Medidata Solutions, Inc.
Medidata Solutions, Inc. (Form: 10-Q, Received: 08/07/2014 06:04:58)
Table of Contents

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, 2014
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
_____________________________________
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 or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting 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
¨
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 31, 2014 , the registrant had 54,033,074 shares of common stock outstanding.


Table of Contents

MEDIDATA SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2014
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.
 
 


- i -

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, 2014
 
December 31, 2013
 
(Amounts in thousands, except per share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
35,192

 
$
22,328

Marketable securities
183,000

 
218,892

Accounts receivable, net of allowance for doubtful accounts of $1,231 and $1,055, respectively
61,971

 
45,534

Prepaid commission expense
3,495

 
3,615

Prepaid expenses and other current assets
14,440

 
13,511

Deferred income taxes
669

 
665

Total current assets
298,767

 
304,545

Restricted cash
5,118

 
5,118

Marketable securities – long-term
200,283

 
195,105

Furniture, fixtures and equipment, net
41,237

 
41,229

Goodwill
15,655

 
15,487

Intangible assets, net
650

 
904

Deferred income taxes – long-term
356

 
345

Other assets
9,161

 
10,620

Total assets
$
571,227

 
$
573,353

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
5,283

 
$
7,524

Accrued payroll and other compensation
10,654

 
27,773

Accrued expenses and other
9,686

 
12,265

Deferred revenue
57,909

 
52,628

Total current liabilities
83,532

 
100,190

Noncurrent liabilities:
 
 
 
1.00% convertible senior notes, net
235,228

 
229,705

Deferred revenue, less current portion
440

 
1,430

Deferred tax liabilities
2,588

 
5,651

Other long-term liabilities
15,205

 
10,564

Total noncurrent liabilities
253,461

 
247,350

Total liabilities
336,993

 
347,540

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; 100,000 shares authorized, 55,817 and 55,018 shares issued; 54,002 and 53,634 shares outstanding, respectively
558

 
550

Additional paid-in capital
273,664

 
248,336

Treasury stock, 1,815 and 1,384 shares, respectively
(44,513
)
 
(26,414
)
Accumulated other comprehensive income (loss)
504

 
(199
)
Retained earnings
4,021

 
3,540

Total stockholders’ equity
234,234

 
225,813

Total liabilities and stockholders’ equity
$
571,227

 
$
573,353




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,
 
2014
 
2013
 
2014
 
2013
 
(Amounts in thousands, except per share data)
Revenues
 
 
 
 
 
 
 
Subscription
$
68,947

 
$
56,346

 
$
132,758

 
$
106,998

Professional services
14,276

 
11,723

 
27,105

 
24,330

Total revenues
83,223

 
68,069

 
159,863

 
131,328

Cost of revenues (1)(2)
 
 
 
 
 
 
 
Subscription
11,221

 
8,949

 
22,307

 
17,974

Professional services
9,753

 
7,971

 
19,466

 
16,075

Total cost of revenues
20,974

 
16,920

 
41,773

 
34,049

Gross profit
62,249

 
51,149

 
118,090

 
97,279

Operating costs and expenses:
 
 
 
 
 
 
 
Research and development (1)
17,311

 
12,105

 
35,100

 
24,010

Sales and marketing (1)(2)
20,425

 
16,253

 
41,157

 
30,742

General and administrative (1)
17,373

 
13,955

 
34,419

 
26,599

Total operating costs and expenses
55,109

 
42,313

 
110,676

 
81,351

Operating income
7,140

 
8,836

 
7,414

 
15,928

Interest and other (expense) income:
 
 
 
 
 
 
 
Interest expense
(3,827
)
 
(27
)
 
(7,608
)
 
(45
)
Interest income
420

 
59

 
815

 
135

Other (expense) income, net
(28
)
 
(10
)
 
6

 
144

  Total interest and other (expense) income, net
(3,435
)
 
22

 
(6,787
)
 
234

Income before income taxes
3,705

 
8,858

 
627

 
16,162

Provision for income taxes
1,409

 
3,752

 
146

 
5,356

Net income
$
2,296

 
$
5,106

 
$
481

 
$
10,806

Earnings per share:
 
 
 
 
 
 
 
Basic (3)
$
0.04

 
$
0.10

 
$
0.01

 
$
0.21

Diluted (3)
$
0.04

 
$
0.09

 
$
0.01

 
$
0.20

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic (3)
52,457

 
50,850

 
52,284

 
50,546

Diluted (3)
54,828

 
53,488

 
54,998

 
53,056

(1)    Stock-based compensation expense included in cost of revenues and operating costs and expenses is as follows:
Cost of revenues
$
1,027

 
$
838

 
$
2,099

 
$
1,325

Research and development
817

 
627

 
1,729

 
1,085

Sales and marketing
1,060

 
1,722

 
3,411

 
2,944

General and administrative
5,726

 
3,937

 
11,090

 
6,975

Total stock-based compensation
$
8,630

 
$
7,124

 
$
18,329

 
$
12,329

(2)    Amortization of intangible assets included in cost of revenues and operating costs and expenses is as follows:
Cost of revenues
$
111

 
$
101

 
$
219

 
$
382

Sales and marketing
30

 
33

 
60

 
146

Total amortization of intangible assets
$
141

 
$
134

 
$
279

 
$
528

(3)    Prior period results have been adjusted to reflect the two-for-one stock split which was effected in the form of a stock dividend in December 2013.

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

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Table of Contents

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(Amounts in thousands)
Net income
$
2,296

 
$
5,106

 
$
481

 
$
10,806

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
403

 
(29
)
 
585

 
(1,015
)
Unrealized gain (loss) on marketable securities
193

 
(21
)
 
195

 
(33
)
Other comprehensive income (loss):
596

 
(50
)
 
780

 
(1,048
)
Income tax (expense) benefit related to unrealized gain or loss on marketable securities
(76
)
 
8

 
(77
)
 
13

Other comprehensive income (loss), net of tax
520

 
(42
)
 
703

 
(1,035
)
Comprehensive income, net of tax
$
2,816

 
$
5,064

 
$
1,184

 
$
9,771




























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,
 
2014

2013
Cash flows from operating activities:
(Amounts in thousands)
Net income
$
481

 
$
10,806

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
5,144

 
3,324

Stock-based compensation
18,329

 
12,329

Amortization of discounts or premiums on marketable securities
2,714

 
1,001

Deferred income taxes
(3,146
)
 
3,883

Amortization of debt issuance costs
639

 
30

Amortization of debt discount
5,523

 

Excess tax benefit associated with equity awards
(2,648
)
 
(997
)
Contingent consideration adjustment

 
120

Provision for doubtful accounts
266

 
657

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(18,328
)
 
3,274

Prepaid commission expense
657

 
(830
)
Prepaid expenses and other current assets
1,018

 
1,153

Other assets
87

 
(78
)
Accounts payable
2,476

 
(900
)
Accrued payroll and other compensation
(7,134
)
 
(2,338
)
Accrued expenses and other
5,437

 
1,183

Deferred revenue
3,588

 
(4,140
)
Other long-term liabilities
2,711

 
591

Net cash provided by operating activities
17,814

 
29,068

Cash flows from investing activities:
 
 
 
Purchases of furniture, fixtures and equipment
(11,602
)
 
(6,761
)
Purchases of available-for-sale securities
(113,019
)
 
(78,255
)
Proceeds from sale of available-for-sale securities
141,214

 
65,272

Decrease in restricted cash
226

 
388

Net cash provided by (used in) investing activities
16,819

 
(19,356
)
Cash flows from financing activities:
 
