in substantial costs and may divert management's attention and resources, which may seriously harm our business, overall financial condition, and operating results. Insurance may not cover such claims, may not be sufficient for one or more such claims, and may not continue to be

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available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, negatively affecting our business, results of operations, and financial condition.
Our contracts with the U.S. government are subject to termination rights and other risks that could adversely affect us.
Because our U.S. government contracts and subcontracts are generally subject to procurement laws and regulations, we may not receive all of the future revenues we anticipate receiving under those contracts and subcontracts in the expected periods. Some of our government contracts are governed by the Federal Acquisition Regulation ("FAR"), which includes uniform policies and procedures for acquiring goods and services by the U.S. government. The FAR also contains guidelines and regulations for managing a contract after an award, including conditions under which contracts may be terminated, in whole or in part, at the government's convenience. These regulations also subject us to financial audits and other reviews by the government of our costs, performance, accounting, and general business practices relating to our government contracts, which may result in adjustment of our contract-related costs and fees. Any such future procurement actions by government customers are subject to risks and uncertainties, which could affect the allocation, timing, schedule, and scope of our government contracts and subcontracts.
Channel partners generate a significant portion of our sales.
We face ongoing business risks due to our partial reliance on our channel partners, including CROs and systems integrators, to generate sales. We rely on our channel partners for a significant portion of our revenue. These partners have considerable discretion in electing whether to utilize our solutions for their outsourced clinical trial management services. If our channel partners do not effectively market and sell subscriptions to our platform, choose to promote our competitors' products, or fail to meet the needs of our customers, our ability to grow our business and sell subscriptions to our platform may be adversely affected. Should our relationships with our channel partners or the effectiveness of our channel partners decline, we face the risk of declining demand for our services, which would affect our revenues and results of operations. In addition, if we are unable to maintain our relationships with our existing channel partners or develop successful relationships with new channel partners, or if our channel partners fail to perform, our business, financial position, and results of operations could be materially and adversely affected.
Unanticipated changes in our effective tax rate and additional tax liabilities may impact our financial results.
We are subject to income tax in the U.S. and various jurisdictions outside of the U.S. Our effective tax rate could fluctuate due to changes in the mix of earnings and losses in countries with differing statutory tax rates. Our tax expense could also be impacted by changes in non-deductible expenses, changes in excess tax benefits on stock-based compensation, changes in the valuation of deferred tax assets and liabilities and our ability to utilize them, the applicability of withholding taxes, and effects from acquisitions.
We are open to tax examinations in multiple jurisdictions. While we regularly evaluate new information that may change our judgment resulting in recognition, derecognition, or change in measurement of a tax position taken, there can be no assurance that the final determination of any examinations will not have an adverse effect on our operating results and financial position.
Our tax provision could also be impacted by changes in accounting principles and/or changes in U.S. federal and state or international tax laws applicable to corporate multinationals. Furthermore, changes in taxing jurisdictions' administrative interpretations, decisions, policies and positions could also impact our tax provision.
We may also be subject to additional liabilities for non-income based taxes due to changes in U.S. federal, state, or international tax laws, changes in taxing jurisdictions' administrative interpretations, decisions, policies, and positions, results of tax examinations, settlements or judicial decisions, changes in accounting principles, changes to our business operations, including acquisitions, as well as the evaluation of new information that results in a change to a tax position taken in a prior period.
Risks Related to Our Industry
We face significant competition, which could cause us to lose business or achieve lower margins.
The market for our clinical trial solutions is intensely competitive and characterized by rapidly changing technologies, evolving industry standards, and frequent new product and service introductions and enhancements that may render existing products and services obsolete. Accordingly, our market share and margins are subject to sudden declines. Some of our competitors have longer operating histories, greater financial, technical, marketing and other resources, and greater name recognition than we do. These competitors may respond more quickly than we can to new and emerging technologies and changing customer and regulatory requirements, or devote greater resources to the development, promotion, and sale of their solutions. New competitors may enter our market in the future, as barriers to entry are relatively low in our industry. Increased competition may result in pricing pressures, which could negatively impact our sales, gross margins, or market share. In addition, current and potential competitors have established, and may in the future establish, relationships with vendors of complementary products, technologies, or services to increase the penetration of their products in the marketplace. Even if our products and services are more effective than the products or service offerings of our competitors, current or potential customers might accept competitive products and services in lieu of purchasing our cloud-based solutions and services. Our failure to compete effectively could materially adversely affect our business, financial condition, or results of operations.

14

We depend entirely on the clinical trial market, and a downturn in this market could cause our revenues to decrease.
Our business depends entirely on the clinical trials conducted or sponsored by pharmaceutical, biotechnology, and medical device companies, CROs, and other entities. Our revenues may decline as a result of conditions affecting these industries, including general economic downturns, increased consolidation, decreased competition, or fewer products under development. Other developments that may affect these industries and harm our operating results include product liability claims, changes in government regulation, changes in governmental price controls or third-party reimbursement practices, and changes in medical practices. Disruptions in the world credit and equity markets may also result in a global downturn in spending on research and development and clinical trials and may impact our customers' access to capital and their ability to pay for our solutions. Any decrease in research and development expenditures or in the size, scope, or frequency of clinical trials could materially adversely affect our business, results of operations, or financial condition.
Extensive governmental regulation of the clinical trial process and our products and services could require significant compliance costs and have a material adverse effect on the demand for our solutions.
The clinical trial process is subject to extensive and strict regulation by the U.S. FDA and other regulatory authorities worldwide. Our cloud-based solutions and services are also subject to state, federal, and foreign regulations. Demand for our solutions is largely a function of such government regulation, which is subject to change at any time. Changes in the level of regulation, including a relaxation in regulatory requirements or the introduction of simplified drug approval procedures, could have a material adverse effect on the demand for our solutions. Proposals to place caps on drug prices could limit the profitability of existing or planned drug development programs, making investment in new drugs and therapies less attractive to pharmaceutical companies. Similarly, the requirements in the U.S., the EU, the Asia Pacific region, and elsewhere to create a detailed registry of all clinical trials could have an impact on customers' willingness to perform certain clinical studies. In addition, the uncertainty surrounding the possible adoption and impact on health care of any GCP reforms could cause our customers to delay planned research and development until some of these uncertainties are resolved.
Modifying our cloud-based solutions and services to comply with changes in regulations or regulatory guidance could require us to incur substantial costs. Further, changing regulatory requirements may render our solutions obsolete or make new products or services more costly or time consuming than we currently anticipate. Failure by us, our customers, or our competitors to comply with applicable regulations could result in increased regulatory scrutiny and enforcement. If our solutions fail to comply with government regulations or guidelines, we could incur significant liability or be forced to cease offering our applicable products or services. If our solutions fail to allow our customers to comply with applicable regulations or guidelines, customers may be unwilling to use our solutions and any such non-compliance could result in the termination of or additional costs arising from contracts with our customers.
Consolidation among our customers could cause us to lose customers, decrease the market for our products and result in a reduction of our revenues.
Our customer base could decline because of industry consolidation, and we may not be able to expand sales of our products and services to new customers. Consolidation in the pharmaceutical, biotechnology and medical device industries, and among CROs has accelerated in recent years, and this trend may continue. In addition, new companies or organizations that result from such consolidation may decide that our products and services are no longer needed because of their own internal processes or the use of alternative systems. As these entities consolidate, competition to provide products and services to industry participants will become more intense and the importance of establishing relationships with large industry participants will become greater. These industry participants may try to use their market power to negotiate price reductions for our products and services. Also, if consolidation of larger current customers occurs, the combined organization may represent a larger percentage of business for us and, as a result, we are likely to rely more significantly on the combined organization's revenues to continue to achieve growth.
Risks Related to Our Common Stock and Our Debt
The price of our common stock may fluctuate significantly, and investors could see their investments decline in value.
Shares of our common stock were sold in our initial public offering ("IPO") in June 2009 at a price of $7.00 per share (on a post-split basis), and our common stock has subsequently traded as high as $88.87 and as low as $6.68 from our IPO through December 31, 2018. However, an active, liquid, and orderly market for our common stock on The NASDAQ Stock Market or otherwise may not be sustained, which could depress the trading price of our common stock. The trading price of our common stock may be subject to wide fluctuations in response to various factors, some of which are beyond our control, including:
•
our quarterly or annual earnings or those of other companies in our industry;
•
announcements by us or our competitors of significant contracts or acquisitions;
•
changes in accounting standards, policies, guidance, interpretations, or principles;
•
forward-looking guidance to industry and financial analysts related to future revenue and earnings;
•
disruptions in our service due to computer hardware, software, network, or data center problems;
•
general economic and stock market conditions, including disruptions in the world credit and equity markets;
•
the failure of securities analysts to cover our common stock or changes in financial estimates and other metrics and modeling used by analysts in their research reports about our business;
•
future issuances of our common stock, whether in connection with an acquisition, or a capital raising transaction; and
•
the other factors described in these “Risk Factors.”

