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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-Q
 _____________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
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
_____________________________________
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11724027&doc=13
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)
 _____________________________________
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
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 Exchange Act).   ¨  Yes    ý  No
As of July 25, 2017, the registrant had 58,504,326 shares of common stock outstanding.


Table of Contents

MEDIDATA SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017
TABLE OF CONTENTS
 
 
Page
PART I
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 


- 1 -

Table of Contents

PART I - FINANCIAL INFORMATION
Item 1.     Financial Statements (Unaudited)

- 2 -

Table of Contents

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
 
June 30,
2017
 
December 31, 2016
 
(Amounts in thousands, except per share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
110,708

 
$
93,519

Marketable securities
256,401

 
281,285

Accounts receivable, net of allowance for doubtful accounts of $1,298 and $1,041, respectively
111,233

 
115,216

Prepaid commission expense
3,511

 
1,842

Prepaid expenses and other current assets
30,846

 
20,382

Deferred income taxes

 
6,536

Total current assets
512,699

 
518,780

Restricted cash
5,513

 
5,760

Furniture, fixtures and equipment, net
71,162

 
58,461

Marketable securities – long-term
167,896

 
140,418

Goodwill
47,678

 
30,780

Intangible assets, net
20,014

 
5,090

Deferred income taxes – long-term
41,268

 
40,415

Other assets
22,625

 
18,181

Total assets
$
888,855

 
$
817,885

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
12,257

 
$
6,202

Accrued payroll and other compensation
19,630

 
29,260

Accrued expenses and other
34,120

 
20,958

Deferred revenue
86,314

 
75,911

Total current liabilities
152,321

 
132,331

Noncurrent liabilities:
 
 
 
1.00% convertible senior notes, net
270,647

 
263,401

Deferred revenue, less current portion
2,159

 
1,703

Deferred tax liabilities
124

 
322

Other long-term liabilities
20,812

 
18,138

Total noncurrent liabilities
293,742

 
283,564

Total liabilities
446,063

 
415,895

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; 62,578 and 61,393 shares issued; 58,503 and 57,733 shares outstanding, respectively
626

 
614

Additional paid-in capital
454,856

 
418,497

Treasury stock, 4,075 and 3,660 shares, respectively
(128,991
)
 
(114,204
)
Accumulated other comprehensive loss
(3,826
)
 
(5,276
)
Retained earnings
120,127

 
102,359

Total stockholders’ equity
442,792

 
401,990

Total liabilities and stockholders’ equity
$
888,855

 
$
817,885


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

- 3 -

Table of Contents

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(Amounts in thousands, except per share data)
 
Revenues
 
 
 
 
 
 
 
 
Subscription
$
114,291

 
$
96,760

 
$
221,361

 
$
186,728

 
Professional services
23,123

 
17,850

 
42,874

 
32,120

 
Total revenues
137,414

 
114,610

 
264,235

 
218,848

 
Cost of revenues (1)(2)
 
 
 
 
 
 
 
 
Subscription
17,017

 
15,600

 
34,146

 
29,929

 
Professional services
14,903

 
13,457

 
28,388

 
23,796

 
Total cost of revenues
31,920

 
29,057

 
62,534

 
53,725

 
Gross profit
105,494

 
85,553

 
201,701

 
165,123

 
Operating costs and expenses
 
 
 
 
 
 
 
 
Research and development (1)
35,884

 
28,267

 
65,821

 
56,495

 
Sales and marketing (1)(2)
32,784

 
27,609

 
62,893

 
53,067

 
General and administrative (1)
23,083

 
18,531

 
47,071

 
37,777

 
Total operating costs and expenses
91,751

 
74,407

 
175,785

 
147,339

 
Operating income
13,743

 
11,146

 
25,916

 
17,784

 
Interest and other income (expense)
 
 
 
 
 
 
 
 
Interest expense
(4,383
)
 
(4,183
)
 
(8,710
)
 
(8,310
)
 
Interest income
1,328

 
932

 
2,499

 
1,804

 
Other income (expense), net

 
3

 

 
(1
)
 
  Total interest and other expense, net
(3,055
)
 
(3,248
)
 
(6,211
)
 
(6,507
)
 
Income before income taxes
10,688

 
7,898

 
19,705

 
11,277

 
Provision for income taxes
2,438

 
1,688

(3)
1,937

 
492

(3)
Net income
$
8,250

 
$
6,210

(3)
$
17,768

 
$
10,785

(3)
Earnings per share
 
 
 
 
 
 
 
 
Basic
$
0.15

 
$
0.11

(3)
$
0.32

 
$
0.20

(3)
Diluted
$
0.14

 
$
0.11

(3)
$
0.30

 
$
0.19

(3)
Weighted average common shares outstanding
 
 
 
 
 
 
 
 
Basic
56,433

 
55,392

 
56,254

 
55,255

 
Diluted
59,835

 
56,875

(3)
59,051

 
56,813

(3)
(1) Stock-based compensation expense included in cost of revenues and operating costs and expenses is as follows:
 
Cost of revenues
$
1,246

 
$
1,239

 
$
2,415

 
$
2,449

 
Research and development
3,427

 
2,323

 
6,262

 
4,517

 
Sales and marketing
1,836

 
1,839

 
3,011

 
3,716

 
General and administrative
6,183

 
5,046

 
11,325

 
10,015

 
Total stock-based compensation
$
12,692

 
$
10,447

 
$
23,013

 
$
20,697

 
(2) Amortization of intangible assets included in cost of revenues and operating costs and expenses is as follows:
 
Cost of revenues
$
1,022

 
$
314

 
$
1,476

 
$
393

 
Sales and marketing
119

 
85

 
202

 
109

 
Total amortization of intangible assets
$
1,141

 
$
399

 
$
1,678

 
$
502

 
(3) Prior periods recast to reflect the Company's early adoption of Accounting Standards Update No. 2016-09 in the third quarter of 2016.
The accompanying notes are an integral part of the condensed consolidated financial statements.

- 4 -

Table of Contents

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(Amounts in thousands)
 
Net income
$
8,250

 
$
6,210

(1)
$
17,768

 
$
10,785

(1)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
879

 
(565
)
 
1,302

 
(652
)
 
Unrealized gain on marketable securities
128

 
399

 
240

 
1,707

 
Other comprehensive income (loss)
1,007

 
(166
)
 
1,542

 
1,055

 
Income tax related to unrealized gain or loss on marketable securities
(49
)
 
(581
)
 
(92
)
 
(581
)
 
Other comprehensive income (loss), net of tax
958

 
(747
)
 
1,450

 
474

 
Comprehensive income, net of tax
$
9,208

 
$
5,463

(1)
$
19,218

 
$
11,259

(1)
(1) Prior periods recast to reflect the Company's early adoption of Accounting Standards Update No. 2016-09 in the third quarter of 2016.

























