Medidata Solutions, Inc.
Medidata Solutions, Inc. (Form: 10-K, Received: 02/28/2017 18:20:51)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-K
  _____________________________________
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
_____________________________________

MDSO123116LOGO.JPG

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

(Address of principal executive offices)
(Zip Code)
(212) 918-1800
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
The NASDAQ Stock Market LLC
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.      ý  Yes      ¨    No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.      ¨   Yes      ý    No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      ý    Yes      ¨    No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      ý    Yes      ¨    No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     ¨    Yes      ý    No
As of June 30, 2016 , the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $2,007,378,966 based on the closing sale price for the registrant's common stock on the NASDAQ Global Market on that date of $46.87 per share. For purposes of determining this number, all executive officers and directors of the registrant are considered to be affiliates of the registrant, as well as individual shareholders holding more than 10% of the registrant's outstanding common stock. This number is provided only for the purpose of this report on Form 10-K and does not represent an admission by either the registrant or any such person as to the status of such person.
As of February 22, 2017 , the registrant had 57,705,105 shares of common stock outstanding.
Documents Incorporated by Reference:
Part III of this Annual Report on Form 10-K incorporates by reference certain information that will be set forth in the registrant's Proxy Statement in connection with the 2017 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2016 . Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part of this Form 10-K.


Table of Contents

MEDIDATA SOLUTIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016
TABLE OF CONTENTS
 
 
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PART I
 
 
Item 1.
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Item 1B.
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PART II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
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Item 9A.
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PART III
 
 
Item 10.
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Item 13.
Item 14.
 
 
 
PART IV
 
 
Item 15.
 
 





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PART I
For purposes of this Annual Report, the terms “Medidata,” “Company,” “we,” “us,” and “our” refer to Medidata Solutions, Inc. and its consolidated subsidiaries. This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act, and is subject to the “safe harbor” created by those sections. Forward-looking statements reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position, and the effects of competition, the projected growth of the industry in which we operate, the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of management's goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects,” and similar expressions, as well as statements in the future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available as of the date of this Annual Report on Form 10-K and/or management's good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. We caution readers not to place undue reliance upon any such forward-looking statements. We urge you to consider the risks and uncertainties discussed in “Risk Factors” under Item 1A in this Annual Report on Form 10-K in evaluating our forward-looking statements.
Item 1. Business
Company Overview
Medidata is a global provider of a platform of cloud-based solutions for life sciences, enabling efficiency and quality throughout clinical development programs, aimed at accelerating processes, enhancing decision-making, minimizing operational risk, saving resources, and enabling transformational trial strategies.
Our customers are pharmaceutical, biotechnology, and medical device companies, academic institutions, contract research organizations ("CROs"), and other organizations engaged in clinical testing. Our global customer base includes 17 of the top 25 global pharmaceutical companies measured by research and development expense, as well as numerous middle-market life science companies. In 2016 , no single customer accounted for 10% or more of our total revenues.
Medidata's platform of advanced technology solutions and data analytics is aimed at enabling efficient and safe development, using secure cloud and hybrid cloud infrastructure to connect and support users over the Internet.
Customers can utilize our entire cloud-based platform or purchase individual solutions or products. We offer our technology on an enterprise or multi-study basis. Customers can also use our solutions on a single-study basis for a limited number of trials or to evaluate them prior to committing to a multi-study arrangement.
Subscription and professional services represent approximately 85% and 15% of our business, respectively. Our business model provides us with a recurring revenue stream that we believe delivers greater revenue visibility than perpetual software licensing models.
Medidata's Approach
Medidata's solutions are designed to address the underlying requirements of clinical development, not only bringing efficiencies to existing processes, but also transforming the enterprise with enhanced productivity and quality. Our platform focuses on increasing efficiency, reducing redundancies and data entry errors, maximizing visibility, and consolidating workflows. We build our solutions to be interoperable with third-party software and data feeds, creating a collaborative ecosystem that broadens the development technology enterprise. This increases the value of legacy, installed systems and new technology such as mobile device applications, and simplifies migration from competitive systems.
We believe our solutions provide our customers with the following benefits:
faster trial results;
scalability;
improved data quality and minimization of risk;
enhanced investigator experience;
interoperability to support ecosystem; and
global connectivity across sponsor and investigator sites.
Our Strategy
Our strategy is to enable our customers to bring their new and enhanced medical treatments to the public quickly, efficiently, and safely by providing a platform that uses innovative technology to automate, streamline, support, and enhance clinical development activities. Key elements of our strategy include:

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Broaden our footprint with our existing customers . We refer to this footprint, measured by the number of Medidata products used by our customer base, as "density." Our strategy of developing technology solutions across the clinical trial process provides additional avenues for growing our business. We will continue to demonstrate the significant efficiencies that our existing customer base can achieve by standardizing end-to-end clinical development processes on our platform and by expanding the use of our solutions. We also intend to drive increased usage by facilitating our customers' use in new trials and converting existing single-study customers into multi-study customers.
Expand usage of existing products. We refer to the level of usage of Medidata products that are already deployed by customers as "intensity." In cases where customers utilize our solutions for only a subset of their clinical trial activities, we seek to drive usage across more trials, therapeutic areas, geographies, and phases.
Launch regular platform enhancements. We will continue to enhance our unified, integrated platform with regular releases, adding new functionality, integrations, and user benefits to our solutions.
Build additional innovative solutions, including new analytics and benchmarks, into our platform. We will continue to build new innovative solutions that further transform the clinical development process, and offer them to new and existing customers. We will continue to develop our analytics and benchmarking capabilities, creating value for our customers by enhancing decision-making.
Expand our global customer base. We are expanding our sales, marketing, and services resources in areas around the globe with significant trial activity. We expect clinical technology adoption to continue to increase, resulting in significant growth in spending on technology solutions. Our view is that clinical development is underinvested in technology, and new technologies will expand opportunities by replacing manual and under-automated activities.
Increase indirect sales partnership initiatives . We will continue to pursue strategic partnerships with CROs and systems integrators to position our software and analytics solutions as the platform of choice for their outsourced clinical trial management services. Our well-established program of support, training, and certification enables partners to cost-effectively implement our solutions and services in sponsor studies as they provide their other services related to pharmaceutical development.
Position the Medidata Clinical Cloud as part of the evolving clinical ecosystem. We are building relationships, supporting technology partnerships and working with other innovative technology and data firms to position Medidata as a key player in the evolving clinical ecosystem. Our partnerships provide immediate benefits to our customers by enabling integrated systems and collaborative governance and future benefits by ensuring that our solutions are embedded in the next generation of innovations.
Communicate the enterprise-level value we create for our customers. Medidata's technology, metrics, and services are designed to drive value creation for our customers by reducing the overall cost of their clinical research and development efforts. We have invested in tools and workforce that measure, document, and communicate that value, and have integrated these resources into our market approach and solution development strategy.

Our Cloud-Based Technology
The Medidata Clinical Cloud
The Medidata Clinical Cloud provides a platform of technology and data analytics solutions designed to optimize activities across clinical development. A software-as-a-service ("SaaS") platform, the Medidata Clinical Cloud is fully scalable and expandable, offering the following capabilities:
Plan Study addresses three key areas to ensure optimal study design, grant development and negotiation, and investigator payments. Study Design Optimization enables customers to gain visibility into the impact of protocol elements on resource and trial endpoints. Grants Manager compares specific industry benchmarks and analytics, using the industry's largest database of negotiated procedure costs, to support appropriate grants to investigator sites and automated negotiations with multiple investigator sites. Payments enables customers to establish a global investigator payment strategy and process to easily automate payment calculation, distribution, and reporting, including tax and currency exchange calculations. These solutions help customers make the most efficient use of resources through better planning at the start of trial design and protocol development.
Support Sites provides robust risk management, reduced source document verification ("SDV"), real-time monitoring, and on-time, accurate payments. Even the most experienced clinical trial sites can encounter difficulties recruiting patients, ensuring data quality, and getting paid; such setbacks at a small subset of sites can adversely affect an entire study's quality, cost, and timeliness. Medidata supports site success with advanced capabilities in the form of Risk Based Monitoring , On-site Monitoring , Site Quality Management , and Targeted SDV .
Engage Patients captures the voice of the patient in clinical studies using a comprehensive mobile health ("mHealth") solution, Medidata Patient Cloud . Medidata Patient Cloud enables sponsors to collect a richer, more complete dataset directly from the patient, accelerating patient-centric clinical research and improving the patient's clinical trial experience. Data is captured from wearable

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sensors and mobile apps using three secure, regulatory-compliant technologies— SensorLink , AppConnect , and ePRO — along with services that support and enrich the life cycle of an mHealth trial.
Conduct Study includes solutions for data capture and study management throughout the clinical trial research process.
Data capture is centered around the industry-leading, fully integrated, robust and scalable electronic data capture ("EDC") and management system solution, Medidata RaveX . It provides a globally-accessible and intuitive user interface to facilitate the capture and cleaning of data from investigative sites, is designed for compliance with regulatory requirements, and supports electronic signatures. As part of Medidata's platform, it seamlessly links to tools for randomization, clinical supply tracking, safety system export, and site management, including monitoring and payments, reducing activity, time, and risk throughout a trial. Our strong support for industry standards, such as those provided by the Clinical Data Interchange Standards Consortium ("CDISC"), provides a foundation for integration with other systems at sponsors, CROs, and technology partners. RaveX can process and manage data from multiple sources, such as Medical Imaging , through its unified integrations, standards-based application programming interfaces ("APIs:), and other data feeds, providing one source of usable, comprehensive patient data throughout the trial.
For study management, the Conduct Study suite offers capabilities that enable clinical teams to manage, monitor, control, integrate, and report operational and clinical data from patients and sites. These tools provide the foundation for an efficient and quality-driven trial, unified with data capture and patient capture activities, minimizing redundancies, enhancing decision-making, increasing speed, and reducing operational risk. Specific functions include randomization and trial supply management ("RTSM") via Balance , centralized medical coding via Coder , and safety data monitoring via Rave Safety Gateway .
Optimize Outcomes is designed to surface a broad range of embedded operational data across the clinical process, alongside the largest databases of industry-wide analyzable, anonymized information. The Medidata platform provides dashboards, interactive platforms, ad hoc and scheduled reporting, and interactive analytics to enhance customers' contextual decision-making and real-time operational adjustments. Products include Insights , Operational Performance Analytics ("OPAL") Diagnostics , Trial Assurance , and Centralized Statistical Analysis ("CSA") .
Technology and Support
We have designed our technology to maximize ease of use, flexibility, data visibility, and system scalability to handle high-volume, global trials as well as smaller studies. We deploy our solutions through the use of industry-standard web browsers and mobile devices, service-oriented architectures ("SOA"), three-tiered server architectures, or a web server, a proprietary application server and a database server. End users can access our solutions through any web browser from anywhere in the world without downloading or installing any Medidata-specific software. In addition, our cloud-based solutions feature end-to-end support for Unicode characters, required to deliver multi-lingual studies. We utilize technologies such as firewalls, intrusion detection, and encryption to ensure the privacy and security of our customers' data, with a dedicated Security Information and Event Management ("SIEM") team monitoring our applications 24/7.
We develop our solutions on a broad base of technologies, including Java 2 Enterprise Edition ("J2EE"), Oracle, Microsoft.NET, Microsoft SQL Server, Business Objects, Ruby, AWS, Cassandra, MySQL, and Chef. By creating consistent data models that can accommodate the broad cloud-based requirements of multiple biopharmaceutical, medical device, and CRO customers, we have been able to avoid customer-specific builds or other customizations to our core product, thereby streamlining development and maintenance. Furthermore, our interfaces are built on fully documented APIs, which allow us to safely update customers' data in new versions of the system, and to develop additional interfaces to address new market opportunities. By including version control and the ability to dynamically integrate data without system interruption, we are better able to accommodate the industry-specific challenges facing clinical trial teams around protocol amendments and the need for incremental changes to study data collection and cleaning processes during a clinical trial.
Medidata provides world-class delivery services to customers utilizing our products, with state-of-the-art virtualization technologies to optimize the delivery of our cloud-based solutions, manage storage effectively, and maintain quality of service. These virtualization capabilities provide the ability to quickly scale to increased customer usage. Medidata manages a hybrid cloud, operating our solutions on a combination of private data center and public cloud. Advanced monitoring services are provided on a 24/7 basis by trained Medidata staff to ensure that usage is delivered in a consistent manner. Advanced backup and storage frameworks are in place, and regionally-diverse data centers and trained engineering teams are utilized to provide for quick reaction time in the event of a disaster.
We have a dedicated global organization to support our customers and applications worldwide. We offer 24/7 support to our customers' investigator sites through multi-lingual help desks located in Iselin, New Jersey; Conshohocken, Pennsylvania; Sofia, Bulgaria; London, United Kingdom; Tokyo, Japan; and Dalian, China.
Professional Services
We offer expert professional services to help life sciences companies realize higher value in their clinical development processes. Our customers vary in their resources, expertise, and preference for developing or deploying their studies on Medidata technology, and we offer flexible, tailored services to support each customer's needs.
To help customers drive additional costs and inefficiencies out of their business, we offer consulting services to advise them on ways to optimize their clinical development processes from trial concept to conclusion. Our consultants use their extensive clinical

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expertise to leverage best practices in the use of clinical technologies, streamline and enhance trial processes, and increase customers' competitiveness in the market. We also leverage analytics and benchmarking to help customers evaluate their clinical trial performance across the organization and against industry benchmarks.
Our professional services offerings include:
Implementation services. We provide implementation of the Medidata Clinical Cloud and our solutions with efficient, scalable study build and configuration, and implementation support. Our methodology leverages both the industry-specific expertise of our employees and the specific capabilities of our platform to simplify, streamline, and expedite the implementation of our solutions.
Sponsor enablement. Our tailored strategies, business solutions, and knowledge transfer enable customers to design, configure, implement, and manage their own studies; we believe this maximizes the benefits of Medidata technology by enabling customers to develop the degree of autonomy most aligned with their organizational resources and strategic goals.
Strategic consulting. Our technology, analytics, and benchmarking solutions support a re-engineered development process that may require our customers to implement internal changes. Medidata's experienced domain experts provide consulting services to help organizations shift to new processes and systems, including re-engineering business processes across departments and changing governance models. Our industry and technology experts draw on Medidata's visibility into best practices and data-driven analytics to advise customers.
Partner support. We offer services supporting successful clinical trials at our CRO and systems integration partners, aimed at maximizing the value of the CRO/sponsor/technology collaboration.
Change management. Our change management expertise helps sponsors realize the full value of their Medidata investment, helping to rapidly enable system utilization and avoid the costs and long implementation timelines associated with full-service vendors.
E-learning and training. We offer self-administered e-learning courses as well as a variety of additional training services through our training group, known as Medidata Academy, to facilitate the successful adoption of our cloud-based solutions throughout the customer or partner organization.