15

In recent years, the stock market in general, and the market for technology-related companies in particular, has experienced extreme price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The price of our common stock could fluctuate based upon factors that have little to do with our performance, and these fluctuations could materially reduce our stock price.
In the past, some companies, including companies in our industry, have had volatile market prices for their securities and have had securities class action suits filed against them. The filing of a lawsuit against us, regardless of the outcome, could have a material adverse effect on our business, financial condition, and results of operations, as it could result in substantial legal costs and a diversion of our management's attention and resources.
Our actual operating results may differ significantly from guidance provided by our management.
From time to time, we release guidance in our earnings releases, earnings conference calls, or otherwise, regarding our future performance that represent our management's estimates as of the date of release. This guidance, which includes forward-looking statements, is based on projections prepared by our management. Our guidance is not prepared with a view toward compliance with published accounting and reporting guidelines, and neither our registered public accountants nor any other independent expert or outside party compiles or examines the projections and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto.
Guidance is based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. We generally state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed, but are not intended to represent that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by analysts.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results will vary from our guidance and the variations may be material. In light of the foregoing, investors are urged to put the guidance in context and not to place undue reliance on any such guidance. Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances discussed therein could result in the actual operating results being different from our guidance, and such differences may be adverse and material.
Provisions of Delaware law and our organizational documents may discourage takeovers and business combinations that our stockholders may consider to be in their best interests, which could negatively affect our stock price.
Provisions of Delaware law and our fifth amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change in control of our company or deterring tender offers for our common stock that other stockholders may consider in their best interests.
Our fifth amended and restated certificate of incorporation authorizes us to issue up to 5,000,000 shares of preferred stock in one or more different series with terms to be fixed by our board of directors. Stockholder approval is not necessary to issue preferred stock in this manner. Issuance of these shares of preferred stock could have the effect of making it more difficult and more expensive for a person or group to acquire control of us, and could effectively be used as an anti-takeover device. Currently there are no shares of our preferred stock issued or outstanding.
Our bylaws provide for an advance notice procedure for stockholders to nominate director candidates for election or to bring business before an annual meeting of stockholders, including proposed nominations of persons for election to our board of directors, and require that special meetings of stockholders be called only by our chairman of the board, chief executive officer, president or the board pursuant to a resolution adopted by a majority of the board.
The anti-takeover provisions of Delaware law and provisions in our organizational documents may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.
As a public company, we may incur significant administrative workload and expenses in connection with new and changing compliance requirements.
As a public company with common stock listed on The NASDAQ Stock Market, we must comply with various laws, regulations, and requirements. New laws and regulations, as well as changes to existing laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and rules adopted by the SEC and by The NASDAQ Stock Market, may result in increased general and administrative expenses and a diversion of management's time and attention as we respond to new requirements.

16

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividends on our common stock and do not intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your investment in our common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. Shares of our common stock may depreciate in value or may not appreciate in value.
Our ability to generate the amount of cash needed to service our debt obligations or to obtain additional financing depends on many factors beyond our control.
As of December 31, 2018, we had $95 million outstanding under our Term Loan and $400 million of aggregate principal amount of Revolving Commitments available under our Credit Facility (defined in Note 10, "Debt," to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K). We may borrow amounts in the future and use the proceeds from any future borrowing for general corporate purposes, future acquisitions, expansion of our business, or repurchases of our outstanding shares of common stock.

Our ability to make scheduled payments of the principal of, or to pay interest on or to refinance our future indebtedness depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. Refer to Note 10, "Debt," to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further information regarding our Credit Facility.
Restrictive covenants in the credit agreement governing our senior secured first lien credit facility may restrict our ability to pursue our business strategies.
The credit agreement governing our Credit Facility imposes restrictions on us, including restrictions on our ability to incur additional indebtedness, grant liens on assets, engage in certain fundamental corporate changes, sell or otherwise dispose of assets, make certain investments and acquisitions, or pay dividends, and requires us to maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control. If we breach any of the covenants and do not obtain a waiver from the lenders, then, subject to the applicable cure periods, our outstanding indebtedness could be declared immediately due and payable. Further, following an event of default under our Credit Facility, the lenders will have the right to proceed against the collateral granted to them to secure that debt. If the debt under our Credit Facility were to be accelerated, it may have a material adverse effect on our liquidity and financial position and, further, we may not have sufficient funds to repay in full such indebtedness that may become due as a result of that acceleration.

17

Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our corporate headquarters and other material leased real property and data center space as of December 31, 2018 are shown in the following table. We do not own any real property.
Location
 
Use
 
Size
 
Expiration of Lease
New York, New York
 
Corporate headquarters
 
137,535 square feet
 
April 2024
Boston, Massachusetts
 
Office space
 
53,136 square feet
 
January 2031
Iselin, New Jersey
 
Office space
 
50,648 square feet
 
June 2026
Hammersmith, United Kingdom
 
Office space
 
29,106 square feet
 
February 2027
San Francisco, California
 
Office space
 
14,015 square feet
 
February 2023
Tokyo, Japan
 
Office space
 
12,338 square feet
 
October 2023
Seoul, South Korea
 
Office space
 
11,882 square feet
 
March 2022
Houston, Texas
 
Data center and office space
 
11,367 square feet
 
December 2020
Frankfurt, Germany
 
Data center
 
 471 square feet
 
February 2020
We believe these facilities and additional or alternative space available to us will be adequate to meet our needs for the foreseeable future.
Item 3. Legal Proceedings
See Note 16, “Commitments and Contingencies—Legal Matters,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for a description of current legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.

18

PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Stock Market Information
Our common stock has been traded on The NASDAQ Global Market under the symbol “MDSO” since the completion of our IPO in June 2009. Before then, there was no public market for our common stock.
The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as reported by The NASDAQ Global Market:
 
2018
 
2017
 
High
 
Low
 
High
 
Low
Fourth Quarter
$
79.76

 
$
60.10

 
$
81.88

 
$
63.33

Third Quarter
88.87

 
71.91

 
85.92

 
70.38

Second Quarter
85.69

 
60.70

 
81.65

 
56.65

First Quarter
71.82

 
59.60

 
58.77

 
47.77

Holders
As of February 25, 2019, we had approximately 62 holders of record of our common stock. The number of record holders was determined from the records of our transfer agent and does not include the many additional beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is American Stock Transfer & Trust Company, 6201 15th Avenue, Brooklyn, New York 11219.
Dividends
Since the completion of our IPO in June 2009, we have not declared or paid any cash dividends on our capital stock. We currently expect to retain any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors considers relevant. The terms of the credit agreement governing our Credit Facility (discussed in Note 10, "Debt," to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K) restrict our ability to pay cash dividends and make stock repurchases, if, after giving effect thereto, the consolidated total net leverage ratio (total funded indebtedness, less unrestricted domestic cash and cash equivalents not to exceed $150 million, to EBITDA) exceeds 2.25 to 1.00 or there is an existing default under the credit agreement.
Securities Authorized for Issuance under Equity Compensation Plans
Refer to Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," under Part III of this Annual Report on Form 10-K for information on where to find information regarding the securities authorized for issuance under our equity compensation plans.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We regularly grant nonvested restricted stock awards and performance-based restricted stock units to our employees pursuant to the terms of our Amended and Restated 2017 Long-Term Incentive Plan ("2017 Plan") and formerly pursuant to the terms of our Second Amended and Restated 2009 Long-Term Incentive Plan ("2009 Plan"). Under the provisions of the 2017 Plan and 2009 Plan, unless otherwise elected, participants fulfill their income tax withholding obligation by having shares withheld at the time of vesting. On the date of vesting, we determine the number of vested shares to be withheld by dividing the participant's income tax withholding obligation by the closing price of our common stock and withhold the resulting number of vested shares.

