Medidata Solutions, Inc.
Medidata Solutions, Inc. (Form: 10-Q, Received: 11/05/2015 07:19:25)
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 September 30, 2015
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 October 30, 2015 , the registrant had 55,368,893 shares of common stock outstanding.


Table of Contents

MEDIDATA SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015
TABLE OF CONTENTS
 
 
Page
PART I
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 


- 1 -

Table of Contents

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

- 2 -

Table of Contents

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
 
September 30,
2015
 
December 31, 2014
 
(Amounts in thousands, except per share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
63,179

 
$
39,517

Marketable securities
224,135

 
233,284

Accounts receivable, net of allowance for doubtful accounts of $1,934 and $1,517, respectively
86,931

 
68,475

Prepaid commission expense
1,735

 
2,819

Prepaid expenses and other current assets
17,344

 
13,661

Deferred income taxes
97

 
96

Total current assets
393,421

 
357,852

Restricted cash
5,582

 
5,118

Furniture, fixtures and equipment, net
43,929

 
38,579

Marketable securities – long-term
205,609

 
183,842

Goodwill
18,910

 
19,025

Intangible assets, net
1,282

 
1,816

Deferred income taxes – long-term
7,595

 
8,066

Other assets
7,442

 
7,919

Total assets
$
683,770

 
$
622,217

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,270

 
$
3,738

Accrued payroll and other compensation
20,604

 
15,574

Accrued expenses and other
14,380

 
12,638

Deferred revenue
67,208

 
62,890

Total current liabilities
104,462

 
94,840

Noncurrent liabilities:
 
 
 
1.00% convertible senior notes, net
249,745

 
240,886

Deferred revenue, less current portion
5,089

 
1,374

Deferred tax liabilities
241

 
238

Other long-term liabilities
22,082

 
20,180

Total noncurrent liabilities
277,157

 
262,678

Total liabilities
381,619

 
357,518

Commitments and contingencies

 

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

 

Common stock, par value $0.01 per share; 200,000 shares authorized; 57,656 and 56,301 shares issued; 55,349 and 54,413 shares outstanding, respectively
577

 
563

Additional paid-in capital
350,075

 
301,465

Treasury stock, 2,307 and 1,888 shares, respectively
(62,082
)
 
(45,049
)
Accumulated other comprehensive loss
(2,402
)
 
(1,912
)
Retained earnings
15,983

 
9,632

Total stockholders’ equity
302,151

 
264,699

Total liabilities and stockholders’ equity
$
683,770

 
$
622,217

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
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(Amounts in thousands, except per share data)
Revenues
 
 
 
 
 
 
 
Subscription
$
88,878

 
$
71,547

 
$
251,556

 
$
204,305

Professional services
14,235

 
14,449

 
42,081

 
41,554

Total revenues
103,113

 
85,996

 
293,637

 
245,859

Cost of revenues (1)(2)
 
 
 
 
 
 
 
Subscription
12,489

 
11,413

 
36,316

 
33,720

Professional services
10,304

 
9,582

 
31,564

 
29,048

Total cost of revenues
22,793

 
20,995

 
67,880

 
62,768

Gross profit
80,320

 
65,001

 
225,757

 
183,091

Operating costs and expenses
 
 
 
 
 
 
 
Research and development (1)
24,192

 
17,677

 
68,622

 
52,777

Sales and marketing (1)(2)
25,881

 
21,004

 
75,923

 
62,161

General and administrative (1)
19,143

 
17,865

 
61,655

 
52,284

Wire transaction loss (2014) (3)

 
4,880

 

 
4,880

Total operating costs and expenses
69,216

 
61,426

 
206,200

 
172,102

Operating income
11,104

 
3,575

 
19,557

 
10,989

Interest and other income (expense)
 
 
 
 
 
 
 
Interest expense
(4,038
)
 
(3,849
)
 
(11,993
)
 
(11,457
)
Interest income
739

 
465

 
1,885

 
1,280

Other income (expense), net
3

 

 
(65
)
 
6

  Total interest and other expense, net
(3,296
)
 
(3,384
)
 
(10,173
)
 
(10,171
)
Income before income taxes
7,808

 
191

 
9,384

 
818

Provision for income taxes
3,127

 
30

 
3,033

 
176

Net income
$
4,681

 
$
161

 
$
6,351

 
$
642

Earnings per share
 
 
 
 
 
 
 
Basic
$
0.09

 
$
0.00

 
$
0.12

 
$
0.01

Diluted
$
0.08

 
$
0.00

 
$
0.11

 
$
0.01

Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
53,933

 
52,772

 
53,615

 
52,448

Diluted
56,687

 
55,069

 
55,985

 
55,064

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

 
1,072

 
3,805

 
3,171

Research and development
2,105

 
988

 
5,904

 
2,717

Sales and marketing
2,343

 
2,200

 
7,170

 
5,611

General and administrative
6,408

 
5,845

 
21,029

 
16,935

Total stock-based compensation
$
12,102

 
$
10,105

 
$
37,908

 
$
28,434

(2)    Amortization of intangible assets included in cost of revenues and operating costs and expenses is as follows:
Cost of revenues
79

 
109

 
438

 
328

Sales and marketing
30

 
30

 
89

 
90

Total amortization of intangible assets
$
109

 
$
139

 
$
527

 
$
418

(3) Operating costs and expenses for the three and nine months ended September 30, 2014 include a pre-tax charge of $4.9 million associated with a previously announced international wire transfer fraud committed against the Company and the related investigation costs. For additional details, see Note 2, "2014 Wire Transaction Loss."
The accompanying notes are an integral part of the condensed consolidated financial statements.