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

- 5 -

Table of Contents

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Six Months Ended June 30,
 
 
2017
 
2016
 
Cash flows from operating activities
(Amounts in thousands)
 
Net income
$
17,768

 
$
10,785

 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
Depreciation and amortization
10,065

 
6,983

 
Stock-based compensation
23,013

 
20,697

 
Amortization of discounts or premiums on marketable securities
757

 
1,700

 
Deferred income taxes
2,535

 
(1,164
)
 
Amortization of debt issuance costs
639

 
639

 
Amortization of debt discount
6,607

 
6,224

 
Provision for doubtful accounts
526

 
508

 
(Gain) loss on fixed asset disposal
(2
)
 
4

 
Change in fair value of contingent consideration
58

 

 
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
4,058

 
(7,729
)
 
Prepaid commission expense
(4,661
)
 
(2,931
)
 
Prepaid expenses and other current assets
(13,031
)
 
3,040

 
Other assets
1,171

 
(3,583
)
 
Accounts payable
4,490

 
(1,932
)
 
Accrued payroll and other compensation
(10,122
)
 
(4,302
)
 
Accrued expenses and other
5,313

 
7,715

 
Deferred revenue
10,634

 
9,206

 
Other long-term liabilities
884

 
(2,814
)
 
Net cash provided by operating activities
60,702

 
43,046

(1)
Cash flows from investing activities
 
 
 
 
Purchases of furniture, fixtures and equipment
(16,642
)
 
(13,425
)
 
Purchases of available-for-sale securities
(157,228
)
 
(144,136
)
 
Proceeds from sale of available-for-sale securities
154,117

 
154,784

 
Acquisition of businesses, net of cash acquired
(22,941
)
 
(17,142
)
 
Net cash used in investing activities
(42,694
)
 
(19,919
)
(2)
Cash flows from financing activities
 
 
 
 
Proceeds from exercise of stock options
9,057

 
1,691

 
Proceeds from employee stock purchase plan
4,248

 
3,385

 
Repayment of notes payable

 
(100
)
 
Acquisition of treasury stock
(14,785
)
 
(13,797
)
 
Net cash used in financing activities
(1,480
)
 
(8,821
)
(1)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
414

 
397

 
Net increase in cash, cash equivalents and restricted cash
16,942

 
14,703

 
Cash, cash equivalents and restricted cash – Beginning of period
99,279

 
55,472

(2)
Cash, cash equivalents and restricted cash – End of period
$
116,221

 
$
70,175

(2)
(1) As a result of the Company's early adoption of Accounting Standards Update No. 2016-09 in the third quarter of 2016, the consolidated statement of cash flows for the six months ended June 30, 2016 has been adjusted to reflect an offsetting increase of $5,048 thousand to net cash provided by operating activities and net cash used in financing activities.
(2) As a result of the Company's early adoption of ASU No. 2016-18 during the first quarter of 2017, the consolidated statement of cash flows for the six months ended June 30, 2016 has been adjusted to include restricted cash in beginning- and end-of-period cash, and to remove change in restricted cash as a reconciling item.




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

- 6 -

Table of Contents

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited)
 
Six Months Ended June 30,
 
2017
 
2016
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
1,441

 
$
1,445

Income taxes
$
2,877

 
$
845

 
 
 
 
Noncash investing activities:
 
 
 
Furniture, fixtures, and equipment acquired but not yet paid for at period-end
$
4,671


$
1,097

Contingent consideration associated with acquisition of business, at fair value
$
5,697

 
$


































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

- 7 -

Table of Contents    
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Medidata Solutions, Inc., together with its consolidated subsidiaries (collectively, the "Company"), is the leading global provider of cloud-based solutions for clinical research in life sciences, offering platform technology that transforms clinical development and increases the value of its customers' research investments. The Company was organized as a New York corporation in June 1999 and reincorporated as a Delaware corporation in May 2000.
Except to the extent updated or described below, the Company’s significant accounting policies as of June 30, 2017 are the same as those at December 31, 2016, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2017.
Basis of Presentation — The accompanying interim condensed consolidated balance sheets as of June 30, 2017 and December 31, 2016, the condensed consolidated statements of operations for the three and six months ended June 30, 2017 and 2016, the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2017 and 2016, and the condensed consolidated statements of cash flows for the six months ended June 30, 2017 and 2016 are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the SEC for interim financial reporting. Accordingly, certain information and footnote disclosures have been condensed or omitted pursuant to SEC rules that would ordinarily be required by U.S. GAAP for complete financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto for the fiscal year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2017.
The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments consisting of normal recurring accruals considered necessary to present fairly the Company’s financial position as of June 30, 2017, results of its operations for the three and six months ended June 30, 2017 and 2016, comprehensive income for the three and six months ended June 30, 2017 and 2016, and cash flows for the six months ended June 30, 2017 and 2016. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
Income Taxes The Company’s interim period provision for income taxes is computed by using an estimate of the annual effective tax rate, adjusted for discrete items taken into account in the relevant period, if any. Each quarter, the annual effective income tax rate is recomputed and if there are material changes in the estimate, a cumulative adjustment is made.
Accounts Receivable Accounts receivable are recorded at original invoice amount less an allowance that management believes will be adequate to absorb estimated losses on uncollectible accounts. This allowance is based on an evaluation of the collectability of accounts receivable and prior bad debt experience. Accounts receivable are written off when deemed uncollectible. Unbilled receivables consist of revenue recognized in excess of billings, substantially all of which is expected to be billed and collected within one year. As of June 30, 2017 and December 31, 2016, unbilled accounts receivable of $12.5 million and $14.1 million, respectively, were included in accounts receivable on the Company's consolidated balance sheets. In general, there is a direct relationship between the Company's accounts receivable balance and its transaction volume.
Recently Adopted Accounting Pronouncements In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes by requiring that all deferred tax assets and liabilities be classified as noncurrent in the consolidated balance sheets. ASU No. 2015-17 is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods, and may be applied either prospectively or retrospectively to all periods presented. The Company adopted ASU No. 2015-17 prospectively on January 1, 2017, and the adoption did not have a material impact on its consolidated financial statements, aside from a balance sheet reclassification from short-term to long-term deferred income taxes.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize the income tax consequences of intra-entity transfers of assets other than inventory when those transfers occur. ASU No. 2016-16 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods. The Company early adopted ASU No. 2016-16 on January 1, 2017, and the adoption had no impact on its consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, which requires entities to include restricted cash in cash and cash equivalents when reconciling beginning-of-period and end-of-period cash in the statement of cash flows. ASU No. 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company early adopted ASU No. 2016-18 retrospectively on January 1, 2017 and the adoption did not have a material impact on its consolidated financial statements, aside from changes in presentation.


