Notes to the Condensed Consolidated Financial Statements
(unaudited)
1. The Company
RealPage, Inc., a Delaware corporation (together with its subsidiaries, the “Company” or “we” or “us”), is a leading global provider of software and data analytics to the real estate industry. Our platform of data analytics and software solutions enables the rental real estate industry to manage property operations (such as marketing, pricing, screening, leasing, payment processing and accounting), identify opportunities through market intelligence, and obtain data-driven insight for better operational and financial decision-making. Our integrated, on demand platform provides a single point of access and a massive repository of real-time lease transaction data, including prospect, renter, and property data. By leveraging data as well as integrating and streamlining a wide range of complex processes and interactions among the rental real estate ecosystem (owners, managers, prospects, renters, service providers, and investors), our platform helps our clients improve financial and operational performance and prudently place and harvest capital.
During the quarter ended June 30, 2020, we continued to respond to the challenges that the evolving COVID-19 virus (“COVID-19”) pandemic created for us and our customers. We completed the movement of almost all our staff to a work-from-home environment while simultaneously supporting our customers as they used our software services to sustain their operations while reducing in-person interactions with their customers. Portions of our business, particularly our electronic payment processing services, experienced growth during the quarter, while certain of our other services experienced lower transactional volumes as leasing and marketing services slowed as a result of COVID-19. Many countries, including particularly the United States, are still experiencing high levels of new COVID-19 infections, and the ultimate severity and duration of the outbreak and its effect on our future operations is uncertain. It is possible that the COVID-19 pandemic, the measures taken by the governments of countries affected, and the resulting economic impact could still materially adversely affect our future results of operations, cash flows and financial position, as well as the financial health of our customers.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements and footnotes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. We believe that the disclosures made are appropriate and conform to those rules and regulations, and that the condensed or omitted information is not misleading.
The unaudited Condensed Consolidated Financial Statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year.
These financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K filed with the SEC on March 2, 2020 (“Annual Report on Form 10-K”).
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Our cash accounts are maintained at various high credit quality financial institutions and may exceed federally insured limits. We have not experienced any losses in such accounts.
Substantially all of our accounts receivable are derived from clients in the residential rental housing market. Concentrations of credit risk with respect to accounts receivable and revenue have historically been limited because our customers are geographically dispersed across primarily the United States. Furthermore, no single client accounted for 10% or more of our revenue or accounts receivable for the three or six months ended June 30, 2020 or 2019. We do not require collateral from clients.
The financial health of our customers, including their ability to generate cash flows sufficient to meet their obligations to us, is dependent on, among other things, the ability of their residents to meet their lease obligations on a consistent and timely basis. A portion of those residents have already been, or may in the future be, affected by the general business closures and limitations resulting from the COVID-19 pandemic. The degree to which our customers will be adversely affected by COVID-19 is still not yet fully known and will be affected by several factors including the severity and duration of what has become a prolonged outbreak in the United States, the effect of the expiration of initial government subsidies, and the scope and
duration of any new subsidies that may be provided to both residents, owners and managers of rental properties and other businesses in general.
We maintain an allowance for credit losses based upon the expected collectability of accounts receivable using historical loss rates adjusted for forward-looking assumptions based on management’s judgments. During the six months ended June 30, 2020, we have not recognized additional allowances as a result of COVID-19. Nevertheless, our reserves may not be sufficient if the effects of COVID-19 on our clients become more severe and/or continue for an extended term. We continue to work closely with our customers to help them address the operational challenges they face as a result of COVID-19, and we will adjust our estimates of reserves for credit losses in future periods as appropriate.
Segment and Geographic Information
Our chief operating decision maker is our Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, we have determined we operate as a single reporting segment and operating unit.
Principally, all of our revenue for the three and six months ended June 30, 2020 and 2019 was earned in the United States. Net property, equipment, and software located in the United States amounted to $160.9 million and $154.5 million at June 30, 2020 and December 31, 2019, respectively. Net property, equipment, and software located in our international subsidiaries amounted to $8.3 million and $8.8 million at June 30, 2020 and December 31, 2019, respectively. Substantially all of the net property, equipment, and software held in our international subsidiaries was located in the Philippines, India, and Spain at both June 30, 2020 and December 31, 2019.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Such significant estimates include, but are not limited to, the determination of the allowances against our accounts receivable; useful lives of intangible assets; impairment assessments on long-lived assets (including goodwill and indefinite-lived intangible assets); contingent commissions related to the sale of insurance products; fair value of acquired net assets and contingent consideration in connection with business combinations; the nature and timing of the satisfaction of performance obligations and related reserves; fair values of stock-based awards; loss contingencies; and the recognition, measurement and valuation of current and deferred income taxes. Actual results could differ from these estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable, the result of which forms the basis for making judgments about the carrying value of assets and liabilities. For greater detail regarding these accounting policies and estimates, refer to our Annual Report on Form 10-K.
During 2020, we have taken specific steps in response to COVID-19, including employing work-from-home strategies, in order to continue to provide services to our customers without any significant interruption in those services. We have considered COVID-19 in preparing the estimates used in the preparation of our financial statements for the three and six months ended June 30, 2020, but the ultimate effect on our financial results and those of our customers in the near and long term is still uncertain. We will continue to revise our estimates in future periods for additional changes brought about by the evolving COVID-19 pandemic or other issues as additional information becomes available.
Cash and Cash Equivalents and Restricted Cash
We consider all highly liquid investments with an initial maturity of three months or less at the date of purchase to be cash equivalents. The fair value of our cash and cash equivalents approximates carrying value.
Restricted cash primarily consists of cash collected from tenants that will be remitted to our clients.
Accounts Receivable
Accounts receivable primarily represent trade receivables from clients recorded at the invoiced amount, net of allowances, which are based on our historical experience, the aging of our trade receivables, and management judgment.
Trade receivables are written off against the allowance when management determines a balance is uncollectible. We incurred bad debt expense of $1.2 million and $0.4 million for the three months ended, and $2.3 million and $1.3 million for the six months ended June 30, 2020 and 2019, respectively.
Internally Developed Software
Costs incurred to develop software intended for our internal use are capitalized during the application development stage. Capitalization of such costs ceases once the project is substantially complete and ready for its intended use. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditure will result in additional functionality. Costs related to preliminary project activities and post-implementation operating activities are expensed as incurred.
Internally developed software costs are included in “Property, equipment, and software, net” in the accompanying Condensed Consolidated Balance Sheets and are amortized on a straight-line basis over their expected useful lives. Amortization of internally developed software is included in “Amortization of product technologies” in the accompanying Condensed Consolidated Statements of Operations.
Business Combinations
We allocate the fair value of the purchase consideration of our acquisitions to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Purchase consideration includes assets transferred, liabilities assumed, and/or equity interests issued by us, all of which are measured at their fair value as of the date of acquisition. Our business combination transactions may be structured to include a combination of up-front, deferred and contingent payments to be made at specified dates subsequent to the date of acquisition. These payments may include a combination of cash and equity. Deferred and contingent payments determined to be purchase consideration are recorded at fair value as of the acquisition date. Deferred obligations are generally subject to adjustments specified in the underlying purchase agreement related to the seller’s indemnification obligations. Our contingent consideration is an obligation to make future payments to the seller contingent upon the achievement of future operational or financial targets and is remeasured to fair value at the end of each reporting period until the obligation is settled.
The valuation of the net assets acquired as well as certain elements of purchase consideration requires management to make significant estimates and assumptions, especially with respect to future expected cash flows, useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain, and, as a result, actual results may differ from estimates. During the measurement period, we may record adjustments to the assets acquired and liabilities assumed with a corresponding offset to goodwill. Subsequent changes to the fair value of contingent consideration are reflected in “General and administrative” in the accompanying Condensed Consolidated Statements of Operations.
Acquisition costs are expensed as incurred and are included in “General and administrative” in the accompanying Condensed Consolidated Statements of Operations. We include the results of operations from acquired businesses in our condensed consolidated financial statements from the effective date of the acquisition.
Goodwill and Indefinite-Lived Intangible Assets
We test goodwill and indefinite-lived intangible assets for impairment separately on an annual basis in the fourth quarter of each year, or more frequently if circumstances indicate that the assets may not be recoverable. For purposes of goodwill impairment testing, we have one reporting unit.
We evaluate impairment of goodwill either by assessing qualitative factors to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount, or by performing a quantitative assessment. Qualitative factors include industry and market considerations, overall financial performance, and other relevant events and circumstances affecting the reporting unit. If we choose to perform a qualitative assessment and after considering the totality of events or circumstances, we determine it is more likely than not that the fair value of our reporting unit is less than its carrying amount, we would perform a quantitative fair value test. Our quantitative impairment assessment utilizes a weighted combination of a discounted cash flow model (known as the income approach) and comparisons to publicly traded companies engaged in similar businesses (known as the market approach). These approaches involve judgmental assumptions, including forecasted future cash flows expected to be generated by the business over an extended period of time, long-term growth rates, the identification of comparable companies, and our discount rate based on our weighted average cost of capital. These assumptions are predominately unobservable inputs and considered Level 3 measurements. We adopted ASU 2017-04, Intangibles - Goodwill and Other, which simplifies the testing for goodwill impairment by eliminating the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment, prospectively on January 1, 2020. To calculate any potential impairment, we compare the fair value of our reporting unit with its carrying amount, including goodwill. Any excess of the carrying amount of the reporting unit over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down.