19

A summary of our repurchases of shares of our common stock for the three months ended December 31, 2018 is as follows: 
 
Total Number
of Shares
Purchased (1)
 
Average
Price Paid
per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum
Number of
Shares that
May Yet be
Purchased
under the  Plans
or Programs
October 1 – October 31, 2018
6,200

 
$
68.85

 
—

 
—

November 1 – November 30, 2018
1,088

 
71.76

 
—

 
—

December 1 – December 31, 2018
1,638

 
77.21

 
—

 
—

Total
8,926

 
$
70.74

 
—

 
—

(1) Represents the number of shares acquired as payment by employees of applicable statutory minimum withholding taxes owed upon vesting of restricted stock awards, restricted stock units, or performance-based restricted stock units granted under the 2017 and 2009 Plans.
Stock Performance Graph
The following graph sets forth the total cumulative stockholder return on our common stock for the last five fiscal years as compared to the NASDAQ Composite Index and the NASDAQ Computer Index over the same period. This graph assumes a $100 investment in our common stock at $60.50, which was the adjusted closing market price per share on December 31, 2013. The comparison in the graphs below are based upon historical stock performance and not indicative of, nor intended to forecast, future performance of our common stock. 
chart-79d4272f1ac055ed801.jpg


20

Item 6. Selected Financial Data
Our selected consolidated financial information presented for each of the years ended December 31, 2018, 2017, and 2016 and as of December 31, 2018 and 2017 was derived from our audited consolidated financial statements, which are included in Item 8 of this Annual Report on Form 10-K. Our selected financial information presented for each of the years ended December 31, 2015 and 2014 and as of December 31, 2016, 2015, and 2014 was derived from our audited consolidated financial statements, which are not included in this Annual Report on Form 10-K.
The information contained in this table should be read in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and accompanying notes thereto included elsewhere in this Annual Report on Form 10-K.
Consolidated Statement of Operations Data
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(in thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
 
 
Subscription
$
535,672

 
$
457,824

(1)
$
388,997

(1)
$
336,195

 
$
280,041

Professional services
100,024

 
86,381

(1)
69,496

(1)
56,311

 
55,030

Total revenues
635,696

 
544,205

 
458,493

 
392,506

 
335,071

Costs of revenues:
 
 
 
 
 
 
 
 
 
Subscription
91,087

 
69,235

 
62,136

 
47,795

 
45,576

Professional services
68,072

 
57,558

 
50,473

 
41,993

 
39,344

Total cost of revenues
159,159

 
126,793

 
112,609

 
89,788

 
84,920

Gross profit
476,537

 
417,412

 
345,884

 
302,718

 
250,151

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Research and development
162,788

 
138,564

 
112,595

 
92,319

 
71,757

Sales and marketing
151,943

 
124,138

(1)
105,925

(1)
103,153

 
83,435

General and administrative
110,489

 
94,324

 
78,678

 
78,014

 
69,111

Wire transaction (recovery) loss (2)
—

 
(4,770
)
 
—

 
—

 
5,784

Total operating costs and expenses
425,220

 
352,256

 
297,198

 
273,486

 
230,087

Operating income
51,317

 
65,156

 
48,686

 
29,232

 
20,064

Interest and other expense, net
(1,179
)
 
(12,121
)
 
(12,895
)
 
(13,457
)
 
(13,550
)
Income before income taxes
50,138

 
53,035

 
35,791

 
15,775

 
6,514

Provision for income taxes
(1,783
)
 
5,459

(1)
7,782

(1)
2,608

 
422

Net income
$
51,921

 
$
47,576

(1)
$
28,009

(1)
$
13,167

 
$
6,092

Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.89

 
$
0.84

(1)
$
0.50

(1)
$
0.25

 
$
0.12

Diluted
$
0.85

 
$
0.80

(1)
$
0.49

(1)
$
0.23

 
$
0.11

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
58,125

 
56,473

 
55,492

 
53,717

 
52,561

Diluted
61,162

 
59,765

 
57,249

 
56,540

 
55,247


21

Stock-based compensation expense and depreciation and amortization of intangible assets included in cost of revenues and operating costs and expenses are as follows: 
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(in thousands)
Stock-based compensation expense
 
 
 
 
 
 
 
 
 
Cost of revenues
$
6,619

 
$
4,873

 
$
4,425

 
$
5,040

 
$
4,313

Research and development
11,993

 
13,314

 
9,223

 
7,907

 
4,085

Sales and marketing
12,568

 
6,833

 
7,074

 
9,171

 
7,450

General and administrative
29,958

 
22,793

 
20,436

 
26,869

 
22,105

Total stock-based compensation
$
61,138

 
$
47,813

 
$
41,158

 
$
48,987

 
$
37,953

Depreciation
 
 
 
 
 
 
 
 
 
Cost of revenues
$
18,938

 
$
10,149

 
$
6,341

 
$
5,585

 
$
5,275

Research and development
4,493

 
4,801

 
3,637

 
2,188

 
2,302

Sales and marketing
3,097

 
2,967

 
2,213

 
1,440

 
849

General and administrative
2,176

 
2,031

 
1,861

 
973

 
1,381

Total depreciation
$
28,704

 
$
19,948

 
$
14,052

 
$
10,186

 
$
9,807

Amortization of intangible assets
 
 
 
 
 
 
 
 
 
Cost of revenues
5,048

 
3,664

 
1,021

 
517

 
499

Sales and marketing
1,293

 
441

 
276

 
119

 
129

Total amortization of intangible assets
$
6,341

 
$
4,105

 
$
1,297

 
$
636

 
$
628

Total depreciation and amortization of intangible assets
$
35,045

 
$
24,053

 
$
15,349

 
$
10,822

 
$
10,435

Consolidated Balance Sheet Data
 
December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(in thousands)
Cash and cash equivalents (4)
$
105,440

 
$
237,325

 
$
93,519

 
$
49,562

 
$
39,517

Total marketable securities (3)
135,105

 
426,008

 
421,703

 
429,167

 
417,126

Total current assets
462,485

 
641,017

(1)
516,267

(1)
383,201

 
357,852

Restricted cash (5)
7,205

 
5,518

 
5,760

 
5,755

 
5,118

Total assets
913,212

 
1,061,233

(1)
828,103

(1)
684,180

 
617,639

Total deferred revenue
78,306

 
82,631

(1)
75,850

(1)
78,575

 
64,264

Total capital lease obligations
—

 
—

 
—

 
—

 
46

Total long-term debt (3)(4)
88,366

 
92,841

 
263,401

 
249,487

 
236,308

Stockholders' equity (3)(6)
631,448

 
512,610

(1)
413,972

(1)
284,156

 
264,699


(1)
Figures have been recast to reflect our January 1, 2018 full retrospective adoption of Accounting Standards Codification ("ASC") 606.
(2)
Operating costs and expenses for the year ended December 31, 2017 include recognition of insurance recovery of amounts associated with an international wire transfer fraud committed against us, recognized during the year ended December 31, 2014. See Note 2, "Wire Transaction Recovery," to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for more information.
(3)
In August 2013, we issued $287.5 million of 1.00% convertible senior notes which matured on August 1, 2018. In accounting for the issuance, we bifurcated the notes into liability and equity components. As of December 31, 2017, the liability portion was recorded, net of discount and unamortized debt issuance costs, in short-term liabilities on our consolidated balance sheets. As of December 31, 2016, 2015, and 2014 the liability was recorded as long-term. Proceeds from this issuance were invested into high quality marketable securities. See Note 10, "Debt," to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further information.

22

(4)
In December 2017, we entered into a credit agreement consisting of revolving commitments with a maximum borrowing limit of $400.0 million and term loans in an aggregate principal amount of $100.0 million. Each of the term loans and the revolving commitments is scheduled to mature on December 21, 2022. The long-term debt balance as of December 31, 2018 and 2017 in the accompanying balance sheets is presented net of unamortized deferred financing costs. See Note 10, "Debt," to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further information.
(5)
Our restricted cash represents deposits made to fully collateralize certain standby letters of credit in connection with office lease arrangements.
(6)
During the third quarter of 2016, we early adopted Accounting Standards Update ("ASU") No. 2016-09, Improvements to Employee Share-Based Payment Accounting, a portion of which requires excess tax benefits and tax deficiencies on equity awards, which were formerly recognized in additional paid-in capital, to be recognized in the income statement when the awards vest or are settled; adoption of this portion of ASU No. 2016-09 resulted in a $50.6 million cumulative-effect adjustment to opening retained earnings as of January 1, 2016.