 
 
Proceeds from exercise of stock options
1,885

 
6,150

Proceeds from employee stock purchase plan
2,513

 

Excess tax benefit associated with equity awards
2,648

 
997

Payment of acquisition-related earn-out
(704
)
 
(380
)
Repayment of obligations under capital leases
(39
)
 
(27
)
Repayment of notes payable
(85
)
 
(38
)
Acquisition of treasury stock
(28,058
)
 
(10,461
)
Net cash used in financing activities
(21,840
)
 
(3,759
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
71

 
(76
)
Net increase in cash and cash equivalents
12,864

 
5,877

Cash and cash equivalents – Beginning of period
22,328

 
32,683

Cash and cash equivalents – End of period
$
35,192

 
$
38,560






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

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Table of Contents

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited)
 
Six Months Ended June 30,
 
2014
 
2013
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
1,350

 
$
15

Income taxes
$
296

 
$
984

 
 
 
 
Noncash activities:
 
 
 
Furniture, fixtures, and equipment acquired but not yet paid for at period-end
$
1,549


$
1,511

Issuance of notes payable in connection with acquisition-related earn-out payments
$
97


$
341



































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

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



1. ORGANIZATION
Medidata Solutions, Inc. (the “Company”) is the leading global provider of cloud-based solutions for clinical research in life sciences, designed to transform clinical development and increase the value of its customers' research investments. The Company’s solutions allow its customers to more efficiently and effectively design, plan and manage key aspects of the clinical trial process, including study and protocol design, trial planning and budgeting, site negotiation, clinical portal, trial management, randomization and trial supply management, clinical data capture and management, safety events capture, medical coding, clinical business analytics, and data flow and interoperability among multiple trial applications.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Except to the extent updated or described below, the Company’s significant accounting policies as of June 30, 2014 are the same as those at December 31, 2013 , which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 24, 2014 .
Basis of Presentation — The accompanying interim condensed consolidated balance sheets as of June 30, 2014 and December 31, 2013 , the condensed consolidated statements of operations for the three and six months ended June 30, 2014 and 2013 , the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2014 and 2013 , and the condensed consolidated statements of cash flows for the six months ended June 30, 2014 and 2013 are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 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, 2013 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 24, 2014 .
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, 2014 , results of its operations for the three and six months ended June 30, 2014 and 2013 , comprehensive income for the three and six months ended June 30, 2014 and 2013 , and cash flows for the six months ended June 30, 2014 and 2013 . The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 .
All share and per share data for all periods presented herein reflect the impact of a two-for-one stock split which was effected in the form of a stock dividend in December 2013.
Stock-Based Compensation The Company follows Accounting Standards Codification ("ASC") 718,  Compensation—Stock Compensation  to account for all of its stock-based compensation plans.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes pricing model. The Company uses stock price volatility of its publicly-traded stock as a basis for determining the expected volatility. Management believes this is the best estimate of the expected volatility over the weighted-average expected life of its option grants. As the Company does not have sufficient historical exercise data in the period since its stock began being publicly traded to provide a reasonable basis upon which to estimate the expected life, the Company uses the simplified method as permitted under SEC Staff Accounting Bulletin Topic 14 for estimating the expected life of options as all of its options qualify as "plain-vanilla" options. The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of the option grant with a maturity tied to the expected life of the options. No dividends are expected to be declared by the Company at this time. Compensation expense for stock options is recognized, net of estimated forfeitures, on a straight-line basis over the vesting period.
The fair value of each nonvested restricted stock award ("RSA") is measured as if the nonvested RSA was vested and issued on the grant date. Compensation expense for RSAs is recognized, net of estimated forfeitures, on a straight-line basis over the vesting period.
The fair value of each performance-based restricted stock unit ("PBRSU") whose vesting is dependent on the achievement of a market price target, or a "market condition," is estimated based upon the results of a Monte Carlo valuation model as of the grant date in accordance with accounting guidelines. Compensation expense related to PBRSUs with a market condition is recognized, net of estimated forfeitures, on a straight-line basis over the vesting period. Conversely, the fair value of each PBRSU whose vesting is dependent on the satisfaction of a performance target, or a "performance condition," is measured as if the PBRSU was vested and issued on the grant date and adjusted in each reporting period for expected performance relative to the associated goals. Compensation expense related to PBRSUs with a performance condition is recognized when it is probable that the condition will be achieved, net of estimated forfeitures, on a straight-line basis over the vesting period. The compensation expense ultimately recognized will equal the grant date fair value for the number of shares for which the performance condition has been satisfied.
The fair value of each employee stock purchase plan ("ESPP") share is estimated using the Black-Scholes pricing model. The Company uses stock price volatility of its publicly-traded stock as a basis for determining the expected volatility. Management

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


believes this is the best estimate of the expected volatility over the weighted-average expected life of the ESPP shares. The expected life of each ESPP share is equivalent to the time between the beginning of the offering period and the end of the related purchase period. The risk-free interest rate is based on the United States Treasury yield curve in effect at the beginning of the offering period with a maturity tied to the expected life of the ESPP share. No dividends are expected to be declared by the Company at this time. Compensation expense for ESPP shares is recognized, net of estimated forfeitures, on a straight-line basis over the term of the offering period.
Income Taxes The Company uses the asset and liability method of accounting for income taxes, as prescribed by ASC 740, Income Taxes , which recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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.
All of the taxes accrued on the Company's undistributed earnings from its foreign subsidiaries are included in U.S. current income taxes under Internal Revenue Code Section 956. As a result, no deferred income tax liability associated with the Company's undistributed earnings was recorded.
The Company follows ASC 740-10 for the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Under ASC 740-10, the Company may 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 the taxing authorities, based on the technical merits of the position.
For the provision for income taxes at interim periods, the Company follows ASC 740-270, Income Taxes — Interim Reporting , and has developed an estimate of the annual effective tax rate based upon the facts and circumstances known at the time. The Company’s effective tax rate is based on expected income, statutory rates and permanent differences applicable to the Company in the various jurisdictions in which the Company operates.
Accounts Receivable Accounts receivable are recorded at original invoice amount less an allowance that management believes will be adequate to absorb estimated losses on existing accounts receivable. The 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, 2014 and December 31, 2013 , unbilled accounts receivable of $11.4 million and $9.5 million , respectively, are included in accounts receivable on the Company's consolidated balance sheets.
Segment Information As defined by ASC 280, Segment Reporting , the Company operates as a single segment, as the chief operating decision maker makes operating decisions and assesses performance based on a single operating unit. The Company recorded revenues in the following geographic areas for the three and six months ended June 30, 2014 and 2013 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
United States of America
$
61,108

 
$
48,706

 
$
116,897

 
$
93,560

Japan
7,617

 
8,071

 
15,574

 
15,904

Switzerland
3,955

 
3,048

 
7,969

 
5,969

Other
10,543

 
8,244

 
19,423

 
15,895

Total
$
83,223

 
$
68,069

 
$
159,863

 
$
131,328

Revenues by geographic area are presented based upon the country in which revenues were generated. No individual country other than the United States, Japan and Switzerland represented 5% or more of net revenues for any of the periods presented.