We quantitatively evaluate indefinite-lived intangible assets by estimating the fair value of those assets based on estimated future earnings derived from the assets using the income approach. Key assumptions for this assessment include forecasted future cash flows from estimated royalty rates and our discount rate based on our weighted average cost of capital. These assumptions are unobservable Level 3 measurements. Assets with indefinite lives that have been determined to be inseparable due to their interchangeable use are grouped into single units of accounting for purposes of testing for impairment. If the carrying amount of an identified intangible asset with an indefinite life exceeds its fair value, we would recognize an impairment loss equal to the excess of carrying value over fair value.
Leases
We determine if an arrangement contains a lease at inception. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and the corresponding lease liabilities represent its obligation to make lease payments arising from the lease. Our ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The ROU asset is reduced for tenant incentives and excludes any initial direct costs incurred. For our real estate contracts with lease and non-lease components, we have elected to combine the lease and non-lease components into a single lease component. The implicit rate within our leases are generally not readily determinable, and instead we use our incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of our incremental borrowing rate requires judgment. We determine our incremental borrowing rate for each lease using our current borrowing rate, adjusted for various factors including collateralization and term to align with the terms of the lease. Certain of our leases include options to extend the lease. Our lease values include options to extend the lease when it is reasonably certain we will exercise such options.
Operating and finance leases are included in “Right-of-use assets”, “Accrued expenses and other current liabilities”, and “Lease liabilities, net of current portion” in the accompanying Condensed Consolidated Balance Sheets.
Lease expenses for minimum lease payments for operating leases are recognized on a straight-line basis over the lease term. Amortization expense of the ROU asset for finance leases is recognized on a straight-line basis over the lease term and interest expense for finance leases is recognized based on the incremental borrowing rate.
We have elected not to recognize a lease liability or ROU asset for short-term leases, defined as those which have an initial term of twelve months or less.
Deferred Revenue
For several of our solutions, we invoice our clients in annual, monthly, or quarterly installments in advance of the commencement of the service period. Deferred revenue is recognized when billings are due or payments are received in advance of revenue recognition from our subscription and other services. Accordingly, the deferred revenue balance does not represent the total contract value of annual subscription agreements.
Revenue Recognition
Revenues are derived from on demand software solutions, professional services and other goods and services. We recognize revenue as we satisfy one or more service obligations under the terms of a contract, generally as control of goods and services are transferred to our clients. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. We include estimates of variable consideration in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur. We estimate and accrue a reserve for credits and other adjustments as a reduction to revenue based on several factors, including past history.
On Demand Revenue
Our on demand revenue consists of license and subscription fees, transaction and payment processing fees related to certain of our software-enabled value-added services, and commissions derived from our selling certain risk mitigation services.
We generally recognize revenue from subscription fees on a straight-line basis over the access period beginning on the date that we make our service available to the client. Our subscription agreements generally are non-cancellable, have an initial term of one year or longer and are billed either monthly, quarterly or annually in advance. Non-refundable up-front fees billed at the initial order date that are not associated with an up-front service obligation are recognized as revenue on a straight-line basis over the period in which the client is expected to benefit, which we consider to be three years.
We recognize revenue from transaction fees in the month the related services are performed based on the amount we have the right to invoice.
We offer risk mitigation services to our clients by acting as an insurance agent and derive commission revenue from the sale of insurance products to our clients’ residents. The commissions are based upon a percentage of the premium that the insurance company charges to the policyholder and are subject to forfeiture in instances where a policyholder cancels prior to the end of the policy. Our contracts with our underwriting partners provide for contingent commissions to be paid to us in accordance with the agreements. Our estimate of contingent commission revenue considers the variable factors identified in the terms of the applicable agreement. We recognize commissions related to these services as earned ratably over the policy term and insurance commission receivable in “Accounts receivable, less allowances”.
Professional and Other Revenue
Professional services and other revenues generally consist of the fees we receive for providing implementation and consulting services, submeter equipment and ongoing maintenance of our existing on premise licenses.
Professional services are billed either on a time and materials basis or on a fixed price basis, and revenue is recognized
over time as we perform the obligation. Professional services are typically sold bundled in a contract with other on demand solutions but may be sold separately. Professional service contracts sold separately generally have terms of one year or less. For bundled arrangements, where we account for individual services as a separate performance obligation, the transaction price is allocated between separate services in the bundle based on their relative standalone selling prices.
Other revenues consist primarily of submeter equipment sales that include related installation services. Such sales are considered bundled, and revenue from these bundled sales is recognized in proportion to the number of installed units completed to date as compared to the total contracted number of units to be provided and installed. For all other equipment sales, we generally recognize revenue when control of the hardware has transferred to our client.
Revenue recognized for on premise software sales generally consists of annual maintenance renewals on existing term or perpetual license, which is recognized ratably over the service period.
Contracts with Multiple Performance Obligations
The majority of the contracts we enter into with clients, including multiple contracts entered into at or near the same time with the same client, require us to provide one or more on demand software solutions, professional services and may include equipment. For these contracts, we account for individual performance obligations separately: i) if they are distinct or ii) if the promised obligations represent a series of distinct services that are substantially the same and have the same pattern of transfer to the client. Once we determine the performance obligations, we determine the transaction price, which includes estimating the amount of variable consideration, if any, to be included in the transaction price. For contracts with multiple performance obligations, we allocate the transaction price to the separate performance obligations on a relative standalone selling price basis. The standalone selling prices of our service are estimated using a market assessment approach based on our overall pricing objectives taking into consideration market conditions and other factors including the number of solutions sold, client demographics and the number and types of users within our contracts.
Sales, value add, and other taxes we collect from clients and remit to governmental authorities are excluded from revenues.
Fair Value Measurements
We measure our financial instruments and acquisition-related contingent consideration obligations at fair value at each reporting period using a fair value hierarchy. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
Level 1 - Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs are quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable, and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3 - Inputs are derived from valuation techniques in which one or more of the significant inputs or value drivers are unobservable.
The categorization of an asset or liability is based on the inputs described above and does not necessarily correspond to our perceived risk of that asset or liability. Moreover, the methods used by us may produce a fair value calculation that is not indicative of the net realizable value or reflective of future fair values. Furthermore, although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments and non-financial assets and liabilities could result in a different fair value measurement at the reporting date.
Certain financial instruments, which may include cash, cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses are recorded at their carrying amounts, which approximates their fair values due to their short-term nature.
We hold an equity investment which does not have a readily determinable fair value. We measure this investment at cost less impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.
Recently Adopted Accounting Standards
Accounting Standards Update 2016-13
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU replaced the incurred loss impairment methodology in GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Our financial assets
in the scope of ASU 2016-13 mainly consist of short-term trade receivables. We have also considered contract assets in our evaluation. Historically, our actual credit losses have not been material. In addition to continuing to individually assess overdue customer balances for expected credit losses, we have implemented modifications to our historical methodology that reflect the expected credit losses on receivables considering both historical experience and forward-looking assumptions. We adopted ASU 2016-13 using the modified retrospective approach on January 1, 2020, resulting in no cumulative adjustment to retained earnings. The adoption of this ASU did not have a material impact on our Condensed Consolidated Financial Statements. We will continue to actively monitor the impact of the COVID-19 pandemic on expected credit losses.
The rollforward of the allowance for credit losses, a component of our allowance for accounts receivable, as of June 30, 2020 was as follows (in thousands):
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Balance as of January 1, 2020
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$
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4,545
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Provision for credit losses
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1,097
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Write-offs, net of recoveries
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(527)
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Balance as of March 31, 2020
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5,115
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Provision for credit losses
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1,168
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Write-offs, net of recoveries
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(740)
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Balance as of June 30, 2020
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$
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5,543
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Accounting Standards Update 2018-15
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a cloud-based hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. We adopted ASU 2018-15 prospectively as of January 1, 2020. The impact to our financial statements will depend on the nature of our future cloud computing arrangements; however, this standard did not have a material impact on our financial statements as of June 30, 2020.
Accounting Standards Update 2020-04
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for activities related to reference rate reform that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, we elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impact of the guidance and may apply other elections, as applicable, as additional changes in the market occur.
Recently Issued Accounting Standards
Accounting Standards Update 2019-12
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 will be effective for interim and annual periods beginning after December 15, 2020. Early adoption is permitted. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.