23

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion and analysis of our financial condition and results of operations. You should read this discussion and analysis together with our consolidated financial statements and accompanying notes to consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based on management's current expectations, estimates, and projections about our business and operations. Our actual results may differ from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those described in “Risk Factors” under Item 1A and elsewhere in this Annual Report on Form 10-K.
Overview
Our unified platform, pioneering analytics, and clinical technology expertise power the development and commercialization of new therapies for over one thousand pharmaceutical companies, biotech and medical device firms, academic medical centers, and CROs around the world. The Medidata Cloud connects patients, physicians, and life sciences professionals, and companies on the Medidata platform are individually and collaboratively reinventing the way research is done to create smarter, more precise treatments.
Highlights
2018
Total revenue increased 17% to $635.7 million, compared with $544.2 million in 2017.
Net income was $51.9 million, or $0.85 per diluted share, up 9% compared with $47.6 million, or $0.80 per diluted share, in 2017.
Operating income was $51.3 million, down 21% compared with $65.2 million in 2017.
12-month unadjusted subscription backlog grew to $522 million as of December 31, 2018, up 17% compared with $446 million at the end of 2017.
Total multi-year subscription backlog grew to $1,170 million as of December 31, 2018, up 13% compared with $1,036 million at the end of 2017.
2017
Total revenue increased 19% to $544.2 million, compared with $458.5 million in 2016.
Net income was $47.6 million, or $0.80 per diluted share, up 70% compared with $28.0 million, or $0.49 per diluted share, in 2016.
Operating income was $65.2 million, up 34% compared with $48.7 million in 2016.
12-month subscription backlog grew to $446 million as of December 31, 2017, up 30% compared with $343 million at the end of 2016.
Total multi-year subscription backlog grew to $1,036 million as of December 31, 2017, up 39% compared with $745 million at the end of 2016.
Results of Operations
Revenues
Our revenues are derived from subscription and professional services.
Our subscription revenues consist of customer fees for the utilization of our cloud-based solutions. Subscriptions to our solutions are provided through multi-study arrangements, which allow customers to manage up to a predetermined number of clinical trials for a term generally ranging from one to five years, and single-study arrangements that allow customers to use our solutions for an individual study and/or to evaluate our products prior to committing to multi-study arrangements. Many of our customers have migrated from single-study arrangements to multi-study arrangements, which represent the majority of our subscription revenues. We recognize revenues from subscriptions ratably over the terms of these arrangements. A majority of our subscription revenues in each period are generated from arrangements initiated during prior periods. Consequently, an increase or decrease in new subscription arrangements in a particular period may not significantly affect our results of operations in that period.
Professional services revenue is derived from the provision of services that help life sciences companies realize higher value in their clinical development processes. Our professional services provide our customers with reliable, repeatable, and cost-effective implementation and training in the use of our cloud-based solutions. We also offer consulting services to advise customers on ways to optimize their clinical development processes.

24

Revenues for 2018, 2017, and 2016 were as follows:
 
2018
 
Change
 
2017 (1)
 
Change
 
2016 (1)
Revenues:
(amounts in thousands except percentages)
Subscription
$
535,672

 
17.0
%
 
$
457,824

 
17.7
%
 
$
388,997

Percentage of total revenues
84.3
%
 
 
 
84.1
%
 
 
 
84.8
%
Professional services
100,024

 
15.8
%
 
86,381

 
24.3
%
 
69,496

Percentage of total revenues
15.7
%
 
 
 
15.9
%
 
 
 
15.2
%
Total revenues
$
635,696

 
16.8
%
 
$
544,205

 
18.7
%
 
$
458,493

(1) Recast to reflect January 1, 2018 full retrospective adoption of ASC 606.
In 2018 and 2017, year-over-year growth in subscription revenues was driven by sales growth among existing customers, both in the form of additional product subscriptions, which we refer to as "density", and increased usage under existing subscriptions, which we refer to as "intensity", as well as new customer wins. Our electronic data capture, risk-based monitoring, payments, and commercial solutions were strong contributors. Our revenue retention rate was over 99% in 2018, 2017, 2016, and our customer count doubled over the three-year period ended December 31, 2018. At the end of 2018 and 2017, we had 12-month subscription backlog of approximately $522 million and $446 million, respectively, representing the future contract value of outstanding arrangements, billed and unbilled, to be recognized in 2019 and 2018, respectively. As of December 31, 2018, our total multi-year subscription backlog was approximately $1,170 million.
Year-over-year growth in professional services revenues in 2018 and 2017 reflects demand from new and existing customers for platform implementation, partner and sponsor enablement, and ongoing support services.
Cost of Revenues
Cost of revenues consists primarily of costs related to delivering, maintaining, and supporting our cloud-based solutions and delivering our professional services and support. These costs include salaries, benefits, bonuses, and stock-based compensation for our data center and professional services staff, as well as costs of third-party consultants. Cost of revenues also includes expenses associated with our data centers, including networking and related depreciation expense, as well as outside service provider costs, amortization expense associated with acquired and developed technology, and general overhead. We allocate general overhead, such as applicable shared rent and utilities, to cost of revenues based on relative headcount. The costs associated with providing professional services are recognized as such costs are incurred. Over the long term, we believe that cost of revenues as a percentage of total revenues will decrease.
Cost of revenues for 2018, 2017, and 2016 was as follows:
 
2018
 
Change
 
2017 (1)
 
Change
 
2016 (1)
Cost of revenues:
(amounts in thousands except percentages)
Subscription
$
91,087

 
31.6
%
 
$
69,235

 
11.4
%
 
$
62,136

Percentage of total revenues
14.3
%
 
 
 
12.7
%
 
 
 
13.6
%
Professional services
68,072

 
18.3
%
 
57,558

 
14.0
%
 
50,473

Percentage of total revenues
10.7
%
 
 
 
10.6
%
 
 
 
11.0
%
Total cost of revenues
$
159,159

 
25.5
%
 
$
126,793

 
12.6
%
 
$
112,609

Percentage of total revenues
25.0
%
 
 
 
23.3
%
 
 
 
24.6
%
 
 
 
 
 
 
 
 
 
 
Gross profit
$
476,537

 
14.2
%
 
$
417,412

 
20.7
%
 
$
345,884

Gross margin
75.0
%
 
 
 
76.7
%
 
 
 
75.4
%
 
 
 
 
 
 
 
 
 
 
Subscription margin
83.0
%
 
 
 
84.9
%
 
 
 
84.0
%
Professional services margin
31.9
%
 
 
 
33.4
%
 
 
 
27.4
%
 
 
 
 
 
 
 
 
 
 
(1) Recast to reflect January 1, 2018 full retrospective adoption of ASC 606.
In 2018, the year-over-year growth in cost of subscription revenues was driven by an increase in depreciation and amortization of $9.7 million associated with internally developed and recently acquired technology assets. Expenses were also impacted by an increase in personnel-related costs of $4.9 million associated with a 10% increase in average headcount and the acquisition of SHYFT, an earlier-stage business that has yet to develop economies of scale. An increase in third-party hosting and cloud costs of $3.8 million resulting from higher platform activity was also a driver. In 2017, the year-over-year growth in cost of subscription revenues was primarily driven by an increase in depreciation and amortization of $6.1 million, associated with internally developed

