Medidata Solutions, Inc.
Medidata Solutions, Inc. (Form: 10-Q, Received: 08/05/2016 06:10:04)
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, 2016
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 29, 2016 , the registrant had 57,489,626 shares of common stock outstanding.


Table of Contents

MEDIDATA SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016
TABLE OF CONTENTS
 
 
Page
PART I
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 


- 1 -

Table of Contents

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

- 2 -

Table of Contents

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
 
June 30,
2016
 
December 31, 2015
 
(Amounts in thousands, except per share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
64,346

 
$
49,562

Marketable securities
253,930

 
220,126

Accounts receivable, net of allowance for doubtful accounts of $1,989 and $1,992, respectively
90,433

 
90,590

Prepaid commission expense
2,665

 
1,670

Prepaid expenses and other current assets
17,546

 
21,165

Deferred income taxes
102

 
88

Total current assets
429,022

 
383,201

Restricted cash
5,758

 
5,755

Furniture, fixtures and equipment, net
54,683

 
51,043

Marketable securities – long-term
164,596

 
209,041

Goodwill
30,320

 
18,797

Intangible assets, net
5,887

 
1,172

Deferred income taxes – long-term
12,668

 
12,128

Other assets
9,080

 
3,043

Total assets
$
712,014

 
$
684,180

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,406

 
$
6,283

Accrued payroll and other compensation
17,688

 
23,744

Accrued expenses and other
18,951

 
15,469

Deferred revenue
76,466

 
75,582

Total current liabilities
114,511

 
121,078

Noncurrent liabilities:
 
 
 
1.00% convertible senior notes, net
256,350

 
249,487

Deferred revenue, less current portion
2,820

 
2,993

Deferred tax liabilities
444

 
414

Other long-term liabilities
23,238

 
26,052

Total noncurrent liabilities
282,852

 
278,946

Total liabilities
397,363

 
400,024

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; 60,970 and 59,455 shares issued; 57,399 and 56,311 shares outstanding, respectively
610

 
594

Additional paid-in capital
395,817

 
364,973

Treasury stock, 3,571 and 3,144 shares, respectively
(112,430
)
 
(100,806
)
Accumulated other comprehensive loss
(2,930
)
 
(3,404
)
Retained earnings
33,584

 
22,799

Total stockholders’ equity
314,651

 
284,156

Total liabilities and stockholders’ equity
$
712,014

 
$
684,180


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 OPERATIONS (Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Amounts in thousands, except per share data)
Revenues
 
 
 
 
 
 
 
Subscription
$
96,760

 
$
83,929

 
$
186,728

 
$
162,678

Professional services
17,850

 
14,155

 
32,120

 
27,846

Total revenues
114,610

 
98,084

 
218,848

 
190,524

Cost of revenues (1)(2)
 
 
 
 
 
 
 
Subscription
15,600

 
12,354

 
29,929

 
23,827

Professional services
13,457

 
10,557

 
23,796

 
21,260

Total cost of revenues
29,057

 
22,911

 
53,725

 
45,087

Gross profit
85,553

 
75,173

 
165,123

 
145,437

Operating costs and expenses
 
 
 
 
 
 
 
Research and development (1)
28,267

 
22,519

 
56,495

 
44,430

Sales and marketing (1)(2)
27,609

 
25,724

 
53,067

 
50,042

General and administrative (1)
18,531

 
21,943

 
37,777

 
42,512

Total operating costs and expenses
74,407

 
70,186

 
147,339

 
136,984

Operating income
11,146

 
4,987

 
17,784

 
8,453

Interest and other income (expense)
 
 
 
 
 
 
 
Interest expense
(4,183
)
 
(3,997
)
 
(8,310
)
 
(7,955
)
Interest income
932

 
612

 
1,804

 
1,146

Other income (expense), net
3

 
(34
)
 
(1
)
 
(68
)
  Total interest and other expense, net
(3,248
)
 
(3,419
)
 
(6,507
)
 
(6,877
)
Income before income taxes
7,898

 
1,568

 
11,277

 
1,576

Provision for income taxes
2,961

 
55

 
492

 
(94
)
Net income
$
4,937

 
$
1,513

 
$
10,785

 
$
1,670

Earnings per share
 
 
 
 
 
 
 
Basic
$
0.09

 
$
0.03

 
$
0.20

 
$
0.03

Diluted
$
0.09

 
$
0.03

 
$
0.19

 
$
0.03

Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
55,392

 
53,647

 
55,255

 
53,453

Diluted
56,604

 
56,191

 
56,594

 
56,050

(1)    Stock-based compensation expense included in cost of revenues and operating costs and expenses is as follows:
Cost of revenues
$
1,239

 
$
1,311

 
$
2,449

 
$
2,559

Research and development
2,323

 
2,013

 
4,517

 
3,799

Sales and marketing
1,839

 
2,460

 
3,716

 
4,827

General and administrative
5,046

 
8,352

 
10,015

 
14,621

Total stock-based compensation
$
10,447

 
$
14,136

 
$
20,697

 
$
25,806

(2)    Amortization of intangible assets included in cost of revenues and operating costs and expenses is as follows:
Cost of revenues
$
314

 
$
180

 
$
393

 
$
359

Sales and marketing
85

 
30

 
109

 
59

Total amortization of intangible assets
$
399

 
$
210

 
$
502

 
$
418

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

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MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Amounts in thousands)
Net income
$
4,937

 
$
1,513

 
$
10,785

 
$
1,670

Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
(565
)
 
925

 
(652
)
 
173

Unrealized gain (loss) on marketable securities
399

 
(390
)
 
1,707

 
203

Other comprehensive (loss) income
(166
)
 
535

 
1,055

 
376

Income tax effect of unrealized gain or loss on marketable securities
(581
)
 