Research and Development
We believe that our future success depends on our ability to continue to enhance and broaden our cloud-based solutions to meet the evolving needs of clinical trial sponsors and other entities engaged in clinical trials. Equally important is our ability to innovate, taking advantage of latest technologies and monitoring trends in healthcare. As of December 31, 2016 , we had 480 employees in research and development. Our efforts are focused on developing new, complementary software solutions, as well as enhancing our existing solutions. Our research and development department includes a product management team that works with both internal and customer experts to create new features and functionality, a team of software project managers, and a technical documentation team, as well as product engineering and software quality assurance functions. We also have a dedicated team building integration software and APIs on top of our platform. While the bulk of research and development focuses on commercial products, we pride ourselves in maintaining a team devoted to research, and we encourage all developers to take part in our Innovation Time program, supporting and rewarding creativity.
When developing our technical solutions to manage clinical data, industry regulatory requirements also dictate that substantial documentation be created to demonstrate data integrity in the solutions, and that our systems perform repeatedly, reliably, and in accordance with the system requirements. This process is known in the industry as validation, and our deliverable is a software validation package. Our software development lifecycle practices, which are part of a required quality system, include streamlined methodologies for generating and maintaining validation packages during the software release process. For those products that allow customers to upgrade at their discretion, these methodologies include a validated path for upgrading existing installations and data. The robustness of the validation process and associated validation deliverables enable our customers to upgrade with confidence and stay on current technology. This allows Medidata to minimize the number of legacy releases that require maintenance and support. The majority of our cloud components are upgraded automatically, meaning that Medidata only has a single version of the software to maintain, and customers always access the latest, improved product. For products which are upgraded automatically, customers receive access to a fully tested software product prior to its official release into production as a fully validated product.
We incurred $112.6 million , $92.3 million , and $71.8 million in research and development expenses for the years ended December 31, 2016 , 2015 , and 2014 , respectively. Research and development expenses comprised 24.3% , 23.5% , and 21.4% of revenue in 2016 , 2015 , and 2014 , respectively.
Sales and Marketing
We market and sell our cloud-based solutions through a direct sales force and through relationships with CROs and other strategic partners. Our marketing efforts focus on increasing awareness, consideration, and preference for our cloud-based solutions and professional services and generating qualified sales leads. As of December 31, 2016 , we had 309 employees in sales and marketing.

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Our sales force operates globally with a focus on North America, Europe, and Asia. The team is organized by both region and focus area and includes business consultants and sales operations support. Sales through this direct channel currently represent the largest source of our total revenues.
Many sponsors of clinical trials outsource some or all of their clinical research activities as a means of expanding capacity, controlling costs, and focusing on core strengths. Our CRO relationships help position our solutions as the core platform for their outsourced services. Through our Medidata Partner Program, we partner with CROs to deliver our clinical trial technology along with the CRO's monitoring, project management, data management, and other expertise. We train, certify, and support our CRO and other clinical services partners on our solutions, which enables our partners to quickly and cost-effectively implement our technology in sponsors' studies.
As part of our customer and prospect approach, we measure and communicate the value of adopting our cloud-based solutions and platform in lowering costs, reducing time to market, minimizing risk, and enhancing therapeutic value. Our marketing objectives are to generate qualified sales leads, enhance the global recognition and reputation of our brand and solutions, and establish Medidata as the premier provider of clinical trial solutions. Our principal marketing initiatives target key executives and decision makers within our existing and prospective customer base.
Customers
We are committed to developing long-term, partnering relationships with our customers located worldwide and working closely with customers to enable them to make optimal use of our systems for their development portfolios. Our customers include pharmaceutical, biotechnology, medical device and diagnostics companies, institutions (which include academic research centers, government, and other non-profit organizations), CROs, and other entities engaged in conducting and/or sponsoring clinical trials. We work with large global pharmaceutical companies with worldwide footprints and clinical trials in multiple locations, as well as with start-up and mid-sized specialty, biotechnology, pharmaceutical, and medical device and diagnostic companies. We also work with government agencies that conduct or support the conduct of clinical trials.
We generate revenues from sales to new customers as well as sales and renewals from our existing customers. Our global direct sales organization represents our primary source of sales, with additional sales generated through our CRO relationships. As of December 31, 2016 , we had 849 customers, including 17 of the top 25 global pharmaceutical companies.
Our five largest customers accounted for 26% , 24% , and 26% of our revenues in 2016 , 2015 , and 2014 , respectively. In 2016 , 2015 , and 2014 , no single customer accounted for 10% or more of our total revenues. At December 31, 2016 , one customer comprised 13% of our accounts receivable. At December 31, 2015 , another unrelated customer comprised 18% of our accounts receivable.
We sell our solutions and provide services globally. Approximately 23% , 24% , and 26% of our revenues in each of the years ended December 31, 2016 , 2015 , and 2014 , respectively, were derived from international operations. A summary of our domestic and international revenues and long-term assets is set forth in Note 1 , “Summary of Significant Accounting Policies—Segment and Geographic Information,” to our consolidated financial statements, which are included in Item 15 of this Annual Report on Form 10-K.
Backlog
At December 31, 2016 and 2015 , our total multi-year subscription backlog was $745 million and $555 million , respectively.
Total subscription backlog increases with the addition of new customer contracts, customer renewals, and contract modifications. It decreases with the recognition of revenue or contract modifications. The timing and duration of new contracts, renewals, contract modifications, and revenue recognition are variable and are not comparable year to year. Total subscription backlog is typically highest at the beginning of a contract and approaches zero prior to renewal. The level of total backlog is not an indicator of the likelihood of renewal or future revenue of that contract. The amount of total backlog associated with an existing multi-year contract may significantly vary year to year solely based on the status of renewal and have no significant impact on the amount of revenue attributable to that contract in a year-over-year comparison. Additionally, large multi-study deals may include provisions under which the customer contracts for a smaller amount of subscription services as they start the contract and the amount ramps up over the life of the contract; the result is an initial large increase in total subscription backlog that does not equate to a proportional increase in revenue in the subsequent period.
We also calculate a 12-month subscription backlog, which represents the future contract value of outstanding multi-study and single study arrangements, billed and unbilled, to be recognized in the next 12 months, excluding expected intra-year renewals and other adjustments. As of January 1, 2017 and 2016 , we had 12-month subscription backlog of approximately $343 million and $296 million , respectively. We believe that 12-month subscription backlog is more easily reconciled to future revenues to be recognized than total backlog, and therefore is a more valuable metric for evaluation of expected future revenues.
Our presentation of backlog may differ from that of other companies in our industry.
Competition
The market for clinical trial solutions is highly competitive and rapidly evolving. It is subject to changing technology, shifting customer needs, changes in laws and regulations, and frequent introductions of new products and services. We compete with firms such as Oracle, Parexel Informatics and others offering products and services that compete with one or more of our solutions.

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We compete on the basis of several factors, including the following:
innovation, breadth and depth of solution offerings;
platform capabilities and solution functionality and features, including analytics;
workforce skill set;
scalability and upgrade pathways and support;
speed, performance, and ease of use of our solutions;
product reliability and infrastructure accessibility and security;
regulatory compliance;
breadth and strength of partnerships;
interoperability;
financial stability;
depth of expertise and quality of our global professional services and customer support; and
sales and marketing capabilities, including the ability to create and communicate operational value.
Although some of our competitors and potential competitors may have greater name recognition, longer operating histories, more product offerings, and greater financial, technological, and other resources than we do, we believe that we compete favorably with our competitors on the basis of these factors.
Intellectual Property
Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing the proprietary rights of others. We rely upon a combination of trademark, trade secret, copyright, patent and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we attempt to protect our intellectual property and proprietary information by requiring our employees and consultants to enter into confidentiality, non-competition and assignment of inventions agreements. We have registered trademarks and service marks in the United States ("U.S.") and abroad, and filed applications for the registration of additional trademarks and service marks. Our principal trademarks are “Medidata,” "Medidata Solutions," "Medidata Clinical Cloud," "Medidata Patient Cloud," "Architecture of Hope," “Medidata CRO Contractor,” “Medidata Designer,” “Medidata Grants Manager,” “Medidata Rave,” "Medidata Balance," "Medidata Coder," and "Medidata Insights." We also hold several domain names, including the domain names “mdsol.com” and “medidatasolutions.com.” As of December 31, 2016 , we hold 25 patents as well as numerous published patent applications outstanding in the United States and certain foreign countries.
The legal protections described above afford only limited protection for our technology. Due to rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new product and service developments, and enhancements to existing products and services are more important than the various legal protections of our technology to establishing and maintaining a technology leadership position.
Government and Other Regulations
Regulation of Clinical Trials and Electronic Systems Used in Clinical Trials
The conduct of clinical trials is subject to regulation and regulatory guidance associated with the approval of new drugs, biological products and medical devices imposed upon the clinical trial process by the U.S. Food and Drug Administration ("FDA"), foreign governmental regulatory agencies and international non-governmental organizations, such as the International Conference on Harmonisation ("ICH").
The laws, regulations, and guidance from various countries and regions are often, but not always, harmonized. In those areas that are not yet harmonized, conflicting or even contradictory requirements may exist. Further, the regulatory environment and requirements for clinical trials and drug/biologic/device approvals are undergoing rapid change in the U.S., the European Union ("EU"), and other regions. We continue to monitor regulatory developments and industry best practices in these areas and make changes and introduce improvements as necessary to remain in compliance.
The use of our software products, services, and hosted solutions by customers engaged in clinical trials must be done in a manner that is compliant with a complex array of U.S. federal and state laws and regulations, including regulation by the FDA, as well as regulations and guidance issued by foreign governments and international non-governmental organizations. Our applications have been designed to allow our customers to deploy such clinical trials as part of a validated system, compliant with applicable laws and regulations.
The use of software during the clinical trial process must adhere to the regulations and regulatory guidance known as Good Clinical Practices ("GCPs"), other various codified practices such as the Consolidated Guidance for Industry from the International Conference on Harmonisation Regarding Good Clinical Practices for Europe, the Asia Pacific region, and the Americas, and other guidance documents. In addition to these regulations and regulatory guidance, the FDA and regulatory authorities from other countries have developed regulations and regulatory guidance concerning electronic records and electronic signatures. In the U.S., this includes Title 21 Code of Federal Register ("CFR") Part 11, Electronic Records; Electronic Signatures , which is further interpreted for clinical trials in a guidance document titled FDA Computerized Systems Used in Clinical Investigations—Guidance for Industry . In general, regulatory guidance stipulates that computerized systems used to capture or manage clinical trial data must meet certain standards for attributability, legibility, contemporaneousness, originality, accuracy, completeness, consistency, and availability, as well as integrity and security. If we or our customers violate the GCPs or other regulatory requirements, both parties run the risk that the violation will result

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in a regulatory citation, the suspension of the clinical trial, investigator disqualification or debarment, the rejection or withdrawal of a product marketing application, criminal prosecution, or civil penalties. Such risks not only impact our customers, but could also have a material adverse effect on our business, results of operations, or financial condition.
Regulation of Health Information
Government regulation of the use and disclosure of subject (patient) privacy and data protection imposes a number of requirements. In the U.S., regulations issued pursuant to the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), require certain “covered entities,” including facilities and providers that are involved in clinical trials, to comply with established standards regarding the privacy and security of protected health information, and to use standardized code sets when conducting certain electronic transactions. The regulations also require “business associates” that provide services on behalf of the covered entity to follow the same standards. Although we are not a “covered entity” or a “business associate” and therefore technically are not subject to HIPAA regulations, many users of our products and services are directly regulated under HIPAA and our products cannot be utilized in a manner that is inconsistent with the users' HIPAA compliance requirements. In addition, to the extent we perform functions or activities on behalf of customers that are directly regulated by such health-related privacy laws, we may be required to comply with a number of the same HIPAA requirements. The breach of such requirements on our part may result in liability to our customers and us. In addition to HIPAA, most states within the U.S. have enacted or are considering their own privacy and data protection laws. Such state laws, if more stringent than HIPAA requirements, are not preempted by the federal requirements and we must comply with them as well.

In addition to complying with the privacy laws in the U.S., many foreign governments have data privacy and data protection laws that include additional protections for customer end-user information and for sensitive patient information, including clinical data. Because our services are available to customers in many foreign countries, we must provide our services in a manner that supports our customers' compliance obligations. Foreign government data protection laws and regulations include the EU's Data Protection Directive ("95/46/EC"), European country-specific laws and regulations that implement that Directive, as well as the EU-U.S. Privacy Shield framework.
Employees
As of December 31, 2016 , we had a total of 1,424 employees, of which 462 were employed at our headquarters in New York, 670 at other locations in the U.S., 150 in the United Kingdom, and 142 in the Asia Pacific region. As of December 31, 2016 , we had 403 employees in customer services and support, 25 employees in data operations, 480 employees in research and development, 309 employees in sales and marketing, and 207 employees in administration and executive management. We also retain additional outside contractors from time to time to supplement our services and research and development staff on an as-needed basis. As of December 31, 2016 , we had 261 independent contractors, the majority of which have been engaged in connection with help desk and customer service functions. None of our employees are covered by a collective bargaining agreement. We consider our relationships with our employees to be good.
Available Information
We were organized as a New York corporation in June 1999 and reincorporated in the State of Delaware in May 2000. Our principal executive offices are located at 350 Hudson Street, 9th Floor, New York, New York 10014, and our telephone number is (212) 918-1800. Our website is located at www.mdsol.com . No information contained on our web site is intended to be included as part of, or incorporated by reference into, this Annual Report on Form 10-K. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as well as reports relating to our securities filed by others pursuant to Section 16 of such act, are available through the investor relations page of our web site free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission ("SEC"). The SEC maintains a web site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov .
 