25

and acquired technology assets, as well as increased personnel-related costs as a result of headcount increases to support our business growth.
The year-over-year growth in cost of professional services revenues in 2018 and 2017 was predominantly due to increases in personnel-related costs associated with our headcount additions in response to strong customer demand and expanding skill requirements for professional services. In 2018, increased expenses following the acquisition of SHYFT were also a factor, causing an initial decline in professional services margin that is expected to resolve as we scale the business. Increased consulting costs were an additional contributor to the grown in cost of professional services revenues in both 2018 and 2017.
In 2018, overall gross margin decreased to 75.0%, driven by lower subscription and professional services margins, reflecting the aforementioned business, infrastructure, and workforce investments. In 2017, overall gross margin rose to 76.7% from 75.4%, as prior workforce and infrastructure investments began to deliver value and scale.
Operating Costs and Expenses
Research and Development. Research and development expenses consist primarily of personnel and related expenses for our research and development staff, including salaries, benefits, bonuses, and stock-based compensation, as well as the cost of certain third-party service providers and allocated overhead. We have focused our research and development efforts on expanding the functionality and ease of use of our cloud-based solutions. We expect research and development costs to increase in the future as we intend to release new features and functionality designed to maximize the efficiency and effectiveness of our customers' treatment development and commercialization processes. Over the long term, we believe that research and development expenses as a percentage of total revenues will decrease.
Sales and Marketing. Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including salaries, benefits, bonuses, and stock-based compensation, as well as commissions, travel costs, marketing and promotional events, corporate communications, advertising, other brand building and product marketing expenses, and allocated overhead. Our sales and marketing expenses have increased primarily due to our ongoing investments in customer engagement and acquisition and other activities to build brand awareness. We expect sales and marketing expenses to continue to increase in absolute terms. Over the long term, we believe that sales and marketing expenses as a percentage of total revenues will decrease.
General and Administrative. General and administrative expenses consist primarily of personnel and related expenses for executive, legal, finance, and human resources departments, including salaries, benefits, bonuses, and stock-based compensation, as well as professional fees, insurance premiums, allocated overhead, and other corporate expenses. On an ongoing basis, we expect general and administrative expenses to increase in absolute terms due to continued investment in our infrastructure to support our continued growth. We expect that general and administrative expenses as a percentage of total revenues will decrease marginally in the future.
Operating costs and expenses for 2018, 2017, and 2016 were as follows:
 
2018
 
Change
 
2017 (1)
 
Change
 
2016 (1)
Operating costs and expenses:
(amounts in thousands except percentages)
Research and development
$
162,788

 
17.5
 %
 
$
138,564

 
23.1
 %
 
$
112,595

Percentage of total revenues
25.6
%
 
 
 
25.5
 %
 
 
 
24.5
%
Sales and marketing
151,943

 
22.4
 %
 
124,138

 
17.2
 %
 
105,925

Percentage of total revenues
23.9
%
 
 
 
22.8
 %
 
 
 
23.1
%
General and administrative
110,489

 
17.1
 %
 
94,324

 
19.9
 %
 
78,678

Percentage of total revenues
17.4
%
 
 
 
17.3
 %
 
 
 
17.2
%
Wire transaction recovery
—

 
100.0
 %
 
(4,770
)
 
(100.0
)%
 
—

Percentage of total revenues
—
%
 
 
 
(0.9
)%
 
 
 
—
%
Total operating costs and expenses
$
425,220

 
20.7
 %
 
$
352,256

 
18.5
 %
 
$
297,198

Percentage of total revenues
66.9
%
 
 
 
64.7
 %
 
 
 
64.8
%
 
 
 
 
 
 
 
 
 
 
Operating income
$
51,317

 
(21.2
)%
 
$
65,156

 
33.8
 %
 
$
48,686

Operating margin
8.1
%
 
 
 
12.0
 %
 
 
 
10.6
%
 
 
 
 
 
 
 
 
 
 
(1) Recast to reflect January 1, 2018 full retrospective adoption of ASC 606.
The growth in research and development expenses in 2018 and 2017 was primarily due to increased personnel-related costs associated with headcount and skill set investments in support of our growth; average headcount grew 17% in 2018 and 31% in 2017, as a result of our acquisitions (SHYFT in 2018, and Mytrus and CHITA in 2017) and the continued hiring of highly skilled

26

engineering talent in both periods. Research and development expenses for both 2018 and 2017 were also impacted by our increased use of specialized consultants and outside experts to enhance the value of our platform. In both periods, the aforementioned people cost increases were partially offset by capitalization of internal-use software development costs associated with the Medidata Cloud platform.
The growth in sales and marketing expenses in 2018 and 2017 was predominantly driven by personnel-related costs associated with headcount increases in connection with expansion of our global sales organization and partner team and with our acquisitions. Average sales and marketing headcount increased 25% in 2018 and 12% in 2017.
The growth in general and administrative expenses in 2018 and 2017 was primarily driven by personnel-related costs associated with increases in average headcount of 12% in 2018 and 6% in 2017. General and administrative expenses in both periods were also impacted by increased legal and professional fees associated with our recent acquisitions and with litigation matters.
Our total operating costs and expenses for 2017 include the insurance recovery of $4.8 million associated with the previously recognized 2014 wire transaction loss. For further information, see Note 2, "Wire Transaction Recovery," to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
Interest and Other Expense
Interest and other expense for 2018, 2017, and 2016 was as follows:
 
2018
 
Change
 
2017
 
Change
 
2016
 
(amounts in thousands except percentages)
Interest and other income (expense)
 
 
 
 
 
 
 
 
 
Interest expense
(15,855
)
 
 
 
(17,765
)
 
 
 
(17,288
)
Interest income
7,435

 
 
 
5,717

 
 
 
4,382

Other income (expense), net
7,241

 
 
 
(73
)
 
 
 
11

Total interest and other expense, net
$
(1,179
)
 
(90.3
)%
 
$
(12,121
)
 
(6.0
)%
 
$
(12,895
)
The decline in total interest and other expense in 2018 was driven by a gain on step acquisition of SHYFT of $7.6 million (included in other income), a decrease in interest expense of $6.5 million as a result of the settlement of our 1.00% convertible senior notes on August 1, 2018, and $1.1 million of interest income associated with the wire transaction recovery, partially offset by an increase in interest expense of $4.5 million associated with our credit facility entered into in December 2017. For further information, see Note 10, “Debt,” to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. The decline in total interest and other expense in 2017 was primarily driven by increased interest income on our available-for-sale marketable securities, partially offset by increased interest expense on our 1.00% convertible notes.
Income Taxes
We are subject to income tax in the U.S. and foreign jurisdictions in which we conduct business. See Note 15, “Income Taxes,” to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for more information regarding our income taxes.
Income taxes for 2018, 2017, and 2016 were as follows:
 
2018
 
 
 
2017 (1)
 
 
 
2016 (1)
 
(amounts in thousands except percentages)
Provision for income taxes
$
(1,783
)
 
 
 
$
5,459

 
 
 
$
7,782

Effective tax rate
(3.6
)%
 
 
 
10.3
%
 
 
 
21.7
%
(1) Recast to reflect January 1, 2018 full retrospective adoption of ASC 606.

27

We had an effective tax rate of (3.6)% for 2018 compared with 10.3% for 2017 and 21.7% for 2016. In 2018, our effective tax rate was lower than the U.S. statutory rate of 21% primarily due to the benefit of research and development tax credits generated during the year and excess tax benefits of stock-based compensation. In 2017, our effective tax rate was lower than the U.S. statutory rate of 35% primarily due to the tax benefit of research and development tax credits generated during the year, excess tax benefits of stock-based compensation, and the intra-entity transfer of assets (for which we were required to recognize income tax consequences at time of transfer, due to the early adoption of ASU No. 2016-16), partially offset by the impact of the enactment of the U.S. Tax Cuts and Jobs Act (the "Tax Act"). In 2016, our effective tax rate was lower than the U.S. statutory rate of 35% as a result of the tax benefit of research and development tax credits generated during the year, change in unrecognized tax benefits on research and development tax credit carryovers resulting from the conclusion of an Internal Revenue Service ("IRS") tax examination, stock-based compensation inclusive of excess tax benefits recognized due to early adoption of ASU No. 2016-09, tax rate differentials on the mix of foreign jurisdictional earnings, and losses incurred by a foreign subsidiary related to our non-U.S. operations for which we have not realized a related tax benefit. Research and development tax credits and the tax impact of stock-based compensation will likely continue to affect future periods' effective tax rates as we continue to develop and enhance our products and grow domestically and internationally.
Liquidity and Capital Resources
We believe that our cash flows from operations, cash and cash equivalents, and highly liquid marketable securities will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for the foreseeable future. Our future capital expenditures and other cash requirements could be higher than we currently expect as a result of various factors, including any expansion of our business that we may complete. The following table presents selected financial information related to our liquidity and capital resources as of and for the years ended December 31, 2018, 2017, and 2016 (in thousands):
 