206

 
(581
)
 
(68
)
Other comprehensive (loss) income, net of tax
(747
)
 
741

 
474

 
308

Comprehensive income, net of tax
$
4,190

 
$
2,254

 
$
11,259

 
$
1,978


























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 (Unaudited)
 
Six Months Ended June 30,
 
2016

2015
Cash flows from operating activities
(Amounts in thousands)
Net income
$
10,785

 
$
1,670

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Amortization of intangible assets and depreciation
6,983

 
5,190

Stock-based compensation
20,697

 
25,806

Amortization of discounts or premiums on marketable securities
1,700

 
2,502

Deferred income taxes
(1,164
)
 
(5,846
)
Amortization of debt issuance costs
639

 
639

Amortization of debt discount
6,224

 
5,862

Excess tax benefit associated with equity awards
(5,048
)
 
(3,712
)
Provision for doubtful accounts
508

 
550

Loss on fixed asset disposal
4

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(7,729
)
 
(33,894
)
Prepaid commission expense
(2,931
)
 
(123
)
Prepaid expenses and other current assets
3,040

 
(3,303
)
Other assets
(3,583
)
 
1,497

Accounts payable
(1,932
)
 
(702
)
Accrued payroll and other compensation
(4,302
)
 
196

Accrued expenses and other
7,715

 
4,439

Deferred revenue
9,206

 
27,085

Other long-term liabilities
(2,814
)
 
889

Net cash provided by operating activities
37,998

 
28,745

Cash flows from investing activities
 
 
 
Purchases of furniture, fixtures and equipment
(13,425
)
 
(5,925
)
Purchases of available-for-sale securities
(144,136
)
 
(140,856
)
Proceeds from sale of available-for-sale securities
154,784

 
126,632

Acquisition of business, net of cash acquired
(17,142
)
 

Net decrease (increase) in restricted cash
81

 
(464
)
Net cash used in investing activities
(19,838
)
 
(20,613
)
Cash flows from financing activities
 
 
 
Proceeds from exercise of stock options
1,691

 
5,199

Proceeds from employee stock purchase plan
3,385

 
2,960

Excess tax benefit associated with equity awards
5,048

 
3,712

Repayment of obligations under capital leases

 
(17
)
Repayment of notes payable
(100
)
 

Acquisition of treasury stock
(13,797
)
 
(16,154
)
Net cash used in financing activities
(3,773
)
 
(4,300
)
Effect of exchange rate changes on cash and cash equivalents
397

 
17

Net increase in cash and cash equivalents
14,784

 
3,849

Cash and cash equivalents – Beginning of period
49,562

 
39,517

Cash and cash equivalents – End of period
$
64,346

 
$
43,366






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,
 
2016
 
2015
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
1,445

 
$
1,438

Income taxes
$
845

 
$
281

 
 
 
 
Noncash activities:
 
 
 
Furniture, fixtures, and equipment acquired but not yet paid for at period-end
$
1,097


$
3,682


































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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Medidata Solutions, Inc., together with its consolidated subsidiaries (collectively, the "Company"), is the leading global provider of cloud-based solutions for clinical research in life sciences, offering platform technology that transforms clinical development and increases the value of its customers' research investments. The Company was organized as a New York corporation in June 1999 and reincorporated as a Delaware corporation in May 2000.
Except to the extent updated or described below, the Company’s significant accounting policies as of June 30, 2016 are the same as those at December 31, 2015 , which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the Securities and Exchange Commission (“SEC”) on February 29, 2016 .
Basis of Presentation — The accompanying interim condensed consolidated balance sheets as of June 30, 2016 and December 31, 2015 , the condensed consolidated statements of operations for the three and six months ended June 30, 2016 and 2015 , the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2016 and 2015 , and the condensed consolidated statements of cash flows for the six months ended June 30, 2016 and 2015 are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the SEC for interim financial reporting. Accordingly, certain information and footnote disclosures have been condensed or omitted pursuant to SEC rules that would ordinarily be required by U.S. GAAP for complete financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto for the fiscal year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 29, 2016 .
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, 2016 , results of its operations for the three and six months ended June 30, 2016 and 2015 , comprehensive income for the three and six months ended June 30, 2016 and 2015 , and cash flows for the six months ended June 30, 2016 and 2015 . The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 .
Income Taxes The Company’s interim period provision for income taxes is computed by using an estimate of the annual effective tax rate, adjusted for discrete items taken into account in the relevant period, if any. Each quarter, the annual effective income tax rate is recomputed and if there are material changes in the estimate, a cumulative adjustment is made.
Accounts Receivable Accounts receivable are recorded at original invoice amount less an allowance that management believes will be adequate to absorb estimated losses on uncollectible accounts. This allowance is based on an evaluation of the collectability of accounts receivable and prior bad debt experience. Accounts receivable are written off when deemed uncollectible. Unbilled receivables consist of revenue recognized in excess of billings, substantially all of which is expected to be billed and collected within one year. As of June 30, 2016 and December 31, 2015 , unbilled accounts receivable of $11.3 million and $10.3 million , respectively, were included in accounts receivable on the Company's consolidated balance sheets. In general, there is a direct relationship between the Company's accounts receivable balance and its transaction volume.
Recently Adopted Accounting Pronouncements In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-15,  Presentation of Financial Statements—Going Concern . This new guidance formally establishes management's responsibility to evaluate at each reporting period whether there is substantial doubt about the entity's ability to continue as a going concern for a period of one year after the date the financial statements are issued, and to provide related footnote disclosures. ASU No. 2014-15 is effective for annual reporting periods ending after December 15, 2016, and for interim and annual periods thereafter. The Company will adopt ASU No. 2014-15 for the annual reporting period ending December 31, 2016, and the adoption is not expected to have a material impact on its consolidated financial statements.
In April 2015, the FASB issued 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 adopted ASU No. 2015-03 retrospectively on January 1, 2016, and the adoption did not have a material impact on its consolidated financial statements, aside from a balance sheet reclassification. Refer to Note 6 , "Debt," for details.
In April 2015, the FASB issued ASU No. 2015-05,  Customer's Accounting for Fees Paid in a Cloud Computing Arrangement , which provides guidance on whether an entity should account for the fees paid as a customer under a cloud computing arrangement as a license of internal-use software or as a service contract. ASU No. 2015-05 is effective for annual periods beginning after December 15, 2015, and interim periods within those annual periods, with early adoption permitted. The Company adopted ASU No. 2015-05 prospectively on January 1, 2016, and the adoption did not have a material impact on its consolidated financial statements as the Company accounts for all subscription fees paid under its cloud computing arrangements as service contracts.