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


The following table summarizes long-term assets by geographic area as of June 30, 2014 and December 31, 2013 (in thousands):
 
June 30,
2014
 
December 31,
2013
Long-term assets:
 
 
 
United States of America
$
257,702

 
$
254,453

United Kingdom
9,526

 
10,041

Japan
5,232

 
4,314

Total
$
272,460

 
$
268,808

Recently Issued Accounting Pronouncements In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU amends ASC 740, Income Taxes, to require that an unrecognized tax benefit be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward; to the extent that a net operating loss carry forward, a similar tax loss, or a tax credit carryforward does not exist at the reporting date, the unrecognized tax benefit should be presented in the financial statements as a liability and not combined with deferred tax assets. ASU No. 2013-11 is effective for interim and annual reporting periods beginning after December 15, 2013. The Company adopted ASU No. 2013-11 on January 1, 2014, and the adoption did not have a material impact on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. This ASU provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Company is currently evaluating the impact of adopting the new accounting standard on its consolidated financial statements, which will be effective for the Company beginning January 1, 2017.
3. 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.
In December 2013, the Company announced a two -for-one split of its common stock, effected in the form of a stock dividend. The record date for the stock split was December 2, 2013, and the additional shares were distributed on December 16, 2013. Each shareholder of record as of the close of business on the record date received one additional share of common stock for each share held.
Subsequent to the second quarter of 2014, the Company filed its Fifth Amended and Restated Certificate of Incorporation on July 31, 2014, to increase the number of authorized shares of its common stock from 100 million to a total of 200 million , as approved at the Company’s May 2014 annual meeting of stockholders.
Treasury Stock — From time to time, the Company grants nonvested RSAs and PBRSUs to its employees pursuant to the terms of the 2009 Long-Term Incentive Plan (the “2009 Plan”). Under the provisions of the 2009 Plan, the plan participants are allowed to cover their income tax withholding obligation through net shares upon the vesting of their RSAs or PBRSUs. On the date of vesting, the Company determines the number of shares to be withheld based on their fair value at the closing price of the Company’s common stock on the vesting date, in order to equal the amount of the plan participant's income tax withholding obligation. Those withheld shares are then held in the Company’s treasury stock at cost for future reissuance. During the six months ended June 30, 2014 , the Company withheld 389,969 shares at an average price of $46.41 in connection with the vesting of its RSAs and PBRSUs.
4. MARKETABLE SECURITIES
The Company manages its cash equivalents and marketable securities as a single investment portfolio that is intended to be available to meet the Company’s current cash requirements. Cash equivalents consist primarily of investments in money market funds. 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 sheet.

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


The following table provides the Company’s marketable securities by security type as of June 30, 2014 and December 31, 2013 (in thousands):
 
As of June 30, 2014
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper and corporate bonds
$
371,160

 
$
276

 
$
(154
)
 
$
371,282

U.S. government agency debt securities
12,000

 
1

 

 
12,001

Total
$
383,160

 
$
277

 
$
(154
)
 
$
383,283

 
As of December 31, 2013
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper and corporate bonds
$
378,135

 
$
122

 
$
(196
)
 
$
378,061

U.S. government agency debt securities
35,934

 
3

 
(1
)
 
35,936

Total
$
414,069

 
$
125

 
$
(197
)
 
$
413,997

Contractual maturities of the Company’s marketable securities as of June 30, 2014 and December 31, 2013 are summarized as follows (in thousands):
 
As of June 30, 2014
 
As of December 31, 2013
 
Cost
 
Estimated
Fair
Value
 
Cost
 
Estimated
Fair
Value
Due in one year or less
$
182,898

 
$
183,000

 
$
218,941

 
$
218,892

Due in one to five years
200,262

 
200,283

 
195,128

 
195,105

Total
$
383,160

 
$
383,283

 
$
414,069

 
$
413,997

The following table provides the fair market value and the gross unrealized losses of the Company’s marketable securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by security type as of June 30, 2014 and December 31, 2013 (in thousands):
 
In Loss Position for Less than 12 Months
 
As of June 30, 2014
 
As of December 31, 2013
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
Commercial paper and corporate bonds
$
139,249

 
$
(154
)
 
$
241,381

 
$
(196
)
U.S. government agency debt securities

 

 
10,910

 
(1
)
Total
139,249

 
(154
)
 
252,291

 
(197
)
None of the Company’s marketable securities has been in a continuous unrealized loss position for more than twelve months as of June 30, 2014 and December 31, 2013 .
The Company regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. 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 at maturity, the Company has determined that the gross unrealized losses on such investments at June 30, 2014 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, 2014 .

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


During the three and six months ended June 30, 2014 , the Company recorded an insignificant amount of net realized gain from the sale of marketable securities. No realized gain or loss was recorded during the three and six months ended June 30, 2013 .
5. FAIR VALUE
ASC 820-10, Fair Value Measurements and Disclosures , establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and enhances disclosure requirements for fair value measurements. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820-10 are described as follows:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including:
quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in markets that are not active;
inputs other than quoted prices that are observable for the asset or liability;
inputs that are derived principally from or corroborated by observable market data by correlation or other means.
If the asset or liability has a specified (contractual) term, the Level 2 inputs must be observable for substantially the full term of the asset or liability.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the fair value measurement for the asset or liability.
Financial assets (excluding cash balances) measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013 are summarized as follows (in thousands):
 
As of June 30, 2014
 
As of December 31, 2013
 
Fair Value Measurement Using
 
Fair Value Measurement Using
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
4,570

 
$

 
$

 
$
4,570

 
$
751

 
$

 
$

 
$
751

Total cash equivalents
4,570

 

 

 
4,570

 
751

 

 

 
751

Commercial paper and corporate bonds

 
371,282

 

 
371,282

 

 
378,061

 

 
378,061

U.S. government agency debt securities

 
12,001

 

 
12,001

 

 
35,936

 

 
35,936

Total marketable securities

 
383,283

 

 
383,283

 

 
413,997

 

 
413,997

Total financial assets
$
4,570

 
$
383,283

 
$

 
$
387,853

 
$
751

 
$
413,997

 

 
$
414,748

The Company’s financial assets that are measured at fair value on a recurring basis are generally classified within Level 1 or Level 2 of the fair value hierarchy. Investments in money market funds have been classified as Level 1 since these securities are valued based upon $1.00 net asset value per share or unadjusted quoted prices in active markets. Investments in commercial paper, corporate bonds, and U.S. government agency debt securities have been classified as Level 2 since these securities are valued based on quoted prices in less active markets or significant inputs which are directly or indirectly observable. The valuation techniques used to measure the fair values of corporate bonds and U.S. government agency debt securities were derived from the inputs of market prices from multiple sources at each reporting period. The fair value was then determined based on a consensus price or a weighted average price for each security. For the remaining financial assets classified as Level 2, substantially all of the securities had a short maturity within one year and high credit ratings. Therefore, the valuation techniques used to measure the fair values were primaril y derived from accretion of purchase price to its face value over the term of maturity or quoted market prices for similar instruments if available. During the six months ended June 30, 2014 , there were no transfers of financial assets between Level 1 and Level 2.