- 4 -


MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(Amounts in thousands)
Net income
$
4,681

 
$
161

 
$
6,351

 
$
642

Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
(564
)
 
(972
)
 
(391
)
 
(387
)
Unrealized loss on marketable securities
(389
)
 
(380
)
 
(186
)
 
(185
)
Other comprehensive loss
(953
)
 
(1,352
)
 
(577
)
 
(572
)
Income tax effect of unrealized loss on marketable securities
155

 
180

 
87

 
103

Other comprehensive loss, net of tax
(798
)
 
(1,172
)
 
(490
)
 
(469
)
Comprehensive income (loss), net of tax
$
3,883

 
$
(1,011
)
 
$
5,861

 
$
173


























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

- 5 -


MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Nine Months Ended
September 30,
 
2015

2014
Cash flows from operating activities
(Amounts in thousands)
Net income
$
6,351

 
$
642

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Amortization of intangible assets and depreciation
7,941

 
7,784

Stock-based compensation
37,908

 
28,434

Amortization of discounts or premiums on marketable securities
3,667

 
4,147

Deferred income taxes
(1,235
)
 
(8,501
)
Amortization of debt issuance costs
958

 
958

Amortization of debt discount
8,859

 
8,315

Excess tax benefit associated with equity awards
(1,706
)
 
(7,742
)
Provision for doubtful accounts
539

 
441

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(32,284
)
 
(16,495
)
Prepaid commission expense
374

 
834

Prepaid expenses and other current assets
(5,268
)
 
(1,149
)
Other assets
1,814

 
1,221

Accounts payable
(1,235
)
 
1,437

Accrued payroll and other compensation
3,376

 
(4,612
)
Accrued expenses and other
1,644

 
6,853

Deferred revenue
22,842

 
14,328

Other long-term liabilities
1,902

 
3,381

Net cash provided by operating activities
56,447

 
40,276

Cash flows from investing activities
 
 
 
Purchases of furniture, fixtures and equipment
(11,017
)
 
(13,900
)
Purchases of available-for-sale securities
(207,126
)
 
(199,425
)
Proceeds from sale of available-for-sale securities
190,656

 
191,741

Net (increase) decrease in restricted cash
(464
)
 
226

Net cash used in investing activities
(27,951
)
 
(21,358
)
Cash flows from financing activities
 
 
 
Proceeds from exercise of stock options
5,770

 
2,985

Proceeds from employee stock purchase plan
4,675

 
4,021

Excess tax benefit associated with equity awards
1,706

 
7,742

Payment of acquisition-related earn-out

 
(704
)
Repayment of obligations under capital leases
(26
)
 
(44
)
Repayment of notes payable
(32
)
 
(85
)
Acquisition of treasury stock
(16,915
)
 
(28,443
)
Net cash used in financing activities
(4,822
)
 
(14,528
)
Effect of exchange rate changes on cash and cash equivalents
(12
)
 
(64
)
Net increase in cash and cash equivalents
23,662

 
4,326

Cash and cash equivalents – Beginning of period
39,517

 
22,328

Cash and cash equivalents – End of period
$
63,179

 
$
26,654






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

- 6 -


MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited)
 
Nine Months Ended
September 30,
 
2015
 
2014
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
2,876

 
$
2,778

Income taxes
$
595

 
$
470

 
 
 
 
Noncash activities:
 
 
 
Furniture, fixtures, and equipment acquired but not yet paid for at period-end
$
2,682


$
803

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


$
97


































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

- 7 -

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


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Medidata Solutions, Inc., together with its consolidated subsidiaries (collectively, the "Company"), is the leading global provider of cloud-based solutions for clinical research in life sciences, offering platform technology that transforms clinical development and increases the value of its customers' research investments. The Company was organized as a New York corporation in June 1999 and reincorporated as a Delaware corporation in May 2000.
Except to the extent updated or described below, the Company’s significant accounting policies as of September 30, 2015 are the same as those at December 31, 2014 , which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the Securities and Exchange Commission (“SEC”) on March 2, 2015 .
Basis of Presentation — The accompanying interim condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014 , the condensed consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014 , the condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2015 and 2014 , and the condensed consolidated statements of cash flows for the nine months ended September 30, 2015 and 2014 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, 2014 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 2, 2015 .
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 September 30, 2015 , results of its operations for the three and nine months ended September 30, 2015 and 2014 , comprehensive income for the three and nine months ended September 30, 2015 and 2014 , and cash flows for the nine months ended September 30, 2015 and 2014 . The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 .
Income Taxes The Company’s interim period provision for income taxes is computed by using an estimate of the annual effective tax rate, adjusted for discrete items taken into account in the relevant period, if any. Each quarter, the annual effective income tax rate is recomputed and if there are material changes in the estimate, a cumulative adjustment is made.
Accounts Receivable Accounts receivable are 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 September 30, 2015 and December 31, 2014 , unbilled accounts receivable of $6.0 million and $8.9 million , respectively, were included in accounts receivable on the Company's consolidated balance sheets.
Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short maturity of these instruments. Fair values of marketable securities are based on unadjusted quoted market prices or pricing models using current market data that are observable either directly or indirectly. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
The Company uses a three-level framework for measuring the fair value of its financial assets and liabilities and gives highest priority to Level 1 inputs and lowest priority to Level 3 inputs, 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; and
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.