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

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 and requires that sufficient information be provided to permit reconciliation of the fair value of assets categorized within the fair value hierarchy to amounts presented on the balance sheets. 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 adopted ASU No. 2015-07 retrospectively on January 1, 2016, and the adoption did not have a material impact on its consolidated financial statements.
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 January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which enhances the reporting model for financial instruments by amending certain aspects of existing guidance on recognition, measurement, presentation, and disclosure to provide financial statement users with more decision-useful information. ASU No. 2016-01 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company will adopt ASU No. 2016-01 on January 1, 2018, and is presently evaluating the impact of the adoption on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which replaces previous lease guidance in its entirety with Accounting Standards Codification ("ASC") 842, Leases. The new guidance requires lessees to recognize lease assets and lease liabilities for those arrangements classified as operating leases under previous guidance, with the exception of leases with a term of twelve months or less. The new guidance also adds quantitative and qualitative disclosure requirements around leasing activities. ASU No. 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, and requires a modified retrospective approach. Early adoption is permitted. The Company will adopt ASU No. 2016-02 on January 1, 2019, and is presently evaluating the impact of the adoption on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liability, and classification on the statement of cash flows. ASU No. 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period. The Company will adopt ASU No. 2016-09 no later than January 1, 2017 but is presently evaluating the impact of the adoption on its consolidated financial statements and may consider early adoption.
2. STOCKHOLDERS' EQUITY
Common Stock — Common stockholders are entitled to one vote for each share of common stock held. Common stockholders may receive dividends if and when the Board of Directors determines, at its sole discretion.
Treasury Stock — From time to time, the Company grants nonvested restricted stock awards ("RSAs"), restricted stock units ("RSUs"), and performance-based restricted stock units ("PBRSUs") to its employees pursuant to the terms of its 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 six months ended June 30, 2016 and 2015 , the Company withheld 326,568 shares at an average price of $35.59 and 321,008 shares at an average price of $50.32 , respectively, in connection with the vesting of equity awards.
Nonvested restricted stock awards forfeited by plan participants are transferred to the Company's treasury stock at par. During the six months ended June 30, 2016 and 2015 , 99,876 and 73,455 forfeited shares, respectively, were transferred to treasury stock at their par value of $0.01 .
3. MARKETABLE SECURITIES
Marketable securities, which the Company classifies as available-for-sale securities, primarily consist of high quality commercial paper, corporate bonds, and U.S. government debt obligations. Marketable securities with remaining effective maturities of twelve months or less from the balance sheet date are classified as short-term; otherwise, they are classified as long-term on the consolidated balance 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, 2016 and December 31, 2015 (in thousands):
 
As of June 30, 2016
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper and corporate bonds
$
384,295

 
$
234

 
$
(156
)
 
$
384,373

U.S. government agency debt securities
34,139

 
16

 
(2
)
 
34,153

Total
$
418,434

 
$
250

 
$
(158
)
 
$
418,526

 
As of December 31, 2015
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper and corporate bonds
$
401,824

 
$

 
$
(1,522
)
 
$
400,302

U.S. government agency debt securities
28,958

 
2

 
(95
)
 
28,865

Total
$
430,782

 
$
2

 
$
(1,617
)
 
$
429,167

Contractual maturities of the Company’s marketable securities as of June 30, 2016 and December 31, 2015 are summarized as follows (in thousands):
 
As of June 30, 2016
 
As of December 31, 2015
 
Cost
 
Estimated
Fair
Value
 
Cost
 
Estimated
Fair
Value
Due in one year or less
$
254,031

 
$
253,930

 
$
220,492

 
$
220,126

Due in one to five years
164,403

 
164,596

 
210,290

 
209,041

Total
$
418,434

 
$
418,526

 
$
430,782

 
$
429,167

At June 30, 2016 , the Company had $0.2 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 June 30, 2016 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, 2016 .
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 June 30, 2016 and December 31, 2015 (in thousands):
 
In Loss Position for Less than 12 Months
 
As of June 30, 2016
 
As of December 31, 2015
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
Commercial paper and corporate bonds
$
120,536

 
$
(66
)
 
$
359,566

 
$
(1,443
)
U.S. government agency debt securities
10,131

 
(2
)
 
25,863

 
(95
)
Total
$
130,667

 
$
(68
)
 
$
385,429

 
$
(1,538
)

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

 
In Loss Position for More than 12 Months
 
As of June 30, 2016
 
As of December 31, 2015
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
Commercial paper and corporate bonds
$
85,242

 
$
(90
)
 
$
38,726

 
$
(79
)
Total
$
85,242

 
$
(90
)
 
$
38,726

 
$
(79
)
During the three and six months ended June 30, 2016 and 2015 , the Company recorded an insignificant amount of net realized gains from the sale of marketable securities.
4. FAIR VALUE
The following table summarizes, as of June 30, 2016 and December 31, 2015 , our financial assets that are measured at fair value on a recurring basis, according to the fair value hierarchy described in our significant accounting policies included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (in thousands):
 