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


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. The Company does not have non-financial assets or liabilities that have been measured at fair value on a nonrecurring basis as of June 30, 2014 .
6. GOODWILL AND INTANGIBLE ASSETS
The change in the carrying amount of goodwill during the six months ended June 30, 2014 is as follows (in thousands):
Balance as of January 1, 2014
$
15,487

Foreign currency translation adjustments
168

Balance as of June 30, 2014
$
15,655

Intangible assets are summarized as follows (in thousands):
 
As of June 30, 2014
 
As of December 31, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Acquired technology
$
4,186

 
$
(3,739
)
 
$
447

 
$
4,129

 
$
(3,481
)
 
$
648

Customer relationships
2,089

 
(1,886
)
 
203

 
2,074

 
(1,818
)
 
256

Total
$
6,275

 
$
(5,625
)
 
$
650

 
$
6,203

 
$
(5,299
)
 
$
904

Annual amortization for the next five years is expected to be as follows (in thousands):
Remainder of year ending December 31, 2014
$
284

Years ending December 31,
 
2015
297

2016
49

2017
20

2018

7. DEBT
In August 2013, the Company issued at par value $287.5 million of 1.00% convertible senior notes (the "Notes"). Interest is payable semi-annually in arrears on August 1 and February 1 of each year, beginning on February 1, 2014. The Notes mature on August 1, 2018 unless repurchased or converted in accordance with their terms prior to such date. The Company may not redeem the Notes prior to their maturity date. The Notes are the Company's senior unsecured obligations and are governed by an indenture dated August 12, 2013 between the Company, as issuer, and Wells Fargo Bank, National Association, as trustee.
Upon conversion of the Notes, the Company may choose to pay or deliver, as applicable, either cash, shares of the Company's common stock, or a combination thereof. If converted, holders of the Notes will receive, at the Company's election, cash and/or shares for the principal amount of the Notes as well as any amounts in excess of principal. The Company intends to settle the principal amount of the Notes in cash if converted.
The initial conversion rate is 17.2286 shares of the Company's common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $58.05 per share of common stock. The conversion rate will be subject to adjustment upon occurrence of certain events, including, but not limited to, the issuance of stock dividends or payment of cash dividends on the Company's common stock (unless the holders of the Notes participate at the same time and under the same terms as the holders of common stock), or execution of a share split or share combination. Upon conversion, holders of the Notes will not receive any separate cash payment representing accrued and unpaid interest, unless conversion occurs after close of business on a regular record date and prior to the related interest payment date.
Holders may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding February 1, 2018 only under the following circumstances:
during any calendar quarter commencing after the calendar quarter ending on December 31, 2013 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

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


during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on such trading day; or
upon the occurrence of certain corporate events described in the indenture governing the Notes.
On or after February 1, 2018 until close of business on the business day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. If the Company undergoes a fundamental change as defined in the indenture governing the Notes, holders may require the Company to repurchase for cash all of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes as a whole. The excess of the par value over the fair value of the debt represents the debt discount, which is amortized to interest expense over the term of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the $8.1 million in issuance costs related to the Note issuance, the Company allocated the total amount incurred to the liability and equity components based on their relative values. The $6.4 million in issuance costs attributed to the liability component were capitalized and are amortized to interest expense over the term of the Notes. The $1.7 million in issuance costs attributed to the equity component were netted against the equity component in additional paid-in capital.
As of June 30, 2014 , the remaining unamortized debt issuance costs related to the Notes were $5.2 million , included in other assets on the Company's consolidated balance sheets.
The components of the Notes are summarized as follows (in thousands):
 
June 30,
2014
 
December 31,
2013
Equity component, net of equity issue costs
$
60,222

 
$
60,222

Liability component:
 
 
 
Principal
287,500

 
287,500

Less: unamortized debt discount
(52,272
)
 
(57,795
)
Net carrying amount
$
235,228

 
$
229,705

The Notes are carried at face value less any unamortized discount, but require a disclosure of an estimate of fair value. As of June 30, 2014 and December 31, 2013 , the estimated fair value of the Notes was $307.3 million and $365.1 million , respectively, which the Company considers to be a Level 2 measurement because it is based upon a recent quoted bid price for the Notes, reflecting market activity in a less than active market. As of June 30, 2014 , the Notes are not convertible. Based on the closing price of the Company's common stock on June 30, 2014 of $42.81 , which is less than the Notes' initial conversion price of $58.05 , the if-converted value of the Notes was less than their principal amount.
As of June 30, 2014 , the remaining life of the Notes is approximately 49 months .
The following table sets forth total interest expense recognized related to the Notes for the three and six months ended June 30, 2014 (in thousands except percentages):
 
Three Months Ended June 30, 2014
 
Six Months Ended June 30, 2014
Contractual interest expense
$
719

 
$
1,430

Amortization of debt issuance costs
320

 
639

Amortization of debt discount
2,782

 
5,523

Total
$
3,821

 
$
7,592

 
 
 
 
Effective interest rate
 
 
6.5
%

- 14 -

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


8. STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with ASC 718, Compensation — Stock Compensation . For the three and six months ended June 30, 2014 and 2013 , the components of stock-based compensation expense are summarized in the following table (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Stock options
$
1,245

 
$
1,056

 
$
2,459

 
$
2,018

Restricted stock awards
3,307

 
5,401

 
6,476

 
8,583

Performance-based restricted stock units
3,700

 
667

 
8,450

 
1,728

Employee stock purchase plan
378

 

 
944

 

Total stock-based compensation
$
8,630

 
$
7,124

 
$
18,329

 
$
12,329

Stock Options
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Expected volatility
44
%
 
42
%
 
43
%
 
42
%
Expected life
6 years

 
6 years

 
6 years

 
6 years

Risk-free interest rate
1.86
%
 
1.03
%
 
1.80
%
 
1.03
%
Dividend yield

 

 

 

The following table summarizes the activity under the stock option plans as of June 30, 2014 , 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, 2014
2,670

 
$
16.00

 
 
 
 
Granted
105

 
52.38

 
 
 
 
Exercised
(186
)
 
10.11

 
 
 
 
Forfeited
(33
)
 
27.88

 
 
 
 
Expired

 

 
 
 
 
Outstanding at June 30, 2014
2,556

 
$
17.77

 
6.94
 
$
66,801

Exercisable at June 30, 2014
1,477

 
$
10.25

 
5.88
 
$
48,076

Vested and expected to vest at June 30, 2014
2,511

 
$
17.42

 
6.91
 
$
66,340

The weighted-average grant-date fair value of stock options granted during the three months ended June 30, 2014 and 2013 was $17.10 and $28.06 , respectively. The weighted-average grant-date fair value of stock options granted during the six months ended June 30, 2014 and 2013 was $22.64 and $28.06 , respectively. The total intrinsic value of stock options exercised during the three months ended June 30, 2014 and 2013 was $1.7 million and $14.0 million , respectively. The total intrinsic value of stock options exercised during the six months ended June 30, 2014 and 2013 was $8.5 million and $18.3 million , respectively. As of June 30, 2014 , there was a total of $12.0 million of unrecognized compensation cost related to all non-vested stock options granted, as recorded in accordance with ASC 718. This cost is expected to be recognized over a weighted-average remaining period of 2.38 years . The total fair value of stock options vested during the three months ended June 30, 2014 and 2013 was $1.4 million and $1.0 million , respectively. The total fair value of stock options vested during the six months ended June 30, 2014 and 2013 was $2.1 million and $2.0 million , respectively.