Item 1A. Risk Factors
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. The risks described below are those which we believe are the material risks we face. Any of the risk factors described below or additional risks and uncertainties not presently known to us, or that we currently deem immaterial, could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Business
Our quarterly and annual operating results fluctuate and may continue to fluctuate in the future, and if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.
Our quarterly and annual revenues and operating results have varied in the past and may vary significantly in the future depending on factors such as:
budgeting cycles of our customers;

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the length of our sales cycle;
increased competition;
our ability to develop innovative products;
the timing of new product releases by us or our competitors;
market acceptance of our products;
changes in our and our competitors' pricing policies;
the financial condition of our current and potential customers;
changes in the regulatory environment;
changes in operating expenses and personnel changes;
our ability to hire and retain qualified personnel;
the effect of potential acquisitions and consequent integration;
changes in our business strategy;
increases in our costs due to inflation; and
general economic factors, including factors relating to disruptions in the world credit and equity markets and the related impact on our customers' access to capital.
Our future growth is dependent on the successful development and introduction of new products and enhancements. There can be no assurance that we will be successful in developing and marketing, on a timely basis, new products or product enhancements, that our new products will adequately address the changing needs of the marketplace or that we will successfully manage the transition from existing technologies. Certain of these products require a higher level of sales and support expertise. The ability of our sales channel to obtain this expertise and to sell the new product offerings effectively could have an adverse impact on our sales and financial results in future periods. Any of these scenarios may result in the loss of or delay in customer acceptance, diversion of development resources, damage to our reputation, or increased service and warranty costs, any of which could have a material adverse effect on our business, financial position, results of operations, and cash flows.
In addition, a significant portion of our operating expenses is relatively fixed and planned expenditures are based in part on expectations regarding future revenues. Accordingly, unexpected revenue shortfalls may decrease our gross margins and could cause significant changes in our operating results from year to year. As a result, in future quarters our operating results could fall below the expectations of securities analysts or investors, in which event our stock price would likely decrease.
We derive a significant percentage of our revenues from a concentrated group of customers and the loss of one or more major customers could materially and adversely affect our business, results of operations or financial condition.
Our top five customers accounted for approximately 26% , 24% , and 26% of our revenues in 2016 , 2015 , and 2014 , respectively. In 2016 , 2015 , and 2014 , no single customer accounted for 10% or more of our total revenues. The loss of any of our major customers could have a material adverse effect on our results of operations and financial condition. We may not be able to maintain our customer relationships, and our customers may delay payment under, or fail to renew, their agreements with us, which could adversely affect our business, results of operations or financial condition. Any reduction in the amount of revenues that we derive from these customers, without an offsetting increase in new sales to other customers, could have a material adverse effect on our operating results. A significant change in the liquidity or financial position of our customers could also have a material adverse effect on the collectability of our accounts receivable, our liquidity and our future operating results.
If our customers cancel their contracts or terminate or delay their clinical trials, we may lose or delay revenues and our business may be harmed.
Certain of our customer contracts are subject to cancellation by our customers at any time with limited notice. Customers engaged in clinical trials may terminate or delay a clinical trial for various reasons, including the failure of the tested product to satisfy safety or efficacy requirements, unexpected or undesired clinical results, decisions to deemphasize a particular product or forgo a particular clinical trial, decisions to downsize clinical development programs, insufficient patient enrollment or investigator recruitment, and production problems resulting in shortages of required clinical supplies. In the case of our cloud-based solutions and services, any termination or delay in the clinical trials would likely result in a consequential delay or termination in those customers' service contracts. We have experienced terminations and delays of our customer service contracts in the past (although no such past terminations have had a significant impact on our results of operations) and we expect to experience additional terminations and delays in the future. The termination of single-study arrangements could result in decreased revenues and the delay of our customers' clinical trials could result in delayed professional services revenues, which could materially harm our business.
As our focus turns to selling additional cloud-based solutions and services to enterprise customers, our sales cycle may become more time-consuming and expensive and less predictable, and implementation challenges may arise, any of which could harm our business and operating results.
Our future success depends in part on our ability to sell additional cloud-based solutions and services to our current customers. This may also require increasingly sophisticated and costly sales efforts that are targeted at senior management. Similarly, the rate at which our customers purchase new or enhanced services depends on a number of factors. If our efforts to upsell to our customers are not successful and negative reaction occurs, our growth prospects may suffer.
As we target more of our platform sales efforts at larger enterprise customers, we may face greater costs, longer sales cycles, and less predictability in our sales pipeline. The customer's decision to use our solutions and services may be an enterprise-wide

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decision and, if so, these types of sales would require us to provide prospective customers with greater levels of education regarding the use and benefits of our cloud-based solutions and services, as well as education regarding privacy and data protection laws. As a result of these factors, these sales opportunities may require us to devote greater sales support and professional services resources to individual customers, driving up costs and time required to complete sales and diverting our sales and professional services resources to a small number of large transactions.
If our security is breached, our business could be disrupted, our operating results could be harmed, and customers could be deterred from using our products and services.
Our business relies on the secure electronic transmission, storage, and hosting of sensitive information, including clinical data, financial information, and other sensitive information relating to our customers, company, and workforce. We anticipate collecting more such information directly from patients as part of our Patient Cloud and mHealth initiatives, including via mobile devices and related systems provided by third parties. As a result, we face some risk of a deliberate or unintentional incident involving unauthorized access to our computer systems (including, among other methods, cyber attacks or social engineering) that could result in misappropriation or loss of assets or sensitive information, data corruption, or other disruption of business operations. In light of this risk, we have devoted significant resources to protecting and maintaining the confidentiality of our information, including implementing security and privacy programs and controls, training our workforce, and implementing new technology. We have no guarantee that these programs and controls will be adequate to prevent all possible security threats. We believe that any compromise of our electronic systems, including the unauthorized access, use, or disclosure of sensitive information or a significant disruption of our computing assets and networks, would adversely affect our reputation and our ability to fulfill contractual obligations, would require us to devote significant financial and other resources to mitigate such problems, and could increase our future cyber security costs. Moreover, unauthorized access, use, or disclosure of such sensitive information could result in contractual or other liability. In addition, any real or perceived compromise of our security or disclosure of sensitive information may result in lost revenues by deterring customers from using or purchasing our products and services in the future or prompting them to use competing service providers.
Any failure by us to properly protect customer data, including any personal health information we possess or are deemed to possess in connection with the conduct of clinical trials, could subject us to significant liability.
Our customers use our solutions to collect, manage, and report information in connection with the conduct of clinical trials. This information may be considered our customers' proprietary information and/or personal health information of the clinical trial participants or patients. In addition, our Patient Cloud and mHealth initiatives are anticipated to result in our collecting more data (which may or may not be personal health information) directly from patients, including via mobile devices and related systems provided by third parties. Regulation related to the use and disclosure of personal health information continues to expand in scope and complexity. Increased focus on individuals' rights related to their personal information, including personal health information, could lead to an increase in existing and future legislative or regulatory initiatives giving direct legal remedies to individuals, including rights to damages, against entities deemed responsible for not adequately securing such personal information. In addition, courts may look to regulatory standards in identifying or applying a common law theory of liability. Since we receive and process our customers' proprietary information and/or personal information of clinical trial participants from customers utilizing our hosted solutions, there is a risk that we could be liable if there were a breach of an obligation to a protected person under contract, standard of practice or regulatory requirement. If we fail to properly protect our customers' data or personal information that is in our possession or deemed to be in our possession, we could be subjected to significant liability and our reputation could be harmed.
We rely upon two internal hosting facilities and Amazon Web Services to deliver our solutions to our customers and any disruption of or interference with our hosting systems, operations, or use of the Amazon Web Services would harm our business and results of operations.
Substantially all of the computer hardware necessary to deliver our solutions is located at our internal hosting facilities in Houston, Texas and Frankfurt, Germany. In addition to our dedicated hosting facilities, we utilize third-party cloud computing services from Amazon Web Services ("AWS") to help us efficiently scale our cloud-based solutions. Because we cannot easily switch our AWS-serviced operations to another cloud provider, any disruption of or interference with our use of AWS would impact our operations, and our business would be adversely impacted. Our systems and operations or those of AWS could suffer damage or interruption from human error, fire, flood, power loss, telecommunications failure, break-ins, terrorist attacks, acts of war, and similar events. The occurrence of a natural disaster, an act of terrorism or other unanticipated problems at our or AWS's hosting facilities could result in lengthy interruptions in our service. Although we and AWS maintain backup facilities and disaster recovery services in the event of a system failure, these may be insufficient or fail. Any system failure, including network, software, or hardware failure, that causes an interruption in our Houston or Frankfurt data centers or our use of AWS or that causes a decrease in responsiveness of our cloud-based solutions could damage our reputation and cause us to lose customers, which would harm our business and results of operations. Our business may be harmed if our customers and potential customers believe our service is unreliable.
Data protection laws and regulations are evolving and may be burdensome for us and our customers.
Our customers can use our platform to collect, process and transfer personal, personally identifying, and/or sensitive personal information, such as clinical information. Laws and regulations related to our services by Federal, state and foreign governments are increasing and in some cases are rapidly developing. Such laws and regulations include 95/46/EC and European country-specific laws and regulations that implement that Directive, the October 6, 2015 European Court of Justice opinion in Case C-362/14 that deemed the U.S.-EU Safe Harbor Framework as no longer a valid method for the transfer of personal information from the European Economic Area ("EEA") to the U.S., as well as the new EU-U.S. Privacy Shield framework that enables companies to receive personal data from

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Europe in compliance with European data protection laws. Because the ultimate success of the EU-U.S. Privacy Shield framework, to which our self-certification has been approved by the Department of Commerce, is uncertain, we continue to offer other alternative methods to our customers to enable a valid basis for the transfer of their clinical information from the EEA to the U.S. There is no assurance that these methods will ultimately be upheld or that we will be able to meet all eventual requirements for the transfer of personal information from the EEA to the U.S. without incurring substantial expense (or at all).
Laws and regulations concerning the collection, processing and transfer of personal information could reduce demand for our services, restrict our customers' ability to adapt or use our services in some locations or globally, increase the cost of compliance for us and/or our customers, provide exposure to fines or penalties for non-compliance, and impact the pace at which we close sales transactions. Any of these factors could harm our business.
Defects or errors in our cloud-based solutions that significantly impact our customers could harm our reputation, result in significant cost to us and impair our ability to market our solutions.
The software applications underlying our cloud-based solutions and services, including Medidata Rave, are inherently complex and may contain defects or errors, some of which may be material. Errors may result from our own technology or from the interface of our cloud-based solutions with legacy systems and data, which we did not develop. The risk of errors is particularly significant when a new product is first introduced or when new versions or enhancements of existing products are released. The likelihood of errors is increased as a result of our commitment to the frequent release of new products and enhancements of existing products.
We have, from time to time, found defects in our solutions. Although these past defects have not resulted in any litigation against us to date, we have invested significant capital, technical, managerial, and other resources to investigate and correct these past defects and we have needed to divert these resources from other development efforts. In addition, material performance problems or defects in our solutions may arise in the future. Material defects in our cloud-based solutions could result in a reduction in sales, delay in market acceptance of our solutions or credits or refunds to our customers. In addition, such defects may lead to the loss of existing customers and difficulty in attracting new customers, diversion of development resources or harm to our reputation.
Correction of defects or errors could prove to be impossible or impractical. The costs incurred in correcting any defects or errors or in responding to resulting claims or liability may be substantial and could adversely affect our operating results.
If we are not able to reliably meet our data storage and management requirements, or if we experience any failure or interruption in the delivery of our services over the Internet, customer satisfaction and our reputation could be harmed and customer contracts may be terminated.
As part of our current business model, we store and manage hundreds of terabytes of data for our customers, resulting in substantial information technology infrastructure and ongoing technological challenges, which we expect to continue to increase over time. If we do not reliably meet these data storage and management requirements, or if we experience any failure or interruption in the delivery of our services over the Internet, customer satisfaction and our reputation could be harmed, leading to reduced revenues and increased expenses. The services we provide to customers are subject to service level agreements and, in the event that we fail to meet guaranteed service or performance levels, we could be subject to issuance of customer credits or termination of these customer contracts. If the cost of meeting these data storage and management requirements increases, our results of operations could be harmed.
We may expand our business through new acquisitions in the future. Any such acquisitions could disrupt our business, harm our financial condition and dilute current stockholders' ownership interests in our company.
We intend to pursue potential acquisitions of and investments in businesses, technologies, or products complementary to our business and periodically engage in discussions regarding such possible acquisitions. For example, we acquired Fast Track Systems, Inc. ("Fast Track") in March 2008; Clinical Force Limited ("Clinical Force") in July 2011; Patient Profiles, LLC ("Patient Profiles") in October 2014; Intelemage, LLC ("Intelemage") in April 2016; and CHITA Inc. ("CHITA") in February 2017.
We may encounter difficulties in identifying and acquiring complementary products, technologies, or businesses, and in the case of executed acquisitions, may encounter numerous risks, including some or all of the following:
substantial cash expenditures;
incurrence of costs, debt, and contingent liabilities, some of which we may not identify at the time of acquisition or which may ultimately be greater than we anticipate;
difficulties in integrating and assimilating the operations, products, and personnel of the acquired companies;
diversion of management's attention away from other business concerns;
risk associated with entering markets in which we have limited or no direct experience;
potential loss of key employees, customers, and strategic alliances from either our current business or the target company's business;
delays in customer purchases due to uncertainty and the inability to maintain relationships with customers of the acquired businesses; and
failure to achieve anticipated business development benefits due to an inadequate evaluation of acquisitions or investments.
An acquisition may not result in short-term or long-term benefits to us. The failure to execute acquisitions or investments successfully or otherwise adequately address these risks could materially harm our business and financial results. We may incorrectly