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Table of Contents    
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Recently Issued Accounting Pronouncements There have been no changes in the expected dates of adoption or estimated effects on the Company's consolidated financial statements of recently issued accounting pronouncements from those disclosed in the Company’s Annual Report on Form 10-K, except as described below.
ASU No. 2014-09, Revenue from Contracts with Customers, which creates Accounting Standards Codification ("ASC") 606 and supersedes the existing accounting standards for revenue recognition in ASC 605, provides principles for recognizing revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods. The Company will adopt ASU No. 2014-09 on January 1, 2018. The Company's assessment of the impact of this updated standard is ongoing; however, the Company continues to expect to identify performance obligations under the new guidance in ASC 606 that are similar to the deliverables and separate units of account identified under the current guidance ASC 605. As a result, the Company anticipates that timing of revenue recognition for most of its contracts will remain the same. A few of the Company's contracts include contingent amounts of variable consideration that were precluded from recognition because of the requirement for amounts to be “fixed or determinable” under ASC 605-10-S99. However, the Company anticipates that ASC 606 will require it to estimate these amounts in advance. As a result, the Company expects to recognize revenue from these contracts earlier under ASC 606 than under ASC 605. ASU No. 2014-09 also creates a new subtopic under ASC 340, Other Assets and Deferred Costs, which discusses the deferral of incremental costs of obtaining a contract with a customer, including the period of amortization of such costs. The Company is still evaluating the planned amortization period for such costs, but expects a longer amortization period than under the current guidance. The Company plans to choose between the permitted full and modified retrospective transition methods at the conclusion of its evaluation in the second half of 2017.
In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting, which clarifies when a change in the terms or conditions of a share-based payment award should be accounted for as a modification. ASU No. 2017-09 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company will adopt ASU No. 2017-09 on January 1, 2018, and the adoption is not expected to have a material impact on its consolidated financial statements.
2. STOCKHOLDERS' EQUITY
Common Stock — Common stockholders are entitled to one vote for each share of common stock held. Common stockholders may receive dividends if and when the board of directors determines, at its sole discretion.
Treasury Stock — From time to time, the Company grants nonvested restricted stock awards ("RSAs"), restricted stock units ("RSUs"), and performance-based restricted stock units ("PBRSUs") to its employees pursuant to the terms of its 2017 Long-Term Incentive Plan ("2017 Plan") and formerly pursuant to the terms of its 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 related income tax withholding obligation by having shares withheld at the time of vesting. On the date of vesting, the Company divides the participant's income tax withholding obligation in dollars by the closing price of its common stock and withholds the resulting number of vested shares. The shares withheld are then transferred to the Company's treasury stock at cost.
During the six months ended June 30, 2017 and 2016, the Company withheld 260,737 shares at an average price of $56.71 and 326,568 shares at an average price of $35.59, respectively, in connection with the vesting of equity awards.
Nonvested restricted stock awards forfeited by plan participants are transferred to the Company's treasury stock at par. During the six months ended June 30, 2017 and 2016, 154,106 and 99,876 forfeited shares, respectively, were transferred to treasury stock at their par value of $0.01.
3. INVESTMENTS
Marketable Securities
Marketable securities, which the Company classifies as available-for-sale securities, primarily consist of high quality commercial paper, corporate bonds, and U.S. government debt obligations. Marketable securities with remaining effective maturities of twelve months or less from the balance sheet date are classified as short-term; otherwise, they are classified as long-term on the consolidated balance sheets.

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Table of Contents    
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following tables provide the Company’s marketable securities by security type as of June 30, 2017 and December 31, 2016 (in thousands):
 
As of June 30, 2017
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper and corporate bonds
$
390,313

 
$
16

 
$
(594
)
 
$
389,735

U.S. government agency debt securities
34,631

 

 
(69
)
 
34,562

Total
$
424,944

 
$
16

 
$
(663
)
 
$
424,297

 
As of December 31, 2016
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper and corporate bonds
$
389,459

 
$
4

 
$
(827
)
 
$
388,636

U.S. government agency debt securities
33,132

 

 
(65
)
 
33,067

Total
$
422,591

 
$
4

 
$
(892
)
 
$
421,703

Contractual maturities of the Company’s marketable securities as of June 30, 2017 and December 31, 2016 are summarized as follows (in thousands):
 
As of June 30, 2017
 
As of December 31, 2016
 
Cost
 
Estimated
Fair
Value
 
Cost
 
Estimated
Fair
Value
Due in one year or less
$
256,720

 
$
256,401

 
$
281,591

 
$
281,285

Due in one to five years
168,224

 
167,896

 
141,000

 
140,418

Total
$
424,944

 
$
424,297

 
$
422,591

 
$
421,703

At June 30, 2017, the Company had $0.7 million of gross unrealized losses primarily due to a decrease in the fair value of certain corporate bonds.
The Company regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Investments that are impaired are those that are considered to have losses that are other-than-temporary. Factors considered in determining whether a loss is temporary include:
the length of time and extent to which fair value has been lower than the cost basis;
the financial condition, credit quality and near-term prospects of the investee; and
whether it is more likely than not that the Company will be required to sell the security prior to recovery.
As the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company has determined that the gross unrealized losses on such investments at June 30, 2017 are temporary in nature. Accordingly, the Company did not consider its investments in marketable securities to be other-than-temporarily impaired as of June 30, 2017.
The following tables provide the fair market value and gross unrealized losses of the Company's marketable securities with unrealized losses, aggregated by security type, as of June 30, 2017 and December 31, 2016 (in thousands):
 
In Loss Position for Less than 12 Months
 
As of June 30, 2017
 
As of December 31, 2016
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
Commercial paper and corporate bonds
$
347,730

 
$
(549
)
 
$
299,708

 
$
(771
)
U.S. government agency debt securities
22,776

 
(54
)
 
28,273

 
(59
)
Total
$
370,506

 
$
(603
)
 
$
327,981

 
$
(830
)

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Table of Contents    
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 
In Loss Position for More than 12 Months
 
As of June 30, 2017
 
As of December 31, 2016
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
Commercial paper and corporate bonds
$
25,200

 
$
(45
)
 
$
68,158

 
$
(56
)
U.S. government agency debt securities
11,785

 
(15
)
 
4,794

 
(6
)
Total
$
36,985

 
$
(60
)
 
$
72,952

 
$
(62
)
During the three and six months ended June 30, 2017 and 2016, the Company recorded an insignificant amount of net realized gains from the sale of marketable securities.
Cost Method Investment
The Company holds shares of Series B Preferred Stock of SHYFT Analytics, Inc. ("SHYFT"), purchased via a private placement. This investment is accounted for under the cost method and is included in other assets on the Company's consolidated balance sheet as of June 30, 2017 at its purchase price of $4.0 million.
4. FAIR VALUE
The following table summarizes, as of June 30, 2017 and December 31, 2016, the Company's financial assets and liabilities that are measured at fair value on a recurring basis, according to the fair value hierarchy described in the significant accounting policies included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (in thousands):
 
As of June 30, 2017
 
As of December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash
$
110,632

 
$

 
$

 
$
110,632

 
$
93,384

 
$

 
$

 
$
93,384

Money market funds
76

 

 

 
76

 
135

 

 

 
135

Total cash and cash equivalents
110,708

 

 

 
110,708

 
93,519

 

 