3. Acquisitions
2020 Acquisitions
Modern Message
On January 22, 2020, we entered into an Agreement and Plan of Merger, by which we acquired all of the outstanding stock of Modern Message Inc. (“Modern Message”), a provider of resident engagement solutions to the multifamily housing industry. Aggregate purchase consideration was $64.7 million, comprised of $62.7 million paid at closing and deferred cash obligations of up to $2.0 million, subject to working capital adjustments and indemnification claims. A portion of the deferred cash obligations will be released within 180 days of closing, a portion on the first anniversary of the closing, and the remainder
on the second anniversary of closing. In addition, the Agreement and Plan of Merger provided for retention incentives for certain executives in the form of restricted stock grants that are tied to post-acquisition employment service. These shares were granted during the first quarter of 2020, and had an aggregate grant date fair value of $10.7 million which will be recognized as stock-based compensation over the requisite service period. The acquisition was financed with cash on hand.
The acquired identified intangible assets consisted of developed technology, client relationships, and trade names that were assigned estimated useful lives of five, nine and five years, respectively. Preliminary goodwill recognized of $49.3 million is primarily comprised of anticipated synergies from the expansion of our resident engagement platform. Goodwill and the acquired identified intangible assets are not deductible for tax purposes. Acquisition costs associated with this transaction totaled $0.5 million.
Purchase Consideration and Purchase Price Allocations
The estimated fair values of assets acquired and liabilities assumed are provisional and are based primarily on the information available as of the acquisition date. We believe this information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but we are awaiting additional information necessary to finalize those values. Therefore, the provisional measurements of fair value are subject to change, and such changes could be significant. We expect to finalize the valuation of these assets and liabilities as soon as practicable, but no later than one year from the acquisition closing date. The components of the purchase consideration and the preliminary allocation of purchase price as of June 30, 2020 are as follows:
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Modern Message
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(in thousands)
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Fair value of purchase consideration:
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Cash, net of cash acquired
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$
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62,749
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Deferred obligations, net
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1,998
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Total fair value of purchase consideration
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$
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64,747
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Fair value of net assets acquired:
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Restricted cash
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$
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3,248
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Accounts receivable
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1,222
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Intangible assets:
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Developed product technologies
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8,700
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Client relationships
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9,400
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Trade names
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700
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Goodwill
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49,337
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Other assets
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426
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Accounts payable and accrued liabilities
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(886)
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Client deposits held in restricted accounts
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(3,450)
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Deferred revenue
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(198)
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Deferred tax liability, net
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(3,752)
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Total fair value of net assets acquired
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$
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64,747
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2019 Acquisitions
We completed five acquisitions during fiscal year 2019. For certain acquisitions in the table below, the estimated fair values of assets acquired and liabilities assumed are provisional. We expect to finalize the valuation of these assets and liabilities as soon as practicable, but no later than one year from the acquisition dates. The allocation of each purchase price, including effects of measurement period adjustments recorded as of June 30, 2020, is as follows:
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Date of Acquisition
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Aggregate Purchase Price
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Closing Cash Payment, Net of Cash Acquired
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Net Tangible Assets Acquired (Liabilities Assumed)
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Identified Intangible Assets
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Goodwill Recognized
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(in thousands)
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LeaseTerm Solutions
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(Final)
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Apr 2019
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$
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26,512
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$
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23,417
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$
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587
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$
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7,300
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$
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18,625
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Hipercept
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(Provisional)
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Jul 2019
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$
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28,353
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$
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17,804
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$
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149
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$
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4,800
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$
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23,404
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Simple Bills
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(Provisional)
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Jul 2019
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$
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18,149
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$
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14,875
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$
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(724)
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$
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9,300
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$
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9,573
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IMS
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(Provisional)
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Dec 2019
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|
$
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55,738
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$
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50,177
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$
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30
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$
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16,100
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$
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39,608
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Buildium
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(Provisional)
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Dec 2019
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$
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569,645
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|
$
|
566,241
|
|
|
$
|
(14,466)
|
|
|
$
|
113,000
|
|
|
$
|
471,111
|
|
Deferred Obligations and Contingent Consideration Activity
The following table presents changes in the Company’s deferred cash and stock obligations and contingent consideration for the six months ended June 30, 2020 and the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Cash and Stock Obligations
|
|
Contingent Consideration
|
|
Total
|
|
|
(in thousands)
|
|
|
|
|
|
Balance at January 1, 2019
|
$
|
52,142
|
|
|
$
|
6,000
|
|
|
$
|
58,142
|
|
|
Additions, net of fair value discount
|
18,183
|
|
|
6,700
|
|
|
24,883
|
|
|
Cash payments
|
(25,215)
|
|
|
(5,963)
|
|
|
(31,178)
|
|
|
Settlements through common stock issued
|
(14,846)
|
|
|
—
|
|
|
(14,846)
|
|
|
Accretion expense
|
1,540
|
|
|
58
|
|
|
1,598
|
|
|
Change in fair value
|
—
|
|
|
(259)
|
|
|
(259)
|
|
|
Indemnification claims and other adjustments
|
(57)
|
|
|
—
|
|
|
(57)
|
|
|
Balance at December 31, 2019
|
31,747
|
|
|
6,536
|
|
|
38,283
|
|
|
Additions, net of fair value discount
|
1,998
|
|
|
—
|
|
|
1,998
|
|
|
Cash payments
|
(2,172)
|
|
|
—
|
|
|
(2,172)
|
|
|
|
|
|
|
|
|
|
Accretion expense
|
512
|
|
|
83
|
|
|
595
|
|
|
Change in fair value
|
—
|
|
|
(1,035)
|
|
|
(1,035)
|
|
|
Indemnification claims and other adjustments
|
478
|
|
|
—
|
|
|
478
|
|
|
Balance at June 30, 2020
|
$
|
32,563
|
|
|
$
|
5,584
|
|
|
$
|
38,147
|
|
In May 2019, in connection with our April 2018 acquisitions of NovelPay, LLC (“NovelPay”) and ClickPay Services, Inc. (collectively with NovelPay, “ClickPay”), we issued an aggregate of 154,281 shares of our common stock to the equity holders of ClickPay. These shares were subject to a holdback with respect to indemnification adjustments pursuant to the acquisition agreements. In May 2020, these holdback claims were finalized, resulting in the retirement of 9,994 previously issued shares of our common stock.
In September 2019, we settled a deferred equity obligation with regard to our September 2018 acquisition of LeaseLabs, Inc. through the issuance of 80,012 shares of our common stock.
Pro Forma Results of Acquisitions
The following table presents unaudited pro forma results of operations for the three and six months ended June 30, 2020 and 2019, as if the aforementioned 2020 and 2019 acquisitions had occurred as of January 1, 2019 and 2018, respectively. The pro forma information includes the business combination accounting effects resulting from these acquisitions, including interest expense, tax expense or benefit, issuance of shares of our common stock, and additional amortization resulting from the valuation of amortizable intangible assets. We prepared the pro forma financial information for the combined entities for comparative purposes only, and it is not indicative of what actual results would have been if the acquisitions had occurred at the
beginning of the periods presented, or of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2020
|
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
2020 Pro Forma
|
|
2019 Pro Forma
|
|
2020 Pro Forma
|
|
2019 Pro Forma
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
Total revenue
|
$
|
285,607
|
|
|
$
|
265,074
|
|
|
$
|
562,762
|
|
|
$
|
520,602
|
|
|
Net income
|
$
|
11,750
|
|
|
$
|
3,643
|
|
|
$
|
17,801
|
|
|
$
|
3,375
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.12
|
|
|
$
|
0.04
|
|
|
$
|
0.19
|
|
|
$
|
0.04
|
|
|
Diluted
|
$
|
0.12
|
|
|
$
|
0.04
|
|
|
$
|
0.18
|
|
|
$
|
0.03
|
|
4. Revenue Recognition
Disaggregation of Revenue
The following table presents our revenues disaggregated by major revenue source. Sales and usage-based taxes are excluded from revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
On demand
|
|
|
|
|
|
|
|
|
Property management
|
$
|
60,082
|
|
|
$
|
51,003
|
|
|
$
|
122,414
|
|
|
$
|
100,917
|
|
|
Resident services
|
129,171
|
|
|
101,205
|
|
|
248,256
|
|
|
198,009
|
|
|
Leasing and marketing
|
47,847
|
|
|
46,808
|
|
|
94,636
|
|
|
91,078
|
|
|
Asset optimization
|
41,459
|
|
|
36,169
|
|
|
81,724
|
|
|
71,700
|
|
|
Total on demand revenue
|
278,559
|
|
|
235,185
|
|
|
547,030
|
|
|
461,704
|
|
|
|
|
|
|
|
|
|
|
|
Professional and other
|
7,048
|
|
|
8,676
|
|
|
15,250
|
|
|
16,463
|
|
|
Total revenue
|
$
|
285,607
|
|
|
$
|
243,861
|
|
|
$
|
562,280
|
|
|
$
|
478,167
|
|
On Demand Revenue
We generate the majority of our on demand revenue by licensing software-as-a-service (“SaaS”) solutions to our clients on a subscription basis. Our SaaS solutions are provided pursuant to contractual commitments that typically include a promise that we will stand ready, on a monthly basis, to deliver access to our technology platform over defined service delivery periods. These solutions represent a series of distinct services that are substantially the same and have the same pattern of transfer to the client. Revenue from our SaaS solutions is generally recognized ratably over the term of the arrangement.