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judge the value or worth of an acquired company or business. In addition, our future success will depend in part on our ability to manage the growth anticipated with these acquisitions.
Furthermore, the development or expansion of our business or any acquired business or companies may require a substantial capital investment by us. We may not have these necessary funds or they might not be available to us on acceptable terms or at all. We may also seek to raise funds for an acquisition by issuing equity securities or convertible debt, as a result of which our existing stockholders may be diluted or the market price of our stock may be adversely affected.
Our revenues derived from international operations are subject to risks that could have an adverse effect on our results of operations.
We intend to continue our strategic expansion into new geographic areas and expect that international customers will continue to account for a substantial percentage of our revenues. International operations are subject to inherent risks. These risks include:
the economic conditions in these various foreign countries and their trading partners, including conditions resulting from disruptions in the world credit and equity markets and the United Kingdom referendum to withdraw from the European Union ("Brexit");
political instability;
longer payment cycles;
greater difficulty in accounts receivable collection and enforcement of agreements;
requirements to comply with foreign laws;
data privacy laws and regulations which restrict the collection by our customers, processing or transfer into the U.S. of customer personal information or that require customer information to be collected or processed in a designated territory;
changes in regulatory requirements;
fewer legal protections for intellectual property and contract rights;
tariffs or other trade barriers;
difficulties in managing foreign operations;
unavailability of staff with needed skills;
exposure to interest rate fluctuations;
transportation delays;
potentially adverse tax consequences; and
exposure to foreign currency exchange risk associated with transactions entered into in currencies other than the U.S. dollar.
Our failure to successfully mitigate these risks could have a material adverse effect on our business, results of operations and financial condition.
We rely in part on third parties for our help desk support and technology partnerships, and our business may suffer if these relationships do not continue.
We currently outsource our help desk support functions, which involve important direct interactions with users of our products. In the event that our vendor becomes unable or unwilling to provide these services to us, we are not equipped to provide the necessary range of help desk support and service functions to our customers. We also work with third-party software companies to allow our cloud-based platform to interface with their products. If we are unable to develop and maintain effective relationships with appropriate technology partners, or if such companies adopt more restrictive policies with respect to, or impose unfavorable terms and conditions on, access to their products, we may not be able to continue to provide our customers with certain platform infrastructure, which could reduce our sales and adversely affect our business, operating results and financial condition.
We rely on third-party SaaS vendors in connection with numerous critical functions of our business, which presents risks that, if realized, could adversely affect our business operations and financial results.
We currently rely on third-party SaaS vendors in connection with many critical functions of our business, including enterprise resource planning services, customer relationship management services, enterprise cloud applications for human resources, and electronic communication services. Further, some of our cloud-based solutions are hosted by Amazon Web Services. If any of these services fail or become unavailable due to extended outages or interruptions, or the security of our data stored with the vendors is compromised, or our own access to our data stored with the vendors is restricted or terminated, or the cloud-based services we use are no longer available on commercially reasonable terms or prices, our revenue could be reduced, our reputation could be damaged, expenses could increase, our ability to manage our finances, sales opportunities and workforce could be interrupted and our processes for delivering services and supporting our customers could be impaired until equivalent services are identified, obtained and implemented, all of which could adversely affect our business.
We have been, and may continue to be, subject to claims that we or our technologies infringe upon the intellectual property or other proprietary rights of a third party. Any such claims may require us to incur significant costs, to enter into royalty or licensing agreements, or to develop or license substitute technology.
We have been, and may in the future be, subject to claims that our technologies infringe upon the intellectual property or other proprietary rights of a third party. For example, in December 2011 we settled a lawsuit filed against us by Datasci LLC. In addition, in January 2016, we settled a separate lawsuit filed against us by DataTrak International, Inc. ("DataTrak") after its patent was held invalid

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in November 2015. See Note 15 , “Commitments and Contingencies—Legal Matters,” to the consolidated financial statements included in Item 15 of this Annual Report on Form 10-K.
We cannot assure you that our cloud-based solutions and the technologies used in our product offerings do not infringe patents held by others or that they will not so infringe in the future. Any future claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is without merit, and could distract our management from our business. Moreover, any settlement or adverse judgment resulting from the claim could require us to pay substantial amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. Any required licenses may not be available to us on acceptable terms, if at all. If we do not obtain any required licenses, we could encounter delays in product introductions if we attempt to design around the technology at issue or attempt to find another provider of suitable alternative technology to permit us to continue offering the applicable solution. In addition, we generally provide in our customer agreements that we will indemnify our customers against third-party infringement claims relating to our technology provided to the customer, which could obligate us to fund significant amounts. Infringement claims asserted against us or against our customers or other third parties that we are required or otherwise agree to indemnify may have a material adverse effect on our business, results of operations or financial condition.
We may be unable to adequately enforce or defend our ownership and use of our intellectual property and other proprietary rights.
Our success is heavily dependent upon our intellectual property and other proprietary rights. We rely upon a combination of trademark, trade secret, copyright, patent and unfair competition laws, as well as license and access agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we attempt to protect our intellectual property and proprietary information by requiring certain of our employees and consultants to enter into confidentiality, non-competition and assignment of inventions agreements. The steps we take to protect these rights may not be adequate to prevent misappropriation of our technology by third parties, or may not be adequate under the laws of some foreign countries, which may not protect our intellectual property rights to the same extent as do the laws of the U.S.
Our attempts to protect our intellectual property may be challenged by others or invalidated through administrative process or litigation, and agreement terms that address non-competition are difficult to enforce in many jurisdictions and may not be enforceable in any particular case. In addition, there remains the possibility that others will “reverse engineer” our products in order to introduce competing products, or that others will develop competing technology independently.
If we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, the proceedings could be burdensome and expensive, even if we were to prevail. The failure to adequately protect our intellectual property and other proprietary rights may have a material adverse effect on our business, results of operations or financial condition.
Our cloud-based solutions and services utilize open source software, and any failure to comply with the terms of one or more of these open source licenses could adversely affect our business.
Our cloud-based solutions utilize software covered by open source licenses. Open source software is typically freely accessible, usable and modifiable, and is used by our development team in an effort to reduce development costs and speed up the development process. Certain open source software licenses require a user who intends to distribute the open source software as a component of the user's software to disclose publicly part or all of the source code to the user's software. In addition, certain open source software licenses require the user of such software to make any derivative works of the open source code available to others on unfavorable terms or at no cost. This can subject previously proprietary software to open source license terms. While we monitor the use of all open source software in our products, processes and technology and try to ensure that no open source software is used in such a way as to require us to disclose or make available the source code to the related product or solution, such use could inadvertently occur. This could harm our intellectual property position and have a material adverse effect on our business.
We could incur substantial costs resulting from product liability claims relating to our products or services or our customers' use of our products or services.
Any failure or errors in a customer's clinical trial caused or allegedly caused by our products or services could result in a claim for substantial damages against us by our customers or the clinical trial participants, regardless of our responsibility for the failure. Although we are generally entitled to indemnification under our customer contracts against claims brought against us by third parties arising out of our customers' use of our products, we might find ourselves entangled in lawsuits against us that, even if unsuccessful, may divert our resources and energy and adversely affect our business. Further, in the event we seek indemnification from a customer, a court may not enforce our indemnification right if the customer challenges it or the customer may not be able to fund any amounts for indemnification owed to us. In addition, our existing insurance coverage may not continue to be available on reasonable terms or may not be available in amounts sufficient to cover one or more large claims, or the insurer may disclaim coverage as to any future claim.
Current and future litigation against us, which may arise in the ordinary course of our business, could be costly and time consuming to defend.
We are from time to time subject to legal proceedings and claims that arise in the ordinary course of business, such as claims brought by our customers in connection with commercial disputes and employment claims made by our current or former employees.

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From time to time, third parties have asserted and may in the future assert intellectual property rights to technologies that are important to our business and have demanded and may in the future demand that we license their technology. For example, in March 2011, we were named in a complaint for patent infringement filed by DataTrak, and in January 2016 we settled the lawsuit after DataTrak's patent was held invalid in November 2015. See Note 15 , “Commitments and Contingencies—Legal Matters,” to the consolidated financial statements included in Item 15 of this Annual Report on Form 10-K for full descriptions. Litigation may result in substantial costs and may divert management's attention and resources, which may seriously harm our business, overall financial condition and operating results. Insurance may not cover such claims, may not be sufficient for one or more such claims, and may not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, negatively affecting our business, results of operations, and financial condition.
Our contracts with the U.S. government are subject to termination rights and other risks that could adversely affect us.
Because our U.S. government contracts and subcontracts are generally subject to procurement laws and regulations, we may not receive all of the future revenues we anticipate receiving under those contracts and subcontracts in the expected periods. Some of our government contracts are governed by the Federal Acquisition Regulation ("FAR"), which includes uniform policies and procedures for acquiring goods and services by the U.S. government. The FAR also contains guidelines and regulations for managing a contract after an award, including conditions under which contracts may be terminated, in whole or in part, at the government's convenience. These regulations also subject us to financial audits and other reviews by the government of our costs, performance, accounting and general business practices relating to our government contracts, which may result in adjustment of our contract-related costs and fees. Any such future procurement actions by government customers are subject to risks and uncertainties, which could affect the allocation, timing, schedule, and scope of our government contracts and subcontracts.
CRO partners generate a significant portion of our sales.
We face ongoing business risks due to our partial reliance on our CRO partners to generate sales. We rely on our CRO partners for a significant portion of our revenue. These partners have considerable discretion in electing whether to utilize our solutions for their outsourced clinical trial management services. Should our relationships with our CRO partners or the effectiveness of our CRO partners decline, we face the risk of declining demand for our services, which would affect our revenue and results of operations. In addition, any disruptions of our CRO partners' operations, such as a decline in their sales or competitive position, could have an adverse impact on our business.
Risks Related to Our Industry
We face significant competition, which could cause us to lose business or achieve lower margins.
The market for our clinical trial solutions is intensely competitive and characterized by rapidly changing technologies, evolving industry standards and frequent new product and service introductions and enhancements that may render existing products and services obsolete. Accordingly, our market share and margins are subject to sudden declines. Some of our competitors have longer operating histories, greater financial, technical, marketing and other resources and greater name recognition than we do. These competitors may respond more quickly than we can to new and emerging technologies and changing customer and regulatory requirements, or devote greater resources to the development, promotion and sale of their solutions. New competitors may enter our market in the future, as barriers to entry are relatively low in our industry. Increased competition may result in pricing pressures, which could negatively impact our sales, gross margins or market share. In addition, current and potential competitors have established, and may in the future establish, relationships with vendors of complementary products, technologies or services to increase the penetration of their products in the marketplace. Even if our products and services are more effective than the products or service offerings of our competitors, current or potential customers might accept competitive products and services in lieu of purchasing our cloud-based solutions and services. Our failure to compete effectively could materially adversely affect our business, financial condition or results of operations.
We depend entirely on the clinical trial market, and a downturn in this market could cause our revenues to decrease.
Our business depends entirely on the clinical trials conducted or sponsored by pharmaceutical, biotechnology and medical device companies, CROs, and other entities. Our revenues may decline as a result of conditions affecting these industries, including general economic downturns, increased consolidation, decreased competition or fewer products under development. Other developments that may affect these industries and harm our operating results include product liability claims, changes in government regulation, changes in governmental price controls or third-party reimbursement practices and changes in medical practices. Disruptions in the world credit and equity markets may also result in a global downturn in spending on research and development and clinical trials and may impact our customers' access to capital and their ability to pay for our solutions. Any decrease in research and development expenditures or in the size, scope or frequency of clinical trials could materially adversely affect our business, results of operations or financial condition.
Extensive governmental regulation of the clinical trial process and our products and services could require significant compliance costs and have a material adverse effect on the demand for our solutions.
The clinical trial process is subject to extensive and strict regulation by the U.S. FDA and other regulatory authorities worldwide. Our cloud-based solutions and services are also subject to state, federal, and foreign regulations. Demand for our solutions is largely a function of such government regulation, which is subject to change at any time. Changes in the level of regulation, including a relaxation in regulatory requirements or the introduction of simplified drug approval procedures, could have a material adverse effect on the

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demand for our solutions. Proposals to place caps on drug prices could limit the profitability of existing or planned drug development programs, making investment in new drugs and therapies less attractive to pharmaceutical companies. Similarly, the requirements in the U.S., the EU, the Asia Pacific region, and elsewhere to create a detailed registry of all clinical trials could have an impact on customers' willingness to perform certain clinical studies. In addition, the uncertainty surrounding the possible adoption and impact on healthcare of any GCP reforms could cause our customers to delay planned research and development until some of these uncertainties are resolved.
Modifying our cloud-based solutions and services to comply with changes in regulations or regulatory guidance could require us to incur substantial costs. Further, changing regulatory requirements may render our solutions obsolete or make new products or services more costly or time consuming than we currently anticipate. Failure by us, our customers, or our competitors to comply with applicable regulations could result in increased regulatory scrutiny and enforcement. If our solutions fail to comply with government regulations or guidelines, we could incur significant liability or be forced to cease offering our applicable products or services. If our solutions fail to allow our customers to comply with applicable regulations or guidelines, customers may be unwilling to use our solutions and any such non-compliance could result in the termination of or additional costs arising from contracts with our customers.
Consolidation among our customers could cause us to lose customers, decrease the market for our products and result in a reduction of our revenues.
Our customer base could decline because of industry consolidation, and we may not be able to expand sales of our products and services to new customers. Consolidation in the pharmaceutical, biotechnology and medical device industries, and among CROs has accelerated in recent years, and this trend may continue. In addition, new companies or organizations that result from such consolidation may decide that our products and services are no longer needed because of their own internal processes or the use of alternative systems. As these entities consolidate, competition to provide products and services to industry participants will become more intense and the importance of establishing relationships with large industry participants will become greater. These industry participants may try to use their market power to negotiate price reductions for our products and services. Also, if consolidation of larger current customers occurs, the combined organization may represent a larger percentage of business for us and, as a result, we are likely to rely more significantly on the combined organization's revenues to continue to achieve growth.
Risks Related to Our Common Stock
The price of our common stock may fluctuate significantly, and investors could see their investments decline in value.
Shares of our common stock were sold in our initial public offering ("IPO") in June 2009 at a price of $7.00 per share (on a post-split basis), and our common stock has subsequently traded as high as $68.21 and as low as $6.68 from our IPO through December 31, 2016 . However, an active, liquid, and orderly market for our common stock on The NASDAQ Stock Market or otherwise may not be sustained, which could depress the trading price of our common stock. The trading price of our common stock may be subject to wide fluctuations in response to various factors, some of which are beyond our control, including:
our quarterly or annual earnings or those of other companies in our industry;
announcements by us or our competitors of significant contracts or acquisitions;
changes in accounting standards, policies, guidance, interpretations or principles;
general economic and stock market conditions, including disruptions in the world credit and equity markets;
the failure of securities analysts to cover our common stock or changes in financial estimates by analysts;
future sales of our common stock; and
the other factors described in these “Risk Factors.”
In recent years, the stock market in general, and the market for technology-related companies in particular, has experienced extreme price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The price of our common stock could fluctuate based upon factors that have little to do with our performance, and these fluctuations could materially reduce our stock price.
In the past, some companies, including companies in our industry, have had volatile market prices for their securities and have had securities class action suits filed against them. The filing of a lawsuit against us, regardless of the outcome, could have a material adverse effect on our business, financial condition and results of operations, as it could result in substantial legal costs and a diversion of our management's attention and resources.
Our actual operating results may differ significantly from guidance provided by our management.
From time to time, we may release guidance in our earnings releases, earnings conference calls, or otherwise, regarding our future performance that represent our management's estimates as of the date of release. This guidance, which includes forward-looking statements, is based on projections prepared by our management. These projections are not prepared with a view toward compliance with published accounting and reporting guidelines, and neither our registered public accountants nor any other independent expert or outside party compiles or examines the projections and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto.
Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our