As of June 30, 2016
 
As of December 31, 2015
 
Fair Value Measurement Using
 
Fair Value Measurement Using
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
Cash
62,216

 

 
62,216

 
48,917

 

 
48,917

Money market funds
131

 

 
131

 
645

 

 
645

Commercial paper

 
1,999

 
1,999

 

 

 

Total cash and cash equivalents
62,347

 
1,999

 
64,346

 
49,562

 

 
49,562

Commercial paper and corporate bonds

 
384,373

 
384,373

 

 
400,302

 
400,302

U.S. government agency debt securities

 
34,153

 
34,153

 

 
28,865

 
28,865

Total marketable securities

 
418,526

 
418,526

 

 
429,167

 
429,167

Total financial assets measured at fair value on a recurring basis
62,347

 
420,525

 
482,872

 
49,562

 
429,167

 
478,729

As of June 30, 2016 and December 31, 2015 , 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 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 six months ended June 30, 2016 and 2015 , 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.
5. GOODWILL AND INTANGIBLE ASSETS
On April 1, 2016 , the Company acquired Intelemage, LLC ("Intelemage"), a medical image sharing and workflow management company for a net purchase price of $17.1 million , broadening its offerings with the addition of digital image management technology. The acquisition resulted in the recognition of the following intangible assets (in thousands):
 
 
Acquisition-Date Fair Value
 
Weighted-Average Useful Life
Acquired technology
 
$
3,750

 
4 years
Customer relationships
 
1,472

 
6 years
Total
 
$
5,222

 
 



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

The change in the carrying amount of goodwill during the six months ended June 30, 2016 was as follows (in thousands):
Balance as of January 1, 2016
$
18,797

Additions related to acquisition of Intelemage
$
11,963

Foreign currency translation adjustments
(440
)
Balance as of June 30, 2016
$
30,320

Total intangible assets are summarized as follows (in thousands):
 
As of June 30, 2016
 
As of December 31, 2015
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Acquired technology
$
8,824

 
$
(4,581
)
 
$
4,243

 
$
5,223

 
$
(4,336
)
 
$
887

Customer relationships
3,596

 
(2,051
)
 
1,545

 
2,165

 
(1,994
)
 
171

Non-competition agreements
150

 
(51
)
 
99

 
150

 
(36
)
 
114

Total
$
12,570

 
$
(6,683
)
 
$
5,887

 
$
7,538

 
$
(6,366
)
 
$
1,172

Amortization of intangible assets for the next five years is expected to be as follows (in thousands):
Remainder of year ending December 31, 2016
$
796

Years ending December 31,
 
2017
1,569

2018
1,488

2019
1,230

2020
498

2021
245

6. DEBT
The Company's 1.00% convertible senior notes (the "Notes"), issued in August 2013, consisted of the following components as of June 30, 2016 and December 31, 2015 (in thousands):
 
June 30,
2016
 
December 31,
2015
Equity component, net of equity issue costs
$
60,222

 
$
60,222

Liability component:
 
 
 
Principal
287,500

 
287,500

Less: unamortized debt discount
(28,488
)
 
(34,712
)
Less: unamortized debt issuance costs
(2,662
)
 
(3,301
)
Net carrying amount
$
256,350

 
$
249,487

On January 1, 2016, the Company retrospectively adopted ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires unamortized debt issuance costs to be presented as a reduction of the carrying amount of the related debt liability, similar to a debt discount. This resulted in the reclassification of $3.3 million in unamortized debt issuance costs from other assets to 1.00% convertible senior notes on the Company's consolidated balance sheet as of December 31, 2015 .
As of June 30, 2016 and December 31, 2015 , the estimated fair value of the Notes was $312.8 million and $313.0 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 June 30, 2016 , the Notes are not convertible. Based on the closing price of the Company's common stock on June 30, 2016 of $46.87 , 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, 2016 , the remaining life of the Notes was approximately 25 months .

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

The following table sets forth total interest expense recognized related to the Notes for the three and six months ended June 30, 2016 and 2015 (in thousands except percentages):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Contractual interest expense
$
719

 
$
719

 
$
1,438

 
$
1,438

Amortization of debt issuance costs
320

 
320

 
639

 
639

Amortization of debt discount
3,135

 
2,953

 
6,224

 
5,862

Total
$
4,174

 
$
3,992

 
$
8,301

 
$
7,939

 
 
 
 
 
 
 
 
Effective interest rate
6.5
%
 
6.5
%
 
6.5
%
 
6.5
%
7. STOCK-BASED COMPENSATION
For the three and six months ended June 30, 2016 and 2015 , the components of stock-based compensation expense were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Stock options
$
998

 
$
1,689

 
$
2,053

 
$
2,836

Restricted stock awards and units
6,263

 
5,082

 
11,741

 
9,303

Performance-based restricted stock units
2,235

 
6,377

 
4,869

 
11,582

Employee stock purchase plan
951

 
988

 
2,034

 
2,085

Total stock-based compensation
$
10,447

 
$
14,136

 
$
20,697

 
$
25,806

Stock Options
The fair value of each stock option granted during the three and six months ended June 30, 2016 and 2015 was estimated on the date of grant using a Black-Scholes pricing model with the following weighted-average assumptions:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Expected volatility
44
%
 
43
%
 
43
%
 
43
%
Expected life
6 years

 
6 years

 
6 years

 
6 years

Risk-free interest rate
1.40
%
 
1.69
%
 
1.45
%
 
1.69
%
Dividend yield

 

 

 

The following table summarizes the status of the Company's stock options as of June 30, 2016 , 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, 2016
 
1,940

 
$
21.73

 
 