Consideration for our on demand subscription services consist of fixed, variable and usage-based fees. We invoice a portion of our fees at the initial order date and then monthly or annually thereafter. Subscription fees are generally fixed based on the number of sites and the level of services selected by the client.
We sell certain usage-based services, primarily within our property management, resident services and leasing and marketing solutions, to clients based on a fixed rate per transaction. Revenues are calculated based on the number of transactions processed monthly and will vary from month to month based on actual usage of these transaction-based services over the contract term, which is typically one year in duration. The fees for usage-based services are not associated with every distinct service promised in the series of distinct services we provide our clients. As a result, we allocate variable usage-based fees only to the related transactions and recognize them in the month that usage occurs.
As part of our resident services offerings, we offer risk mitigation services to our clients by acting as an insurance agent and we derive commission revenue from the sale of insurance products to our clients’ residents. The commissions are based upon a percentage of the premium that the insurance company underwriting partners charge to the policyholder and are subject to forfeiture in instances where a policyholder cancels prior to the end of the policy. The overall insurance services we provide represent a single performance obligation that qualifies as a separate series. Our contracts with our underwriting partners also provide for contingent commissions to be paid to us in accordance with the agreements. The contingent commissions are not
associated with every distinct service promised in the series of distinct insurance services we provide. We generally accrue and recognize contingent commissions monthly based on estimates of the variable factors identified in the terms of the applicable agreements.
Professional Services and Other Revenues
Professional services and other revenues generally consist of the fees we receive for providing implementation and consulting services, submeter equipment and ongoing maintenance of our existing on premise licenses.
Professional services revenues primarily consist of fees for implementation services, consulting services and training. Professional services are billed either on a fixed rate per hour (time) and materials basis or on a fixed price basis. Professional services are typically sold bundled in a contract with other on demand solutions but may be sold separately. For bundled arrangements, we allocate the transaction price to separate services based on their relative standalone selling prices if a service is separately identifiable from other items in the bundled arrangement and if a client can benefit from it on its own or with other resources readily available to the client.
Other revenues consist of submeter equipment sales that include related installation services, sales of other equipment and on premise software sales. Submeter hardware and installation services are considered to be part of a single performance obligation due to the significance of the integration and interdependency of the installation services with the meter equipment. Our typical payment terms for submeter installations require a percentage of the overall transaction price to be paid up-front, with the remainder billed as progress payments. We recognize submeter revenue in proportion to the number of fully installed units completed to date as compared to the total contracted number of units to be provided and installed. For all other equipment sales, we generally recognize revenue when control of the hardware has transferred to our client, which occurs at a point in time, typically upon delivery to the client.
The majority of on premise revenue consists of maintenance renewals from clients who renew for an additional one-year term. Maintenance renewal revenue is recognized ratably over the service period based upon the standalone selling price of that service obligation.
Contract Balances
Contract assets generally consist of amounts recognized as revenue before they can be invoiced to clients or amounts invoiced to clients prior to the period in which the service is provided where the right to payment is subject to conditions other than just the passage of time. These contract assets are included in “Accounts receivable” in the accompanying Condensed Consolidated Financial Statements and related disclosures. Contract liabilities are comprised of billings or payments received from our clients in advance of performance under the contract. We refer to these contract liabilities as “Deferred revenue” in the accompanying Condensed Consolidated Financial Statements and related disclosures. We recognized revenue of $105.7 million for the six months ended June 30, 2020, which was included in the line “Deferred revenue” in the accompanying Condensed Consolidated Balance Sheet as of the beginning of the period.
Contract Acquisition Costs
We capitalize certain commissions as incremental costs of obtaining a contract with a client if we expect to recover those costs. The commissions are capitalized and amortized over a period of benefit determined to be three years. Below is a summary of our capitalized commissions costs and their respective locations in the accompanying Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
June 30, 2020
|
|
December 31, 2019
|
|
|
|
|
(in thousands)
|
|
|
|
Capitalized commissions costs — current
|
Other current assets
|
|
$
|
10,553
|
|
|
$
|
9,870
|
|
|
Capitalized commissions costs — noncurrent
|
Other assets
|
|
9,162
|
|
|
8,463
|
|
|
Total capitalized commissions costs
|
|
|
$
|
19,715
|
|
|
$
|
18,333
|
|
Amortization of capitalized commissions was $2.9 million and $2.0 million for the three months ended June 30, 2020 and 2019, respectively, and $5.7 million and $3.8 million for the six months ended June 30, 2020 and 2019, respectively. No impairment loss was recognized in relation to these capitalized costs.
Remaining Performance Obligations
Certain clients commit to purchase our solutions for terms ranging from two to seven years. We expect to recognize approximately $481.9 million of revenue in the future related to performance obligations for on demand contracts with an original duration greater than one year that were unsatisfied or partially unsatisfied as of June 30, 2020. Our estimate does not include amounts related to:
•professional and usage-based services that are billed and recognized based on services performed in a certain period;
•amounts attributable to unexercised contract renewals that represent a material right; or
•amounts attributable to unexercised client options to purchase services that do not represent a material right.
We expect to recognize revenue on approximately 72.4% of the remaining performance obligations over the next 24 months, with the remainder recognized thereafter. Revenue from remaining performance obligations for professional service contracts as of June 30, 2020 was immaterial.
5. Property, Equipment, and Software
Property, equipment, and software consisted of the following at June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
|
(in thousands)
|
|
|
|
Leasehold improvements
|
$
|
69,859
|
|
|
$
|
70,558
|
|
|
Data processing and communications equipment
|
84,619
|
|
|
77,358
|
|
|
Furniture, fixtures, and other equipment
|
38,669
|
|
|
35,856
|
|
|
Software
|
175,764
|
|
|
157,832
|
|
|
Property, equipment, and software, gross
|
368,911
|
|
|
341,604
|
|
|
Less: Accumulated depreciation and amortization
|
(199,689)
|
|
|
(178,322)
|
|
|
Property, equipment, and software, net
|
$
|
169,222
|
|
|
$
|
163,282
|
|
Depreciation and amortization expense for property, equipment, and purchased software was $7.6 million and $7.7 million for the three months ended, and $15.0 million and $15.2 million for the six months ended June 30, 2020 and 2019, respectively.
The unamortized amount of capitalized software development costs was $72.9 million and $66.5 million at June 30, 2020 and December 31, 2019, respectively. Amortization expense related to capitalized software development costs totaled $4.2 million and $3.7 million for the three months ended, and $8.2 million and $7.0 million for the six months ended June 30, 2020 and 2019, respectively.
6. Leases
Our leases are primarily comprised of real estate leases of office facilities and equipment under operating leases that expire on various dates through 2033. In May 2015, we entered into a lease agreement for office space located in Richardson, Texas to serve as our corporate headquarters and data center. The lease, which is classified as a finance lease, is for a term of twelve years, beginning in 2016, and includes optional extension periods. The lease agreement contains provisions for rent escalations over the term of the lease and leasehold improvement incentives.
The components of lease costs for the three and six months ended June 30, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Operating lease cost
|
$
|
4,201
|
|
|
$
|
3,477
|
|
|
$
|
8,673
|
|
|
$
|
6,963
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
Depreciation of finance lease asset
|
$
|
992
|
|
|
$
|
992
|
|
|
$
|
1,984
|
|
|
$
|
1,984
|
|
|
Interest on lease liabilities
|
1,019
|
|
|
1,061
|
|
|
2,048
|
|
|
2,106
|
|
|
Total finance lease cost
|
$
|
2,011
|
|
|
$
|
2,053
|
|
|
$
|
4,032
|
|
|
$
|
4,090
|
|
Rent expense for short-term leases for the three and six months ended June 30, 2020 and 2019 was not material.
Supplemental balance sheet information related to leases at June 30, 2020, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Finance leases
|
|
Total leases
|
|
|
(in thousands, except lease term and discount rate)
|
|
|
|
|
|
Right-of-use assets
|
$
|
62,116
|
|
|
$
|
52,256
|
|
|
$
|
114,372
|
|
|
|
|
|
|
|
|
|
Lease liabilities, current (1)
|
$
|
12,982
|
|
|
$
|
3,480
|
|
|
$
|
16,462
|
|
|
Lease liabilities, net of current portion
|
54,066
|
|
|
71,631
|
|
|
125,697
|
|
|
Total lease liabilities
|
$
|
67,048
|
|
|
$
|
75,111
|
|
|
$
|
142,159
|
|
|
|
|
|
|
|
|
|
Weighted average remaining term (in years)
|
5.6
|
|
13.2
|
|
|
|
Weighted average discount rate
|
4.8
|
%
|
|
5.4
|
%
|
|
|
(1)Included in the line “Accrued expenses and other current liabilities” in the accompanying Condensed Consolidated Balance Sheets.