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control and are based upon specific assumptions with respect to future business decisions, some of which will change. We generally state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to represent that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by analysts.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results will vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon, or otherwise consider, our guidance in making an investment decision with respect to our common stock. Any failure to successfully implement our operating strategy could result in the actual operating results being different from our guidance, and such differences may be adverse and material.
Provisions of Delaware law and our organizational documents may discourage takeovers and business combinations that our stockholders may consider to be in their best interests, which could negatively affect our stock price.
Provisions of Delaware law and our fifth amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change in control of our company or deterring tender offers for our common stock that other stockholders may consider in their best interests.
Our fifth amended and restated certificate of incorporation authorizes us to issue up to 5,000,000 shares of preferred stock in one or more different series with terms to be fixed by our board of directors. Stockholder approval is not necessary to issue preferred stock in this manner. Issuance of these shares of preferred stock could have the effect of making it more difficult and more expensive for a person or group to acquire control of us, and could effectively be used as an anti-takeover device. Currently there are no shares of our preferred stock issued or outstanding.
Our bylaws provide for an advance notice procedure for stockholders to nominate director candidates for election or to bring business before an annual meeting of stockholders, including proposed nominations of persons for election to our board of directors, and require that special meetings of stockholders be called only by our chairman of the board, chief executive officer, president or the board pursuant to a resolution adopted by a majority of the board.
The anti-takeover provisions of Delaware law and provisions in our organizational documents may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.
As a public company, we may incur significant administrative workload and expenses in connection with new and changing compliance requirements.
As a public company with common stock listed on The NASDAQ Stock Market, we must comply with various laws, regulations and requirements. New laws and regulations, as well as changes to existing laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and rules adopted by the SEC and by The NASDAQ Stock Market, may result in increased general and administrative expenses and a diversion of management's time and attention as we respond to new requirements.
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividends on our common stock and do not intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your investment in our common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. Shares of our common stock may depreciate in value or may not appreciate in value.
We have indebtedness in the form of convertible senior notes, which could adversely affect our liquidity and impede our ability to raise additional capital.
In August, 2013, we completed an offering of $287.5 million aggregate principal amount of 1.00% convertible senior notes ("Notes"), due August 1, 2018. As a result of the Notes offering, we incurred $287.5 million principal amount of indebtedness, the principal amount of which we may be required to pay at maturity in 2018, or, upon the occurrence of a make-whole fundamental change (as defined in the indenture governing the Notes). There can be no assurance that we will be able to repay this indebtedness when due, or that we will be able to refinance this indebtedness on acceptable terms or at all. In addition, this indebtedness could, among other things:
make it difficult for us to pay other obligations;
make it difficult to obtain favorable terms for any necessary future financing for working capital, capital expenditures, debt services requirements, acquisitions, and investments and other general corporate purposes;
require us to dedicate a substantial portion of our cash flow from operations to service the indebtedness, reducing the amount of cash flow available for other purposes; and

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limit our flexibility in planning for and reacting to change in our business.
Conversion of the Notes may affect the price of our common stock.
Holders of the outstanding Notes will be able to convert them into our common stock under certain circumstances prior to February 1, 2018. Upon conversion, holders of the Notes would receive cash, shares of common stock or a combination of cash and shares of common stock, at our election. Any sales in the public market of shares of common stock issued upon conversion of the Notes could decrease the trading price of our common stock.
The conversion provisions of the Notes require us to deliver cash and, in certain circumstances, common stock upon conversion and could dilute the ownership interests of stockholders.
Upon any conversion of some or all of the Notes, we intend to make cash payments up to the principal amount of the converted Notes. Additionally, our basic earnings per share would be expected to decrease to the extent we are required to issue shares upon conversion because such underlying shares would be included in the basic earnings per share calculation and the conversion would result in dilution to our stockholders. Any new issuance of equity securities, including the issuance of shares upon the conversion of the Notes, would dilute the interests of our then-existing stockholders, including holders who receive shares upon conversion of the Notes.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our corporate headquarters and other material leased real property and data center space as of December 31, 2016 are shown in the following table. We do not own any real property.
Location
 
Use
 
Size
 
Expiration of Lease
New York, New York
 
Corporate headquarters
 
137,535 square feet
 
April 2024
Iselin, New Jersey
 
Office space
 
50,648 square feet
 
June 2026
Hammersmith, United Kingdom
 
Office space
 
23,066 square feet
 
November 2022
San Francisco, California
 
Office space
 
14,015 square feet
 
February 2023
Tokyo, Japan
 
Office space
 
12,338 square feet
 
October 2023
Houston, Texas
 
Data center and office space
 
11,367 square feet
 
December 2020
Conshohocken, Pennsylvania
 
Office space
 
10,297 square feet
 
June 2017
Seoul, South Korea
 
Office space
 
699 square feet
 
April 2017
Frankfurt, Germany
 
Data center
 
 471 square feet
 
February 2019
We believe these facilities and additional or alternative space available to us will be adequate to meet our needs for the foreseeable future.
Item 3. Legal Proceedings
See Note 15 , “Commitments and Contingencies—Legal Matters,” to the consolidated financial statements included in Item 15 of this Annual Report on Form 10-K for a description of current legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.

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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Stock Market Information
Our common stock has been traded on The NASDAQ Global Market under the symbol “MDSO” since the completion of our IPO in June 2009. Before then, there was no public market for our common stock.
The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as reported by The NASDAQ Global Market:
 
2016
 
2015
 
High
 
Low
 
High
 
Low
Fourth Quarter
$
57.85

 
$
46.10

 
$
50.78

 
$
35.81

Third Quarter
56.76

 
46.11

 
61.31

 
40.28

Second Quarter
48.58

 
37.36

 
58.97

 
45.86

First Quarter
49.39

 
30.22

 
50.73

 
40.80

Holders
On February 22, 2017 , we had approximately 71 holders of record of our common stock. The number of record holders was determined from the records of our transfer agent and does not include the many additional beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is American Stock Transfer & Trust Company, 6201 15 th Avenue, Brooklyn, New York 11219.
Dividends
Since the completion of our IPO in June 2009, we have not declared or paid any cash dividends on our capital stock. We currently expect to retain any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors considers relevant.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
From time to time, we grant nonvested restricted stock awards or performance-based restricted stock units to our employees pursuant to the terms of our Second Amended and Restated 2009 Long-Term Incentive Plan ("2009 Plan"). Under the provisions of our 2009 Plan, unless otherwise elected, participants fulfill their income tax withholding obligation by having shares withheld at the time of vesting. On the date of vesting, we determine the number of vested shares to be withheld by dividing the participant's income tax withholding obligation by the closing price of our common stock and withhold the resulting number of vested shares.
A summary of our repurchases of shares of our common stock for the three months ended December 31, 2016 is as follows: 
 
Total Number
of Shares
Purchased (1)
 
Average
Price Paid
per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum
Number of
Shares that
May Yet be
Purchased
under the  Plans
or Programs
October 1 – October 31, 2016
17,163

 
$
54.10

 

 

November 1 – November 30, 2016
1,196

 
46.53

 

 

December 1 – December 31, 2016
2,851

 
52.45

 

 

Total
21,210

 
$
53.45

 

 

 (1) Represents the number of shares acquired as payment by employees of applicable statutory minimum withholding taxes owed upon vesting of restricted stock awards, restricted stock units, or performance-based restricted stock units granted under our 2009 Plan.


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Stock Performance Graph
The following graph sets forth the total cumulative stockholder return on our common stock for the last five fiscal years as compared to the NASDAQ Composite Index and the NASDAQ Computer Index over the same period. This graph assumes a $100 investment in our common stock at $10.88, which was the adjusted closing market price per share on December 31, 2011. The comparison in the graphs below are based upon historical stock performance and not indicative of, nor intended to forecast, future performance of our common stock. 
MDSO123116GRAPH.JPG


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Item 6. Selected Financial Data
Our selected consolidated financial information presented for each of the years ended December 31, 2016 , 2015 , and 2014 and as of December 31, 2016 and 2015 was derived from our audited consolidated financial statements, which are included in Item 15 of this Annual Report on Form 10-K. Our selected financial information presented for each of the years ended December 31, 2013 and 2012 and as of December 31, 2014, 2013, and 2012 was derived from our audited consolidated financial statements, which are not included in this Annual Report on Form 10-K.
The information contained in this table should be read in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and accompanying notes thereto included elsewhere in this Annual Report on Form 10-K.
Consolidated Statement of Operations Data
 
Year ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
(in thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
 
 
Subscription
$
394,269

 
$
336,195

 
$
280,041

 
$
227,921

 
$
171,647

Professional services
69,112

 
56,311

 
55,030

 
48,928

 
46,700

Total revenues
463,381

 
392,506

 
335,071

 
276,849

 
218,347

Costs of revenues:
 
 
 
 
 
 
 
 
 
Subscription
62,136

 
47,795

 
45,576

 
37,053

 
32,600

Professional services
50,473

 
41,993

 
39,344

 
32,856

 
30,062

Total cost of revenues
112,609

 
89,788

 
84,920

 
69,909

 
62,662

Gross profit
350,772

 
302,718

 
250,151

 
206,940

 
155,685

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Research and development
112,595

 
92,319

 
71,757

 
51,202

 
42,276

Sales and marketing
109,290

 
103,153

 
83,435

 
66,337

 
47,739

General and administrative
78,678

 
78,014

 
69,111

 
65,513

 
37,777

2014 wire transaction loss (1)

 

 
5,784

 

 

Total operating costs and expenses
300,563

 
273,486

 
230,087

 
183,052

 
127,792

Operating income
50,209

 
29,232

 
20,064

 
23,888

 
27,893

Interest and other (expense) income, net
(12,895
)
 
(13,457
)
 
(13,550
)
 
(5,506
)
 
176

Income before income taxes
37,314

 
15,775

 
6,514

 
18,382

 
28,069

Provision for income taxes
8,331

 
2,608

 
422

 
1,721

 
10,049

Net income
$
28,983

 
$
13,167

 
$
6,092

 
$
16,661

 
$
18,020

Earnings per share (2):
 
 
 
 
 
 
 
 
 
Basic
$
0.52

 
$
0.25

 
$
0.12

 
$
0.33

 
$
0.37

Diluted
$
0.51

 
$
0.23

 
$
0.11

 
$
0.31

 
$
0.35

Weighted-average common shares outstanding (2):
 
 
 
 
 
 
 
 
 
Basic
55,492

 
53,717

 
52,561

 
51,060

 
49,092

Diluted
57,249

 
56,540

 
55,247

 
54,118

 
50,938


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Stock-based compensation expense and depreciation and amortization of intangible assets included in cost of revenues and operating costs and expenses are as follows: 
 
Year ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
(in thousands)
Stock-based compensation expense
 
 
 
 
 
 
 
 
 
Cost of revenues
$
4,425

 
$
5,040

 
$
4,313

 
$
3,149

 
$
1,751

Research and development
9,223

 
7,907

 
4,085

 
2,397

 
1,049

Sales and marketing
7,074

 
9,171

 
7,450

 
8,859

 
2,871

General and administrative
20,436

 
26,869

 
22,105

 
21,738

 
5,243

Total stock-based compensation
$
41,158

 
$
48,987

 
$
37,953

 
$
36,143

 
$
10,914

Depreciation
 
 
 
 
 
 
 
 
 
Cost of revenues
$
6,341

 
$
5,585

 
$
5,275

 
$
3,975

 
$
4,280

Research and development
3,637

 
2,188

 
2,302

 
1,289

 
944

Sales and marketing
2,213

 
1,440

 
849

 
339

 
603

General and administrative
1,861

 
973

 
1,381

 
529

 
315

Total depreciation
14,052

 
10,186

 
9,807

 
6,132

 
6,142

Amortization of intangible assets
 
 
 
 
 
 
 
 
 
Cost of revenues
1,021

 
517

 
499

 
589

 
1,276

Sales and marketing
276

 
119

 
129

 
215

 
516

Total amortization of intangible assets
1,297

 
636

 
628

 
804

 
1,792

Total depreciation and amortization of intangible assets
$
15,349

 
$
10,822

 
$
10,435

 
$
6,936

 
$
7,934

Consolidated Balance Sheet Data
 
December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
(in thousands)
Cash and cash equivalents
$
93,519

 
$
49,562

 
$
39,517

 
$
22,328

 
$
32,683

Total marketable securities (3)
421,703

 
429,167

 
417,126

 
413,997

 
89,871

Total current assets
518,780

 
383,201

 
357,852

 
304,545

 
182,701

Restricted cash (4)
5,760

 
5,755

 
5,118

 
5,344

 
388

Total assets (5)
817,885

 
684,180

 
617,639

 
567,497

 
224,631

Total deferred revenue
77,614

 
78,575

 
64,264

 
54,058

 
54,671

Total capital lease obligations

 

 
46

 
80

 
155

Total long-term debt (3)(5)
263,401

 
249,487

 
236,308

 
223,849

 

Stockholders' equity (3)(6)
401,990

 
284,156

 
264,699

 
225,813

 
142,091


(1)
Operating costs and expenses for the year ended December 31, 2014 include a pre-tax charge of $5.8 million associated with an international wire transfer fraud committed against us during September 2014 and the related investigation costs. See Note 2 , "2014 Wire Transaction Loss," to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K for more information.
(2)
Basic and diluted earnings per share amounts and basic and diluted weighted-average common shares outstanding for 2012 have been adjusted to reflect a two-for-one stock split effected in the form of a stock dividend in December 2013.
(3)
In August 2013, we issued $287.5 million of 1.00% convertible senior notes which will mature on August 1, 2018 unless earlier repurchased or converted. In accounting for the issuance, we separated the notes into their liability and equity components. As of December 31, 2016 , the notes are not convertible and the liability portion thereof has been recorded, net of discount, in long-term liabilities in our consolidated financial statements. Proceeds from this issuance have been invested into high quality marketable securities. See Note 9 , "Debt," to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K for more information regarding the convertible senior notes.
(4)
Our restricted cash represents deposits made to fully collateralize certain standby letters of credit in connection with office lease arrangements. The majority of our outstanding letters of credit was previously collateralized in part with a revolving line of credit that matured on September 30, 2013. Subsequently our outstanding letters of credit have been fully collateralized with our restricted cash.