- 8 -

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

Level 3 - Unobservable inputs to the valuation methodology that are significant to the fair value measurement for the asset or liability.
Recently Issued Accounting Pronouncements There have been no changes in the expected dates of adoption or estimated effects on the Company's consolidated financial statements of recently issued accounting pronouncements from those disclosed in the Company’s Annual Report on Form 10-K, except as described below.
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. ASU No. 2015-03 requires that debt issuance costs be presented not as an asset but as a reduction of the carrying amount of the related debt liability, similar to a debt discount. ASU No. 2015-03 is effective for annual periods beginning after December 15, 2015, and interim periods within those annual periods, with early adoption permitted. The Company will adopt ASU No. 2015-03 on January 1, 2016, and such adoption is not expected to have a material impact on the Company's consolidated financial statements aside from a balance sheet reclassification. Upon adoption, the Company will apply the new guidance on a retrospective basis and adjust the balance sheet of each period presented to appropriately reflect the period-specific effects of the new guidance.
In May 2015, the FASB issued ASU No. 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). ASU No. 2015-07 removes the requirement to categorize within the fair value hierarchy those investments that are measured at fair value using net asset value per share as a practical expedient. It also removes the requirement to make certain disclosures for all investments that are eligible to be measured using the practical expedient, limiting the requirement to only those investments for which the practical expedient has been elected. ASU No. 2015-07 is effective for annual periods beginning after December 15, 2015, and interim periods within those annual periods, with early adoption permitted. The Company will adopt ASU No. 2015-07 on January 1, 2016, and the adoption is not expected to have a material impact on the Company's consolidated financial statements.
In July 2015, the FASB voted to approve a one-year delay of the effective date of ASU No. 2014-09,  Revenue from Contracts with Customers , which supersedes the existing accounting standards for revenue recognition. This ASU provides principles for recognizing revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU No. 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is not permitted. The Company will adopt ASU No. 2014-09 on January 1, 2018, and is presently evaluating the impact of the adoption on its consolidated financial statements.
2. 2014 WIRE TRANSACTION LOSS
On September 18, 2014, the Company discovered that it had been the subject of an international wire transfer fraud perpetrated against it on September 16, 2014. The incident involved a fraudulent request targeting certain mid-level employees in the Company's finance department , resulting in the transfer of  $4.8 million  to an overseas account. As a result, the Company recorded a charge of  $4.9 million  in the third quarter of 2014 for the loss and related investigation costs incurred through September 30, 2014. No customer data was involved in this matter and the incident did not have a material effect on the Company's business.
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.
Treasury Stock — From time to time, the Company grants nonvested restricted stock awards ("RSAs"), restricted stock units ("RSUs"), and performance-based restricted stock units ("PBRSUs") to its employees pursuant to the terms of its Second Amended and Restated 2009 Long-Term Incentive Plan (the “2009 Plan”). Under the provisions of the 2009 Plan, unless otherwise elected, participants fulfill their related income tax withholding obligation by having shares withheld at the time of vesting. On the date of vesting, the Company divides the participant's income tax withholding obligation in dollars by the closing price of its common stock and withholds the resulting number of vested shares. The shares withheld are then transferred to the Company's treasury stock at cost for future reissuance. During the nine months ended September 30, 2015 and 2014 , the Company withheld 338,792 shares at an average price of $50.27 and 398,360 shares at an average price of $46.40 , respectively, in connection with the vesting of equity awards.
Nonvested restricted stock awards forfeited by plan participants are transferred to the Company's treasury stock at par. During the nine months ended September 30, 2015 and 2014 , 80,752 and 60,745 forfeited shares, respectively, were transferred to treasury stock at their par value of $0.01 .
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

- 9 -

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

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.
The following table provides the Company’s marketable securities by security type as of September 30, 2015 and December 31, 2014 (in thousands):
 
As of September 30, 2015
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper and corporate bonds
$
420,496

 
$
37

 
$
(941
)
 
$
419,592

U.S. government agency debt securities
10,153

 
5

 
(6
)
 
10,152

Total
$
430,649

 
$
42

 
$
(947
)
 
$
429,744

 
As of December 31, 2014
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper and corporate bonds
$
417,845

 
$
72

 
$
(791
)
 
$
417,126

Total
$
417,845

 
$
72

 
$
(791
)
 
$
417,126

Contractual maturities of the Company’s marketable securities as of September 30, 2015 and December 31, 2014 are summarized as follows (in thousands):
 
As of September 30, 2015
 
As of December 31, 2014
 
Cost
 
Estimated
Fair
Value
 
Cost
 
Estimated
Fair
Value
Due in one year or less
$
224,182

 
$
224,135

 
$
233,326

 
$
233,284

Due in one to five years
206,467

 
205,609

 
184,519

 
183,842

Total
$
430,649

 
$
429,744

 
$
417,845

 
$
417,126

At September 30, 2015 , the Company had $0.9 million of gross unrealized losses primarily due to a decrease in the fair value of certain corporate bonds.
The Company regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Investments that are impaired are those that are considered to have losses that are other-than-temporary. Factors considered in determining whether a loss is temporary include:
the length of time and extent to which fair value has been lower than the cost basis;
the financial condition, credit quality and near-term prospects of the investee; and
whether it is more likely than not that the Company will be required to sell the security prior to recovery.
As the Company has the ability and intent to hold these investments until a recovery of fair value, which may be until maturity, the Company has determined that the gross unrealized losses on such investments at September 30, 2015 are temporary in nature. Accordingly, the Company did not consider its investments in marketable securities to be other-than-temporarily impaired as of September 30, 2015 .

- 10 -

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

The following tables provide the fair market value and the gross unrealized losses of the Company's marketable securities with unrealized losses, aggregated by security type, as of September 30, 2015 and December 31, 2014 (in thousands):
 
In Loss Position for Less than 12 Months
 
As of September 30, 2015
 
As of December 31, 2014
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
Commercial paper and corporate bonds
$
247,395

 
$
(899
)
 
$
322,938

 
$
(791
)
U.S. government agency debt securities
10,152

 
(6
)
 

 

Total
$
257,547

 
$
(905
)
 
$
322,938

 
$
(791
)
 
In Loss Position for More than 12 Months
 
As of September 30, 2015
 
As of December 31, 2014
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
Commercial paper and corporate bonds
$
53,094

 
$
(42
)
 
$

 
$

Total
$
53,094

 
$
(42
)
 
$

 
$

During the three and nine months ended September 30, 2015 and 2014 , the Company recorded an insignificant amount of net realized gains from the sale of marketable securities.
5. FAIR VALUE
As of September 30, 2015 and December 31, 2014 , financial assets (excluding cash balances) measured at fair value on a recurring basis as described in Note 1 , "Summary of Significant Accounting Policies," are summarized as follows (in thousands):
 
As of September 30, 2015
 
As of December 31, 2014
 
Fair Value Measurement Using
 
Fair Value Measurement Using
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
141

 
$

 
$
141

 
$
733

 
$

 
$
733

Total cash equivalents
141

 

 
141

 
733

 

 
733

Commercial paper and corporate bonds

 
419,592

 
419,592

 

 
417,126

 
417,126

U.S. government agency debt securities

 
10,152

 
10,152

 

 

 

Total marketable securities

 
429,744

 
429,744

 

 
417,126

 
417,126

Total financial assets
$
141

 
$
429,744

 
$
429,885

 
$
733

 
$
417,126

 
$
417,859

As of September 30, 2015 and December 31, 2014 , the Company had no financial liabilities measured at fair value on a recurring basis, and none of its financial assets measured at fair value on a recurring basis relied upon Level 3 inputs.
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 as they are valued using quoted prices in less active markets or other directly or indirectly observable inputs. Fair values of corporate bonds and U.S. government agency debt securities were derived from a consensus or weighted-average price based on input of market prices from multiple sources at each reporting period. With regard to commercial paper, all of the securities had high credit ratings and one year or less to maturity; therefore, fair value was derived from accretion of purchase price to face value over the term of maturity or quoted prices for similar instruments if available. During the nine months ended September 30, 2015 and 2014 , there were no transfers of financial assets between Level 1 and Level 2.
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.