 
93,519

Commercial paper and corporate bonds

 
389,735

 

 
389,735

 

 
388,636

 

 
388,636

U.S. government agency debt securities

 
34,562

 

 
34,562

 

 
33,067

 

 
33,067

Total marketable securities

 
424,297

 

 
424,297

 

 
421,703

 

 
421,703

Total financial assets measured at fair value on a recurring basis
$
110,708

 
$
424,297

 
$

 
$
535,005

 
$
93,519

 
$
421,703

 
$

 
$
515,222

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration – short-term
$

 
$

 
$
3,965

 
$
3,965

 
$

 
$

 
$

 
$

Contingent consideration – long-term

 

 
1,790

 
1,790

 

 

 

 

Total financial liabilities measured at fair value on a recurring basis
$

 
$

 
$
5,755

 
$
5,755

 
$

 
$

 
$

 
$

Investments in commercial paper, corporate bonds, and U.S. government agency debt securities have been classified as Level 2 as they are valued using quoted prices in less active markets or other directly or indirectly observable inputs. Fair values of corporate bonds and U.S. government agency debt securities were derived from a consensus or weighted-average price based on input of market prices from multiple sources at each reporting period. With regard to commercial paper, all of the securities had high credit ratings and one year or less to maturity; therefore, fair value was derived from accretion of purchase price to face value over the term of maturity or quoted market prices for similar instruments if available. During the six months ended June 30, 2017 and 2016, there were no transfers of financial assets between Level 1 and Level 2.
Contingent consideration liabilities associated with acquisition-related earn-out payments are classified as Level 3 in the fair value hierarchy because they rely significantly on inputs that are unobservable in the market. The fair value of short-term contingent consideration, which is related to the achievement of a technical milestone, has been estimated using situation-based modeling, which considers the probability-weighted present value of the expected payout amount. Significant assumptions include the Company's expectations with regard to the likelihood and timing of achievement of the related technical milestone and a discount rate of 2.9%. The fair value of long-term contingent consideration, which is related to achievement of revenue targets, has been estimated using a Monte Carlo simulation to simulate future performance of the acquired business under a risk-neutral framework; significant assumptions include a risk-adjusted discount rate of 10.2% and revenue volatility of 8.0%. Short-term and long-term contingent consideration are recorded in accrued expenses and other and other long-term liabilities, respectively, on the Company's consolidated balance sheet as of June 30, 2017.

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Table of Contents    
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table provides a summary of changes in fair value of the Company's Level 3 financial liabilities during the six months ended June 30, 2017 (in thousands):
Balance as of January 1, 2017
$

Contingent consideration — acquisition
5,697

Fair value adjustment (included in general and administrative expenses)
58

Balance as of June 30, 2017
$
5,755

The carrying amounts of all other current financial assets and current financial liabilities reflected in the consolidated balance sheets approximate fair value due to their short-term nature.
5. ACQUISITIONS
The Company acquired all outstanding equity interests in CHITA Inc. ("CHITA") and Mytrus, Incorporated ("Mytrus") on February 17, 2017 and April 18, 2017, respectively.
CHITA provides regulated content management for the life sciences industry. Mytrus provides cloud-based software for electronic informed consent ("eConsent"), which replaces paper patient consent forms. Through these acquisitions, the Company adds regulated document and standard operating procedure ("SOP") management, electronic trial master file ("eTMF"), and eConsent capabilities to its platform.
Aggregate purchase consideration of $28.9 million consisted of upfront consideration of $23.2 million and contingent consideration (associated with CHITA) initially valued at $5.7 million. In connection with these acquisitions, the Company recognized $16.6 million in finite-lived intangible assets, deferred tax liabilities of $2.9 million, and $1.5 million in other net tangible liabilities, resulting in the recognition of $16.7 million in goodwill.
Intangible assets acquired were as follows (in thousands):
 
Acquisition Date Fair Value
 
Weighted-Average Useful Life
Developed technology
$
15,602

 
5 years
Customer relationships
890

 
6 years
Non-competition agreements
110

 
3.5 years
Total
$
16,602

 
 
The Company does not consider these acquisitions, individually or in the aggregate, to be significant to its financial condition or results of operations; its consolidated results of operations for the three and six months ended June 30, 2017 include the revenues and expenses of CHITA and Mytrus since their respective acquisition dates.

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Table of Contents    
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

6. GOODWILL AND INTANGIBLE ASSETS
The change in the carrying amount of goodwill during the six months ended June 30, 2017 was as follows (in thousands):
Balance as of January 1, 2017
$
30,780

Additions related to acquisitions
16,690

Foreign currency translation adjustments
208

Balance as of June 30, 2017
$
47,678

Total intangible assets are summarized as follows (in thousands):
 
As of June 30, 2017
 
As of December 31, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Developed technology
$
24,386

 
$
(6,644
)
 
$
17,742

 
$
8,714

 
$
(5,098
)
 
$
3,616

Customer relationships
4,475

 
(2,373
)
 
2,102

 
3,566

 
(2,176
)
 
1,390

Non-competition agreements
260

 
(90
)
 
170

 
150

 
(66
)
 
84

Total
$
29,121

 
$
(9,107
)
 
$
20,014

 
$
12,430

 
$
(7,340
)
 
$
5,090

Future amortization of intangible assets is expected to be as follows (in thousands):
Remainder of year ending December 31, 2017
$
2,427

Years ending December 31,
 
2018
4,788

2019
4,530

2020
3,787

2021
3,517

2022
921

Thereafter
44

Total
$
20,014

7. DEBT
The Company's 1.00% convertible senior notes (the "Notes"), issued in August 2013, consisted of the following components as of June 30, 2017 and December 31, 2016 (in thousands):
 
June 30,
2017
 
December 31,
2016
Equity component, net of equity issue costs
$
60,222

 
$
60,222

Liability component:
 
 
 
Principal
287,500

 
287,500

Less: unamortized debt discount
(15,469
)
 
(22,076
)
Less: unamortized debt issuance costs
(1,384
)
 
(2,023
)
Net carrying amount
$
270,647

 
$
263,401

As of June 30, 2017 and December 31, 2016, the estimated fair value of the Notes was $398.6 million and $314.4 million, respectively. The Company considers this disclosure to be a Level 2 measurement because it is based upon a recent modeled bid-price quote for the Notes, reflecting activity in a less active market. Based on the closing price of the Company's common stock as of June 30, 2017 of $78.20, which is higher than the Notes' initial conversion price of $58.05, the if-converted value of the Notes exceeded their face value by $99.8 million.
As of June 30, 2017, the remaining life of the Notes is approximately 13 months.