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(5)
On January 1, 2016, we adopted Accounting Standards Update ("ASU") No. 2015-03, Simplifying the Presentation of Debt Issuance Costs , which requires unamortized debt issuance costs to be presented not as an asset, but as a reduction of the carrying amount of the related debt liability, similar to a debt discount. Unamortized debt issuance costs of $3.3 million, $4.6 million, and $5.9 million as of December 31, 2015, 2014, and 2013, respectively, have been reclassified to conform with current period presentation.
(6)
During the third quarter of 2016, we early adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting , a portion of which requires excess tax benefits and tax deficiencies on equity awards, which were formerly recognized in additional paid-in capital, to be recognized in the income statement when the awards vest or are settled; adoption of this portion of ASU No. 2016-09 resulted in a $50.6 million cumulative-effect adjustment to opening retained earnings as of January 1, 2016.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion and analysis of our financial condition and results of operations. You should read this discussion and analysis together with our consolidated financial statements and accompanying notes to consolidated financial statements included in Item 15 of this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based on management's current expectations, estimates, and projections about our business and operations. Our actual results may differ from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those described in “Risk Factors” under Item 1A and elsewhere in this Annual Report on Form 10-K.
Overview
We are reinventing global drug development by creating the industry's leading cloud-based solutions for clinical research. Through our advanced applications and intelligent data analytics, we help advance the scientific goals of life sciences customers worldwide, including over 800 global pharmaceutical companies; innovative biotechnology, diagnostic and device firms; leading academic medical centers; and contract research organizations. Our platform technology brings a new level of quality and efficiency to clinical trials that empowers our customers to make more informed decisions earlier and faster, and is the primary technology solution powering clinical trials for 17 of the world's top 25 global pharmaceutical companies, from study design and planning through execution, management, and reporting.
Highlights
2016
Total revenue increased 18.1% to $463.4 million , compared with $392.5 million in 2015.
Professional services increased 22.7% to a record $69.1 million .
Operating income was $50.2 million , up 72% compared with $29.2 million in 2015.
Net income was $29.0 million , or $0.51 per diluted share, up 120% compared with $13.2 million , or $0.23 per diluted share, in 2015.
We closed enterprise platform deals with multiple top-25 pharmaceutical companies, including Bristol-Myers Squibb and Celgene.
We added a record 288 new customers in 2016, an increase of 43% over 2015, to end the year with 849 customers, up 39% from the end of 2015.
79% of customers had committed to multiple products at the end of 2016, up from 67% at the end of 2015.
12-month subscription backlog grew to a record $343 million as of December 31, 2016, up 16% compared with $296 million at the end of 2015.

2015
Total revenue increased 17.1% to $392.5 million, while we increased our spending on research and development as a percentage of revenue by 2.1 percentage points and increased our sales and marketing spending as a percentage of revenue by 1.4 percentage points.
Operating income was $29.2 million, up 46% compared with $20.1 million in 2014.
Net income was $13.2 million, or $0.23 per diluted share, up 116% compared with $6.1 million, or $0.11 per diluted share, in 2014.
We closed two enterprise platform deals in the fourth quarter: Celgene and Boehringer Ingelheim, reflecting our growing traction and success in the marketplace.
We added 201 new customers in 2015, an increase of 52% over 2014, to end the year with 611 customers.

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67% of customers had committed to multiple products at the end of 2015, up from 58% at the end of 2014.
Billings were $423 million for 2015, up 19% year-over-year.
12-month subscription backlog grew to a $296 million as of December 31, 2015, up 18% compared with $251 million at the end of 2014.
Results of Operations
Revenues
Our revenues are derived from subscription and professional services.
Our subscription revenues consist of customer fees for the value and utilization of our cloud-based solutions. Subscriptions to our solutions are provided through multi-study arrangements, which allow customers to manage up to a predetermined number of clinical trials for a term generally ranging from one to five years, and single-study arrangements that allow customers to use our solutions for an individual study and/or to evaluate our products prior to committing to multi-study arrangements. Many of our customers have migrated from single-study arrangements to multi-study arrangements, which represent the majority of our subscription revenues. We recognize revenues from subscriptions ratably over the terms of these arrangements. A majority of our subscription revenues in each period are generated from arrangements initiated during prior periods. Consequently, an increase or decrease in new subscription arrangements in a particular period may not significantly affect our results of operations in that period.
Professional services revenue is derived from the provision of professional services that help life sciences companies realize higher value in their clinical development processes. Our professional services provide our customers with reliable, repeatable, and cost-effective implementation and training in the use of our cloud-based solutions. We also offer consulting services to advise customers on ways to optimize their clinical development process from trial concept to conclusion.
Revenues for 2016 , 2015 , and 2014 were as follows:
 
2016
 
Change
 
2015
 
Change
 
2014
Revenues:
(amounts in thousands except percentages)
Subscription
$
394,269

 
17.3
%
 
$
336,195

 
20.1
%
 
$
280,041

Percentage of total revenues
85.1
%
 
 
 
85.7
%
 
 
 
83.6
%
Professional services
69,112

 
22.7
%
 
56,311

 
2.3
%
 
55,030

Percentage of total revenues
14.9
%
 
 
 
14.3
%
 
 
 
16.4
%
Total revenues
$
463,381

 
18.1
%
 
$
392,506

 
17.1
%
 
$
335,071

In 2016 and 2015 , year-over-year growth in subscription revenues was largely the result of expanding business with current customers, both in the form of additional product subscriptions and increased usage under existing subscriptions, with a strong contribution from our electronic data capture and risk-based monitoring solutions. As of December 31, 2016 and 2015 , 79% and 67% of customers, respectively, were using multiple solutions from our platform; our revenue retention rate was over 99% in both 2016 and 2015 . We added 201 new customers in 2015 and 288 new customers in 2016 to reach a total of 849 customers as of December 31, 2016 . At the end of 2016 and 2015 , we had 12-month subscription backlog of approximately $343 million and $296 million , respectively, representing the future contract value of outstanding arrangements, billed and unbilled, to be recognized in 2017 and 2016, respectively.
Year-over-year growth in professional services revenues in 2016 and 2015 resulted from increased demand from new and existing customers for implementation and other professional services. In 2016, high utilization associated with large scale enterprise implementation projects resulted in record professional services revenues.
Cost of Revenues
Cost of revenues consists primarily of costs related to delivering, maintaining, and supporting our cloud-based solutions and delivering our professional services and support. These costs include salaries, benefits, bonuses, and stock-based compensation for our data center and professional services staff, as well as costs of third-party consultants. Cost of revenues also includes costs associated with our data center, including networking and related depreciation expense, as well as outside service provider costs, amortization expense associated with acquired and developed technology, and general overhead. We allocate general overhead, such as applicable shared rent and utilities, to cost of revenues based on relative headcount. The costs associated with providing professional services are recognized as such costs are incurred. Over the long term, we believe that cost of revenues as a percentage of total revenues will decrease.

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Cost of revenues for 2016 , 2015 , and 2014 was as follows:
 
2016
 
Change
 
2015
 
Change
 
2014
Cost of revenues:
(amounts in thousands except percentages)
Subscription
$
62,136

 
30.0
%
 
$
47,795

 
4.9
%
 
$
45,576

Percentage of total revenues
13.4
%
 
 
 
12.2
%
 
 
 
13.6
%
Professional services
50,473

 
20.2
%
 
41,993

 
6.7
%
 
39,344

Percentage of total revenues
10.9
%
 
 
 
10.7
%
 
 
 
11.7
%
Total cost of revenues
$
112,609

 
25.4
%
 
$
89,788

 
5.7
%
 
$
84,920

Percentage of total revenues
24.3
%
 
 
 
22.9
%
 
 
 
25.3
%
 
 
 
 
 
 
 
 
 
 
Gross profit
$
350,772

 
15.9
%
 
$
302,718

 
21.0
%
 
$
250,151

Gross margin
75.7
%
 
 
 
77.1
%
 
 
 
74.7
%
 
 
 
 
 
 
 
 
 
 
Subscription margin
84.2
%
 
 
 
85.8
%
 
 
 
83.7
%
Professional services margin
27.0
%
 
 
 
25.4
%
 
 
 
28.5
%
In 2016 and 2015 , the year-over-year growth in cost of subscription revenues was primarily due to higher third-party cloud hosting costs resulting from increased platform activity and increased expenses associated with other software-related contracts with outside vendors. In both years, personnel-related costs contributed to the growth in cost of subscription revenues, as a result of headcount increases to support our business growth. In 2016, investment in hosting infrastructure at our new data center in Europe also contributed to increased expenses. In 2015, expenses were reduced by a sales tax refund resulting from exempt asset purchases.
The year-over-year growth in cost of professional services revenues in 2016 and 2015 was largely due to the increase in personnel-related costs associated with our headcount additions in response to increased customer demand and expanding skill requirements for professional services. In 2016, cost of professional services revenues was also impacted by increased consulting costs.
Overall gross margin increased from 74.7% in 2014 to 77.1% in 2015 , driven by the significant growth in our higher margin subscription revenues, partially offset by decreased professional services margin resulting from continued workforce and other investments to enhance our strategic services offerings. In 2016 , gross margin decreased slightly to 75.7% due to the aforementioned infrastructure and skill set investments and a greater mix of lower margin professional services revenue as a result of strong professional services growth.
Operating Costs and Expenses
Research and Development . Research and development expenses consist primarily of personnel and related expenses for our research and development staff, including salaries, benefits, bonuses, and stock-based compensation, as well as the cost of certain third-party service providers and allocated overhead. We have focused our research and development efforts on expanding the functionality and ease of use of our cloud-based solutions. We expect research and development costs to increase in the future as we intend to release new features and functionality designed to maximize the efficiency and effectiveness of the clinical development process for our customers. Over the long term, we believe that research and development expenses as a percentage of total revenues will decrease.
Sales and Marketing . Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including salaries, benefits, bonuses, and stock-based compensation, as well as commissions, travel costs, marketing and promotional events, corporate communications, advertising, other brand building and product marketing expenses, and allocated overhead. Our sales and marketing expenses have increased primarily due to our ongoing investments in customer acquisition and other activities to build brand awareness. We expect sales and marketing expenses to continue to increase in absolute terms. Over the long term, we believe that sales and marketing expenses as a percentage of total revenues will decrease.
General and Administrative . General and administrative expenses consist primarily of personnel and related expenses for executive, legal, finance, and human resource departments, including salaries, benefits, bonuses, and stock-based compensation, as well as professional fees, insurance premiums, allocated overhead, and other corporate expenses. On an ongoing basis, we expect general and administrative expenses to increase modestly in absolute terms due to continued investment in our infrastructure to support our continued growth. We expect that general and administrative expenses as a percentage of total revenues will decrease marginally in the future.

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Operating costs and expenses for 2016 , 2015 , and 2014 were as follows:
 
2016
 
Change
 
2015
 
Change
 
2014
Operating costs and expenses:
(amounts in thousands except percentages)
Research and development
$
112,595

 
22.0
%
 
$
92,319

 
28.7
 %
 
$
71,757

Percentage of total revenues
24.3
%
 
 
 
23.5
%
 
 
 
21.4
%
Sales and marketing
109,290

 
5.9
%
 
103,153

 
23.6
 %
 
83,435

Percentage of total revenues
23.6
%
 
 
 
26.3
%
 
 
 
24.9
%
General and administrative
78,678

 
0.9
%
 
78,014

 
12.9
 %
 
69,111

Percentage of total revenues
17.0
%
 
 
 
19.9
%
 
 
 
20.5
%
2014 wire transaction loss

 
%
 

 
(100.0
)%
 
5,784

Percentage of total revenues
%
 
 
 
%
 
 
 
1.7
%
Total operating costs and expenses
$
300,563

 
9.9
%
 
$
273,486

 
18.9
 %
 
$
230,087

Percentage of total revenues
64.9
%
 
 
 
69.7
%
 
 
 
68.7
%
 
 
 
 
 
 
 
 
 
 
Operating income
$
50,209

 
71.8
%
 
$
29,232

 
45.7
 %
 
$
20,064

Operating margin
10.8
%
 
 
 
7.4
%
 
 
 
6.0
%
The growth in research and development expenses in 2016 and 2015 was primarily due to personnel-related costs associated with headcount and skill set investments in support of our growth; headcount grew 21% in 2015 and 14% in 2016, with an increasing focus on the hiring of highly skilled engineering talent. Research and development expenses for both 2016 and 2015 were also impacted by our increased use of specialized consultants and outside experts to enhance the value of our platform. In 2016, the aforementioned people cost increases were partially offset by capitalization of internal-use software development costs associated with our Clinical Cloud platform.
The growth in sales and marketing expenses in 2016 and 2015 was largely driven by personnel-related costs associated with headcount increases to expand our global sales organization and partner team. Sales and marketing headcount increased 26% in 2015 and 8% in 2016 to reach a total of 309 employees as of the end of 2016.
General and administrative headcount increased 10% in 2015 and 27% in 2016 to support our business growth, resulting in higher personnel-related costs. In 2016, this increase was almost fully offset by a 24% decrease in stock-based compensation expense as a result of certain material equity awards becoming fully vested during the fourth quarter of 2015 and first quarter of 2016. In 2015, stock-based compensation costs increased 22% compared with 2014, driven by grants to both new hires and existing employees, contributing to the overall increase general and administrative expenses for that year. General and administrative expenses for 2016 were also impacted by decreased legal fees as a result of the resolution of our litigation with DataTrak early in the year.
In the first quarter of 2016, the state of New Jersey enacted legislation that allows companies to recognize grants associated with the New Jersey Business Employment Incentive Program ("NJ BEIP"), which incentivizes businesses to locate and expand jobs in New Jersey. We applied the benefits of these grants against the underlying salary expense related to our employees in research and development, sales and marketing, and general and administrative functions in New Jersey, reducing total operating expenses by $3.0 million for 2016. The NJ BEIP is not expected to have a material impact on future periods. Additionally, in 2012 we signed an incentive proposal under New York State's Empire State Development ("ESD") Excelsior Jobs Program ("Excelsior"). Excelsior provides qualifying taxpayers with refundable tax credits related to new or expanding operations in New York State. The 2012 agreement provided for credits of $2.8 million over a ten-year period beginning in 2014, resulting in an immaterial quarterly benefit. In the third quarter of 2016, we received and signed a new, larger Excelsior incentive proposal that provides for an additional $17.0 million of credits over a ten-year period beginning in 2016. The benefits of all Excelsior credits are applied against underlying salary expense and reduced total operating expenses by $1.5 million for 2016.
Our total operating costs and expenses for 2014 included a $5.8 million charge associated with the international wire transfer fraud committed against us on September 16, 2014, and the related investigation costs incurred. For further information, see Note 2 , "2014 Wire Transaction Loss," to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K.