- 11 -

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

6. GOODWILL AND INTANGIBLE ASSETS
The change in the carrying amount of goodwill during the nine months ended September 30, 2015 was as follows (in thousands):
Balance as of January 1, 2015
$
19,025

Foreign currency translation adjustments
(115
)
Balance as of September 30, 2015
$
18,910

Intangible assets are summarized as follows (in thousands):
 
As of September 30, 2015
 
As of December 31, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Acquired technology
$
5,261

 
$
(4,295
)
 
$
966

 
$
5,299

 
$
(3,891
)
 
$
1,408

Customer relationships
2,175

 
(1,980
)
 
195

 
2,186

 
(1,922
)
 
264

Non-competition agreements
150

 
(29
)
 
121

 
150

 
(6
)
 
144

Total
$
7,586

 
$
(6,304
)
 
$
1,282

 
$
7,635

 
$
(5,819
)
 
$
1,816

Annual amortization for the next five years is expected to be as follows (in thousands):
Remainder of year ending December 31, 2015
$
109

Years ending December 31,
 
2016
414

2017
388

2018
305

2019
47

2020
19

7. DEBT
The Company's 1.00% convertible senior notes (the "Notes"), issued in August 2013, consisted of the following components as of September 30, 2015 and December 31, 2014 (in thousands):
 
September 30,
2015
 
December 31,
2014
Equity component, net of equity issue costs
$
60,222

 
$
60,222

Liability component:
 
 
 
Principal
287,500

 
287,500

Less: unamortized debt discount
(37,755
)
 
(46,614
)
Net carrying amount
$
249,745

 
$
240,886

As of September 30, 2015 and December 31, 2014 , the estimated fair value of the Notes was $301.9 million and $314.8 million , respectively. The Company considers this disclosure to be a Level 2 measurement because it is based upon a recent modeled bid-price quote for the Notes, reflecting activity in a less than active market. As of September 30, 2015 , the Notes are not convertible. Based on the closing price of the Company's common stock on September 30, 2015 of $42.11 , 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 September 30, 2015 , the remaining life of the Notes was approximately 34 months and related unamortized debt issuance costs of $3.6 million were included in other assets on the Company's consolidated balance sheets.

- 12 -

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

The following table sets forth total interest expense recognized related to the Notes for the three and nine months ended September 30, 2015 and 2014 (in thousands except percentages):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Contractual interest expense
$
719

 
$
718

 
$
2,156

 
$
2,148

Amortization of debt issuance costs
319

 
319

 
958

 
958

Amortization of debt discount
2,997

 
2,792

 
8,859

 
8,315

Total
$
4,035

 
$
3,829

 
$
11,973

 
$
11,421

 
 
 
 
 
 
 
 
Effective interest rate
6.5
%
 
6.5
%
 
6.5
%
 
6.5
%
8. STOCK-BASED COMPENSATION
For the three and nine months ended September 30, 2015 and 2014 , the components of stock-based compensation expense were as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Stock options
$
1,070

 
$
1,272

 
$
3,906

 
$
3,731

Restricted stock awards and units
5,031

 
3,281

 
14,334

 
9,757

Performance-based restricted stock units
4,964

 
4,803

 
16,546

 
13,253

Employee stock purchase plan
1,037

 
749

 
3,122

 
1,693

Total stock-based compensation
$
12,102

 
$
10,105

 
$
37,908

 
$
28,434

Stock Options
The fair value of each stock option granted during the three and nine months ended September 30, 2015 and 2014 was estimated on the date of grant using a Black-Scholes pricing model with the following weighted-average assumptions:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Expected volatility
43
%
 
44
%
 
43
%
 
43
%
Expected life
6 years

 
6 years

 
6 years

 
6 years

Risk-free interest rate
1.69
%
 
1.91
%
 
1.69
%
 
1.84
%
Dividend yield

 

 

 


- 13 -

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

The following table summarizes the status of the Company's stock options as of September 30, 2015 , and changes during the nine 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, 2015
 
2,330

 
$
18.93

 
 
 
 
Granted
 
123

 
50.08

 
 
 
 
Exercised
 
(399
)
 
14.45

 
 
 
 
Forfeited
 
(58
)
 
14.13

 
 
 
 
Expired
 
(1
)
 
0.31

 
 
 
 
Outstanding at September 30, 2015
 
1,995

 
$
21.89

 
5.86
 
$
44,567

Exercisable at September 30, 2015
 
1,469

 
$
14.70

 
5.14
 
$
41,560

Vested and expected to vest at September 30, 2015
 
1,953

 
$
21.33

 
5.81
 
$
44,516

The weighted-average grant-date fair value of stock options granted during the three months ended September 30, 2015 and 2014 was $19.99 and $19.92 , respectively. The weighted-average grant-date fair value of stock options granted during the nine months ended September 30, 2015 and 2014 was $21.81 and $21.64 , respectively. The total intrinsic value of stock options exercised during the three months ended September 30, 2015 and 2014 was $1.7 million and $2.9 million , respectively. The total intrinsic value of stock options exercised during the nine months ended September 30, 2015 and 2014 was $14.1 million and $11.4 million , respectively. The total fair value of stock options vested during the three months ended September 30, 2015 and 2014 was $1.1 million and $1.5 million , respectively. The total fair value of stock options vested during the nine months ended September 30, 2015 and 2014 was $3.5 million and $3.6 million , respectively. As of September 30, 2015 , there was $9.0 million in unrecognized compensation cost related to all non-vested stock options granted. This cost is expected to be recognized over a weighted-average remaining period of 2.35 years .
R estricted Stock Awards and Units
The following table summarizes the status of the Company’s nonvested time-based RSAs and RSUs as of September 30, 2015 , and changes during the nine months then ended (in thousands, except per share data):
 
Number of
Shares
 
Weighted-
Average
Grant-Date
Fair Value
Nonvested at January 1, 2015
1,383

 
$
30.64

Granted
645

 
47.44

Vested
(564
)
 
23.62

Forfeited
(81
)
 