 
 
Granted
 
117

 
39.53

 
 
 
 
Exercised
 
(108
)
 
15.74

 
 
 
 
Forfeited
 
(18
)
 
43.12

 
 
 
 
Expired
 
(3
)
 
13.99

 
 
 
 
Outstanding at June 30, 2016
 
1,928

 
$
22.96

 
5.64
 
$
48,010

Exercisable at June 30, 2016
 
1,502

 
$
16.61

 
4.79
 
$
46,206

Vested and expected to vest at June 30, 2016
 
1,872

 
$
22.08

 
5.54
 
$
47,782


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

The weighted-average grant-date fair value of stock options granted during the three months ended June 30, 2016 and 2015 was $17.34 and $22.11 , respectively. The weighted-average grant-date fair value of stock options granted during the six months ended June 30, 2016 and 2015 was $17.14 and $22.11 , respectively. The total intrinsic value of stock options exercised during the three months ended June 30, 2016 and 2015 was $2.3 million and $5.1 million , respectively. The total intrinsic value of stock options exercised during the six months ended June 30, 2016 and 2015 was $3.0 million and $12.4 million , respectively. The total fair value of stock options vested during the three months ended June 30, 2016 and 2015 was $1.3 million and $1.1 million , respectively. The total fair value of stock options vested during the six months ended June 30, 2016 and 2015 was $2.1 million and $2.4 million , respectively. As of June 30, 2016 , there was $7.6 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 2.62 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 June 30, 2016 , 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, 2016
1,355

 
$
40.82

Granted
1,027

 
36.38

Vested
(453
)
 
33.16

Forfeited
(105
)
 
41.78

Nonvested at June 30, 2016
1,824

 
$
40.17

The total fair value of RSAs and RSUs vested during the three months ended June 30, 2016 and 2015 was $7.5 million and $18.2 million , respectively. The total fair value of RSAs and RSUs vested during the six months ended June 30, 2016 and 2015 was $16.9 million and $27.2 million , respectively. As of June 30, 2016 , there was $63.0 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 2.89 years .
Performance-Based Restricted Stock Units
No PBRSUs were granted during the three months ended June 30, 2016 and 2015 .
During the six months ended June 30, 2016 , the Company granted 223 thousand PBRSUs ("2016 TSR PBRSUs") with market conditions based on the Company's total stockholder return ("TSR") relative to that of the Russell 2000 Index over the three-year period ending December 31, 2018, vesting in full in three years with the number of 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.
During the six months ended June 30, 2015 , the Company granted 242 thousand PBRSUs ("2015 TSR PBRSUs") with market conditions based on the Company's 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 .
The fair value of PBRSUs with market conditions granted during the six months ended June 30, 2016 and 2015 was estimated as of the date of grant using a Monte Carlo valuation model with the following weighted average assumptions:
 
2016 TSR PBRSUs
 
2015 TSR PBRSUs
Expected volatility - Medidata
48
%
 
46
%
Expected volatility - comparison index
43
%
 
41
%
Expected life
2.84 years

 
2.88 years

Risk-free interest rate
0.91
%
 
0.99
%
Dividend yield

 


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

The following table summarizes the status of the Company’s PBRSUs based upon expected performance as of June 30, 2016 , and changes during the six months then ended (in thousands, except per share data):
 
Revenue
 
TSR
 
Other
 
Total Number of Shares
 
Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2016
136

 
347

 
7

 
490

 
$
49.86

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

 
223

 
16

 
239

 
46.45

Adjustment related to expected performance

 
22

 

 
22

 
60.64

Vested
(136
)
 
(164
)
 

 
(300
)
 
38.47

Forfeited

 
(6
)
 

 
(6
)
 
68.61

Nonvested at June 30, 2016

 
422

 
23

 
445

 
$
55.99

No PBRSUs vested during the three months ended June 30, 2016 and 2015 . The total fair value of PBRSUs vested during the six months ended June 30, 2016 and 2015 was $10.0 million and $10.6 million , respectively. As of June 30, 2016 , there was $14.8 million in unrecognized compensation cost related to all nonvested PBRSUs. This cost is expected to be recognized over a weighted-average remaining period of 2.05 years .
Employee Stock Purchase Plan
The fair value shares granted under the Company's employee stock purchase plan ("ESPP") was estimated using a Black-Scholes pricing model with the following weighted-average assumptions:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Expected volatility
46
%
 
51
%
 
46
%
 
51
%
Expected life
1.68 years

 
1.56 years

 
1.68 years

 
1.56 years

Risk-free interest rate
0.58
%
 
0.35
%
 
0.58
%
 
0.35
%
Dividend yield

 

 

 

During the three and six months ended June 30, 2016 , 89 thousand shares were purchased under the ESPP at a weighted-average price of $38.35 . During the three and six months ended June 30, 2015 , 86 thousand shares were purchased under the ESPP at a weighted-average price of $37.93 . As of June 30, 2016 , there was $1.4 million in unrecognized compensation cost related to ESPP shares. This cost is expected to be recognized over a weighted-average remaining period of 1.22 years .
During the second quarter of 2016, the Company increased the number of shares reserved under the ESPP from 0.3 million to 0.8 million .
Modifications
Net incremental expense associated with modifications to stock options, RSAs, RSUs, and PBRSUs during the three and six months ended June 30, 2016 was $0.1 million and $0.3 million in the aggregate, respectively, and immaterial on an individual basis.
During the three and six months ended June 30, 2015 , net incremental expense associated with modifications was $1.3 million as a result of the Company's CFO transition in the second quarter of 2015.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in the balances of each component of accumulated other comprehensive loss during the six months ended June 30, 2016 are as follows (in thousands):
 