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Interest and Other Expense:
Interest and other expense for 2016 , 2015 , and 2014 was as follows:
 
2016
 
Change
 
2015
 
Change
 
2014
 
(amounts in thousands except percentages)
Interest and other expense
$
(12,895
)
 
(4.2
)%
 
$
(13,457
)
 
(0.7
)%
 
$
(13,550
)
Interest and other expense is driven largely by cash and non-cash interest expense on the convertible senior notes that we issued in August 2013. For further information, see Note 9 , “Debt,” to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K. For all periods presented, debt interest expense was partially offset by interest income from our marketable securities portfolio.
Income taxes
We are subject to income tax in the U.S. and foreign jurisdictions in which we conduct business. See Note 14 , “Income Taxes,” to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K for more information regarding our income taxes.
Income taxes for 2016 , 2015 , and 2014 were as follows:
 
2016
 
 
 
2015
 
 
 
2014
 
(amounts in thousands except percentages)
Provision for income taxes
$
8,331

 
 
 
$
2,608

 
 
 
$
422

Effective tax rate
22.3
%
 
 
 
16.5
%
 
 
 
6.5
%
We had an effective tax rate of 22.3% for 2016 compared with 16.5% for 2015 and 6.5% for 2014 . In 2016 , our effective tax rate was lower than the U.S. statutory rate of 35% as a result of the tax benefit of research and development tax credits generated during the year, change in unrecognized tax benefits on research and development tax credit carryovers resulting from the conclusion of an IRS tax examination, share-based compensation inclusive of excess tax benefits recognized due to early adoption of ASU No. 2016-09, tax rate differentials on the mix of foreign jurisdictional earnings, and losses incurred by a foreign subsidiary related to our non-U.S. operations for which we have not realized a related tax benefit. In 2015 , our effective tax rate was lower than the U.S. statutory rate of 35% primarily due to the tax benefit of research and development tax credits, the domestic production activities deduction, net of tax reserves, and share-based compensation. Except for the change in unrecognized tax benefits, these items will likely continue to affect future periods' effective tax rates as we continue to develop and enhance our products and grow domestically and internationally. However, research and development tax rates may not have as significant an impact on future effective tax rates to the extent that pre-tax income grows at a faster rate than such credits.
Liquidity and Capital Resources
We believe that our cash flows from operations, cash and cash equivalents, and highly liquid marketable securities will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for the foreseeable future. Our future capital expenditures and other cash requirements could be higher than we currently expect as a result of various factors, including any expansion of our business that we may complete. The following table presents selected financial information related to our liquidity and capital resources as of and for the years ended December 31, 2016 , 2015 , and 2014 (in thousands):
 
2016
 
2015
 
2014
 
Cash, cash equivalents, and marketable securities
$
515,222

 
$
478,729

 
$
456,643

 
Furniture, fixtures and equipment, net
$
58,461

 
$
51,043

 
$
38,579

 
1.00% convertible senior notes, net
$
263,401

 
$
249,487

(1)
$
236,308

(1)
 
 
 
 
 
 
 
Cash provided by operating activities
$
88,769

 
$
88,594

(2)
$
67,445

(2)
Cash used in investing activities
$
(41,258
)
 
$
(37,498
)
 
$
(30,444
)
 
Cash used in financing activities
$
(3,311
)
 
$
(40,995
)
(2)
$
(19,692
)
(2)
 
(1) On January 1, 2016, we 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 reclassification of $3.3 million and $4.6 million in unamortized debt issuance costs from other assets to 1.00% convertible senior notes on our consolidated balance sheets as of December 31, 2015 and 2014, respectively.
(2) The consolidated statements of cash flows for the years ended December 31, 2015 and 2014 have been adjusted to reflect our 2016 adoption of Accounting Standards Update 2016-09, which requires excess tax benefit on equity awards to be presented as an operating activity. The impact is an offsetting increase to net cash provided by operating activities and net cash used in financing activities of $1.6 million for the year ended December 31, 2015 and $5.8 million for the year ended December 31, 2014. Refer to Note 1, "Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements" to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K for more information.

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Cash, Cash Equivalents, and Marketable Securities
We manage our cash equivalents and marketable securities as a single investment portfolio that is intended to be available to meet our current cash requirements. Cash equivalents substantially consist of investments in money market funds. Marketable securities, which we classify as available-for-sale securities, primarily consist of high quality commercial paper, corporate bonds, and U.S. government debt obligations.
For 2016 , cash provided by operating activities of $88.8 million was driven by strong customer collections, which were 15% higher than in the prior year, partially offset by operating expenditures and cash interest expense on our 1.00% convertible senior notes. Cash used in investing activities of $41.3 million consisted primarily of cash payments for capital expenditures of $25.7 million , a net payment of $17.2 million to acquire Intelemage, and $4.0 million cost method investment, partially offset by net sales of marketable securities of $5.4 million . Cash used in financing activities of $3.3 million resulted predominantly from the acquisition of $15.6 million of treasury stock in connection with equity plan participant tax withholdings upon vesting, partially offset by equity plan proceeds of $12.4 million .

For 2015, cash provided by operating activities of $88.6 million was driven by strong customer collections, which were 20% higher than in the prior year, partially offset by operating expenditures and cash interest expense on our 1.00% convertible senior notes. Cash used in investing activities of $37.5 million consisted primarily of cash payments for capital expenditures of $19.0 million and net purchases of marketable securities of $17.7 million. Cash used in financing activities of $41.0 million resulted predominantly from the acquisition of $53.6 million of treasury stock in connection with equity plan participant tax withholdings upon vesting, partially offset by equity plan proceeds of $12.7 million.
For 2014, cash provided by operating activities of $67.4 million was driven by strong customer collections, partially offset by operating expenditures, the wire transaction loss, and cash interest expense on our 1.00% convertible senior notes. Cash used in investing activities of $30.4 million consisted primarily of cash payments for capital expenditures of $15.8 million, cash consideration of $5.5 million paid to acquire Patient Profiles, and net purchases of marketable securities of $9.4 million. Cash used in financing activities of $19.7 million resulted predominantly from the acquisition of $28.6 million of treasury stock in connection with equity plan participant tax withholdings upon vesting and acquisition-related earn-out payment of $0.7 million, partially offset by equity plan proceeds of $9.7 million.
Capital Assets
We acquired $22.1 million in capital assets during 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 and capitalization of software development costs. Our actual cash payments for capital expenditures during 2016 were $25.7 million . We expect to spend approximately $30 million on capital expenditures during 2017 .
Debt
In August 2013, we issued $287.5 million of 1.00% convertible senior notes which 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 December 31, 2016 the Notes are not convertible and therefore are classified as long-term liabilities on our consolidated balance sheet. We intend to use the net proceeds from the offering for working capital and other general corporate purposes, including possible acquisitions of, or investments in, businesses, technologies, or products complementary to our business. For further information, see Note 9 , “Debt,” to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K.
Critical Accounting Estimates
Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions about certain items and future events. We consider the following estimates and assumptions to be critical to an understanding of our financial statements because they inherently involve levels of subjectivity and judgment and may have a material impact on our financial condition or results of operations. Also see Note 1 , “Summary of Significant Accounting Policies,” to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K, which discusses our significant accounting policies.
Revenue Recognition
We typically sell our technology in multiple-element arrangements that combine a subscription to our cloud-based platform with various professional services. Our professional services are typically sold together with subscriptions as a component of a single-study or multi-study arrangement.
To qualify as a separate unit of accounting, a delivered item must have value to the customer on a standalone basis. The significant deliverables under our multiple-element arrangements are subscription and professional services.

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We have determined that our various cloud-based solutions have standalone value and consider them separate units of accounting. In determining whether each of our solutions has standalone value, we considered factors including the availability of similar solutions from other vendors, our fee structure based on inclusion and exclusion of the solution, and our marketing and delivery of the solution. The service components of our subscriptions, including license, delivery, and support are combined and accounted for as a separate unit of accounting. We use estimated selling price ("ESP") to determine the selling price for our subscriptions when sold in multiple-element arrangements, as we are unable to establish vendor-specific objective evidence ("VSOE") for these subscriptions, and third-party evidence ("TPE") is not a practical alternative due to differences in features and functionality as compared with other companies' offerings. To determine ESP for subscription services, we utilize an internal pricing tool that provides price quotes for all potential new subscription configurations. We employ a team of pricing specialists and have established procedures to monitor compliance and evaluate pricing data on a periodic basis. This evaluation includes the judgmental review of historical pricing data, market conditions consideration, and the review of pricing strategies and practices. Any necessary pricing modification made to the pricing tool is supported by the result of such evaluation. Changes in the methods or assumptions used in determining ESP could have a material effect on our future results of operations.
We have determined that our professional services have standalone value because those services are sold separately by other vendors. As historical analysis of our standalone sales of these services indicates a sufficiently narrow price range, we have established VSOE for professional services.
We allocate the arrangement consideration among subscription and professional services deliverables based on their relative fair values.
Stock-Based Compensation
For all equity grants, we recognize compensation cost under the straight-line method, net of estimated forfeitures. Forfeiture assumptions used in amortizing stock-based compensation expense are management estimates based on an analysis of historical data. Refer to Note 11 , “Stock-Based Compensation,” to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K for more information about our equity plans and the types of equity compensation we grant to employees.
Performance-based restricted stock units ("PBRSUs") comprise a significant portion of our stock-based compensation expense. The fair value of each PBRSU whose vesting is based upon the achievement of a market condition is based upon the results of a Monte Carlo valuation model, which requires the use of estimates, including:
the expected volatility of our stock price and, in some cases when the market condition compares the performance of our stock with a stock market index, the expected volatility of that index;
the expected term; and
risk free interest rates.
For PBRSUs with market conditions, we determine volatility based upon the closing price of our publicly-traded stock and the closing price of the relevant index as applicable. The risk-free interest rate is based on the U.S. Treasury yield curve with a maturity tied to the expected term of the PBRSU. We have not paid and do not expect to pay dividends on our common stock. Thus, no expected dividend yield is factored into our Monte Carlo model.
The use of different assumptions in the Monte Carlo valuation models would result in different amounts of stock-based compensation expense. Furthermore, if different assumptions are used in future periods, stock-based compensation expense could be materially impacted.
The fair value of each PBRSU whose vesting is dependent on the satisfaction of a performance condition is measured as if the PBRSU was vested and issued on the grant date, and adjusted each period for management's expectations of performance relative to the associated goals. Compensation expense is recognized only when management believes it is probable that the condition will be achieved. Although the total compensation expense recognized for these PBRSUs will ultimately equal the grant date fair value per share multiplied by the number of shares for which the performance condition has been satisfied, changes in management's performance expectations can cause significant fluctuations in timing of expense over the life of the PBRSUs.
Allowance for Doubtful Accounts
Accounts receivable are recorded at original invoice amount less an allowance that we believe will be adequate to absorb estimated losses on uncollectible accounts. The allowance is based on an evaluation of the collectability of accounts receivable and prior bad debt experience. Changes in the financial health of a particular customer or the changes in the economy as a whole could result in actual receivable losses that are materially different from the estimated reserve.
Income Taxes
Our income tax expenses, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management's best assessment of estimated current and future taxes to be paid. The objectives for accounting for income taxes, as prescribed by the relevant accounting guidance, are to recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for future tax consequences of events that have been recognized in the financial statements. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on

27

Table of Contents

examination by taxing authorities, based on the technical merits of the position. The assumptions about future tax consequences require significant judgment and variations in the actual outcome of these consequences could materially impact our results of operations.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Determination of valuation allowances, if any, recorded against deferred tax assets requires significant judgment and use of assumptions, such as estimates of future taxable income. As of December 31, 2016 and 2015 , we had not recorded any valuation allowances against our deferred tax assets. In the event we change our determinations as to the amount of deferred tax assets that can be realized and recognize a valuation allowance, income tax expense will be impacted in the period of such determination.
Effect of Recently Issued Accounting Pronouncements on Current and Future Trends
Refer to Note 1 , “Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements,” to our consolidated financial statements, which are included in Item 15 of this Annual Report on Form 10-K. No other recently issued accounting pronouncements have had or are expected to have a material impact on our current or future trends.
Contractual Obligations, Commitments and Contingencies
The following table of our material contractual obligations as of December 31, 2016 summarizes the aggregate effect that these obligations are expected to have on our cash flows in the periods indicated (in thousands):
 
Payments Due by Period
 
Total
 
2017
 
2018 - 2019
 
2020- 2021
 
2022 and later
Contractual Obligations:
 
 
 
 
 
 
 
 
 
1.00% convertible senior notes
$
287,500

 
$

 
$
287,500

 
$

 
$

Interest payments on convertible senior notes
4,552

 
2,875

 
1,677

 

 

Operating lease obligations
105,553

 
14,242

 
27,972

 
28,267

 
35,072

Total
$
397,605

 
$
17,117

 
$
317,149

 
$
28,267

 
$
35,072

Convertible Senior Notes
In August 2013, we issued at par value  $287.5 million  of  1.00%  convertible senior notes, as described above. Interest is payable semi-annually in arrears on August 1 and February 1 of each year. The Notes mature on August 1, 2018 unless repurchased or converted in accordance with their terms prior to such date.
Operating and Lease Obligations
We lease office space under noncancelable operating lease agreements. For further information, see Note 10 , “Lease Commitments,” to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K.
Letters of Credit
We had several outstanding standby letters of credit as of December 31, 2016 and 2015 in the total amount of $5.5 million and $5.7 million , respectively. These standby letters of credit were fully collateralized with our restricted cash as of December 31, 2016 and 2015 .
Tax Uncertainties
The relevant accounting guidance provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, on the basis of the technical merits of the position. We recognize tax liabilities based on estimates of whether additional taxes and interest will be due. We adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. As of December 31, 2016 , we had approximately $2.9 million of gross unrecognized tax benefits. At this time, we are unable to make a reasonably reliable estimate of the cash settlement amount or the timing of payments in individual years in connection with these tax liabilities; therefore, such amounts are not included in the above contractual obligations table.