- 15 -

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


R estricted Stock Awards
The following table summarizes the status of the Company’s nonvested RSAs as of June 30, 2014 , 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, 2014
1,672

 
$
18.06

Granted
318

 
52.37

Vested
(674
)
 
14.33

Forfeited
(41
)
 
20.35

Nonvested at June 30, 2014
1,275

 
$
28.51

As of June 30, 2014 , there was a total of $32.4 million of unrecognized compensation cost related to all nonvested RSAs granted, as recorded in accordance with ASC 718. This cost is expected to be recognized over a weighted-average remaining period of 2.44 years . The total fair value of RSAs vested during the three months ended June 30, 2014 and 2013 was $19.8 million and $25.2 million , respectively. The total fair value of RSAs vested during the six months ended June 30, 2014 and 2013 was $28.2 million and $25.5 million , respectively.
Performance-Based Restricted Stock Units
During the first quarter of 2014 , the Company granted PBRSUs to certain employees including executives. Of the number of PBRSUs granted, which assumes performance at 100% of targeted levels, (1) 149 thousand PBRSUs ("2014 Revenue PBRSUs") have performance conditions based on revenue for the year ending December 31, 2014 relative to the Company's revenue guidance and a minimum profitability condition, vesting annually over three years commencing on the first anniversary of the grant date, with the number of PBRSUs ultimately earned ranging from zero to 200% of the target ; and (2) 74 thousand PBRSUs ("2014 TSR PBRSUs") have market conditions based on the Company's total stockholder return ("TSR") relative to that of the NASDAQ Composite Index for the year ending December 31, 2014, vesting annually over three years commencing on the first anniversary of the grant date, with the number of PBRSUs ultimately earned ranging from zero to 200% of the target . The Company also granted an insignificant number of other PBRSUs with performance conditions based on achievement of certain predetermined objectives.
The fair value of each TSR PBRSU is estimated as of the date of grant based upon evaluation of expected performance relative to the associated market condition using a Monte Carlo valuation model with the following weighted-average assumptions:
 
2014 TSR PBRSUs
 
2013 TSR PBRSUs
Expected volatility - Medidata
52
%
 
39
%
Expected volatility - NASDAQ Composite Index
13
%
 
15
%
Expected life
0.89 years

 
1.00 year

Risk-free interest rate
0.12
%
 
0.16
%
Dividend yield

 

The following table summarizes the status of the Company’s PBRSUs based upon expected performance as of June 30, 2014 , and changes during the six months then ended (in thousands, except per share data):
 
Revenue
 
TSR
 
Long-Term
 
Other
 
Total Number of Shares
 
Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2014
454

 
227

 
1,012

 
9

 
1,702

 
$
29.18

Granted (based on performance at 100% of targeted levels)
149

 
74

 

 
5

 
228

 
54.01

Adjustment related to expected performance

 

 

 
(5
)
 
(5
)
 
67.01

Vested
(152
)
 
(75
)
 

 

 
(227
)
 
26.33

Forfeited
(7
)
 
(4
)
 
(57
)
 

 
(68
)
 
47.58

Nonvested at June 30, 2014
444

 
222

 
955

 
9

 
1,630

 
$
32.17

As of June 30, 2014 , there was a total of $33.7 million of unrecognized compensation cost related to all nonvested PBRSUs, as recorded in accordance with ASC 718. This cost is expected to be recognized over a weighted-average remaining period of 1.72

- 16 -

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


years . There were no PBRSUs vested during the three months ended June 30, 2014 and 2013 . The total fair value of PBRSUs vested during the six months ended June 30, 2014 and 2013 was $13.3 million and none , respectively.
Employee Stock Purchase Plan
The Company adopted the Amended and Restated 2014 Employee Stock Purchase Plan (the "2014 ESPP"), which became effective as of January 1, 2014 based upon the approval obtained from the Company's stockholders at the 2014 Annual Meeting of Stockholders. The ESPP allows eligible employees to purchase shares of the Company's common stock at a discount though payroll deductions, and consists of a 24-month offering period with four six-month purchase periods in each offering period. Employees purchase shares at the lesser of (1) 85% of the fair market value (“FMV”) per share on the first day of the offering period, or (2) 85% of the FMV per share at the end of the relevant purchase period. As such, the ESPP is considered to be a compensatory plan under ASC 718. A total of 0.3 million shares of common stock is reserved for issuance under the ESPP.
The fair value of ESPP shares is estimated using the Black-Scholes pricing model with the following weighted-average assumptions:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Expected volatility
49
%
 
%
 
49
%
 
%
Expected life
1.22 years

 
0.00 years

 
1.22 years

 
0.00 years

Risk-free interest rate
0.21
%
 
%
 
0.21
%
 
%
Dividend yield

 

 

 

For the ESPP purchase period ended June 30, 2014 ("First Purchase Period"), 68.0 thousand shares of common stock were purchased at a weighted-average price of $36.39 , resulting in cash proceeds of $2.5 million .
Based upon provisions set forth in the 2014 ESPP, the look-back purchase price for the offering period beginning January 1, 2014 ("First Offering Period") was reset since the FMV per share at the end of the First Purchase Period was lower than the stock price at the first day of the First Offering Period. As a result, the First Offering Period was canceled following the completion of the First Purchase Period and all participants in the First Offering Period have been automatically enrolled into a new 24-month offering period beginning July 1, 2014. Under ASC 718, the reset provision is accounted for as a Plan modification. The fair value of ESPP shares will be revalued based on assumptions on July 1, 2014 with unrecognized compensation cost adjusted accordingly.
As of June 30, 2014 , there was $3.3 million in unrecognized compensation cost related to ESPP shares under the First Offering Period based upon pre-modified assumptions, as recorded in accordance with ASC 718. This cost is expected to be recognized over a weighted-average remaining period of 1.50 years .
9. ACCUMULATED OTHER COMPREHENSIVE INCOME
The changes in the balances of each component of accumulated other comprehensive income (loss) during the six months ended June 30, 2014 are as follows (in thousands):
 
Foreign Currency Translation Adjustments
 
Unrealized Gain (Loss) On Available-For-Sale Securities
 
Total
Balance as of January 1, 2014
$
(127
)
 
$
(72
)
 
$
(199
)
Other comprehensive income, net of tax
585

 
118

 
703

Balance as of June 30, 2014
$
458

 
$
46

 
$
504

For the six months ended June 30, 2014 , reclassifications of items from accumulated other comprehensive income (loss) to net income were insignificant.
10. EARNINGS PER SHARE
The Company follows ASC 260, Earnings Per Share , in calculating 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 unvested 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 antidilutive. The effect of the Notes, if any, is reflected in diluted earnings per share using the treasury stock method as the Company intends to settle the principal amount of the Notes in cash upon conversion.

- 17 -

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


All share and per share data for all periods presented reflect the impact of a two-for-one stock split which was effected in the form of a stock dividend in December 2013. A reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share for the three and six months ended June 30, 2014 and 2013 are shown in the following table (in thousands, except per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Numerator
 
 
 
 
 
 
 
Net income
$
2,296

 
$
5,106

 
$
481

 
$
10,806

Denominator
 
 
 
 
 
 
 
Denominator for basic earnings per share:
 
 
 
 
 
 
 
Weighted average common shares outstanding
52,457

 
50,850

 
52,284

 
50,546

Denominator for diluted earnings per share:
 
 
 
 
 
 
 
Dilutive potential common shares:
 
 
 
 
 
 
 
Stock options
1,141

 
1,466

 
1,274

 
1,482

Restricted stock awards
567

 
956

 
721

 
904

Performance-based restricted stock units
663

 
216

 
717

 
124

Employee stock purchase plan

 

 
2

 

Weighted average common shares outstanding with assumed conversion
54,828

 
53,488

 
54,998

 
53,056

Basic earnings per share
$
0.04

 
$
0.10

 
$
0.01

 
$
0.21

Diluted earnings per share
$
0.04

 
$
0.09

 
$
0.01

 
$
0.20

Antidilutive common stock equivalents excluded from the calculation of dilutive earnings per share for the three and six months ended June 30, 2014 and 2013 are shown in the following table (in thousands, except per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Stock options
417

 
112

 
289

 
64

Restricted stock awards
285

 

 
46

 

Performance-based restricted stock units
156

 

 
116

 
74

Employee stock purchase plan
266

 

 

 