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Table of Contents    
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table sets forth total interest expense recognized related to the Notes for the three and six months ended June 30, 2017 and 2016 (in thousands except percentages):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Contractual interest expense
$
719

 
$
719

 
$
1,438

 
$
1,438

Amortization of debt issuance costs
320

 
320

 
639

 
639

Amortization of debt discount
3,328

 
3,135

 
6,607

 
6,224

Total
$
4,367

 
$
4,174

 
$
8,684

 
$
8,301

 
 
 
 
 
 
 
 
Effective interest rate
6.5
%
 
6.5
%
 
6.5
%
 
6.5
%
8. STOCK-BASED COMPENSATION
For the three and six months ended June 30, 2017 and 2016, the components of stock-based compensation expense were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Stock options
$
938

 
$
998

 
$
1,855

 
$
2,053

Restricted stock awards and units
7,769

 
6,263

 
14,688

 
11,741

Performance-based restricted stock units
3,074

 
2,235

 
4,702

 
4,869

Employee stock purchase plan
969

 
951

 
1,897

 
2,034

Total stock-based compensation (1)
$
12,750

 
$
10,447

 
$
23,142

 
$
20,697

(1) Total stock-based compensation is presented in this table on a gross basis, consistent with the additional paid-in capital impact recorded in stockholders' equity. On the Company's consolidated statements of operations and consolidated statements of cash flows, stock-based compensation is presented net of foreign exchange impact and capitalization of eligible software development-related costs.
Stock Options
The fair value of each stock option granted during the three and six months ended June 30, 2017 and 2016 was estimated on the date of grant using a Black-Scholes pricing model with the following weighted-average assumptions:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Expected volatility
43
%
 
44
%
 
44
%
 
43
%
Expected life
6 years

 
6 years

 
6 years

 
6 years

Risk-free interest rate
2.02
%
 
1.40
%
 
2.07
%
 
1.45
%
Dividend yield

 

 

 


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Table of Contents    
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table summarizes the status of the Company's stock options as of June 30, 2017, and changes during the six months then ended (in thousands, except per share data):
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
(years)
 
Aggregate
Intrinsic
Value
Outstanding at January 1, 2017
1,793

 

$23.39

 
 
 
 
Granted
77

 
56.90

 
 
 
 
Exercised
(268
)
 
33.81

 
 
 
 
Forfeited
(42
)
 
44.08

 
 
 
 
Expired
(7
)
 
58.92

 
 
 
 
Outstanding at June 30, 2017
1,553

 

$22.53

 
4.70
 

$86,484

Exercisable at June 30, 2017
1,249

 

$16.18

 
3.76
 

$77,450

Vested and expected to vest at June 30, 2017
1,521

 

$21.97

 
4.61
 

$85,499

The weighted-average grant-date fair value of stock options granted during the three months ended June 30, 2017 and 2016 was $25.47 and $17.34, respectively. The weighted-average grant-date fair value of stock options granted during the six months ended June 30, 2017 and 2016 was $25.37 and $17.14, respectively. The total intrinsic value of stock options exercised during the three months ended June 30, 2017 and 2016 was $4.0 million and $2.3 million, respectively. The total intrinsic value of stock options exercised during the six months ended June 30, 2017 and 2016 was $8.0 million and $3.0 million, respectively. The total fair value of stock options vested during the three months ended June 30, 2017 and 2016 was $1.0 million and $1.3 million, respectively. The total fair value of stock options vested during the six months ended June 30, 2017 and 2016 was $2.1 million and $2.1 million, respectively.
As of June 30, 2017, there was $5.9 million in unrecognized compensation cost related to all non-vested stock options granted. This cost is expected to be recognized over a weighted-average remaining period of 2.58 years.
Restricted Stock Awards and Units
The following table summarizes the status of the Company’s nonvested time-based RSAs and RSUs as of June 30, 2017, and changes during the six months then ended (in thousands, except per share data):
 
Number of
Shares
 
Weighted-
Average
Grant Date
Fair Value
Nonvested at January 1, 2017
1,850

 

$40.89

Granted
727

 
56.91

Vested
(537
)
 
38.77

Forfeited
(156
)
 
41.40

Nonvested at June 30, 2017
1,884

 

$47.66

The total fair value of RSAs and RSUs vested during the three months ended June 30, 2017 and 2016 was $4.7 million and $7.5 million, respectively. The total fair value of RSAs and RSUs vested during the six months ended June 30, 2017 and 2016 was $31.0 million and $16.9 million, respectively.
As of June 30, 2017, there was $76.7 million in unrecognized compensation cost related to all nonvested RSAs and RSUs granted. This cost is expected to be recognized over a weighted-average remaining period of 2.76 years.
Performance-Based Restricted Stock Units
No PBRSUs were granted during the three months ended June 30, 2017 and 2016.
During the six months ended June 30, 2017, the Company granted: (1) 132 thousand PBRSUs ("2017 TSR PBRSUs") with market conditions based on the Company's total stockholder return ("TSR") relative to that of the Russell 2000 Index over the three-year period ending December 31, 2019, vesting in full in three years with the number of shares ultimately earned ranging from zero to 200% of the target number of shares; (2) 132 thousand PBRSUs ("2017 Net Income PBRSUs") with performance conditions based on the compound annual growth rate of net income over the three-year period ending December 31, 2019, vesting in full in three years with the number of shares ultimately earned ranging from zero to 200% of the target number of shares.

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Table of Contents    
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

During the six months ended June 30, 2016, the Company granted 223 thousand PBRSUs ("2016 TSR PBRSUs") with market conditions based on the Company's TSR relative to that of the Russell 2000 Index over the three-year period ending December 31, 2018, vesting in full in three years with the number of shares ultimately earned ranging from zero to 200% of the target number of shares. The Company also granted an insignificant number of other PBRSUs with performance conditions based on achievement of certain individual performance objectives.
The fair value of PBRSUs with market conditions granted during the six months ended June 30, 2017 and 2016 was estimated as of the date of grant using a Monte Carlo valuation model with the following weighted average assumptions:
 
2017 TSR PBRSUs
 
2016 TSR PBRSUs
Expected volatility - Medidata
42
%
 
48
%
Expected volatility - comparison index
43
%
 
43
%
Expected life
2.85 years

 
2.84 years

Risk-free interest rate
1.40
%
 
0.91
%
Dividend yield

 

The following table summarizes the status of the Company’s PBRSUs based upon expected performance as of June 30, 2017, and changes during the six months then ended (in thousands, except per share data):
 
Net Income
 
TSR
 
Other
 
Total Number of Shares
 
Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2017

 
390

 
2

 
392

 
$
57.05

Granted (based on performance at 100% of targeted levels)
132

 
132

 

 
264

 
71.51

Adjustment related to expected performance
66

 
402

 

 
468

 
61.82

Vested

 
(92
)
 

 
(92
)
 
67.30

Forfeited

 
(26
)
 

 
(26
)
 
59.60

Nonvested at June 30, 2017
198

 
806

 
2

 
1,006

 
$
62.06

No PBRSUs vested during the three months ended June 30, 2017 and 2016. The total fair value of PBRSUs vested during the six months ended June 30, 2017 and 2016 was $5.1 million and $10.0 million, respectively. As of June 30, 2017, there was $26.4 million in unrecognized compensation cost related to all nonvested PBRSUs. This cost is expected to be recognized over a weighted-average remaining period of 2.00 years.
Employee Stock Purchase Plan
The fair value of shares granted under the Company's employee stock purchase plan ("ESPP") was estimated using a Black-Scholes pricing model with the following weighted-average assumptions:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Expected volatility
39
%
 