34.79

Nonvested at September 30, 2015
1,383

 
$
41.10

The total fair value of RSAs and RSUs vested during the three months ended September 30, 2015 and 2014 was $2.1 million and $0.8 million , respectively. The total fair value of RSAs and RSUs vested during the nine months ended September 30, 2015 and 2014 was $29.3 million and $29.0 million , respectively. As of September 30, 2015 , there was $46.0 million in unrecognized compensation cost related to all nonvested RSAs and RSUs granted. This cost is expected to be recognized over a weighted-average remaining period of 2.51 years .
Performance-Based Restricted Stock Units
No PBRSUs were granted during the three months ended September 30, 2015 and 2014 .
During the nine months ended September 30, 2015 , the Company granted 242 thousand PBRSUs ("2015 TSR PBRSUs") with market conditions based on the Company's total stockholder return ("TSR") relative to that of the Russell 2000 Index over the one-, two-, and three-year periods ending December 31, 2015, 2016, and 2017, respectively, vesting in equal parts over three years with the number of PBRSUs ultimately earned ranging from zero to 200% of the target number of shares .
During the nine months ended September 30, 2014 , the Company granted (a) 74 thousand PBRSUs ("2014 TSR PBRSUs") with market conditions based on the Company's TSR relative to that of the NASDAQ Composite Index for the year ending December 31, 2014, vesting in equal parts over three years with the number of PBRSUs ultimately earned ranging from zero to 200% of the target number of shares ; (b) 149 thousand PBRSUs ("2014 Revenue PBRSUs") with performance conditions based

- 14 -

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

on revenue for the year ending December 31, 2014, vesting in equal parts over three years with the number of PBRSUs ultimately earned ranging from zero to 200% of the target number of shares . The Company also granted an insignificant number of other PBRSUs with performance conditions based on achievement of certain individual performance objectives.
The fair value of PBRSUs with market conditions was estimated as of the date of grant using a Monte Carlo valuation model with the following weighted average assumptions:
 
2015 TSR PBRSUs
 
2014 TSR PBRSUs
Expected volatility - Medidata
46
%
 
52
%
Expected volatility - comparison index
41
%
 
13
%
Expected life
2.88 years

 
0.89 years

Risk-free interest rate
0.99
%
 
0.12
%
Dividend yield

 

The following table summarizes the status of the Company’s PBRSUs based upon expected performance as of September 30, 2015 , and changes during the nine 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, 2015
303

 
151

 
1,115

 
9

 
1,578

 
$
28.87

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

 
242

 

 

 
242

 
66.99

Adjustment related to expected performance

 
35

 
(182
)
 

 
(147
)
 
35.41

Vested
(151
)
 
(76
)
 

 
(2
)
 
(229
)
 
26.50

Forfeited
(16
)
 
(23
)
 
(8
)
 

 
(47
)
 
39.32

Nonvested at September 30, 2015
136

 
329

 
925

 
7

 
1,397

 
$
36.81

The total fair value of PBRSUs vested during the three months ended September 30, 2015 and 2014 was $0.1 million and $0.1 million , respectively. The total fair value of PBRSUs vested during the nine months ended September 30, 2015 and 2014 was $10.7 million and $13.4 million , respectively. As of September 30, 2015 , there was $15.0 million in unrecognized compensation cost related to all nonvested PBRSUs. This cost is expected to be recognized over a weighted-average remaining period of 0.61 years .
Employee Stock Purchase Plan
The fair value of ESPP shares was estimated using a Black-Scholes pricing model with the following weighted-average assumptions:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Expected volatility
49
%
 
54
%
 
49
%
 
50
%
Expected life
1.45 years

 
1.48 years

 
1.49 years

 
1.30 years

Risk-free interest rate
0.35
%
 
0.30
%
 
0.34
%
 
0.24
%
Dividend yield

 

 

 

No shares were purchased under the ESPP during the three months ended September 30, 2015 and 2014 . During the nine months ended September 30, 2015 , 86 thousand shares were purchased under the ESPP at a weighted-average price of $37.93 . During the nine months ended September 30, 2014 , 68 thousand shares were purchased under the ESPP at a weighted-average price of $36.39 . As of September 30, 2015 , there was $3.8 million in unrecognized compensation cost related to ESPP shares. This cost is expected to be recognized over a weighted-average remaining period of 1.00 year .
Modifications
During May 2015, the Company entered into a separation agreement with its previous chief financial officer that triggered a modification of a portion of his outstanding stock options, RSAs, and Long-Term PBRSUs , resulting in incremental expense of $1.3 million , all of which was recognized during the second quarter of 2015. Additionally, approximately $0.4 million of unamortized expense was accelerated from future periods, partially offset by $0.2 million in forfeitures of unvested awards. With regard to the

- 15 -

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

Long-Term PBRSUs, incremental and accelerated expense amounts were based on expected performance as of June 30, 2015, with adjustments for subsequent changes in fair value recognized in the period in which those changes occur.
Incremental expense associated with other modifications during the three and nine months ended September 30, 2015 was immaterial both individually and in the aggregate.
9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in the balances of each component of accumulated other comprehensive loss during the nine months ended September 30, 2015 are as follows (in thousands):
 
Foreign currency translation adjustments
 
Unrealized gains (losses) on marketable securities
 
Total
Balance as of January 1, 2015
$
(1,467
)
 
$
(445
)
 
$
(1,912
)
Other comprehensive loss, net of tax
(391
)
 
(99
)
 
(490
)
Balance as of September 30, 2015
$
(1,858
)
 
$
(544
)
 
$
(2,402
)
For the nine months ended September 30, 2015 and 2014 , reclassifications of items from accumulated other comprehensive loss to net income were insignificant.
10. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted-average number of shares outstanding during the period. The holders of unvested RSAs do not have nonforfeitable rights to dividends or dividend equivalents and therefore, such 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. As the Company intends to settle the principal amount of the Notes (see Note 7 , "Debt") in cash upon conversion, their dilutive effect, if any, will be reflected in diluted earnings per share using the treasury stock method, which considers the number of shares that would be required to settle any premium above principal at the average stock price for the period. During the three and nine months ended September 30, 2015 , 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.
A reconciliation of the numerator and denominator of basic earnings per share and diluted earnings per share for the three and nine months ended September 30, 2015 and 2014 is shown in the following table (in thousands, except per share data):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Numerator
 
 
 
 
 
 
 
Net income
$
4,681

 
$
161

 
$
6,351

 
$
642

Denominator
 
 
 
 
 
 
 
Denominator for basic earnings per share:
 
 
 
 
 
 
 
Weighted average common shares outstanding
53,933

 
52,772

 
53,615

 
52,448

Denominator for diluted earnings per share:
 
 
 
 
 
 
 