Total
1,124

 
112

 
451

 
138

The effect of the Notes (see Note 9, "Debt") issued in August 2013, if any, will be reflected in diluted earnings per share using the treasury stock method as the Company intends to settle the principal amount of the Notes in cash upon conversion. During the three and six months ended June 30, 2014 , 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 this period.
11. INCOME TAXES
The Company’s effective tax rate for the three and six months ended June 30, 2014 was 38% and 23% , respectively, and differed from the federal statutory rate of 35% primarily due to state and local income taxes, investment in U.S. property under Internal Revenue Code Section 956 and stock-based compensation, partially offset by the benefit associated with domestic production activities deduction.
The Company’s effective tax rate for the three and six months ended June 30, 2013 was 42% and 33% , respectively, and differed from the federal statutory rate of 35% primarily due to state and local income taxes, stock-based compensation, research and development tax credits, and limitations on officers' compensation. The Company recognized as a favorable discrete item a research and development tax credit of $1.2 million , resulting from the retroactive reinstatement of the research and development tax credit for 2012 during the first quarter of 2013.
The Company had approximately $4.1 million of gross unrecognized tax benefits as of December 31, 2013 . For the three and six months ended June 30, 2014 , there was no change relating to the Company’s tax positions. The Company’s 2012 federal income tax return is currently under examination by the IRS and it has yet to notify the Company if there are any issues related to this examination.

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


12. COMMITMENTS AND CONTINGENCIES
Legal Matters The Company is subject to legal proceedings and claims that arise in the ordinary course of business. From time to time, third parties have asserted and may in the future assert intellectual property rights to technologies that are important to the Company’s business and have demanded and may in the future demand that the Company license their technology. The Company 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.
On March 4, 2011, DataTrak International, Inc. ("DataTrak") filed a complaint for alleged patent infringement against the Company in DataTrak International v. Medidata Solutions, C.A. No. 1:11-cv-00458 in the U.S. District Court for the Northern District of Ohio. The complaint asserts infringement of U.S. Patent No. 7,464,087 (the “’087 Patent”), which claims a method and system for unifying data from a variety of sources. The complaint asserts that the Company infringes upon the patent owned without providing any details concerning the alleged infringement, and it seeks unspecified damages and injunctive relief. On October 28, 2011, the Company filed an application for ex parte reexamination of the ’087 Patent with the U.S. Patent and Trademark Office (the “PTO”). On December 16, 2011, the PTO issued a non-final rejection of the validity of all claims of the ’087 Patent. On the same date, the district court granted the Company’s motion to stay the case pending reexamination of the patent-in-suit. On April 6, 2012, the PTO issued its final office action rejecting all asserted claims of the ’087 Patent. In July 2012, DataTrak filed a notice of appeal to the Board of Patent Appeals and Interferences (the "BPAI"). The BPAI rendered a decision on March 4, 2014, affirming the rejection of some claims of the '087 Patent and reversing the rejection of other claims. The PTO issued a notice of intent to issue ex parte reexamination certificate on August 1, 2014, which confirms patentability of the remaining claims and closes the reexamination proceeding.
The Company believes that it has valid defenses to the lawsuit and intends to defend itself vigorously in the event the stay of the case is lifted. The probability of a favorable or unfavorable outcome to the Company should the lawsuit resume is not known nor can the liability that could potentially result from a negative outcome be reasonably estimated. As a result, the Company has not recorded an accrual associated with this litigation. Additionally, given the early stage of the proceedings, the complexities of the facts in dispute and the multiple claims involved, the Company is unable to estimate a range of loss related to this litigation.
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 be entitled to (a) a severance payment equal to the officer’s base salary plus target bonus amount; (b) continuation of health benefits for 12 months ; and (c) immediate vesting of remaining unvested equity awards with service-based vesting conditions, unless otherwise specified in the equity award agreements.

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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, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or 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, 2013 filed with the Securities and Exchange Commission, or SEC, on February 24, 2014 .
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, 2013 .
Overview
We are the leading global provider of cloud-based solutions for clinical research in life sciences, designed to transform clinical development and increase the value of our clients' research investments. Our platform technology and solutions address the life cycle of the clinical process, enhancing productivity and quality by speeding time to market, reducing costs, increasing therapeutic value and minimizing operational and program risk.
Our clients are life sciences companies that create and test new drugs, vaccines, devices, diagnostics and other treatments and create new uses and markets for existing treatments. They include pharmaceutical, biotechnology, medical device and diagnostic companies, academic institutions and medical centers, contract research organizations, or CROs, and other organizations engaged in clinical testing.
Our solutions allow our clients to increase the value of their development programs by more efficiently and effectively designing, planning, and managing key aspects of the clinical trial process, including study and protocol design, trial planning and budgeting, site negotiation, clinical portal, trial management, randomization and trial supply management, clinical data capture and management, safety events capture, medical coding, clinical business analytics, and data flow and interoperability among multiple trial applications. Our clients rely on our solutions to safely accelerate the clinical development process, enhancing decision-making and saving resources in the development life cycle.
The demand for electronic clinical solutions, such as those provided by us, has been driven by the increasing complexity and cost associated with paper-based trials and inefficiencies with early generation electronic data capture, or EDC, solutions. Paper-based trials may delay the clinical development process, impair data quality and prevent real-time decision making, while traditional EDC solutions have faced challenges with integration, site requirements, customization and scalability.
We have grown our revenues significantly since inception by expanding our customer base, increasing penetration with existing clients, selling multiple solutions under our clinical cloud-based platform, enhancing our solutions and services and growing our indirect channel. In order to achieve and sustain our growth objectives, we have invested in and will continue to invest in key areas, including: new personnel, particularly in direct domestic and international sales activities and research and development; resources to support our offerings, including new and expanded technologies and solution capabilities; marketing programs to build brand awareness; and infrastructure to support growth.
We derive a majority of our subscription revenues through multi-study arrangements which grant customers the right to use our solutions for a predetermined number of studies. We also offer our solutions on a single-study basis under which customers may use our platform for a limited number of studies or evaluate it prior to committing to multi-study arrangements. We invest heavily in training our clients, their investigators and other third parties to assume some or all of the implementation and management activities associated with our solutions. We believe this knowledge transfer accelerates client adoption and provides a better basis for a transformative approach to future development.
We use a number of metrics to evaluate and manage our business. These metrics include revenue growth, customer growth, customer retention rate, revenues from lost customers, geographic contribution, and subscription backlog.
Our customer base has grown from 219 at January 1, 2011 to 437 at June 30, 2014 . Our relationships with some of these customers include multiple divisions and business units at various domestic and international locations. We generate revenues