2018
 
2017
 
2016
Cash, cash equivalents, and marketable securities
$
240,545

 
$
663,333

 
$
515,222

Furniture, fixtures and equipment, net
$
98,983

 
$
88,091

 
$
58,461

1.00% convertible senior notes, net (including current maturities)
$
—

 
$
278,094

 
$
263,401

Term loan, net (including current maturities)
$
93,275

 
$
97,841

 
$
—

 
 
 
 
 
 
Cash provided by operating activities
$
89,176

 
$
121,746

 
$
88,769

Cash provided by (used in) investing activities
$
72,077

 
$
(78,030
)
 
$
(41,407
)
Cash (used in) provided by financing activities
$
(290,419
)
 
$
99,089

 
$
(3,311
)
Cash, Cash Equivalents, and Marketable Securities
We manage our cash equivalents and marketable securities as a single investment portfolio that is intended to be available to meet our current cash requirements. Cash equivalents substantially consist of investments in money market funds. Marketable securities, which we classify as available-for-sale securities, primarily consist of high quality commercial paper, corporate bonds, and U.S. government debt obligations.
For 2018, cash provided by operating activities of $89.2 million was driven by strong customer collections, which were 2% higher than in the prior year, partially offset by operating expenditures and cash interest expense on our term loan and 1.00% convertible senior notes (the "Notes"). Cash used in investing activities of $72.1 million consisted primarily of net payments of $178.9 million to acquire SHYFT and cash payments for capital expenditures of $40.1 million, partially offset by net sales of marketable securities of $291.1 million. Cash used in financing activities of $290.4 million was driven by the repayment of the $287.5 million principal amount of the Notes upon maturity on August 1, 2018, the acquisition of $20.1 million in treasury stock in connection with equity plan participant tax withholdings upon vesting, $5.0 million in term loan principal payments, and $4.6 million in earn-out payments related to the 2017 acquisition of CHITA, partially offset by equity plan proceeds of $27.0 million.
For 2017, cash provided by operating activities of $121.7 million was driven by strong customer collections, which were 28% higher than in the prior year, partially offset by operating expenditures and cash interest expense on our 1.00% convertible senior notes. Cash used in investing activities of $78.0 million consisted primarily of cash payments for capital expenditures of $44.6 million, aggregate payments of $22.9 million to acquire CHITA and Mytrus, purchase of $4.1 million in cost method investments, and net purchases of marketable securities of $6.3 million. Cash provided by financing activities of $99.1 million consisted of $98.0 million in net proceeds from the term loan portion of our credit facility and equity plan proceeds of $19.6 million, partially offset by the acquisition of $18.5 million in treasury stock in connection with equity plan participant tax withholdings upon vesting.
For 2016, cash provided by operating activities of $88.8 million was driven by strong customer collections, which were 15% higher than in the prior year, partially offset by operating expenditures and cash interest expense on our 1.00% convertible senior notes. Cash used in investing activities of $41.4 million consisted primarily of cash payments for capital expenditures of $25.7 million, a net payment of $17.2 million to acquire Intelemage, and $4.0 million cost method investment, partially offset by net sales of marketable securities of $5.4 million. Cash used in financing activities of $3.3 million resulted predominantly from the acquisition

28

of $15.6 million in treasury stock in connection with equity plan participant tax withholdings upon vesting, partially offset by equity plan proceeds of $12.4 million.
Capital Assets
We acquired $39.7 million in capital assets during 2018, predominantly related to continued enhancements to our existing infrastructure and facilities and capitalization of software development costs. Our actual cash payments for capital expenditures during 2018 were $40.1 million. We expect to spend approximately $60 million on capital expenditures during 2019.
Debt
In August 2013, we issued the Notes, which matured on August 1, 2018. We settled the $287.5 million principal amount of the Notes in cash and the conversion premium in shares of our common stock. We issued 1.4 million shares of common stock in settlement of the premium, determined by a calculation based on the volume-weighted average price of our common stock over the 40 trading-day observation period beginning on and including June 1, 2018, as specified in the indenture governing the Notes.
In December 2017, we entered into a credit agreement that provides us with a senior secured first lien credit facility in an aggregate principal amount of $500.0 million, consisting of (a) term loans in an aggregate principal amount of $100.0 million (the "Term Loans") and (b) revolving commitments in an aggregate principal amount of $400.0 million. The credit facility is scheduled to mature on December 21, 2022, with the term loans payable in quarterly installments and interest payable in quarterly installments.
We intend to use the net proceeds from our debt for working capital and other general corporate purposes, including possible acquisitions of, or investments in, businesses, technologies, or products complementary to our business. For further information, see Note 10, “Debt,” to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
Critical Accounting Estimates
Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions about certain items and future events. We consider the following estimates and assumptions to be critical to an understanding of our financial statements because they inherently involve levels of subjectivity and judgment and may have a material impact on our financial condition or results of operations. Also see Note 1, “Summary of Significant Accounting Policies,” to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, which discusses our significant accounting policies.
Revenue Recognition
We recognize revenue when control of promised goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. To determine the amount of revenue to be recognized, we apply the following five steps:
•
identify the contract with a customer;
•
identify the performance obligations in the contract;
•
determine the transaction price;
•
allocate the transaction price to performance obligations in the contract; and
•
recognize revenue as the performance obligation is satisfied.
The application of these steps is inherently subjective.
With regard to identification of contracts, contract modifications are common in our business, and we exercise judgment in determining whether each of those modifications constitutes a separate contract, a cancellation of an old and execution of a new contract, or the continuation of a single performance obligation.
To identify the performance obligations within a contract, we must exercise judgment with regard to whether the promises within the contract are capable of being distinct and are separately identifiable from other promises in the contract.
With regard to determination of transaction price, although most of our contracts state a fixed price, from time to time, contracts may include variable consideration; in these cases, we are required to estimate the amount of consideration we ultimately expect to be entitled to, based upon factors such as our historical experience and our assessment of the probability of a range of outcomes.
When allocating the transaction price to performance obligations, we rely on a determination of standalone selling price. If standalone selling price is not observable, it must be estimated. We most commonly estimate standalone selling price using an adjusted market assessment approach that relies on a range of historical selling prices at which that deliverable was sold to other customers that we deem to be economically similar.
With regard to satisfaction of performance obligations, for professional services arrangements that bear a fixed price, we measure our delivery progress using a proportional performance method, which relies on our estimate of the total number of hours that will be required to fully satisfy the obligation.

29

Stock-Based Compensation
For all equity grants, we recognize compensation cost under the straight-line method, net of estimated forfeitures. Forfeiture assumptions used in amortizing stock-based compensation expense are management estimates based on an analysis of historical data. Refer to Note 12, “Stock-Based Compensation,” to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for more information about our equity plans and the types of equity compensation we grant to employees.
Performance-based restricted stock units ("PBRSUs") comprise a significant portion of our stock-based compensation expense. The fair value of each PBRSU whose vesting is based upon the achievement of a market condition is based upon the results of a Monte Carlo valuation model, which requires the use of estimates, including:
•
the expected volatility of our stock price and, in some cases when the market condition compares the performance of our stock with a stock market index, the expected volatility of that index;
•
the expected term; and
•
risk free interest rates.
For PBRSUs with market conditions, we determine volatility based upon the closing price of our publicly-traded stock and the closing price of the relevant index as applicable. The risk-free interest rate is based on the U.S. Treasury yield curve with a maturity tied to the expected term of the PBRSU. We have not paid and do not expect to pay dividends on our common stock. Thus, no expected dividend yield is factored into our Monte Carlo model.
The use of different assumptions in the Monte Carlo valuation models would result in different amounts of stock-based compensation expense. Furthermore, if different assumptions are used in future periods, stock-based compensation expense could be materially impacted.
The fair value of each PBRSU whose vesting is dependent on the satisfaction of a performance condition is measured as if the PBRSU was vested and issued on the grant date, and adjusted each period for management's expectations of performance relative to the associated goals. Compensation expense is recognized only when management believes it is probable that the condition will be achieved. Although the total compensation expense recognized for these PBRSUs will ultimately equal the grant date fair value per share multiplied by the number of shares for which the performance condition has been satisfied, changes in management's performance expectations can cause significant fluctuations in timing of expense over the life of the PBRSUs.
Allowance for Doubtful Accounts
Accounts receivable are recorded at original invoice amount less an allowance that we believe will be adequate to absorb estimated losses on uncollectible accounts. The allowance is based on an evaluation of the collectability of accounts receivable and prior bad debt experience. Changes in the financial health of a particular customer, industry, or the economy as a whole could result in actual receivable losses that are materially different from the estimated reserve.
Software Development Costs
Costs incurred in the development and implementation of internal-use software are capitalized during the application development stage. Upgrades and enhancements to existing internal-use software are capitalized only if it is probable that those expenditures will result in additional functionality. Costs that do not meet these criteria are expensed as incurred. Once put into service, capitalized costs are depreciated on a straight-line basis over an estimated useful life of three to five years. We exercise judgment in determining when the application development stage begins and ends, applying the definition of additional functionality, determining which types of personnel costs and professional fees to capitalize, estimating the useful life of software assets, and evaluating capitalized costs for potential impairment.
Business Combinations
Upon acquisition of a business, we allocate the fair value of purchase consideration among the tangible assets acquired, tangible liabilities assumed, and identifiable intangible assets acquired based on their estimated fair values at the purchase date, the estimation of which requires management to make significant judgments and assumptions. The excess of the fair value of purchase consideration over the fair values of these assets and liabilities is recorded as goodwill. During the one-year measurement period following an acquisition, we may record adjustments to the assets acquired and liabilities assumed, and to goodwill, based on additional information that impacts the estimated fair values as of the purchase date.
Income Taxes
Our income tax expenses, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management's best assessment of estimated current and future taxes to be paid. The objective of accounting for income taxes, as prescribed by the relevant accounting guidance, is to recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for future tax consequences of events that have been recognized in the financial statements. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The assumptions about future tax consequences