Foreign currency translation adjustments
 
Unrealized gains (losses) on marketable securities
 
Total
Balance as of January 1, 2016
$
(2,405
)
 
$
(999
)
 
$
(3,404
)
Other comprehensive income, net of tax
(652
)
 
1,126

 
474

Balance as of June 30, 2016
$
(3,057
)
 
$
127

 
$
(2,930
)

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

For the six months ended June 30, 2016 and 2015 , reclassifications of items from accumulated other comprehensive loss to net income were insignificant.
9. 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 6 , "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 six months ended June 30, 2016 and 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 these periods.
A reconciliation of the numerator and denominator of basic earnings per share and diluted earnings per share for the three and six months ended June 30, 2016 and 2015 is shown in the following table (in thousands, except per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Numerator
 
 
 
 
 
 
 
Net income
$
4,937

 
$
1,513

 
$
10,785

 
$
1,670

Denominator
 
 
 
 
 
 
 
Denominator for basic earnings per share:
 
 
 
 
 
 
 
Weighted average common shares outstanding
55,392

 
53,647

 
55,255

 
53,453

Denominator for diluted earnings per share:
 
 
 
 
 
 
 
Dilutive potential common shares:
 
 
 
 
 
 
 
Stock options
744

 
916

 
746

 
953

Restricted stock awards and units
324

 
450

 
403

 
518

Performance-based restricted stock units
144

 
1,178

 
190

 
1,126

Weighted average common shares outstanding with assumed conversion
56,604

 
56,191

 
56,594

 
56,050

Basic earnings per share
0.09

 
$
0.03

 
$
0.20

 
$
0.03

Diluted earnings per share
0.09

 
$
0.03

 
$
0.19

 
$
0.03

Antidilutive common stock equivalents excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2016 and 2015 are shown in the following table (in thousands, except per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Stock options
613

 
362

 
634

 
440

Restricted stock awards and units
15

 
9

 
35

 
24

Performance-based restricted stock units

 
1

 
2

 
1

Employee stock purchase plan
233

 
220

 
233

 
220

Total
861

 
592

 
904

 
685

10. INCOME TAXES
The Company had approximately $4.3 million and $8.1 million of gross unrecognized tax benefits as of June 30, 2016 and December 31, 2015 , respectively. The $3.8 million decrease in gross unrecognized tax benefits during the six months ended June 30, 2016 was primarily the result of the Internal Revenue Service ("IRS") concluding its examination of the Company's 2012 federal income tax return. The Company redetermined its unrecognized tax benefits, including similar items in open tax years, based on the agreed adjustments with the IRS and other associated information and analysis, resulting in a discrete item in the period.

- 16 -

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

11. 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 "NDOH District Court"). The complaint asserted infringement of U.S. Patent No. 7,464,087 (the “'087 Patent”). On November 6, 2015, the NDOH District Court granted the Company's motion to dismiss DataTrak's complaint on the grounds that the '087 Patent is invalid for lack of patentable subject matter under 35 U.S.C. §101. On January 5, 2016, the Company entered into a settlement agreement resolving all related aspects of its litigation with DataTrak. No monies were exchanged.
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, unless otherwise specified in the equity award agreements.



- 17 -

Table of Contents

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). Forward-looking statements reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of management’s goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in the future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Important factors that could cause such differences include, but are not limited to the factors discussed under the “Risk Factors” section included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the Securities and Exchange Commission ("SEC") on February 29, 2016 .
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, 2015 .
Overview
We are the leading global provider of cloud-based solutions for life sciences, transforming clinical development through our applications and data analytics. We are committed to powering smarter treatments and healthier people while advancing the competitive and scientific goals of our life sciences customers worldwide. Our industry-leading technology platform, the Medidata Clinical Cloud®, is the primary technology solution powering clinical trials for 17 of the world's top 25 global pharmaceutical companies, bringing new levels of productivity and quality to the clinical testing of promising medical treatments, from study design and planning through execution, management and reporting.
Subscription revenues, which are comprised of fees from clients accessing our cloud-based solutions, represented 85% of our revenues for the first half of 2016. Professional services revenues, which are derived from the provision of services that help our clients realize higher value in their clinical development processes, represented 15% of total revenues.
Second Quarter and First Half 2016 Highlights
Total revenues increased 17% and 15% compared with the second quarter and first half of 2015, respectively.
Professional services revenues increased 26% and 15% compared with the second quarter and first half of 2015, respectively. For the second quarter of 2016, professional services revenues were a record $17.9 million .
Operating income increased 124% and 110% compared with the second quarter and first half of 2015, respectively.
Cash flow from operations for the first half of 2016 was $38.0 million , compared with $28.7 million for the first half of 2015.
We added 132 new clients during the first half of 2016, including 32 from the recently acquired Intelemage business, 45% more than the number of customers added during the same period last year.

- 18 -

Table of Contents

Results of Operations
Revenues
Revenues for the three- and six-month periods ended June 30, 2016 and 2015 were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Revenues:
(amounts in thousands except percentages)
Subscription
$
96,760

 
$
83,929

 
15.3
%
 
$
186,728

 
$
162,678

 
14.8
%
Percentage of total revenues
84.4
%
 
85.6
%
 
 
 
85.3
%
 
85.4
%
 
 
Professional services
17,850

 
14,155

 
26.1
%
 
32,120

 
27,846

 
15.3
%
Percentage of total revenues
15.6
%
 
14.4
%
 
 
 