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from sales to new clients as well as sales and renewals from our existing clients. Our global direct sales organization represents our primary source of sales, with an increasing volume of sales generated through our partnership with CROs. Our customer retention rate was 94.5% and 93.7% for the six months ended June 30, 2014 and 2013 , respectively. We calculate customer retention based upon the number of clients that existed both at the beginning and end of the relevant period. Revenues from lost customers for the six months ended June 30, 2014 and 2013 accounted for 0.4% and 0.6% , respectively, of total prior year revenues. To calculate the impact of customers lost during the period, we consider the revenues recognized from lost customers during the most recent prior fiscal year as a percentage of total company revenues from the same period. Traditionally, we maintain a high percentage of customer retention and hence the revenue impact from lost customers is insignificant to our total revenues. We believe revenues from lost customers coupled with customer retention rate give the best sense of volume and scale of customer loss and retention. Our presentation of customer retention and revenues from lost customers may differ from other companies in our industry.
We manage our business as one reportable segment. We generate the majority of our revenues from sales to customers located in the United States. However, revenues generated from customers located in Europe and Asia (including Australia) represent a significant portion of overall revenues. For the three months ended June 30, 2014 , revenues generated from customers located in Europe, or European revenues, increased 25% year over year and represented approximately 16% of total revenues as compared with 15% in the prior period. For the six months ended June 30, 2014 , European revenues increased 23% year over year and represented approximately 15% of total revenues in both current and prior periods. For the three months ended June 30, 2014 , revenues generated from customers located in Asia, or Asian revenues, increased slightly year over year and represented approximately 11% of total revenues as compared with 13% in the prior period. For the six months ended June 30, 2014 , Asian revenues increased 3% year over year and represented approximately 11% of total revenues as compared with 13% in the prior period. We expect sales to customers in Europe and Asia to continue to represent a significant portion of total sales as we continue to serve existing and new clients in these markets.
We monitor subscription backlog as an indicator of the underlying health of our business. Our subscription backlog solely relates to our cloud-based offerings, representing the total future contract value of outstanding multi-study and single-study arrangements, billed and unbilled, at a point in time. Subscription revenues generated in any given period are a function of revenues recognized from the beginning of period subscription backlog, contract renewals, and new customer contracts. For this reason, subscription backlog at the beginning of any period is not necessarily indicative of long-term future performance. In addition, our subscription backlog does not include revenues associated with intra-year contract renewals. We monitor the amount of revenues expected to be recognized from subscription backlog over the current fiscal year while updating subscription backlog each quarter to indicate how much remains to be recognized within the year. As of January 1, 2014 , we had full year subscription backlog of approximately $228 million . The remaining amount of revenue to be recognized from subscription backlog in the current year, or remaining subscription backlog, as of June 30, 2014 is approximately $133 million . Our presentation of backlog may differ from other companies in our industry.
We consider the global adoption of clinical development technologies to be essential to our future growth. Our future growth will also depend on our ability to sustain high levels of customer satisfaction and our ability to increase sales to existing clients. In addition, the market for our solutions is often characterized by rapid technological change and evolving regulatory standards. Our future growth is dependent on the successful development and introduction of new solutions and enhancements. To address these challenges, we will continue to expand our direct and indirect sales channels in domestic and international markets, pursue research and development as well as acquisition opportunities to expand and enhance our offerings, expand our marketing efforts, and drive platform adoption through our professional services offerings. Our success in these areas will depend upon our abilities to execute on our operational plans, interpret and respond to customer and regulatory requirements, and retain key staff.
Sources of Revenues
We derive revenues from subscription and professional services. We typically sell multi-study or single-study subscription arrangements, which grant our customers the right to use our cloud-based solutions. Our subscription revenues are comprised of subscription fees from customers accessing our cloud-based solutions. Professional services revenue is derived from the provision of professional services that help life sciences companies realize higher value in their clinical development processes.
Subscriptions to our cloud-based solutions are principally provided through multi-study arrangements, which grant customers the right to manage up to a predetermined number of clinical trials for a term generally ranging from one to five years, as well as 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 clients have migrated from single-study arrangements to multi-study arrangements, which represent the majority of our subscription revenues.
Our professional services provide our clients with reliable, repeatable and cost-effective implementation and training in the use of our cloud-based solutions. We also offer strategic consulting services to advise clients on ways to optimize their clinical development process and maximize the value that our solutions bring to our clients' clinical research. Over the long term, we expect professional services revenues to decline slightly as a percentage of total revenues as our clients and partners become more adept at the management and configuration of our technology for their clinical trials as part of our knowledge transfer efforts.

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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. Cost of revenues also includes costs associated with our data center, including networking and related depreciation expense; as well as outside service provider costs, amortization expense 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.
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, 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 absolute dollars in the future as we intend to release new features and functionality designed to maximize the efficiency and effectiveness of the clinical development process for our customers. 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, commissions, travel costs, and marketing and promotional events, corporate communications, advertising, other brand building and product marketing expenses and allocated overhead. Our sales and marketing expenses have increased in absolute dollars primarily due to our ongoing substantial investments in customer acquisition and other activities to build brand awareness. We expect sales and marketing expenses to continue to increase in absolute dollars. 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, facility, global learning and development, finance and human resources departments, including salaries, benefits, bonuses and stock-based compensation, professional fees, insurance premiums, allocated overhead and other corporate expenses. On an ongoing basis, we expect general and administrative expenses to increase modestly in absolute dollars as we continue to add administrative personnel and incur additional professional fees and other expenses resulting from continued investment in our infrastructure to support continued growth. Over the long term, we believe that general and administrative expenses as a percentage of total revenues will decrease.
Interest and Other Expense
Interest and other expense relates primarily to interest expense, including contractual interest expense and amortization of debt discount and issuance costs, on our 1.00% convertible senior notes (the "Notes") issued in August 2013. The Notes mature in August 2018 unless repurchased or converted in accordance with their terms prior to such date. The annualized effective rate of interest on the Notes is expected to be 6.5% to 6.6% throughout their term.
Income Tax Expense
We are subject to income tax in the United States as well as other tax jurisdictions in which we conduct business. In 2014 , we expect that our effective income tax rate will be approximately 38%. We have U.S. federal and state net operating loss carryforwards, or NOLs, available to offset future taxable income, which do not fully expire until 2033 and are subject to limitations under Section 382 of the Internal Revenue Code. Historically, we have also had other tax credits, such as research and development tax credits, available to offset our taxable income. Given the expiration of the federal research and development tax credit at the end of 2013, we have not recognized a related tax benefit in our 2014 results to date, nor will we include such benefit in our 2014 estimated effective income tax rate, unless such tax credit is reinstated by Congress. Over the long term, we expect our overall income tax expense to increase in absolute dollars.
Critical Accounting Policies
Our condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Our critical accounting policies, including the assumptions and judgments underlying them, require the application of significant judgment in the preparation of our financial statements, and as a result they are subject to a greater degree of uncertainty. In applying these policies, we use our judgment to determine the appropriate assumptions to be used in calculating estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Estimates and assumptions are based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Accordingly, actual results could differ from those estimates. Our critical accounting policies consist of revenue recognition, stock-based compensation, goodwill and intangibles, convertible notes and income taxes. Except to the extent updated or described below, our critical accounting policies as of June 30, 2014 are the same as those at December 31, 2013 , which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 .