Supplemental balance sheet information related to leases at December 31, 2019, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Finance leases
|
|
Total leases
|
|
|
(in thousands, except lease term and discount rate)
|
|
|
|
|
|
Right-of-use assets
|
$
|
67,700
|
|
|
$
|
54,241
|
|
|
$
|
121,941
|
|
|
|
|
|
|
|
|
|
Lease liabilities, current (1)
|
$
|
12,873
|
|
|
$
|
3,254
|
|
|
$
|
16,127
|
|
|
Lease liabilities, net of current portion
|
59,822
|
|
|
73,491
|
|
|
133,313
|
|
|
Total lease liabilities
|
$
|
72,695
|
|
|
$
|
76,745
|
|
|
$
|
149,440
|
|
|
|
|
|
|
|
|
|
Weighted average remaining term (in years)
|
6.1
|
|
13.7
|
|
|
|
Weighted average discount rate
|
4.8
|
%
|
|
5.4
|
%
|
|
|
(1)Included in the line “Accrued expenses and other current liabilities” in the accompanying Condensed Consolidated Balance Sheets.
Supplemental cash flow information related to leases for the six months ended June 30, 2020 and 2019 was as follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Cash payments for lease liabilities within operating activities:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
$
|
8,734
|
|
|
$
|
7,809
|
|
|
Finance leases
|
|
|
|
|
$
|
2,048
|
|
|
$
|
2,106
|
|
|
Non-cash activity:
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for operating lease obligations
|
|
|
|
|
$
|
1,392
|
|
|
$
|
12,029
|
|
At June 30, 2020, future maturities of lease liabilities due under these lease agreements were as follows for the years ending December 31, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Finance leases
|
|
Total leases
|
|
2020
|
$
|
6,981
|
|
|
$
|
3,138
|
|
|
$
|
10,119
|
|
|
2021
|
15,735
|
|
|
7,504
|
|
|
23,239
|
|
|
2022
|
13,745
|
|
|
7,609
|
|
|
21,354
|
|
|
2023
|
11,994
|
|
|
7,714
|
|
|
19,708
|
|
|
2024
|
9,988
|
|
|
7,819
|
|
|
17,807
|
|
|
Thereafter
|
18,543
|
|
|
72,214
|
|
|
90,757
|
|
|
Total undiscounted lease payments
|
76,986
|
|
|
105,998
|
|
|
182,984
|
|
|
Present value adjustment
|
(9,938)
|
|
|
(30,887)
|
|
|
(40,825)
|
|
|
Present value of lease payments
|
$
|
67,048
|
|
|
$
|
75,111
|
|
|
$
|
142,159
|
|
7. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill during the six months ended June 30, 2020 were as follows, in thousands:
|
|
|
|
|
|
|
|
Balance as of January 1, 2020
|
$
|
1,611,749
|
|
|
Goodwill acquired
|
49,268
|
|
|
Measurement period adjustments
|
2,622
|
|
|
|
|
|
Balance as of June 30, 2020
|
$
|
1,663,639
|
|
Identified intangible assets consisted of the following at June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technologies
|
|
$
|
286,280
|
|
|
$
|
(146,135)
|
|
|
$
|
140,145
|
|
|
$
|
277,030
|
|
|
$
|
(125,537)
|
|
|
$
|
151,493
|
|
|
Client relationships
|
|
349,838
|
|
|
(160,508)
|
|
|
189,330
|
|
|
341,438
|
|
|
(140,044)
|
|
|
201,394
|
|
|
Trade names
|
|
26,257
|
|
|
(18,070)
|
|
|
8,187
|
|
|
25,557
|
|
|
(16,928)
|
|
|
8,629
|
|
|
Non-compete agreements
|
|
5,273
|
|
|
(2,703)
|
|
|
2,570
|
|
|
5,273
|
|
|
(2,186)
|
|
|
3,087
|
|
|
Total finite-lived intangible assets
|
|
667,648
|
|
|
(327,416)
|
|
|
340,232
|
|
|
649,298
|
|
|
(284,695)
|
|
|
364,603
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
8,388
|
|
|
—
|
|
|
8,388
|
|
|
8,393
|
|
|
—
|
|
|
8,393
|
|
|
Total intangible assets
|
|
$
|
676,036
|
|
|
$
|
(327,416)
|
|
|
$
|
348,620
|
|
|
$
|
657,691
|
|
|
$
|
(284,695)
|
|
|
$
|
372,996
|
|
Amortization expense related to finite-lived intangible assets was $21.6 million and $16.5 million for the three months ended, and $42.7 million and $32.6 million for the six months ended June 30, 2020 and 2019, respectively.
8. Debt
Credit Facility
On September 5, 2019, we entered into a $1.2 billion Amended and Restated Credit Agreement (the “Amended Credit Facility”) to amend and restate our previous credit facility, originally dated as of September 30, 2014 (as previously amended, the “2014 Credit Facility”). The Amended Credit Facility was entered into by and among the Company, the lenders from time to time party thereto (the “Lenders”), and Wells Fargo Bank, National Association, as administrative agent (the “Agent”).
The Amended Credit Facility extends the maturity date of the 2014 Credit Facility from February 27, 2022 to September 5, 2024 (subject to early maturity provisions in certain circumstances, as described below), reduces our borrowing costs, provides additional borrowing capacity, and increases covenant flexibility. The Amended Credit Facility provides for the following:
Revolving Facility: The Amended Credit Facility provides $600.0 million in aggregate commitments for secured revolving loans, with sublimits of $10.0 million for the issuance of letters of credit and $20.0 million for swingline loans (“Revolving Facility”). During the three months ended June 30, 2020, we repaid the previous amount outstanding under the Revolving Facility.
Initial Term Loan: An initial term loan of $300.0 million was borrowed on the closing date for the Amended Credit Facility (the “Term Loan”). The proceeds of the Term Loan were used to repay the term loan balances outstanding under the 2014 Credit Facility.
Delayed Draw Term Loan: In December 2019, we drew funds of $300.0 million available under the delayed draw term loan (“Delayed Draw Term Loan”).
Revolving loans under the Amended Credit Facility may be voluntarily prepaid and re-borrowed. Principal payments on the Term Loan and Delayed Draw Term Loan (collectively, the “Term Loans”) are due in quarterly installments equal to an initial amount of $3.8 million, which increases to $7.5 million beginning on December 31, 2020, increases to $11.3 million beginning on December 31, 2022, and increases to $15.0 million beginning on December 31, 2023. Once repaid or prepaid, the Term Loans may not be re-borrowed. All outstanding principal and accrued but unpaid interest is due, and the commitments for the Revolving Facility terminate, on the maturity date. The Term Loans are subject to mandatory repayment requirements in the event of certain asset sales or if certain insurance or condemnation events occur, subject to customary reinvestment provisions. We may prepay the Term Loans in whole or in part at any time without premium or penalty.
Accordion Feature: The Amended Credit Facility also allows us, subject to certain conditions, to request additional term loan commitments and/or additional revolving commitments in an aggregate principal amount of up to the greater of $250.0 million or 100% of consolidated EBITDA (as defined within the agreement) for the most recent four fiscal quarters, plus an amount that would not cause our Senior Leverage Ratio, as defined below, to exceed 3.50 to 1.00.
All outstanding revolving loans and term loans under the Amended Credit Facility mature on September 5, 2024. If on or prior to August 16, 2022, we have failed to demonstrate to the Agent that we would be in compliance with each financial covenant after giving pro forma effect to the repayment in full of the 2022 Convertible Notes which mature on November 15, 2022, then the Amended Credit Facility will mature on August 16, 2022. In addition, if on any business day during the period beginning on August 16, 2022 until the 2022 Convertible Notes are paid in full, our available liquidity is less than an amount equal to 125% of the outstanding principal amount of the 2022 Convertible Notes, then amounts outstanding under the Amended Credit Facility are due the next business day.
At our option, amounts outstanding under the Amended Credit Facility accrue interest at a per annum rate equal to either LIBOR, plus a margin ranging from 1.00% to 2.00%, or the Base Rate, plus a margin ranging from 0.00% to 1.00% (“Applicable Margin”). The base LIBOR is, at our discretion, equal to either one, three, or six month LIBOR. The Base Rate is defined as the greater of Wells Fargo's prime rate, the Federal Funds Rate plus 0.50%, or one month LIBOR plus 1.00%. In each case, the Applicable Margin is determined based upon our Net Leverage Ratio, as defined below. Accrued interest on amounts outstanding under the Amended Credit Facility is due and payable quarterly, in arrears, for loans bearing interest at the Base Rate and at the end of the applicable interest period in the case of loans bearing interest at the adjusted LIBOR. Unused commitments under the Revolving Facility are subject to a commitment fee to be paid in arrears on the last day of each fiscal quarter, ranging from 0.15% to 0.35% per annum determined based on our Net Leverage Ratio, as defined below.