14.7
%
 
14.6
%
 
 
Total revenues
$
114,610

 
$
98,084

 
16.8
%
 
$
218,848

 
$
190,524

 
14.9
%
Year-over-year growth in subscription revenues was driven by major platform customer wins and strong sales growth in our risk-based monitoring, mobile and patient data capture, and randomization solutions among both new and existing customers. We added 96 and 132 clients in the three and six months ended June 30, 2016 , respectively, to end the first half of the year with 711 customers, up 32% compared with June 30, 2015 . Of these customers, 32 were gained in connection with our acquisition of Intelemage. As of June 30, 2016 , we had remaining subscription backlog of $178 million , representing the future contract value of outstanding arrangements, billed and unbilled, to be recognized during the rest of 2016, excluding renewals. This reflects an increase of 13% compared with remaining subscription backlog of $158 million at June 30, 2015 .
Year-over-year growth in professional services revenues was driven by increased demand from new and existing customers for implementation and other professional services. Large implementation projects during the second quarter resulted in record professional services revenues for the three months ended June 30, 2016 .
Cost of Revenues
Cost of revenues for the three- and six-month periods ended June 30, 2016 and 2015 was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Cost of revenues:
(amounts in thousands except percentages)
Subscription
$
15,600

 
$
12,354

 
26.3
%
 
$
29,929

 
$
23,827

 
25.6
%
Percentage of total revenues
13.6
%
 
12.6
%
 
 
 
13.7
%
 
12.5
%
 
 
Professional services
13,457

 
10,557

 
27.5
%
 
23,796

 
21,260

 
11.9
%
Percentage of total revenues
11.8
%
 
10.8
%
 
 
 
10.8
%
 
11.2
%
 
 
Total cost of revenues
$
29,057

 
$
22,911

 
26.8
%
 
$
53,725

 
$
45,087

 
19.2
%
Percentage of total revenues
25.4
%
 
23.4
%
 
 
 
24.5
%
 
23.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
$
85,553

 
$
75,173

 
13.8
%
 
$
165,123

 
$
145,437

 
13.5
%
Gross margin
74.6
%
 
76.6
%
 
 
 
75.5
%
 
76.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscription margin
83.9
%
 
85.3
%
 
 
 
84.0
%
 
85.4
%
 
 
Professional services margin
24.6
%
 
25.4
%
 
 
 
25.9
%
 
23.7
%
 
 
Year-over-year growth in cost of subscription revenues was primarily due to higher vendor software and third-party cloud hosting costs resulting from increased platform activity and platform enhancements, as well as investment in hosting infrastructure, including our data center in Europe. Additionally, our business growth drove a year-over-year headcount increase of roughly 13%, resulting in increased personnel-related costs. Subscription gross margin decreased to 83.9% and 84.0% for the three and six months ended June 30, 2016 , respectively, compared with 85.3% and 85.4% for the three and six months ended June 30, 2015 , respectively, as a result of these investments.
Year-over-year growth in cost of professional services revenues was largely due to increased personnel-related and consulting costs in response to growing demand for platform adoption and other professional services.

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Overall gross margin decreased to 74.6% and 75.5% for the three and six months ended June 30, 2016 , respectively, compared with 76.6% and 76.3% for the three and six months ended June 30, 2015 , respectively, driven by lower subscription margins and a greater mix of professional services in the second quarter and first half of 2016.
Operating Costs and Expenses
Operating costs and expenses for the three- and six-month periods ended June 30, 2016 and 2015 were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Operating costs and expenses:
(amounts in thousands except percentages)
Research and development
$
28,267

 
$
22,519

 
25.5
 %
 
$
56,495

 
$
44,430

 
27.2
 %
Percentage of total revenues
24.6
%
 
23.0
%
 
 
 
25.8
%
 
23.3
%
 
 
Sales and marketing
27,609

 
25,724

 
7.3
 %
 
53,067

 
50,042

 
6.0
 %
Percentage of total revenues
24.1
%
 
26.2
%
 
 
 
24.3
%
 
26.3
%
 
 
General and administrative
18,531

 
21,943

 
(15.5
)%
 
37,777

 
42,512

 
(11.1
)%
Percentage of total revenues
16.2
%
 
22.3
%
 
 
 
17.3
%
 
22.3
%
 
 
Total operating costs and expenses
$
74,407

 
$
70,186

 
6.0
 %
 
$
147,339

 
$
136,984

 
7.6
 %
Percentage of total revenues
64.9
%
 
71.5
%
 
 
 
67.4
%
 
71.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
$
11,146

 
$
4,987

 
123.5
 %
 
$
17,784

 
$
8,453

 
110.4
 %
Operating margin
9.7
%
 
5.1
%
 
 
 
8.1
%
 
4.4
%
 
 
The year-over-year growth in research and development expenses was primarily driven by net increases in personnel-related costs of $4.5 million and $8.8 million for the three and six months ended June 30, 2016 , respectively, resulting from a 25% year-over-year headcount increase due to our hiring of skilled engineering talent. Increased fees for specialized consultants and outside experts of $1.1 million and $2.8 million for the three and six months ended June 30, 2016 , respectively, associated with investments to enhance the value of our platform, were also a contributor.
The year-over-year growth in sales and marketing expenses was predominantly driven by net increases in personnel-related costs of $1.2 million and $4.8 million for the three and six months ended June 30, 2016 , respectively, resulting from a 10% year-over-year headcount increase to expand our global sales organization and partner team, partially offset by a decrease in stock-based compensation expense due to certain material equity awards becoming fully vested during the fourth quarter of 2015 and first quarter of 2016.
The year-over-year decline in general and administrative expenses was largely driven by decreases in stock-based compensation expense of $3.3 million and $4.6 million for the three and six months ended June 30, 2016 , respectively, associated with certain material equity awards becoming fully vested during the fourth quarter of 2015 and first quarter of 2016, partially offset by net increases in other non-equity personnel-related costs associated with an 11% year-over-year headcount increase. Lower legal and professional fees also impacted expenses.
In the first quarter of 2016, the state of New Jersey enacted legislation that allows us to recognize grants associated with the New Jersey Business Employment Incentive Program, which incentivizes businesses to locate and expand jobs in New Jersey. The benefits of these grants were applied against the underlying salary expense relating to our employees in research and development, sales and marketing, and general and administrative functions in New Jersey in the first quarter, reducing total operating expenses by $2.3 million for the six months ended June 30, 2016 .
Income Taxes
Provision for income taxes for the three- and six-month periods ended June 30, 2016 and 2015 was as follows:
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(amounts in thousands)
Provision for income taxes