30

require significant judgment and variations in the actual outcome of these consequences could materially impact our results of operations.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Determination of valuation allowances, if any, recorded against deferred tax assets requires significant judgment and use of assumptions, such as estimates of future taxable income. The Tax Act was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law including changes to the taxation of foreign earnings and the ability to utilize foreign tax credits. As of December 31, 2017, we made a determination that it is more likely than not that our deferred tax asset related to foreign tax credits will not be realized, resulting in the establishment of a valuation allowance and corresponding increase in income tax expense of $3.2 million for the year ended December 31, 2017. In 2018, upon filing the tax returns of our foreign entities for the year ended December 31, 2017, we revised our deferred tax asset for the foreign tax credits and the related valuation allowance to reflect the amounts included on the tax returns.
Effect of Recently Issued Accounting Pronouncements on Current and Future Trends
Refer to Note 1, “Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements,” to our consolidated financial statements, which are included in Item 8 of this Annual Report on Form 10-K. No other recently issued accounting pronouncements have had or are expected to have a material impact on our current or future trends.
Contractual Obligations, Commitments and Contingencies
The following table of our material contractual obligations as of December 31, 2018 summarizes the aggregate effect that these obligations are expected to have on our cash flows in the periods indicated (in thousands):
 
Payments Due by Period
 
Total
 
2019
 
2020 - 2021
 
2022- 2023
 
2024 and later
Contractual Obligations:
 
 
 
 
 
 
 
 
 
Operating lease obligations
132,339

 
17,982

 
38,490

 
36,645

 
39,222

Term loan
95,000

 
5,000

 
17,500

 
72,500

 
—

Interest payments on term loan
11,673

 
3,419

 
5,838

 
2,416

 
—

Unused fees on revolving commitments
2,480

 
620

 
1,240

 
620

 
—

Contingent consideration
1,110

 
1,110

 
—

 
—

 
—

Total
$
242,602

 
$
28,131

 
$
63,068

 
$
112,181

 
$
39,222

Operating and Lease Obligations
We lease office space under noncancelable operating lease agreements. For further information, see Note 11, “Lease Commitments,” to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
Credit Facility
In December 2017, we entered into a credit facility consisting of term loans in an aggregate principal amount of $100.0 million and revolving commitments in an aggregate principal amount of $400.0 million. As of December 31, 2018, $95.0 million was outstanding under the term loans and the revolving commitments were undrawn. Each of the term loans and the revolving commitments is scheduled to mature on December 21, 2022, with the term loans payable in quarterly installments and interest payable in monthly installments.
Contingent Consideration
In February 2017, we recognized a contingent consideration liability in connection with the acquisition of CHITA which had an initial fair value of $5.7 million at the purchase date. The liability is adjusted quarterly to reflect payments made to date and any changes in expectations regarding future payments. Periodic earn-out payments under this arrangement will conclude in the third quarter of 2019.
Letters of Credit
We had several outstanding standby letters of credit totaling $7.2 million and $5.5 million as of December 31, 2018 and 2017, respectively, which were fully collateralized with our restricted cash and are not included in the above contractual obligations table.

31

Tax Uncertainties
The relevant accounting guidance provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, on the basis of the technical merits of the position. We recognize tax liabilities based on estimates of whether additional taxes and interest will be due. We adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. As of December 31, 2018, we had approximately $6.4 million of gross unrecognized tax benefits. At this time, we are unable to make a reasonably reliable estimate of the cash settlement amount or the timing of payments in individual years in connection with these tax liabilities; therefore, such amounts are not included in the above contractual obligations table.
Legal Matters
For discussion of legal matters, refer to Note 16, “Commitments and Contingencies—Legal Matters,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
As of December 31, 2018, we did not have any off-balance sheet arrangements, as defined in Item 303(A)(4)(ii) of Regulation S-K, promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors. We do not engage in off-balance sheet financing arrangements, aside from entering into operating leases, which will largely be recorded on our balance sheet effective January 1, 2019 in connection with our adoption of the new leasing guidance in ASC 842. For additional details, refer to Note 1, “Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

32

Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
We had unrestricted cash and cash equivalents totaling $105.4 million at December 31, 2018. Our cash equivalents are invested principally in money market funds. We also had investments in marketable securities, which we classify as available-for-sale securities, totaling $135.1 million at December 31, 2018. Substantially all of our marketable securities are fixed income securities, which primarily consist of high quality commercial paper and corporate bonds. Due to the short duration, laddered maturities, and high credit ratings of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates.
Our exposure to interest rate risk mainly relates to current and future borrowings under our credit facility. Based on the $95.0 million of term loan principal outstanding under our credit facility as of December 31, 2018, the estimated potential impact of a hypothetical 1% increase in interest rate would amount to $1.0 million for the year ended December 31, 2018.
Exchange Rate Sensitivity
Our non-U.S. operating subsidiaries are located in the United Kingdom, Japan, South Korea, Singapore, China, and Germany. The functional currencies for these subsidiaries are the respective local currencies. We have exposure to exchange rate movements that are captured in translation adjustments for these subsidiaries. Such cumulative adjustments are recorded in accumulated other comprehensive income (loss). The estimated potential translation loss for 2018 resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates amounted to $3.3 million.
We bill our customers primarily in U.S. dollars. The majority of our foreign currency billings are billed from Medidata Solutions, Inc., a U.S. entity. Foreign currency billings are mainly denominated in Euros, British pounds sterling, Chinese yuan, Australian dollars, and Canadian dollars. Our foreign currency denominated costs and expenses are mainly incurred by our non-U.S. operating subsidiaries. Accordingly, future changes in currency exchange rates will impact our future operating results. The following table includes the percentage of our revenues and expenses denominated in foreign currencies:
 
2018
 
2017
 
2016
Revenues
4.5
%
 
4.3
%
 
4.9
%
Costs and expenses
17.3
%
 
19.5
%
 
17.4
%
Total losses arising from transactions denominated in foreign currencies amounted to $1.2 million in 2018, $0.6 million in 2017, and $0.1 million in 2016.
Impact of Inflation
We do not believe that inflation has had a material effect on our business, financial condition, or results of operations.

33

Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements


34

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of Medidata Solutions, Inc.

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Medidata Solutions, Inc. and subsidiaries (the "Company") as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for revenue from contracts with customers due to the adoption of the new revenue standard, ASC Topic 606, “Revenue from Contracts with Customers”. The Company adopted the new revenue standard using the full retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.




/s/Deloitte & Touche LLP

New York, New York
March 1, 2019

We have served as the Company’s auditor since 2004.