Dilutive potential common shares:
 
 
 
 
 
 
 
Stock options
856

 
1,141

 
921

 
1,232

Restricted stock awards and units
361

 
393

 
496

 
644

Performance-based restricted stock units
1,532

 
763

 
951

 
731

Employee stock purchase plan
5

 

 
2

 
9

Weighted average common shares outstanding with assumed conversion
56,687

 
55,069

 
55,985

 
55,064

Basic earnings per share
0.09

 
$
0.00

 
$
0.12

 
$
0.01

Diluted earnings per share
0.08

 
$
0.00

 
$
0.11

 
$
0.01


- 16 -

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

Antidilutive common stock equivalents excluded from the calculation of dilutive earnings per share for the three and nine months ended September 30, 2015 and 2014 are shown in the following table (in thousands, except per share data):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Stock options
411

 
417

 
355

 
325

Restricted stock awards and units
13

 
39

 
5

 
51

Performance-based restricted stock units

 
141

 
1

 
124

Employee stock purchase plan
243

 
345

 
243

 

Total
667

 
942

 
604

 
500

11. INCOME TAXES
The Company had approximately $6.7 million and $5.0 million of gross unrecognized tax benefits as of September 30, 2015 and December 31, 2014 , respectively. The $1.7 million increase in gross unrecognized tax benefits during the nine months ended September 30, 2015 was the result of the Company submitting claims for additional prior year tax incentives. As a result of the request, the Company determined that a reserve was necessary primarily due to the taxing authority's routine review and challenge of similar submissions. The Company believes that its accruals for tax liabilities are adequate for all open years and does not anticipate any adjustments that will result in a material change to its financial position during the next twelve months.
The Company's 2012 federal income tax return is currently under examination by the Internal Revenue Service. The Company has not been advised of any adjustments that would result in a material impact to its financial condition or results of operations.
12. COMMITMENTS AND CONTINGENCIES
Legal Matters The Company is subject to legal proceedings and claims that arise in the ordinary course of business and records an estimated liability for these matters when an adverse outcome is considered to be probable and can be reasonably estimated. Although the outcome of the litigation cannot be predicted with certainty and some lawsuits, claims, or proceedings may be disposed of unfavorably to the Company, which could materially and adversely affect its financial condition or results of operations, the Company does not believe that it is currently a party to any material legal proceedings.
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, and seeks unspecified damages and injunctive relief. On August 13, 2015, the Company filed a motion to dismiss DataTrak's claims against it on the basis that its ‘087 patent is invalid under 35 U.S.C. §101 asserting that the claims of the patent are directed at an abstract idea and do not constitute patentable subject matter. The Company's motion to dismiss is now fully briefed and awaiting decision by the court. In the meantime, discovery in the case is proceeding. The Company believes that it has valid defenses to the lawsuit and intends to defend itself vigorously. The probability of a favorable or unfavorable outcome to the Company arising from the lawsuit 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 current 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.
On March 25, 2015, the Company filed a separate lawsuit against DataTrak in the United States District Court for the District of New Jersey. The complaint asserts that DataTrak infringes U.S. Patents Nos. 8,738,397 (the "'397 Patent") and 8,620,677 (the "'677 Patent"), pertaining to patient randomization and site performance in clinical trials. On May 20, 2015, DataTrak filed a motion to dismiss the Company's claims against it on the basis that its ‘397 and '677 patents are invalid under 35 U.S.C. §101 asserting that the claims of each of these patents are directed at an abstract idea and do not constitute patentable subject matter. The defendant's motion to dismiss is now fully briefed and awaiting decision by the court. The outcome and amount of any future financial impact from this litigation is indeterminate at this time.
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

- 17 -

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

benefits for 12 months ; and (c) immediate vesting of remaining unvested equity awards, unless otherwise specified in the equity award agreements.

- 18 -

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


Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). Forward-looking statements reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of management’s goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in the future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Important factors that could cause such differences include, but are not limited to the factors discussed under the “Risk Factors” section included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the Securities and Exchange Commission ("SEC") on March 2, 2015 .
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, 2014 .
Overview
We are the leading global provider of cloud-based solutions for clinical research in life sciences, transforming clinical development through our applications and intelligent data analytics. Our platform technology brings new levels of productivity and quality to the clinical testing of promising medical treatments, from study design and planning through execution, management, and reporting. We are committed to advancing the competitive and scientific goals of our customers, which include over 90% of the top 25 global pharmaceutical companies measured by revenue.
Subscription revenues, which are comprised of fees from clients accessing our cloud-based solutions, represented 86% of our revenues for the first nine months of 2015. Professional services revenues, which are derived from the provision of services that help our clients realize higher value in their clinical development processes, represented 14% of total revenues.
Third Quarter and Year-to-Date 2015 Highlights
Revenue increased 20% and 19% compared with the third quarter and first nine months of 2014, respectively. Subscription revenue grew 24% and 23% for the third quarter and first nine months, respectively.
Gross margin grew to 77.9% for the third quarter and 76.9% for the first nine months, an increase of 230 and 240 basis points compared with the third quarter and first nine months of 2014, respectively.
We added a record 142 new customers during the first nine months of 2015, 51% more than the number of customers added during the same period last year.
We continued to make strategic investments in research and development and in our sales force. As compared with the third quarter of 2014, research and development expenses increased 37% and sales and marketing expenses increased 23% . As compared with the first nine months of 2014, research and development expenses increased 30% and sales and marketing expenses increased 22% .
Cash flow from operations for the first nine months of 2015 was $56.4 million compared with $40.3 million for the first nine months of 2014.