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Stock-Based Compensation
We follow Accounting Standards Codification, or ASC, 718, Compensation—Stock Compensation , to account for all of our stock-based compensation plans. According to ASC 718, all forms of share-based payments to employees, including employee stock options, nonvested restricted stock awards, or RSAs, performance based restricted stock units, or PBRSUs, and employee stock purchase plan, or ESPP, shares, are treated the same as any other form of compensation by recognizing the related cost in the statement of operations.
Under ASC 718, stock-based compensation expense is measured at the grant date based on the fair value of the award, and the expense is recognized ratably over the award’s vesting period. For all share-based awards, we recognize compensation cost under the straight-line method, net of estimated forfeitures. Forfeiture assumptions used in amortizing stock-based compensation expense are based on an analysis of historical data.
We measure the fair value of stock options on the date of grant using the Black-Scholes pricing model which requires the use of several estimates, including:
the expected volatility of our stock price;
the expected life of the option;
risk-free interest rates; and
expected dividend yield.
For stock options, we use stock price volatility of our publicly-traded stock as a basis for determining the expected volatility. As we do not have sufficient historical exercise data in the period since our stock began being publicly traded to provide a reasonable basis upon which to estimate the expected life, we use the simplified method as permitted under SEC Staff Accounting Bulletin No. 110 for estimating the expected life of options as all of our options qualify as "plain-vanilla" options. The risk-free interest rate is based on the United States Treasury yield curve with a maturity tied to the expected life of the stock option. We have not paid and do not expect to pay dividends on our common stock. Thus, no expected dividend yield is factored into our Black-Scholes model.
The fair value of each nonvested RSA is measured as if the nonvested RSA was vested and issued on the grant date.
The fair value of each PBRSU whose vesting is based upon the achievement of a market price target, or 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 the NASDAQ Composite Index, the expected volatility of the NASDAQ Composite 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 NASDAQ Composite Index as applicable. The risk-free interest rate is based on the United States 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 valuation model.
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 expected performance relative to the associated goals. Related compensation expense is recognized only when it is probable that performance will meet or exceed the performance condition's minimum threshold.
The fair value of each ESPP share is estimated using the Black-Scholes pricing model, with similar inputs to those required for the valuation of stock options. We use stock price volatility of our publicly-traded stock as a basis for determining the expected volatility. The expected life of each ESPP share is equivalent to the time between the beginning of the offering period and the end of the related purchase period. The risk-free interest rate is based on the United States Treasury yield curve in effect at the beginning of the offering period with a maturity tied to the expected life of the ESPP share. No expected dividend yield is factored into the Black-Scholes pricing model as we do not expect to pay dividends on our common stock.
The use of different assumptions in our Black-Scholes or 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 in the future.
Results of Operations
We recognize revenues from subscriptions ratably over the terms of these arrangements. As a result, a substantial majority of our subscription revenues in each quarter are generated from arrangements entered into in prior periods. Consequently, an increase or a decrease in new subscription contracts in a particular quarter may not significantly affect results of operations in that quarter.

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Our typical practice is to sell our subscriptions and professional services in a multiple-element arrangement. Under our current accounting policy, our professional services revenues are recognized as delivered for any multiple-element arrangements. Concurrently, as required by ASC 605-25, Revenue Recognition — Multiple-Element Arrangements, we continue to recognize revenues from professional services ratably over the term of those multiple-element arrangements entered into prior to 2011 under the pre-amended ASC 605-25 until such arrangements expire. The portion of professional services revenues recognized under our former accounting policy has gradually declined over the past few years and is now insignificant. Regardless of revenue recognition, we recognize expenses related to our professional services in the period in which the expenses are incurred.
We now expect professional services revenues and related gross margins to be more reflective of the services delivered during each reporting period.
The following table sets forth our consolidated results of operations as a percentage of total revenues for the periods shown:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Subscription
82.8
%
 
82.8
%
 
83.0
%
 
81.5
%
Professional services
17.2
%
 
17.2
%
 
17.0
%
 
18.5
%
Total revenues
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cost of revenues:
 
 
 
 
 
 
 
Subscription
13.5
%
 
13.1
%
 
13.9
%
 
13.7
%
Professional services
11.7
%
 
11.7
%
 
12.2
%
 
12.2
%
Total cost of revenues
25.2
%
 
24.8
%
 
26.1
%
 
25.9
%
Gross profit
74.8
%
 
75.2
%
 
73.9
%
 
74.1
%
Operating costs and expenses:
 
 
 
 
 
 
 
Research and development
20.8
%
 
17.8
%
 
22.0
%
 
18.3
%
Sales and marketing
24.5
%
 
23.9
%
 
25.8
%
 
23.4
%
General and administrative
20.9
%
 
20.5
%
 
21.5
%
 
20.2
%
Total operating costs and expenses
66.2
%
 
62.2
%
 
69.3
%
 
61.9
%
Operating income
8.6
%
 
13.0
%
 
4.6
%
 
12.2
%
Three Months Ended June 30, 2014 Compared with Three Months Ended June 30, 2013
Revenues
 
Three Months Ended June 30,
 
2014

2013
 
Change
 
Amount
 
% of
Revenues
 
Amount
 
% of
Revenues
 
Amount
 
%
 
(Amount in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Subscription
$
68,947

 
82.8
%
 
$
56,346

 
82.8
%
 
$
12,601

 
22.4
%
Professional services
14,276

 
17.2
%
 
11,723

 
17.2
%
 
2,553

 
21.8
%
Total revenues
$
83,223

 
100.0
%
 
$
68,069

 
100.0
%
 
$
15,154

 
22.3
%
Total revenues . Total revenues increased $15.2 million , or 22.3% , to $83.2 million for the three months ended June 30, 2014 from $68.0 million for the same period in 2013 . The increase in revenues was the result of a $12.6 million increase in subscription revenues and a $2.6 million increase in professional services revenues. During the second quarter of 2014 , we added 30 new clients to reach a total of 437 as of June 30, 2014 compared to 363 clients a year ago. At the start of the second quarter of 2014 , we had approximately $177 million of 2014 remaining subscription backlog. As of June 30, 2014 , the total 2014 remaining subscription backlog was approximately $133 million .
Subscription revenues . Subscription revenues increased $12.6 million , or 22.4% , to $68.9 million for the three months ended June 30, 2014 from $56.3 million for the same period in 2013 . The majority of the increase in subscription revenues was derived from increased activity among our existing large and midmarket clients, primarily resulting from renewals and increased adoption of

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our solutions. We also benefited from strong demand from both new and existing customers who contracted for multiple products under our cloud-based platform, with 54% of our customers using multiple solutions as of June 30, 2014 , as compared with 45% as of June 30, 2013 . Revenues from new customers accounted for 21% of the total increase in subscription revenues. Subscription revenues increased significantly from both international and domestic customers compared with the prior period. Revenues from customers based in North America and Europe grew 27% and 19% .
Professional services revenues . Professional services revenues increased $2.6 million , or 21.8% , to $14.3 million for the three months ended June 30, 2014 as compared with $11.7 million for the same period in 2013 . The increase in professional services revenues was due to persistent demand from our existing clients who sought to optimize the value of our platform, as well as servicing of new clients.
Cost of Revenues
 
Three Months Ended June 30,
 
2014

2013
 
Change
 
Amount
 
% of
Revenues
 
Amount
 
% of
Revenues
 
Amount
 
%
 
(Amount in thousands)
Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
Subscription
$
11,221

 
13.5
%
 
$
8,949

 
13.1
%
 
$
2,272

 
25.4
%
Professional services
9,753

 
11.7
%
 
7,971

 
11.7
%
 
1,782

 
22.4
%
Total cost of revenues
$
20,974

 
25.2
%
 
$
16,920

 
24.8
%
 
$
4,054

 
24.0
%
Total cost of revenues . Total cost of revenues increased $4.1 million , or 24.0% , to $21.0 million for the three months ended June 30, 2014 from $16.9 million for the same period in 2013 .
Cost of subscription revenues . Cost of subscription revenues increased $2.3 million , or 25.4% , to $11.2 million for the three months ended June 30, 2014 from $8.9 million for the same period in 2013 . The increase was largely driven by higher third-party cloud hosting costs due to increased volume, increased consulting costs associated with our help-desk support and higher personnel-related costs resulting from increased headcount to support our business growth.
Cost of professional services revenues . Cost of professional services revenues increased $1.8 million , or 22.4% , to $9.8 million for the three months ended June 30, 2014 from $8.0 million for the same period in 2013 . The increase was primarily driven by growing personnel-related costs resulting from increased headcount to support the demand for our professional services. In addition, travel-related costs were also higher due to an overall increase in professional services activities.
Operating Costs and Expenses  
 
Three Months Ended June 30,
 
2014

2013
 
Change
 
Amount
 
% of
Revenues
 
Amount
 
% of