Certain of our existing and future material domestic subsidiaries are required to guarantee our obligations under the Amended Credit Facility, and the obligations under the Amended Credit Facility are secured by substantially all of our assets and the assets of the subsidiary guarantors. The Amended Credit Facility contains customary affirmative and negative covenants. The negative covenants limit our and our subsidiaries’ ability to, among other things, incur additional indebtedness,
grant liens on our assets, make investments including acquisitions, dispose of assets, or pay dividends or distributions or repurchase our stock, subject in each case to customary exceptions and qualifications. Our covenants also include requirements that we comply with the following financial ratios:
Consolidated Net Leverage Ratio: The Consolidated Net Leverage Ratio (“Net Leverage Ratio”), defined as a ratio of consolidated funded indebtedness less qualified cash and cash equivalents, each as defined in the Amended Credit Facility, on the last day of each fiscal quarter to the sum of the four previous consecutive fiscal quarters’ consolidated EBITDA, as defined in the Amended Credit Facility, of no greater than 5.00 to 1.00 (or, at our election following certain material acquisitions, 5.50 to 1.00).
Consolidated Interest Coverage Ratio: The Consolidated Interest Coverage Ratio (“Interest Coverage Ratio”), defined as a ratio of the sum of the four previous fiscal quarters’ consolidated EBITDA to our interest expense for the same period, excluding non-cash interest attributable to the Convertible Notes, as defined below, of no less than 3.00 to 1.00.
Consolidated Senior Secured Net Leverage Ratio: The Consolidated Senior Secured Net Leverage Ratio (“Senior Leverage Ratio”), defined as a ratio of consolidated senior secured indebtedness less qualified cash and cash equivalents, each as defined in the Amended Credit Facility, on the last day of each fiscal quarter to the sum of the four previous consecutive fiscal quarters’ consolidated EBITDA, of no greater than 3.75 to 1.00 (or, at our election following certain material acquisitions, 4.25 to 1.00).
As of June 30, 2020, we were in compliance with the covenants under our Amended Credit Facility.
The Amended Credit Facility contains customary events of default, subject to customary cure periods for certain defaults. In the event of a default, the obligations under the Amended Credit Facility could be accelerated, the applicable interest rate could be increased, the loan commitments could be terminated, our subsidiary guarantors could be required to pay the obligations in full and our lenders would be permitted to exercise remedies with respect to all of the collateral that is securing the Amended Credit Facility. Any such default that is not cured or waived could have a material adverse effect on our liquidity and financial condition.
As of June 30, 2020 and December 31, 2019, we had $600.0 million and $370.0 million, respectively, of available credit under our Revolving Facility. Principal outstanding for the Revolving Facility was $230.0 million as of December 31, 2019. There was no principal outstanding as of June 30, 2020. We incur commitment fees on the unused portion of the Revolving Facility. The carrying value of the Revolving Facility approximates its fair value.
Unamortized debt issuance costs for the revolving facility were $2.4 million and $2.7 million at June 30, 2020 and December 31, 2019, respectively, and are included in the line “Other assets” in the Condensed Consolidated Balance Sheets.
Principal outstanding and unamortized debt issuance and discount costs for the Term Loans were as follows at June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
Term Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Principal outstanding
|
$
|
588,750
|
|
|
|
|
|
|
|
|
$
|
596,250
|
|
|
|
|
Unamortized issuance costs
|
(831)
|
|
|
|
|
|
|
|
|
(942)
|
|
|
|
|
Unamortized discount
|
(1,098)
|
|
|
|
|
|
|
|
|
(1,245)
|
|
|
|
|
Carrying value
|
$
|
586,821
|
|
|
|
|
|
|
|
|
$
|
594,063
|
|
|
|
The fair value of the Term Loans on June 30, 2020 and December 31, 2019 was $544.6 million and $582.7 million, respectively. The fair value was estimated by discounting future cash flows using prevailing market interest rates on debt with similar creditworthiness, terms, and maturities. We concluded that this fair value measurement should be categorized within Level 2.
Future maturities of principal under the Term Loans are as follows for the years ending December 31, in thousands:
|
|
|
|
|
|
|
|
|
Term Loans
|
|
2020
|
$
|
11,250
|
|
|
2021
|
30,000
|
|
|
2022
|
33,750
|
|
|
2023
|
48,750
|
|
|
2024
|
465,000
|
|
|
|
$
|
588,750
|
|
Convertible Notes
2025 Convertible Notes
In May 2020, we issued convertible senior notes in an aggregate principal amount of $345.0 million (including the underwriters’ exercise in full of their over-allotment option of $45.0 million) which will mature on May 15, 2025 (the “2025 Convertible Notes”). The 2025 Convertible Notes were issued pursuant to an Indenture, dated May 22, 2020, by and between us and U.S. Bank National Association, as Trustee, as supplemented by the First Supplemental Indenture (as supplemented, the “Indenture”). We received net proceeds from the offering of approximately $337.5 million after adjusting for debt issuance costs, including the underwriting discount.
The 2025 Convertible Notes accrue interest at a rate of 1.50% per year until maturity, payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2020. On or after February 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert at their option all or any portion of their 2025 Convertible Notes at the then applicable conversation rate. The 2025 Convertible Notes are convertible at an initial rate of 13.04 shares of our common stock per $1,000 principal amount of 2025 Convertible Notes (equivalent to an initial conversion price of approximately $76.70 per share of our common stock). The conversion rate is subject to customary adjustments for certain events as described in the Indenture. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. Upon any conversion of the 2025 Convertible Notes, it is our current intent to settle the first $1,000 of conversion value for each $1,000 principal amount of the 2025 Convertible Notes through combination settlement, which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount in shares of our common stock. As of June 30, 2020, the if-converted value of the 2025 Convertible Notes did not exceed the aggregate principal.
Holders may convert all or any portion of their 2025 Convertible Notes, at their option, prior to the close of business on the business day immediately preceding February 15, 2025 only under the following circumstances:
•during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•during the five business day period after any five consecutive trading day period (the “Measurement Period”) in which the trading price per $1,000 principal amount of the 2025 Convertible Notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sales price of our common stock and the conversion rate on each such trading day;
•if we call any or all of the 2025 Convertible Notes for redemption at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or
•upon the occurrence of specified corporate events, as described in the Indenture.
On or after May 20, 2023, we may redeem for cash, at our option, all or part of the 2025 Convertible Notes if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption, is greater than or equal to 130% of the conversion price on each applicable trading day. There is no sinking fund provided for the 2025 Convertible Notes.
If we undergo a fundamental change (as defined in the Indenture), subject to certain conditions, holders may require us to repurchase for cash all or any portion of their 2025 Convertible Notes. The fundamental change repurchase price is equal to 100% of the principal amount of the 2025 Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. If holders elect to convert their 2025 Convertible Notes in connection with
a make-whole fundamental change, as described in the Indenture, we will, to the extent provided in the Indenture, increase the conversion rate applicable to the 2025 Convertible Notes.
The 2025 Convertible Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2025 Convertible Notes and equal in right of payment to any of our existing and future unsecured indebtedness that is not subordinated including the 2022 Convertible Notes. The 2025 Convertible Notes are effectively junior in right of payment to any of our secured indebtedness to the extent of the value of assets securing such indebtedness and structurally junior to all existing and future indebtedness and other liabilities, including trade payables, of our subsidiaries. The Indenture does not limit the amount of debt that we or our subsidiaries may incur. The 2025 Convertible Notes are not guaranteed by any of our subsidiaries.
The Indenture does not contain any financial or operating covenants or restrictions on the payment of dividends, the incurrence of indebtedness, or the issuance or repurchase of securities by us or any of our subsidiaries. The Indenture contains customary events of default with respect to the 2025 Convertible Notes and provides that upon certain events of default occurring and continuing, the Trustee may, and the Trustee at the request of holders of at least 25% in principal amount of the 2025 Convertible Notes shall, declare all of principal and accrued and unpaid interest, if any, of the 2025 Convertible Notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization involving us or a significant subsidiary, all of the principal of and accrued and unpaid interest on the 2025 Convertible Notes will automatically become due and payable.
In accounting for the issuance of the 2025 Convertible Notes, we separated the 2025 Convertible Notes into liability and equity components. We allocated $288.0 million of the 2025 Convertible Notes to the liability component, and $57.0 million to the equity component. The portion allocated to equity is presented in stockholders’ equity net of $3.9 million of related deferred taxes and of allocated issuance cost as described below. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the term of the 2025 Convertible Notes using the effective interest method. The equity component will not be remeasured as long as it continues to meet the conditions for equity classification.