- 19 -

Table of Contents

Results of Operations
Revenues
Revenues for the three- and nine -month periods ended September 30, 2015 and 2014 were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Revenues:
(amounts in thousands except percentages)
Subscription
$
88,878

 
$
71,547

 
24.2
 %
 
$
251,556

 
$
204,305

 
23.1
%
Percentage of total revenues
86.2
%
 
83.2
%
 
 
 
85.7
%
 
83.1
%
 
 
Professional services
14,235

 
14,449

 
(1.5
)%
 
42,081

 
41,554

 
1.3
%
Percentage of total revenues
13.8
%
 
16.8
%
 
 
 
14.3
%
 
16.9
%
 
 
Total revenues
$
103,113

 
$
85,996

 
19.9
 %
 
$
293,637

 
$
245,859

 
19.4
%
Year-over-year growth in subscription revenues was largely the result of increased sales to our existing large and mid-size customers, both from expanded usage of current solutions and adoption of additional solutions from our technolo gy platform, particularly in the areas of risk-based monitoring, patient randomization, and patient cloud solutions. As is typical of our subscription model, our revenues reflect periodic true-ups resulting from contract modifications. For the three and nine months ended September 30, 2015 , we recognized $4.1 million in additional revenue as a result of one customer-driven contract modification. Conversely, in other instances, contract modifications resulted in negative true-ups, reducing revenue by $0.8 million and $1.8 million for the three and nine months ended September 30, 2015 , respectively, resulting in net impact of $3.3 million for the quarter and $2.3 million year-to-date. As of September 30, 2015 , 65% of our customers were using multiple products from our platform, up from 56% at September 30, 2014 . We added 51 and 142 customers in three and nine months ended September 30, 2015 , respectively, to end the quarter with 572 customers, up 24% compared with September 30, 2014 . Of the 51 new customers added during the quarter, 20% were from APAC, a direct result of our level of investment in the region. As of September 30, 2015 we had remaining subscription backlog of $82 million , representing the future contract value of outstanding arrangements, billed and unbilled, to be recognized during the rest of 2015, excluding renewals. This is an increase of 15% compared with remaining subscription backlog of $71 million at September 30, 2014 .
Professional services revenues decreased slightly for the three months ended September 30, 2015 and increased marginally year-to-date. We are building up a more predictable revenue stream of agreements with longer delivery cycles as we execute on our primary professional services objective of enabling our customers to derive maximum value from our platform, in turn driving increased subscription revenue.
Cost of Revenues
Cost of revenues for the three- and nine -month periods ended September 30, 2015 and 2014 was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
-
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Cost of revenues:
(amounts in thousands except percentages)
Subscription
$
12,489

 
$
11,413

 
9.4
%
 
$
36,316

 
$
33,720

 
7.7
%
Percentage of total revenues
12.1
%
 
13.3
%
 
 
 
12.4
%
 
13.7
%
 
 
Professional services
10,304

 
9,582

 
7.5
%
 
31,564

 
29,048

 
8.7
%
Percentage of total revenues
10.0
%
 
11.1
%
 
 
 
10.7
%
 
11.8
%
 
 
Total cost of revenues
$
22,793

 
$
20,995

 
8.6
%
 
$
67,880

 
$
62,768

 
8.1
%
Percentage of total revenues
22.1
%
 
24.4
%
 
 
 
23.1
%
 
25.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
$
80,320

 
$
65,001

 
23.6
%
 
$
225,757

 
$
183,091

 
23.3
%
Gross margin
77.9
%
 
75.6
%
 
 
 
76.9
%
 
74.5
%
 
 
Year-over-year growth in cost of subscription revenues was primarily due to increased personnel-related costs to support customer demand. Subscription gross margin increased to 85.9% and 85.6% for the three and nine months ended September 30, 2015 , respectively, compared with 84.0% and 83.5% for the three and nine months ended September 30, 2014 , respectively, as a result of revenue growth combined with productivity initiatives taken with respect to hosting costs.

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Table of Contents

Year-over-year growth in cost of professional services revenues was largely due to the increase in personnel-related costs. Professional services gross margin decreased to 27.6% and 25.0% for the three and nine months ended September 30, 2015 , respectively, compared with 33.7% and 30.0% for the three and nine months ended September 30, 2014 , respectively, as a result of workforce investments to enhance our strategic services offerings.
Overall gross margin increased to 77.9% and 76.9% for the three and nine months ended September 30, 2015 , respectively, compared with 75.6% and 74.5% for the three and nine months ended September 30, 2014 , respectively, driven by significant growth in our higher-margin subscription revenues and from the improving subscription margin, partially offset by the decline in professional services margin.
Operating Costs and Expenses
Operating costs and expenses for the three- and nine -month periods ended September 30, 2015 and 2014 were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Operating costs and expenses:
(amounts in thousands except percentages)
Research and development
$
24,192

 
$
17,677

 
36.9
 %
 
$
68,622

 
$
52,777

 
30.0
 %
Percentage of total revenues
23.5
%
 
20.5
%
 
 
 
23.4
%
 
21.5
%
 
 
Sales and marketing
25,881

 
21,004

 
23.2
 %
 
75,923

 
62,161

 
22.1
 %
Percentage of total revenues
25.1
%
 
24.4
%
 
 
 
25.8
%
 
25.3
%
 
 
General and administrative
19,143

 
17,865

 
7.2
 %
 
61,655

 
52,284

 
17.9
 %
Percentage of total revenues
18.5
%
 
20.8
%
 
 
 
21.0
%
 
21.2
%
 
 
Wire transaction loss (2014)

 
4,880

 
(100.0
)%
 

 
4,880

 
(100.0
)%
Percentage of total revenues
%
 
5.7
%
 
 
 
%
 
2.0
%
 
 
Total operating costs and expenses
$
69,216

 
$
61,426

 
12.7
 %
 
$
206,200

 
$
172,102

 
19.8
 %
Percentage of total revenues
67.1
%
 
71.4
%
 
 
 
70.2
%
 
70.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
$
11,104

 
$
3,575

 
210.6
 %
 
$
19,557

 
$
10,989

 
78.0
 %
Operating margin
10.8
%
 
4.2
%
 
 
 
6.7
%
 
4.5
%
 
 
The year-over-year growth in research and development expenses was primarily due to increases in personnel-related costs of $4.8 million and $12.3 million for the three and nine months ended September 30, 2015 , respectively, resulting in part from respective average headcount increases of 26% and 23% with regard to those periods. Growth was also driven by increases in consulting and professional fees of $1.1 million and $2.4 million for the three and nine months ended September 30, 2015 , respectively, associated with investments to enhance the value of our platform, with particular focus on user experience, data analytics, risk-based monitoring, and mobile health offerings.
The year-over-year growth in sales and marketing expenses was predominantly driven by increases in personnel-related costs of $2.9 million and $10.0 million for the three and nine months ended September 30, 2015 , respectively, resulting in part from average headcount increases of 26% and 27% with regard to those periods to expand our global sales organization, particularly in emerging Asian markets. Travel and conference expenses also increased as a result of these initiatives.
The year-over-year growth in general and administrative expenses was largely driven by increases in personnel-related costs of $1.0 million and $3.3 million for the three and nine months ended September 30, 2015 , respectively. With regard to the nine months ended September 30, 2015 , the increase in general and administrative expenses was also driven by CFO transition costs of $1.9 million, including $1.5 million of stock-based compensation expense. Legal fees increased by $0.5 million and $2.2 million and professional fees increased by $0.6 million and $1.2 million for the three and nine months ended September 30, 2015 , respectively, as a result of various litigation matters and the international expansion of our business.
Our total operating costs and expenses for the three and nine months ended September 30, 2014 also include a charge of $4.9 million associated with the previously announced international wire transfer fraud committed against us on September 16, 2014 and the related investigation costs. For further information, see Note  2 , “ 2014 Wire Transaction Loss,” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