$2,961

 

$55

 
$
492

 
$
(94
)
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, share-based compensation, change in tax reserves, and U.S. tax incentives. The benefit from U.S. credits and incentives will likely continue to have a favorable impact on our overall effective tax rate in the future. In the first quarter of 2016, the Internal Revenue Service concluded its examination of our 2012 federal income

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tax return. As a result, we redetermined our unrecognized tax benefits for previously recorded reserves, resulting in a material discrete item in the period.
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. We expect our annual effective tax rate for 2016 to be closer to the U.S. statutory rate.
Critical Accounting Estimates
Our condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions about certain items and future events. These estimates inherently involve levels of subjectivity and judgment and may have a material impact on our financial condition or results of operations. Accordingly, actual results could differ from those estimates. Our critical accounting estimates as of June 30, 2016 are the same as those at December 31, 2015 , which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 . Also see Note 1 , "Summary of Significant Accounting Policies," to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, which discusses our significant accounting policies.
Effects of Recently Issued Accounting Pronouncements on Current and Future Trends
Refer to Note 1 , "Summary of Significant Accounting Policies — Recently Issued Accounting Pronouncements," to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. No other recently issued accounting pronouncements have had or are expected to have a material impact on our current or future trends.
Liquidity and Capital Resources
We believe that our cash flows from operations, cash and cash equivalents, and highly liquid marketable securities will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for the foreseeable future. Our future capital expenditures and other cash requirements could be higher than we currently expect as a result of various factors, including any expansion of our business that we may complete. The following table presents selected financial information related to our liquidity and capital resources as of June 30, 2016 and December 31, 2015 , and for the six-month periods ended June 30, 2016 and 2015 (in thousands):
 
June 30,
2016
 
December 31,
2015
Cash, cash equivalents, and marketable securities
$
482,872

 
$
478,729

Furniture, fixtures and equipment, net
54,683

 
51,043

1.00% convertible senior notes, net
256,350

 
249,487

 
 
 
 
 
Six months ended June 30,
 
2016
 
2015
Cash provided by operating activities
$
37,998

 
$
28,745

Cash provided by investing activities
(19,838
)
 
(20,613
)
Cash used in financing activities
(3,773
)
 
(4,300
)
Cash, Cash Equivalents, and Marketable Securities
For the six months ended June 30, 2016 , cash provided by operating activities of $38.0 million was driven by strong customer collections, partially offset by operating expenditures and cash interest expense on our 1.00% convertible senior notes. Cash used in investing activities of $19.8 million consisted of a net payment of $17.1 million to acquire Intelemage, LLC ("Intelemage") and cash payments for capital expenditures of $13.4 million , partially offset by net sales of marketable securities of $10.6 million . Cash used in financing activities of $3.8 million resulted primarily from the acquisition of $13.8 million of treasury stock in connection with equity plan participant tax withholdings upon vesting, partially offset by equity plan proceeds of $5.1 million .
For the six months ended June 30, 2015 , cash provided by operating activities of $28.7 million was driven by strong customer collections, partially offset by operating expenditures and cash interest expense on our 1.00% convertible senior notes. Cash used in investing activities of $20.6 million consisted of net purchases of marketable securities of $14.2 million and cash payments for capital expenditures of $5.9 million . Cash used in financing activities of $4.3 million resulted primarily from the acquisition of $16.2 million of treasury stock in connection with equity plan participant tax withholdings upon vesting, partially offset by equity plan proceeds of $8.2 million .

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Capital Assets
We acquired $9.8 million in capital assets during the six months ended June 30, 2016 , predominantly related to our new office spaces in Iselin, NJ and San Francisco, CA, as well as investments in our new European data center. On a cash basis, our capital expenditures during the six months ended June 30, 2016 were $13.4 million and included payments for previously accrued assets. We expect to acquire approximately $6 to $8 million in additional capital assets during the remainder of 2016, primarily related to data center investments.
Debt
In August 2013, we issued $287.5 million of 1.00% convertible senior notes (the "Notes") that will mature on August 1, 2018 unless earlier repurchased or converted. Upon conversion, we will deliver to the holders of the Notes either cash, shares of our common stock, or a combination thereof, at our election. If converted, we intend to settle the principal amount of the Notes in cash and any excess conversion value beyond the principal amount in shares of our common stock, cash, or a combination thereof. As of June 30, 2016 , the Notes are not convertible and therefore are classified as long term liabilities in our condensed consolidated balance sheet. For further information, see Note 6 , “Debt,” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Contractual Obligations, Commitments and Contingencies
The table below summarizes the aggregate effect that our material contractual obligations as of June 30, 2016 are expected to have on our cash flows in the periods indicated (in thousands):
 
Payments Due by Period
 
Total
 
Remainder of 2016
 
2017 - 2018
 
2019 - 2020
 
2021 and later
Contractual Obligations:
 
 
 
 
 
 
 
 
 
1.00% convertible senior notes
$
287,500

 
$

 
$
287,500

 
$

 
$

Interest payments on convertible senior notes
7,188

 
1,438

 
5,750

 

 

Operating lease obligations
114,665

 
7,400

 
28,580

 
28,852

 
49,833

Total
$
409,353

 
$
8,838

 
$
321,830

 
$
28,852

 
$
49,833