We incurred issuance costs of $7.5 million related to the 2025 Convertible Notes. Issuance costs were allocated to the liability and equity components based on their relative values. Issuance costs attributable to the liability component are being amortized to interest expense over the term of the 2025 Convertible Notes, and issuance costs attributable to the equity component are included along with the equity component in stockholders' equity.
2022 Convertible Notes
In May 2017, we issued convertible senior notes with an aggregate principal amount of $345.0 million which mature on November 15, 2022 (the “2022 Convertible Notes”). The 2022 Convertible Notes accrue interest at a rate of 1.50%, payable semi-annually on May 15 and November 15 of each year. The 2022 Convertible Notes are convertible at an initial rate of 23.84 shares per $1,000 of principal (equivalent to an initial conversion price of approximately $41.95 per share of our common stock). Based on our closing stock price of $65.01 on June 30, 2020, the if-converted value exceeded the aggregate principal amount of the 2022 Convertible Notes by $189.7 million.
During the second quarter of 2020, the closing price of our common stock exceeded 130% of the conversion price of the 2022 Convertible Notes for more than 20 trading days during the last 30 consecutive trading days of the quarter, thereby satisfying one of the early conversion events. As a result, the 2022 Convertible Notes are convertible at any time during the third quarter of 2020. Accordingly, as of June 30, 2020, the carrying amount of the 2022 Convertible Notes of $311.6 million was classified as a current liability in the accompanying Condensed Consolidated Balance Sheets.
There have been no significant changes to the terms of the 2022 Convertible Notes disclosed in our Annual Report on Form 10-K.
The net carrying amount of our 2022 and 2025 Convertible Notes (collectively referred to as the “Convertible Notes”) at June 30, 2020 and December 31, 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
|
|
2022 Convertible Notes
|
|
2025 Convertible Notes
|
|
2022 Convertible Notes
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
Liability component:
|
|
|
|
|
|
|
|
Principal amount
|
$
|
344,995
|
|
|
$
|
345,000
|
|
|
$
|
344,995
|
|
|
|
Unamortized discount
|
(29,569)
|
|
|
(55,697)
|
|
|
(35,287)
|
|
|
|
Unamortized debt issuance costs
|
(3,788)
|
|
|
(6,181)
|
|
|
(4,520)
|
|
|
|
Convertible notes, net
|
$
|
311,638
|
|
|
$
|
283,122
|
|
|
$
|
305,188
|
|
|
|
|
|
|
|
|
|
|
|
Equity component, net of issuance costs and deferred tax:
|
$
|
61,390
|
|
|
$
|
51,821
|
|
|
$
|
61,390
|
|
|
The estimated fair value of the Convertible Notes at June 30, 2020 and December 31, 2019 was $941.3 million and $486.7 million, respectively. The estimated fair value is based on quoted market prices as of the last trading day for the six months ended June 30, 2020; however, the Convertible Notes have only a limited trading volume and, as such, this fair value estimate is not necessarily the value at which the Convertible Notes could be retired or transferred. We concluded this measurement should be classified within Level 2.
The following table sets forth total interest expense related to the Convertible Notes for the three and six months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Contractual interest expense
|
$
|
1,854
|
|
|
$
|
1,294
|
|
|
$
|
3,148
|
|
|
$
|
2,588
|
|
|
Amortization of debt discount
|
4,183
|
|
|
2,717
|
|
|
7,021
|
|
|
5,393
|
|
|
Amortization of debt issuance costs
|
479
|
|
|
348
|
|
|
842
|
|
|
691
|
|
|
|
$
|
6,516
|
|
|
$
|
4,359
|
|
|
$
|
11,011
|
|
|
$
|
8,672
|
|
The effective interest rate of the liability component for the three and six-month periods ended June 30, 2020 and 2019 was 5.87% for the 2022 Convertible Notes and 5.74% for the 2025 Convertible Notes, respectively.
Capped Calls, Note Hedges, and Warrants
On May 22, 2020, we entered into privately negotiated option contracts to purchase hedge instruments (the “Capped Calls”) initially covering approximately 5.8 million shares of our common stock at a cost of $39.4 million. The Capped Calls are subject to anti-dilution provisions substantially similar to those of the 2025 Convertible Notes, have a strike price of approximately $76.70 per share, are subject to a cap price of $118.00 per share, are exercisable by us upon any conversion under the 2025 Convertible Notes, and expire on May 15, 2025. The Capped Calls are transactions that are separate from the terms of the 2025 Convertible Notes, and holders of the 2025 Convertible Notes have no rights with respect to the Capped Calls.
On May 23, 2017, we entered into privately negotiated transactions to purchase hedge instruments (“Note Hedges”), covering approximately 8.2 million shares of our common stock at a cost of $62.5 million. The Note Hedges are subject to anti-dilution provisions substantially similar to those of the 2022 Convertible Notes, have a strike price of approximately $41.95 per share, are exercisable by us upon any conversion under the 2022 Convertible Notes, and expire on November 15, 2022.
The Capped Calls and Note Hedges (collectively referred to as the “Note Hedge Instruments”) are generally expected to reduce the potential dilution to our common stock (or, in the event the conversion is settled in cash, to reduce our cash payment obligation) in the event that at the time of conversion our stock price exceeds the conversion price under our previously issued Convertible Notes. The costs of the Note Hedge Instruments are expected to be tax deductible as original issue discounts over the lives of the respective convertible notes, as the Note Hedge Instruments represent integrated debt instruments for tax purposes. As the Note Hedge Instruments meet certain accounting criteria, they are recorded in stockholders’ equity as a reduction of additional paid-in-capital and are not accounted for as derivatives. The fair value of the Note Hedge Instruments are not remeasured each reporting period.
On May 23, 2017, we also sold warrants for the purchase of up to 8.2 million shares of our common stock for aggregate proceeds of $31.5 million (“Warrants”). The Warrants have a strike price of $57.58 per share and are subject to customary anti-dilution provisions. The Warrants will expire in ratable portions on a series of expiration dates commencing on February 15,
2023. The proceeds from the issuance of the Warrants were recorded as an increase to our additional paid-in capital in the accompanying Condensed Consolidated Financial Statements.
The Note Hedges are transactions that are separate from the terms of the 2022 Convertible Notes and the Warrants, and holders of the 2022 Convertible Notes and the Warrants have no rights with respect to the Note Hedges. The Warrants are similarly separate in both terms and rights from the Note Hedges and the 2022 Convertible Notes.
9. Stock-based Expense
On June 3, 2020, our stockholders approved the 2020 Equity Incentive Plan (“2020 Plan”). The 2020 Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares. The 2020 Plan replaces our 2010 Equity Incentive Plan (the “2010 Plan”), and no further awards will be made under the 2010 Plan after the effective date of the 2020 Plan. Additionally, any awards that expire or are forfeited under the 2010 Plan become available for issuance under the 2020 Plan.
At June 30, 2020, there were 12.8 million shares of our common stock reserved for awards under the 2020 Plan. The 2020 Plan permits the exercise of stock options and grants of restricted stock to be fulfilled through the issuance of previously authorized but unissued common stock shares, or the reissuance of shares held in treasury.
Restricted Stock Awards
During the three months ended June 30, 2020, we granted 68,646 time-based restricted stock awards with a grant date weighted average fair value of $58.28 per share. During the six months ended June 30, 2020, we granted 973,773 time-based restricted stock awards with a grant date weighted average fair value of $59.86. These awards generally vest ratably over a period of twelve quarters with the first vesting on the first day of the second calendar quarter immediately following the grant date. A portion of these grants are associated with the Modern Message acquisition and vest 5% each quarter over a period of eleven quarters with the first vesting on the first day of the second calendar quarter immediately following the grant date and with the remaining shares vesting during the twelfth quarter.
Market-based Restricted Stock Awards
There were no grants of market-based awards during the three months ended June 30, 2020. During the six months ended June 30, 2020, we made grants of restricted stock that become eligible to vest based on the achievement of certain market-based conditions. Prior to July 1, 2023, these awards become Eligible Shares if the average closing price of our common stock equals or exceeds the triggers shown below for a period of twenty consecutive trading days:
|
|
|
|
|
|
|
|
Awards Granted
|
Stock Price Trigger
|
|
109,888
|
$73.60
|
|
109,888
|
$82.43
|
|
109,888
|
$94.21
|
|
109,960
|
$105.98
|
Shares that become Eligible Shares vest ratably over four calendar quarters, with the first vesting on the first day of the quarter immediately after becoming Eligible Shares. Vesting is conditional upon the recipient remaining a service provider, as defined in the plan document, to the Company through each applicable vesting date. The aggregate grant date fair value of these awards was $13.5 million.
We capitalized stock-based expense for software development costs of $0.5 million and $0.9 million during the three and six months ended June 30, 2020, respectively.