46
%
 
39
%
 
46
%
Expected life
1.49 years

 
1.68 years

 
1.49 years

 
1.68 years

Risk-free interest rate
0.62
%
 
0.58
%
 
0.62
%
 
0.58
%
Dividend yield

 

 

 

During the three and six months ended June 30, 2017, 103 thousand shares were purchased under the ESPP at a weighted-average price of $40.50. During the three and six months ended June 30, 2016, 89 thousand shares were purchased under the ESPP at a weighted-average price of $38.35. As of June 30, 2017, there was $3.4 million in unrecognized compensation cost related to ESPP shares. This cost is expected to be recognized over a weighted-average remaining period of 1.04 years.
Modifications
Incremental expense associated with modifications to stock options, RSAs and PBRSUs during the three months ended June 30, 2017 and 2016 was none and $0.1 million in the aggregate, respectively and immaterial on an individual basis. Incremental expense during the six months ended June 30, 2017 and 2016 was $0.1 million and $0.3 million in the aggregate, respectively and immaterial on an individual basis.

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Table of Contents    
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in the balances of each component of accumulated other comprehensive loss during the six months ended June 30, 2017 were as follows (in thousands):
 
Foreign currency translation adjustments
 
Unrealized gains (losses) on marketable securities
 
Total
Balance as of January 1, 2017
$
(4,729
)
 
$
(547
)
 
$
(5,276
)
Other comprehensive income
1,302

 
148

 
1,450

Balance as of June 30, 2017
$
(3,427
)
 
$
(399
)
 
$
(3,826
)
For the six months ended June 30, 2017 and 2016, reclassifications of items from accumulated other comprehensive income (loss) to net income were insignificant.
10. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted-average number of shares outstanding during the period. The holders of unvested RSAs do not have nonforfeitable rights to dividends or dividend equivalents and therefore, such vested awards do not qualify as participating securities and are excluded from the basic earnings per share calculation. Diluted earnings per share includes the determinants of basic net income per share and, in addition, gives effect to the potential dilution that would occur if securities or other contracts to issue common stock are exercised, vested, or converted into common stock, unless they are anti-dilutive. As the Company intends to settle the principal amount of the Notes (see Note 7, "Debt") in cash upon conversion, their dilutive effect is reflected in diluted earnings per share using the treasury stock method, which considers the number of shares that would be required to settle any premium above principal at the average stock price for the period. During the three and six months ended June 30, 2016, the average price of the Company's stock was below the conversion price of the Notes; as a result, the Notes were not dilutive for these periods.

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Table of Contents    
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

A reconciliation of the numerator and denominator of basic earnings per share and diluted earnings per share for the three and six months ended June 30, 2017 and 2016 is shown in the following table (in thousands, except per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016 (1)
 
2017
 
2016 (1)
Numerator
 
 
 
 
 
 
 
Net income
$
8,250

 
$
6,210

 
$
17,768

 
$
10,785

Denominator
 
 
 
 
 
 
 
Denominator for basic earnings per share:
 
 
 
 
 
 
 
Weighted average common shares outstanding
56,433

 
55,392

 
56,254

 
55,255

Denominator for diluted earnings per share:
 
 
 
 
 
 
 
Dilutive potential common shares:
 
 
 
 
 
 
 
Stock options
1,001

 
980

 
976

 
977

Restricted stock awards and units
798

 
409

 
835

 
440

Performance-based restricted stock units
625

 
94

 
560

 
141

Employee stock purchase plan
149

 

 
114

 

Convertible senior notes
829

 

 
312

 

Weighted average common shares outstanding with assumed conversion
59,835

 
56,875

 
59,051

 
56,813

Basic earnings per share
$
0.15

 
$
0.11

 
$
0.32

 
$
0.20

Diluted earnings per share
$
0.14

 
$
0.11

 
$
0.30

 
$
0.19

(1) Prior period recast to reflect the Company's early adoption of ASU No. 2016-09 in the third quarter of 2016.
Anti-dilutive common stock equivalents excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2017 and 2016 are shown in the following table (in thousands, except per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016 (1)
 
2017
 
2016 (1)
Stock options
94

 
665

 
202

 
636

Restricted stock awards and units
1

 
132

 
10

 
121

Performance-based restricted stock units

 

 

 
166

Employee stock purchase plan
275

 
233

 
275

 
233

Total
370

 
1,030

 
487

 
1,156

(1) Prior period recast to reflect the Company's early adoption of ASU No. 2016-09 in the third quarter of 2016.
11. INCOME TAXES
The Company's unrecognized tax benefits were approximately $2.9 million as of June 30, 2017, and were unchanged from December 31, 2016.
12. COMMITMENTS AND CONTINGENCIES
Legal Matters The Company is subject to legal proceedings and claims that arise in the ordinary course of business and records an estimated liability for these matters when an adverse outcome is considered to be probable and can be reasonably estimated. Although the outcome of the litigation cannot be predicted with certainty and some lawsuits, claims, or proceedings may be disposed of unfavorably to the Company, which could materially and adversely affect its financial condition or results of operations, the Company does not believe that it is currently a party to any material legal proceedings.
Contractual Warranties The Company typically provides contractual warranties to its customers covering its solutions and services. To date, any refunds provided to customers have been immaterial.
Change in Control Agreements The Company has change in control agreements with its chief executive officer and certain other executive officers. These agreements provide for payments to be made to such officers upon involuntary termination of their employment by the Company without cause or by such officers for good reason as defined in the agreements, within a period of 2 years following a change in control. The agreements provide that, upon a qualifying termination event, such officers will

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Table of Contents    
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

be entitled to (a) a severance payment equal to the sum of the officer’s base salary and target bonus amount (except that such payment for the Company's chief executive officer and president would be two times such sum); (b) continuation of health benefits for one year (except that such continuation for the Company's chief executive officer and president would be for two years); and (c) immediate vesting of remaining unvested equity awards, unless otherwise specified in the equity award agreements.
Wire Transaction Claim In September 2014, the Company discovered that it had been the victim of a crime involving the fraudulently induced transfer of $4.8 million. The Company filed an insurance claim for its loss, and its insurer, Federal Insurance Co. ("Federal"), denied coverage. The Company commenced legal action, alleging that Federal had wrongly denied coverage. On July 21, 2017, the United States District Court for the Southern District of New York granted the Company's motion for summary judgment, and denied Federal's motion.