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Table of Contents

Income Taxes
Provision for income taxes for the three- and nine -month periods ended September 30, 2015 and 2014 was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(amounts in thousands)
Provision for income taxes

$3,127

 

$30

 

$3,033

 

$176

The provision for income taxes increased by $3.1 million and $2.9 million for the three and nine months ended September 30, 2015 , respectively, primarily as a result of an increase in pre-tax income subject to tax in the various jurisdictions in which we operate.
The difference between our effective tax rate and the U.S. statutory rate is primarily due to the relative mix of pre-tax income subject to tax in various jurisdictions, non-deductible expenses, investment in U.S. property under Internal Revenue Code Section 956, and U.S. tax incentives. Disqualified dispositions related to stock options and employee stock purchase plan shares are treated as discrete items and can create significant differences between the quarterly and annual effective tax rate.
Our quarterly tax provision and quarterly estimate of the annual effective tax rate are subject to significant variation due to several factors, including variability in accuracy of predictions of pre-tax book and taxable income or loss, the mix of jurisdictions to which they relate, and changes in tax law in the jurisdictions in which we conduct business.
Critical Accounting Estimates
Our condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions about certain items and future events. These estimates inherently involve levels of subjectivity and judgment and may have a material impact on our financial condition or results of operations. Accordingly, actual results could differ from those estimates. Our critical accounting estimates as of September 30, 2015 are the same as those at December 31, 2014 , which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 . Also see Note 1 , "Summary of Significant Accounting Policies," to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, which discusses our critical accounting policies.
Effects of Recently Issued Accounting Pronouncements on Current and Future Trends
Refer to Note 1 , "Summary of Significant Accounting Policies — Recently Issued Accounting Pronouncements," to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. No other recently issued accounting pronouncements have had or are expected to have a material impact on our current or future trends.
Liquidity and Capital Resources
We believe that our cash flows from operations, cash and cash equivalents, and highly liquid marketable securities will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for the foreseeable future. Our future capital expenditures and other cash requirements could be higher than we currently expect as a result of various factors, including any expansion of our business that we may complete. The following table presents selected financial information related to our liquidity and capital resources as of September 30, 2015 and December 31, 2014 , and for the nine -month periods ended September 30, 2015 and 2014 (in thousands):
 
September 30,
2015
 
December 31,
2014
Cash, cash equivalents, and marketable securities
$
492,923

 
$
456,643

Furniture, fixtures and equipment, net
43,929

 
38,579

1.00% convertible senior notes, net
249,745

 
240,886

 
 
 
 
 
Nine months ended September 30,
 
2015
 
2014
Cash provided by operating activities
$
56,447

 
$
40,276

Cash used in investing activities
(27,951
)
 
(21,358
)
Cash used in financing activities
(4,822
)
 
(14,528
)

- 22 -


Cash, Cash Equivalents, and Marketable Securities
For the nine months ended September 30, 2015 , cash provided by operating activities of $56.4 million was driven by strong customer collections, partially offset by operating expenditures and cash interest expense on our 1.00% convertible senior notes. Cash used in investing activities of $28.0 million consisted principally of net purchases of marketable securities of $16.5 million and cash payments for capital expenditures of $11.0 million . Cash used in financing activities of $4.8 million resulted primarily from the acquisition of $16.9 million of treasury stock in connection with equity plan participant tax withholdings upon vesting, partially offset by equity plan proceeds of $10.4 million .
For the nine months ended September 30, 2014 , cash provided by operating activities of $40.3 million was driven by strong customer collections, partially offset by operating expenditures and cash interest expense on our 1.00% convertible senior notes. Cash used in investing activities of $21.4 million consisted principally of net purchases of marketable securities of $7.7 million and cash payments for capital expenditures of $13.9 million . Cash used in financing activities of $14.5 million resulted primarily from the acquisition of $28.4 million of treasury stock in connection with equity plan participant tax withholdings upon vesting, partially offset by equity plan proceeds of $7.0 million .
Capital Assets
We acquired $12.8 million in capital assets during the nine months ended September 30, 2015 , predominantly related to our New York City headquarters and the continued enhancement of the infrastructure and capacity of our Houston, TX data center. Our actual cash payments for capital expenditures during the nine months ended September 30, 2015 were $11.0 million . We expect to acquire approximately $8 to $10 million in additional capital assets during the remainder of 2015.
Debt
In August 2013, we issued $287.5 million of 1.00% convertible senior notes that will mature on August 1, 2018 unless earlier repurchased or converted. Upon conversion, we will deliver to the holders of the Notes either cash, shares of our common stock, or a combination thereof, at our election. If converted, we intend to settle the principal amount of the Notes in cash and any excess conversion value beyond the principal amount in shares of our common stock, cash, or a combination thereof. As of September 30, 2015 , the Notes are not convertible and therefore are classified as long term liabilities in our condensed consolidated balance sheet. For further information, see Note 7 , “Debt,” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Contractual Obligations, Commitments and Contingencies
During the third quarter of 2015, we entered into operating leases for new office space in Iselin, NJ and San Francisco, CA.
The table below summarizes the aggregate effect that our material contractual obligations as of September 30, 2015 are expected to have on our cash flows in the periods indicated (in thousands):
 
Payments Due by Period
 
Total
 
Remainder of 2015
 
2016 - 2017
 
2018- 2019
 
2020 and later
Contractual Obligations:
 
 
 
 
 
 
 
 
 
1.00% convertible senior notes
$
287,500

 
$

 
$

 
$
287,500

 
$

Interest payments on convertible senior notes
7,427

 

 
5,750

 
1,677

 

Operating lease obligations
118,600

 
2,985

 
25,873

 
27,831