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Table of Contents

Legal Matters
For discussion of legal matters, refer to Note 15 , “Commitments and Contingencies—Legal Matters,” to the consolidated financial statements included in Item 15 of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
As of December 31, 2016 , we did not have any off-balance sheet arrangements, as defined in Item 303(A)(4)(ii) of Regulation S-K, promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors. Aside from entering into operating leases, which primarily relate to office space, we do not engage in off-balance sheet financing arrangements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
We had unrestricted cash and cash equivalents totaling $93.5 million at December 31, 2016 . Our cash equivalents are invested principally in money market funds. We also had investments in marketable securities, which we classify as available-for-sale securities, totaling $421.7 million at December 31, 2016 . Substantially all of our marketable securities are fixed income securities, which primarily consist of high quality commercial paper and corporate bonds. Due to the short duration, laddered maturities, and high credit ratings of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates.
Exchange Rate Sensitivity
Our non-U.S. operating subsidiaries are located in the United Kingdom, Japan, South Korea, Singapore, China, and Germany. The functional currencies for these subsidiaries are the respective local currencies. We have exposure to exchange rate movements that are captured in translation adjustments for these subsidiaries. Such cumulative adjustments are recorded in accumulated other comprehensive income (loss). The estimated potential translation loss for 2016 resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates amounted to $1.4 million .
We bill our customers primarily in U.S. dollars. The majority of our foreign currency billings are billed from Medidata Solutions, Inc., a U.S. entity, and are mainly denominated in Euros, British pounds sterling, Australian dollars, and Canadian dollars. Our foreign currency denominated costs and expenses are mainly incurred by our non-U.S. operating subsidiaries. Accordingly, future changes in currency exchange rates will impact our future operating results. The following table includes the percentage of our revenues and expenses denominated in foreign currencies:
 
2016
 
2015
 
2014
Revenues
4.9
%
 
5.0
%
 
5.2
%
Costs and expenses
17.4
%
 
12.7
%
 
14.1
%
Gains and losses arising from transactions denominated in foreign currencies are recorded as foreign currency transaction gains (losses) in general and administrative expenses on our consolidated statements of operations and amounted to $(0.1) million in 2016 , $(0.6) million in 2015 , and $(1.1) million in 2014 .
Impact of Inflation
We do not believe that inflation has had a material effect on our business, financial condition, or results of operations.

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Table of Contents

Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data are listed under Part IV, Item 15, in this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of December 31, 2016 , an evaluation was performed with the participation of our Disclosure Committee and our management, including the Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Based upon such evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of December 31, 2016 .
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In making the assessment of the effectiveness of our internal control over financial reporting as of December 31, 2016 , our management used the criteria set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on our assessment, we determined that our internal control over financial reporting was effective based on those criteria as of December 31, 2016 .
Deloitte & Touche LLP, our independent registered public accounting firm, has performed an audit of the effectiveness of our internal control over financial reporting as of December 31, 2016 , based on criteria established in Internal Control—Integrated Framework (2013) issued by the COSO. This audit is required to be performed in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our independent auditors were given unrestricted access to all financial records and related data. The attestation reporting on the effectiveness of our internal control over financial reporting as of December 31, 2016 issued by our independent registered public accounting firm is included at the end of Item 9A in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

30

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the internal control over financial reporting of Medidata Solutions, Inc. and subsidiaries (the “Company”) as of December 31, 2016 , based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016 , based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2016 of the Company and our report dated February 28, 2017 , expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.


/s/ DELOITTE & TOUCHE LLP
New York, New York
February 28, 2017

31

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Item 9B. Other Information
Not applicable.

32

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PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item 10 is incorporated by reference to our Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2016 in connection with our 2017 Annual Meeting of Stockholders.
Item 11. Executive Compensation
The information required by this Item 11 is incorporated by reference to our Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2016 in connection with our 2017 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 is incorporated by reference to our Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2016 in connection with our 2017 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is incorporated by reference to our Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2016 in connection with our 2017 Annual Meeting of Stockholders.
Item 14. Principal Accounting Fees and Services
The information required by this Item 14 is incorporated by reference to our Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2016 in connection with our 2017 Annual Meeting of Stockholders. 

33

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PART IV
Item 15. Exhibits and Financial Statement Schedule
(a) We have filed the following documents as part of this Form 10-K:
1. Consolidated Financial Statements
 
Page
F- 1
F- 2
F- 3
F- 4
F- 5
F- 6
F- 8
2. Financial Statement Schedule
 
Page
F- 31
All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.
3. Exhibits
The information required by this Item 15 is set forth on the exhibit index that follows the signature page of this report.

34

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
MEDIDATA SOLUTIONS, INC.
 
 
By:
 
/S/    TAREK A. SHERIF        
 
 
Tarek A. Sherif
Chairman and Chief Executive Officer
Date: February 28, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
 
Signature
  
Title
 
Date
 
 
 
 
 
/ S /    T AREK  A. S HERIF 
 
Chairman, Chief Executive Officer
( Principal Executive Officer ) and
Director
 
February 28, 2017
Tarek A. Sherif
  
 
 
 
 
/ S /    R OUVEN  B ERGMANN 
 
Chief Financial Officer
( Principal Financial and Principal Accounting Officer )
 
February 28, 2017
Rouven Bergmann
  
 
 
 
 
 
 
/ S /    G LEN  M. D E  V RIES 
 
President and Director
 
February 28, 2017
Glen M. de Vries
  
 
 
 
 
/ S /    C ARLOS  D OMINGUEZ     
 
Director
 
February 28, 2017
Carlos Dominguez
  
 
 
 
 
/ S /    N EIL  M. K URTZ , M. D.  
 
Director
 
February 28, 2017
Neil M. Kurtz, M.D.
  
 
 
 
 
/ S /    G EORGE W. M CCULLOCH
 
Director
 
February 28, 2017
George W. McCulloch
  
 
 
 
 
/ S /    L EE  A. S HAPIRO  
 
Director
 
February 28, 2017
Lee A. Shapiro
  
 
 
 
 
/ S /    R OBERT  B. T AYLOR  
 
Director
 
February 28, 2017
Robert B. Taylor
  
 

35

Table of Contents

EXHIBIT INDEX
 
 
 
 
Incorporated by Reference
Exhibit No.
 
Description
 
Form
 
File No.
 
Date Filed
3.1
 
Fifth Amended and Restated Certificate of Incorporation of Medidata Solutions, Inc.
 
10-Q
 
001-34387
 
8/7/14
3.2
 
Certificate of Amendment of Fifth Amended and Restated Certificate of Incorporation of Medidata Solutions, Inc., dated June 2, 2016
 
8-K
 
001-34387
 
6/7/16
3.3
 
Amended and Restated Bylaws
 
8-K
 
001-34387
 
2/16/16
4.1
 
Specimen stock certificate
 
S-1/A
 
333-156935
 
6/3/09
4.2
 
Indenture, dated as of August 12, 2013, between Medidata Solutions, Inc. and Wells Fargo Bank, National Association, as Trustee
 
8-K
 
001-34387
 
8/6/13
4.3
 
Form of 1.00% Convertible Senior Notes due 2018
 
8-K
 
001-34387
 
8/6/13
10.1
 
Form of Officer and Director Indemnification Agreement
 
S-1/A
 
333-156935
 
6/3/09
10.2†
 
Medidata Solutions, Inc. Amended and Restated 2000 Stock Option Plan
 
S-1/A
 
333-156935
 
5/15/09
10.3†
 
Form of Medidata Solutions, Inc. Amended and Restated 2000 Stock Option Plan Option Agreement
 
S-1/A
 
333-156935
 
5/15/09
10.4†
 
Medidata Solutions, Inc. Second Amended and Restated 2009 Long-Term Incentive Plan
 
8-K
 
001-34387
 
5/2/13
10.5†
 
Form of Medidata Solutions, Inc. 2009 Long-Term Incentive Plan Stock Option Agreement
 
S-1/A
 
333-156935
 
6/3/09
10.6†
 
Form of Medidata Solutions, Inc. 2009 Long-Term Incentive Plan Restricted Stock Agreement
 
S-1/A
 
333-156935
 
6/3/09
10.7†
 
Form of Medidata Solutions, Inc. Restricted Stock Agreement
 
10-Q
 
001-34387
 
5/3/13
10.8†
 
Form of Medidata Solutions, Inc. Performance-Based Restricted Stock Unit Agreement
 
10-Q
 
001-34387
 
5/9/16
10.9†
 
Form of Medidata Solutions, Inc. Long-Term Performance-Based Restricted Stock Unit Agreement
 
10-Q
 
001-34387
 
5/3/13
10.10†
 
Medidata Solutions, Inc. Second Amended and Restated 2014 Employee Stock Purchase Plan
 
DEF 14A
 
001-34387
 
4/21/16
10.11†
 
Form of Executive Change in Control Agreement
 
8-K
 
001-34387
 
7/8/14
10.12†
 
Amended and Restated Executive Change in Control Agreement for CEO and President
 
8-K
 
001-34387
 
8/15/16
10.13
 
Lease between AGBRI Fannin L.P. and Medidata Solutions, Inc., dated March 13, 2006, as amended on March 8, 2007 and June 3, 2008, for space at the premises located at 1301 Fannin Street, Houston, Texas
 
S-1/A
 
333-156935
 
3/23/09
10.14
 
Agreement of Lease between the Rector, Church-Wardens and Vestrymen of Trinity Church in the City of New York and Medidata Solutions, Inc. dated October 19, 2012, for space at the premises located at 350 Hudson Street, New York, New York
 
8-K
 
001-34387
 
10/23/12
10.15
 
Amendment No. 1, dated September 25, 2013, to Agreement of Lease between the Rector, Church-Wardens and Vestrymen of Trinity Church in the City of New York and Medidata Solutions, Inc.
 
10-K
 
001-34387
 
2/24/14
10.16
 
Amendment No. 2, dated December 6, 2013, to Agreement of Lease between the Rector, Church-Wardens and Vestrymen of Trinity Church in the City of New York and Medidata Solutions, Inc.
 
10-K
 
001-34387
 
2/24/14
10.17†
 
Separation Agreement and General Release between Medidata Solutions, Inc. and Cory Douglas, dated May 13, 2015
 
8-K
 
001-34387
 
5/14/15
21.1*
 
Subsidiaries of Medidata Solutions, Inc.
 
 
 
 
 
 
23.1*
 
Consent of Deloitte & Touche LLP
 
 
 
 
 
 
31.1*
 
Rule 13a-14(a) or 15d-14 Certification of Chief Executive Officer
 
 
 
 
 
 
31.2*
 
Rule 13a-14(a) or 15d-14 Certification of Chief Financial Officer
 
 
 
 
 
 
32.1**
 
Certification of Chief Executive Officer pursuant to Exchange Act rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350
 
 
 
 
 
 
32.2**
 
Certification of Chief Financial Officer pursuant to Exchange Act rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350
 
 
 
 
 
 
101.INS*
 
XBRL Instance Document
 
 
 
 
 
 
101.SCH*
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 
101.PRE*
 
XBRL Taxonomy Presentation Linkbase Document
 
 
 
 
 
 
*
 
Filed herewith.
**
 
Furnished herewith.
 
Indicates a management contract or any compensatory plan, contract or arrangement.





36

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Medidata Solutions, Inc.
New York, New York

We have audited the accompanying consolidated balance sheets of Medidata Solutions, Inc. and subsidiaries (the “Company”) as of December 31, 2016 and 2015 , and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2016 . Our audits also included the financial statement schedule listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Medidata Solutions, Inc. and subsidiaries as of December 31, 2016 and 2015 , and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 , in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2016 , based on the criteria established in Internal Control -Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2017 , expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP
New York, New York
February 28, 2017

F- 1

Table of Contents

MEDIDATA SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
 
December 31,
 
2016
 
2015
 
(Amounts in thousands, except per share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
93,519

 
$
49,562

Marketable securities
281,285

 
220,126

Accounts receivable, net of allowance for doubtful accounts of $1,041 and $1,992, respectively
115,216

 
90,590

Prepaid commission expense
1,842

 
1,670

Prepaid expenses and other current assets
20,382

 
21,165

Deferred income taxes
6,536

 
88

Total current assets
518,780

 
383,201

Restricted cash
5,760

 
5,755

Furniture, fixtures and equipment, net
58,461

 
51,043

Marketable securities – long-term
140,418

 
209,041

Goodwill
30,780

 
18,797

Intangible assets, net
5,090

 
1,172

Deferred income taxes – long-term
40,415

 
12,128

Other assets
18,181

 
3,043

Total assets
$
817,885

 
$
684,180

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
6,202

 
$
6,283

Accrued payroll and other compensation
29,260

 
23,744

Accrued expenses and other
20,958

 
15,469

Deferred revenue
75,911

 
75,582

Total current liabilities
132,331

 
121,078

Noncurrent liabilities:
 
 
 
1.00% convertible senior notes, net
263,401

 
249,487

Deferred revenue, less current portion
1,703

 
2,993

Deferred tax liabilities
322

 
414

Other long-term liabilities
18,138

 
26,052

Total noncurrent liabilities
283,564

 
278,946

Total liabilities
415,895

 
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; 61,393 and 59,455 shares issued; 57,733 and 56,311 shares outstanding, respectively
614

 
594

Additional paid-in capital
418,497

 
364,973

Treasury stock, 3,660 and 3,144 shares, respectively
(114,204
)
 
(100,806
)
Accumulated other comprehensive loss
(5,276
)
 
(3,404
)
Retained earnings
102,359

 
22,799

Total stockholders' equity
401,990

 
284,156

Total liabilities and stockholders' equity
$
817,885

 
$
684,180

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

F- 2

Table of Contents

MEDIDATA SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
Year ended December 31,
 
2016
 
2015
 
2014
 
(Amounts in thousands, except per share data)
Revenues
 
 
 
 
 
Subscription
$
394,269

 
$
336,195

 
$
280,041

Professional services
69,112

 
56,311

 
55,030

Total revenues
463,381

 
392,506

 
335,071

Cost of revenues (1)(2)
 
 
 
 
 
Subscription
62,136

 
47,795

 
45,576

Professional services
50,473

 
41,993

 
39,344

Total cost of revenues
112,609