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Table of Contents

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). 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 at the time 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. Important factors that could cause such differences include, but are not limited to the factors discussed under the “Risk Factors” section included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the Securities and Exchange Commission ("SEC") on February 28, 2017.
The following is a discussion and analysis of our financial condition and results of operations and should be read together with our condensed consolidated financial statements and related notes to condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes to audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
Overview
Medidata is a global provider of a platform of cloud-based solutions for life sciences, enabling efficiency and quality through clinical development programs, aimed at accelerating processes, enhancing decision making, minimizing operational risk, saving resources, and enabling transformational trial strategies. We are committed to powering smarter treatments and healthier people while advancing the competitive and scientific goals of our life sciences customers worldwide. As of June 30, 2017, our industry-leading technology platform, the Medidata Clinical Cloud®, was the primary technology solution powering clinical trials for 18 of the world's top 25 global pharmaceutical companies, and was used by 18 of the top 25 medical device developers, from study design and planning through execution, management and reporting.
Subscription revenues, which are comprised of fees from clients accessing our cloud-based solutions, represented 84% of our revenues for the first half of 2017. Professional services revenues, which are derived from the provision of services that help our clients realize higher value in their clinical development processes, represented 16% of total revenues.
Second Quarter and First Half 2017 Highlights
Total revenues increased 20% and 21% compared with the second quarter and first half of 2016, respectively.
Professional services revenue increased 30% and 33% compared with the second quarter and first half of 2016, respectively.
Operating income increased 23% and 46% compared with the second quarter and first half of 2016, respectively.
Net income for the first half of 2017 was $17.8 million, up 65% compared with $10.8 million in the first half of 2016.
Cash flow from operations for the first half of 2017 was $60.7 million, up 41%, compared with $43.0 million for the first half of 2016.

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Results of Operations
Revenues
Revenues for the three and six months ended June 30, 2017 and 2016 were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Revenues:
(amounts in thousands except percentages)
Subscription
$
114,291

 
$
96,760

 
18.1
%
 
$
221,361

 
$
186,728

 
18.5
%
Percentage of total revenues
83.2
%
 
84.4
%
 
 
 
83.8
%
 
85.3
%
 
 
Professional services
23,123

 
17,850

 
29.5
%
 
42,874

 
32,120

 
33.5
%
Percentage of total revenues
16.8
%
 
15.6
%
 
 
 
16.2
%
 
14.7
%
 
 
Total revenues
$
137,414

 
$
114,610

 
19.9
%
 
$
264,235

 
$
218,848

 
20.7
%
Year-over-year growth in subscription revenues was driven by major platform customer wins and sales growth among both new and existing customers, with strong contributions from our risk-based monitoring, data analytics, and mobile health solutions. As of June 30, 2017, we had remaining subscription backlog of $204 million, representing the future contract value of outstanding arrangements, billed and unbilled, to be recognized during the remainder of 2017, excluding renewals. This reflects an increase of 15% compared with remaining backlog of $178 million at June 30, 2016.
Year-over-year growth in professional services revenues was driven by strong demand from new and existing customers implementing our platform, data analytics, and strategic services. Professional services revenues for the three months ended June 30, 2017 benefited from the successful completion of large projects, and we expect professional services revenue to decrease in the second half of 2017 relative to the first half.
Cost of Revenues
Cost of revenues for the three and six months ended June 30, 2017 and 2016 was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Cost of revenues:
(amounts in thousands except percentages)
Subscription
$
17,017

 
$
15,600

 
9.1
%
 
$
34,146

 
$
29,929

 
14.1
%
Percentage of total revenues
12.4
%
 
13.6
%
 
 
 
12.9
%
 
13.7
%
 
 
Professional services
14,903

 
13,457

 
10.7
%
 
28,388

 
23,796

 
19.3
%
Percentage of total revenues
10.8
%
 
11.8
%
 
 
 
10.8
%
 
10.8
%
 
 
Total cost of revenues
$
31,920

 
$
29,057

 
9.9
%
 
$
62,534

 
$
53,725

 
16.4
%
Percentage of total revenues
23.2
%
 
25.4
%
 
 
 
23.7
%
 
24.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
$
105,494

 
$
85,553

 
23.3
%
 
$
201,701

 
$
165,123

 
22.2
%
Gross margin
76.8
%
 
74.6
%
 
 
 
76.3
%
 
75.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscription margin
85.1
%
 
83.9
%
 
 
 
84.6
%
 
84.0
%
 
 
Professional services margin
35.5
%
 
24.6
%
 
 
 
33.8
%
 
25.9
%
 
 
Year-over-year growth in cost of subscription revenues was largely driven by increases in depreciation and amortization of $1.4 million and $2.0 million for the three and six months ended June 30, 2017, respectively, associated with technology obtained through recent business acquisitions and increased software development capitalization. Net increases in personnel costs of $0.7 million and $1.5 million for the three and six months ended June 30, 2017, respectively, driven by a 4% year-over-year headcount increase, also impacted expenses, partially offset by decreased consulting and professional fees. As a result of the scaling of our business, subscription gross margin increased to 85.1% and 84.6% for the three and six months ended June 30, 2017, respectively, compared with 83.9% and 84.0% for the three and six months ended June 30, 2016, respectively.

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Year-over-year growth in cost of professional services revenues was primarily driven by net increases in personnel costs of $1.4 million and $2.7 million for the three and six months ended June 30, 2017, respectively, associated with a 20% year-over-year headcount increase to support strong customer demand. For the six months ended June 30, 2017, cost of professional services revenues were also impacted by increased consulting and professional fees. Professional services gross margin increased to 35.5% and 33.8% for the three and six months ended June 30, 2017, respectively, compared with 24.6% and 25.9% for the three months ended June 30, 2016, respectively, benefiting significantly from effective project mix and more efficient use of resources in the current periods.
Overall gross margin increased to 76.8% and 76.3% for the three and six months ended June 30, 2017, respectively, compared with 74.6% and 75.5% for the three and six months ended June 30, 2016, respectively, driven by strong 2017 margins for both subscription and professional services.
Operating Costs and Expenses
Operating costs and expenses for the three and six months ended June 30, 2017 and 2016 were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Operating costs and expenses:
(amounts in thousands except percentages)
Research and development
$
35,884

 
$
28,267

 
26.9
%
 
$
65,821

 
$
56,495

 
16.5
%
Percentage of total revenues
26.1
%
 
24.6
%
 
 
 
24.9
%
 
25.8
%
 
 
Sales and marketing
32,784

 
27,609

 
18.7
%
 
62,893

 
53,067

 
18.5
%
Percentage of total revenues
23.9
%
 
24.1
%
 
 
 
23.8
%
 
24.3
%
 
 
General and administrative
23,083

 
18,531

 
24.6
%
 
47,071

 
37,777

 
24.6
%
Percentage of total revenues
16.8
%
 
16.2
%
 
 
 
17.8
%
 
17.3
%
 
 
Total operating costs and expenses
$
91,751

 
$
74,407

 
23.3
%
 
$
175,785

 
$
147,339

 
19.3
%
Percentage of total revenues
66.8
%
 
64.9
%
 
 
 
66.5
%
 
67.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
$
13,743

 
$
11,146

 
23.3
%
 
$
25,916

 
$
17,784

 
45.7
%
Operating margin
10.0
%
 
9.7
%
 
 
 