35

MEDIDATA SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
 
December 31,
 
 
2018
 
2017
 
 
(Amounts in thousands, except per share data)
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
105,440

 
$
237,325

 
Marketable securities
135,105

 
246,967

 
Accounts receivable, net of allowance for doubtful accounts of $1,999 and $1,454, respectively (1)
170,744

 
110,685

 
Prepaid commission expense
22,247

 
12,404

(2
)
Prepaid expenses and other current assets
28,949

 
33,636

(2
)
Total current assets
462,485

 
641,017

 
Restricted cash
7,205

 
5,518

 
Furniture, fixtures and equipment, net
98,983

 
88,091

 
Marketable securities, long-term
—

 
179,041

 
Goodwill
216,017

 
47,435

 
Intangible assets, net
29,546

 
17,587

 
Deferred income taxes
45,982

 
35,789

(2
)
Other assets
52,994

 
46,755

(2
)
Total assets
$
913,212

 
$
1,061,233

 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
$
7,482

 
$
5,009

 
Accrued payroll and other compensation
51,270

 
32,537

 
Accrued expenses and other
37,487

 
36,041

 
Deferred revenue
74,463

 
77,375

(2
)
1.00% convertible senior notes, net
—

 
278,094

 
Total current liabilities
170,702

 
429,056

 
Noncurrent liabilities:
 
 
 
 
Term loan, net
88,366

 
92,841

 
Deferred revenue, less current portion
3,843

 
5,256

 
Deferred tax liabilities
99

 
99

 
Other long-term liabilities
18,754

 
21,371

 
Total noncurrent liabilities
111,062

 
119,567

 
Total liabilities
281,764

 
548,623

 
Commitments and contingencies

 

 
Stockholders' equity:
 
 
 
 
Preferred stock, par value $0.01 per share; 5,000 shares authorized, none issued and outstanding
—

 
—

 
Common stock, par value $0.01 per share; 200,000 shares authorized; 66,103 and 62,801 shares issued; 61,348 and 58,607 shares outstanding, respectively
661

 
628

 
Additional paid-in capital
574,667

 
486,147

 
Treasury stock, 4,755 and 4,194 shares, respectively
(152,849
)
 
(132,705
)
 
Accumulated other comprehensive loss
(4,869
)
 
(3,377
)
 
Retained earnings
213,838

 
161,917

(2)
Total stockholders' equity
631,448

 
512,610

 
Total liabilities and stockholders' equity
$
913,212

 
$
1,061,233

 
(1) Unbilled receivables of $38,601 and $12,488, respectively, are included in accounts receivable as of December 31, 2018 and 2017.
(2) The consolidated balance sheet as of December 31, 2017 has been recast to reflect the Company's January 1, 2018 full retrospective adoption of Accounting Standards Codification ("ASC") 606. For additional details, see Note 1, "Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements."


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

36

MEDIDATA SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
 
 
(Amounts in thousands, except per share data)
 
Revenues
 
 
 
 
 
 
Subscription
$
535,672

 
$
457,824

(4)
$
388,997

(4)
Professional services
100,024

 
86,381

(4)
69,496

(4)
Total revenues
635,696

 
544,205

 
458,493

 
Cost of revenues (1)(2)
 
 
 
 
 
 
Subscription
91,087

 
69,235

 
62,136

 
Professional services
68,072

 
57,558

 
50,473

 
Total cost of revenues
159,159

 
126,793

 
112,609

 
Gross profit
476,537

 
417,412

 
345,884

 
Operating costs and expenses
 
 
 
 
 
 
Research and development (1)
162,788

 
138,564

 
112,595

 
Sales and marketing (1)(2)
151,943

 
124,138

(4)
105,925

(4)
General and administrative (1)
110,489

 
94,324

 
78,678

 
Wire transaction recovery (3)
—

 
(4,770
)
 
—

 
Total operating costs and expenses
425,220

 
352,256

 
297,198

 
Operating income
51,317

 
65,156

 
48,686

 
Interest and other income (expense)
 
 
 
 
 
 
Interest expense
(15,855
)
 
(17,765
)
 
(17,288
)
 
Interest income
7,435

 
5,717

 
4,382

 
Other income (expense), net
7,241

 
(73
)
 
11

 
Total interest and other expense, net
(1,179
)
 
(12,121
)
 
(12,895
)
 
Income before income taxes
50,138

 
53,035

 
35,791

 
Provision for income taxes
(1,783
)
 
5,459

(4)
7,782

(4)
Net income
$
51,921

 
$
47,576

(4)
$
28,009

(4)
Earnings per share
 
 
 
 
 
 
Basic

$0.89

 

$0.84

(4)

$0.50

(4)
Diluted

$0.85

 

$0.80

(4)

$0.49

(4)
Weighted-average common shares outstanding
 
 
 
 
 
 
Basic
58,125

 
56,473

 
55,492

 
Diluted
61,162

 
59,765

 
57,249

 
(1) Stock-based compensation expense included in cost of revenues and operating costs and expenses is as follows:
Cost of revenues
$
6,619

 
$
4,873

 
$
4,425

 
Research and development
11,993

 
13,314

 
9,223

 
Sales and marketing
12,568

 
6,833

 
7,074

 
General and administrative
29,958

 
22,793

 
20,436

 
Total stock-based compensation
$
61,138

 
$
47,813

 
$
41,158

 
(2) Amortization of intangible assets included in cost of revenues and operating costs and expenses is as follows:
Cost of revenues
$
5,048

 
$
3,664

 
$
1,021

 
Sales and marketing
1,293

 
441

 
276

 
Total amortization of intangible assets
$
6,341

 
$
4,105

 
$
1,297

 
(3) Operating costs and expenses for the year ended December 31, 2017 include recognition of insurance recovery of amounts associated with the previously recognized 2014 wire transaction loss. For additional details, see Note 2, "Wire Transaction Recovery."
(4) The consolidated statements of operations for the years ended December 31, 2017 and 2016 have been recast to reflect the Company's January 1, 2018 full retrospective adoption of ASC 606. For additional details, see Note 1, "Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements."




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

37

MEDIDATA SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
 
 
(Amounts in thousands)
 
Net income
$
51,921

 
$
47,576

(1)
$
28,009

(1)
Other comprehensive income (loss):
 
 
 
 
 
 
Foreign currency translation adjustments
(1,796
)
 
2,270

 
(2,324
)
 
Unrealized gain (loss) on marketable securities
659

 
(601
)
 
728

 
Other comprehensive (loss) income
(1,137
)
 
1,669

 
(1,596
)
 
Income tax related to unrealized gain or loss on marketable securities
(355
)
 
230

 
(276
)
 
Other comprehensive (loss) income, net of tax
(1,492
)
 
1,899

 
(1,872
)
 
Comprehensive income, net of tax
$
50,429

 
$
49,475

(1)
$
26,137

(1)
(1) The consolidated statements of comprehensive income for the years ended December 31, 2017 and 2016 have been recast to reflect the Company's January 1, 2018 full retrospective adoption of ASC 606.









































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

38

MEDIDATA SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury Stock
 
Accumulated Other
Comprehensive Loss
 
Retained Earnings (1)
 
Total
(amounts in thousands)
Shares
 
Amount
 
Shares
 
Amount
 
Balance—December 31, 2015
59,455

 
$
594

 
$
364,973

 
3,144

 
$
(100,806
)
 
$
(3,404
)
 
$
73,376

 
$
334,733

Opening retained earnings adjustment for cumulative effect of full retrospective adoption of ASC 606 (1)


 


 


 


 


 


 
12,956

 
$
12,956

Adjusted Balance—January 1, 2016
59,455

 
594

 
364,973

 
3,144

 
(100,806
)
 
(3,404
)
 
86,332

 
347,689

Net income (1)
—

 
—

 
—

 
—

 
—

 
—

 
28,009

 
28,009

Other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
—

 
(1,872
)
 
—

 
(1,872
)
Total comprehensive income (1)
—

 
—

 
—

 
—

 
—

 
(1,872
)
 
28,009

 
26,137

Stock options exercised
279

 
3

 
5,492

 
—

 
—

 
—

 
—

 
5,495

Stock-based compensation
—

 
—

 
41,194

 
—

 
—

 
—

 
—

 
41,194

Nonvested restricted stock awards granted
1,183

 
12

 
(12
)
 
—

 
—

 
—

 
—

 
—