9.8
%
 
8.1
%
 
 
The year-over-year growth in research and development expenses was largely driven by net increases in personnel and recruiting costs of $3.8 and $5.4 million for the three and six months ended June 30, 2017, respectively, resulting from a 28% year-over-year headcount increase in connection with our continued hiring of skilled engineering talent and our acquisitions of CHITA Inc. ("CHITA") and Mytrus Inc. ("Mytrus"). Research and development expenses were also impacted by increased use of specialized consultants, outside experts, and third-party software, as well as higher rent expense in connection with new and acquired offices. These increases were partially offset by capitalization of internal-use software development costs associated with our Clinical Cloud platform.
The year-over-year growth in sales and marketing expenses was predominantly driven by net increases in personnel and recruiting costs of $2.3 million and $3.6 million for the three and six months ended June 30, 2017, respectively, resulting from an 18% year-over-year headcount increase to expand our global sales organization and partner team. Sales and marketing expense were also impacted by increased conference, event, and travel costs. On a comparable basis, the six months ended June 30, 2017 lack the benefit of the $1.4 million in grant income that was recorded as a result of the enactment of the New Jersey Business Employment Incentive Program ("NJ BEIP") in the first quarter of 2016.
The year-over-year increase in general and administrative expenses was primarily driven by net increases in personnel-related costs of $3.4 million and $5.9 million for the three and six months ended June 30, 2017, respectively, resulting from a 17% year-over-year headcount increase. General and administrative expenses were also impacted by increases in legal and professional fees of $0.5 million and $2.3 million for the three and six months ended June 30, 2017, respectively, associated with acquisitions and litigation matters.

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Income Taxes
Provision for income taxes for the three and six months ended June 30, 2017 and 2016 was as follows:
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(amounts in thousands)
Provision for income taxes
$
2,438

 
$
1,688

 
$
1,937

 
$
492

The difference between our effective tax rate and the U.S. statutory rate is primarily due to the relative mix of pre-tax income subject to tax in various jurisdictions, state taxes, share-based compensation, and U.S. tax credits and incentives. The benefits from U.S. credits and incentives will likely continue to have a favorable impact on our overall effective tax rate in the future. Share-based compensation will also continue to have an impact on our effective tax rate which may or may not be favorable.
Our quarterly tax provision and quarterly estimate of the annual effective tax rate are subject to significant variation due to several factors, including variability in accuracy of predictions of pre-tax book and taxable income or loss, the mix of jurisdictions to which they relate, and changes in tax law in the jurisdictions in which we conduct business.
Critical Accounting Estimates
Our condensed consolidated 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. These estimates inherently involve levels of subjectivity and judgment and may have a material impact on our financial condition or results of operations. Accordingly, actual results could differ from those estimates. Our critical accounting estimates as of June 30, 2017 are the same as those at December 31, 2016, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Also see Note 1, "Summary of Significant Accounting Policies," to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, which discusses our significant accounting policies.
Effects of Recently Issued Accounting Pronouncements on Current and Future Trends
Refer to Note 1, "Summary of Significant Accounting Policies — Recently Issued Accounting Pronouncements," to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. No other recently issued accounting pronouncements have had or are expected to have a material impact on our current or future trends.
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 June 30, 2017 and December 31, 2016, and for the six-month periods ended June 30, 2017 and 2016 (in thousands):
 
June 30,
2017
 
December 31,
2016
 
Cash, cash equivalents, and marketable securities
$
535,005

 
$
515,222

 
Furniture, fixtures and equipment, net
71,162

 
58,461

 
1.00% convertible senior notes, net
270,647

 
263,401

 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
2017
 
2016
 
Cash provided by operating activities
$
60,702

 
$
43,046

(1)
Cash used in investing activities
(42,694
)
 
(19,919
)
 
Cash used in financing activities
(1,480
)
 
(8,821
)
(1)
(1) As a result of our early adoption of ASU No. 2016-09 in the third quarter of 2016, the consolidated statement of cash flows for the six months ended June 30, 2016 has been adjusted to reflect an offsetting increase of $5,048 thousand to net cash provided by operating activities and net cash used in financing activities.
Cash, Cash Equivalents, and Marketable Securities
For the six months ended June 30, 2017, cash provided by operating activities of $60.7 million was driven by strong customer collections, partially offset by operating expenditures and cash interest expense on our 1.00% convertible senior notes. Cash used

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in investing activities of $42.7 million consisted of net payments of $22.9 million in aggregate to acquire CHITA and Mytrus, cash payments for capital expenditures of $16.6 million, and net purchases of marketable securities of $3.1 million. Cash used in financing activities of $1.5 million resulted from the acquisition of $14.8 million of treasury stock in connection with equity plan participant tax withholdings upon vesting, partially offset by equity plan proceeds of $13.3 million.
For the six months ended June 30, 2016, cash provided by operating activities of $43.0 million was driven by strong customer collections, partially offset by operating expenditures and cash interest expense on our 1.00% convertible senior notes. Cash used in investing activities of $19.9 million consisted of a net payment of $17.1 million to acquire Intelemage, LLC ("Intelemage") and cash payments for capital expenditures of $13.4 million, partially offset by net sales of marketable securities of $10.6 million. Cash used in financing activities of $8.8 million resulted primarily from the acquisition of $13.8 million of treasury stock in connection with equity plan participant tax withholdings upon vesting, partially offset by equity plan proceeds of $5.1 million.
Capital Assets
We acquired $20.2 million in capital assets during the six months ended June 30, 2017, predominantly related to our new office spaces in Seoul, South Korea and Hammersmith, UK, continued enhancements to our existing infrastructure and facilities, and capitalization of software development costs. On a cash basis, our capital expenditures during the six months ended June 30, 2017 were $16.6 million and included payments for previously accrued assets. We expect to spend approximately $17 to $20 million on additional capital assets during the remainder of 2017.
Debt
In August 2013, we issued $287.5 million of 1.00% convertible senior notes (the "Notes") that will mature on August 1, 2018 unless earlier repurchased or converted. Upon conversion, we will deliver to the holders of the Notes either cash, shares of our common stock, or a combination thereof, at our election. If converted, we intend to settle the principal amount of the Notes in cash and any excess conversion value beyond the principal amount in shares of our common stock, cash, or a combination thereof. As of June 30, 2017, the Notes are not convertible and therefore are classified as long term liabilities in our condensed consolidated balance sheet. For further information, see Note 7, “Debt,” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Contractual Obligations, Commitments and Contingencies
The table below summarizes the aggregate effect that our material contractual obligations as of June 30, 2017 are expected to have on our cash flows in the periods indicated (in thousands):
 
Payments Due by Period
 
Total
 
Remainder of 2017
 
2018 - 2019
 
2020 - 2021
 
2022 and later
Contractual Obligations:
 
 
 
 
 
 
 
 
 
1.00% convertible senior notes
$
287,500

 
$

 
$
287,500

 
$

 
$