10. Commitments and Contingencies
Guarantor Arrangements
We have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The term of the indemnification period is for the officer or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a director and officer insurance policy that limits our exposure and enables us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Accordingly, we had no liabilities recorded for these agreements as of June 30, 2020 or December 31, 2019.
In the ordinary course of our business, we include standard indemnification provisions in our agreements with clients. Pursuant to these provisions, we indemnify our clients for losses suffered or incurred in connection with third-party claims that our products infringed upon any U.S. patent, copyright, trademark, or other intellectual property right. Where applicable, we generally limit such infringement indemnities to those claims directed solely to our products and not in combination with other software or products. With respect to our products, we also generally reserve the right to resolve any such claims by designing a non-infringing alternative, by obtaining a license on reasonable terms, or by terminating our relationship with the client and refunding the client’s fees.
The potential amount of future payments to defend lawsuits or settle indemnified claims under these indemnification provisions is unlimited in certain agreements; however, we believe the estimated fair value of these indemnification provisions is minimal, and, accordingly, we had no liabilities recorded for these agreements as of June 30, 2020 or December 31, 2019.
Litigation
From time to time, in the normal course of our business, we are a party to litigation matters and claims, including purported class action lawsuits and other complex litigation matters. Such matters can be expensive and disruptive to our normal business operations. Moreover, the results of such proceedings are difficult to predict, and our view of these matters may change in the future as the litigation and events related thereto unfold. We expense legal fees as incurred. Insurance recoveries associated with legal costs incurred are recorded when they are deemed probable of recovery.
At June 30, 2020 and December 31, 2019, we had accrued amounts for estimated settlement losses related to certain legal matters. We do not believe there is a reasonable possibility that a material loss exceeding amounts already recognized may have been incurred as of the date of the balance sheets presented herein. We are involved in other litigation matters, including purported class action lawsuits, that are not likely to be material either individually or in the aggregate based on information available at this time.
11. Net Income per Share
Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by using the weighted average number of common shares outstanding, after giving effect to all potential dilutive common shares outstanding during the period. Included within diluted net income per share is the dilutive effect of outstanding stock options and restricted stock using the treasury stock method. Weighted average shares from common share equivalents in the amount of approximately 16,000 and 46,000 for the three months ended, and 300,000 and 270,000 for the six months ended June 30, 2020 and 2019, respectively, were excluded from the dilutive shares outstanding because their effect was anti-dilutive.
For purposes of considering the Convertible Notes in determining diluted net income per share, it is our current intent to settle conversions of the Convertible Notes through combination settlement, which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount (the “conversion premium”) in shares of our common stock. Therefore, only the impact of the conversion premium is included in total dilutive weighted average shares outstanding using the treasury stock method. The dilutive effect of the conversion premium for the three and six months ended June 30, 2020 and 2019 are shown in the table below.
The Warrants sold in connection with the issuance of the 2022 Convertible Notes are considered to be dilutive when the average price of our common stock during the period exceeds the Warrants’ strike price of $57.58 per share, as described in Note 8. The effect of the additional shares that may be issued upon exercise of the Warrants is included in total dilutive weighted average shares outstanding using the treasury stock method and, to the extent dilutive, is shown in the table below. The Note Hedge Instruments purchased in connection with the issuance of the Convertible Notes are considered to be anti-dilutive and therefore do not impact our calculation of diluted net income per share. Refer to Note 8 for further discussion regarding the Convertible Notes.
We exclude common shares subject to a holdback pursuant to business combinations from the calculation of basic weighted average shares outstanding where the release of such shares is contingent upon an event not solely subject to the passage of time. As of June 30, 2020, there were approximately 6,000 contingently returnable shares related to our acquisition of BluTrend which were excluded from the computation of basic net income per share as these shares are subject to sellers’ indemnification obligations and are subject to a holdback. There were approximately 163,000 contingently returnable shares as of June 30, 2019 related to our acquisitions of ClickPay and BluTrend. Dilutive common shares outstanding include the weighted average contingently returnable shares discussed above that are subject to a holdback, and any contingently returnable shares prior to their release during each period. These shares are subject to releases to the sellers on the second anniversary dates of the acquisitions which are contingent on the sellers’ indemnification obligations.
Certain of our performance-based restricted stock awards are considered contingently issuable shares and are excluded from the diluted weighted average shares outstanding computation because the related performance-based targets were not achieved as of the end of the reporting period.
The following table presents the calculation of basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
11,301
|
|
|
$
|
15,063
|
|
|
$
|
16,906
|
|
|
$
|
26,335
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Weighted average common shares used in computing basic net income per share
|
95,752
|
|
|
91,914
|
|
|
94,203
|
|
|
91,703
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Add weighted average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options and restricted stock
|
973
|
|
|
1,422
|
|
|
1,010
|
|
|
1,474
|
|
|
Convertible Notes and Warrants
|
3,472
|
|
|
2,933
|
|
|
2,820
|
|
|
2,572
|
|
|
Contingently issuable or returnable shares in connection with our acquisitions
|
57
|
|
|
224
|
|
|
110
|
|
|
287
|
|
|
Weighted average common shares used in computing diluted net income per share
|
100,254
|
|
|
96,493
|
|
|
98,143
|
|
|
96,036
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.12
|
|
|
$
|
0.16
|
|
|
$
|
0.18
|
|
|
$
|
0.29
|
|
|
Diluted
|
$
|
0.11
|
|
|
$
|
0.16
|
|
|
$
|
0.17
|
|
|
$
|
0.27
|
|
12. Income Taxes
We make estimates and judgments in determining our provision for income taxes for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities that arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.
Our provision for income taxes in interim periods is based on our estimated annual effective tax rate. We record cumulative adjustments in the quarter in which a change in the estimated annual effective rate is determined. The estimated annual effective tax rate calculation does not include the effect of discrete events that may occur during the year. The effect of these events, if any, is recorded in the quarter in which the event occurs.
Our effective income tax rate was (3.9)% and 12.7% for the six months ended June 30, 2020 and 2019, respectively. Our effective rate is lower than the statutory rate for the six months ended June 30, 2020 primarily due to $4.6 million of excess tax benefits from stock-based compensation recognized as discrete items as required by ASU 2016-09.
Our effective rate was lower than the statutory rate for the six months ended June 30, 2019, primarily due to $3.8 million of excess tax benefits from stock-based compensation recognized as discrete items as required by ASU 2016-09, offset, partially, by state taxes and certain non-deductible expenses.
13. Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis:
Interest rate swap agreements: The fair value of our interest rate derivatives is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
Although the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy. We have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of our interest rate swaps. As a result, we determined that our interest rate swap valuation in its entirety is classified in Level 2 of the fair value hierarchy.
Foreign currency forward contracts: We enter into foreign exchange currency contracts to hedge fluctuations associated with foreign currency denominated monetary assets and liabilities, and the future payment of operating expenses by certain of our non-U.S. subsidiaries. The fair values of our foreign exchange currency contracts are based on quoted foreign exchange forward rates at the reporting date and are classified within Level 2 of the fair value hierarchy.
Contingent consideration obligations: The fair value of the contingent consideration obligations includes inputs not observable in the market and thus represents a Level 3 measurement. The amount to be paid under these obligations is contingent upon the achievement of stipulated operational or financial targets by the business subsequent to acquisition. The fair value for our contingent consideration obligations is estimated based on management’s assessment of the probability of achievement of operational or financial targets. The fair value estimate considers the projected future operating or financial results for the factor upon which the respective contingent obligation is dependent. The fair value estimate is generally sensitive to changes in these projections. We develop the projected future operating results based on an analysis of historical results, market conditions, and the expected impact of anticipated changes in our overall business and/or product strategies.
At June 30, 2020, the contingent consideration obligation consisted of a potential obligation related to our Hipercept acquisition. The fair value for this contingent consideration obligation is estimated using a probability weighted discount model which considers the achievement of the conditions upon which the contingent obligation is dependent. The probability of achieving the specified conditions is generally assessed by applying a Monte Carlo weighted-average model. The valuation model includes certain observable inputs including a discount rate which for the period ending June 30, 2020 was 4.5% and significant unobservable inputs including a measure of estimated volatility, a compounded annual growth rate of revenue, and a risk of target metric, which for the period ended June 30, 2020 were 17.1%, 41.2%, and 4.2%, respectively.
The following tables disclose the assets and liabilities measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019, by the fair value hierarchy levels as described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at June 30, 2020
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
$
|
266
|
|
|
$
|
—
|
|
|
$
|
266
|
|
|
$
|
—
|
|
|
Total assets measured at fair value
|
$
|
266
|
|
|
$
|
—
|
|
|
$
|
266
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
$
|
7,055
|
|
|
$
|
—
|
|
|
$
|
7,055
|
|
|
$
|
—
|
|
|
Foreign currency forward contracts(1)
|
159
|
|
|
—
|
|
|
159
|
|
|
—
|
|
|
Contingent consideration related to the acquisition of:
|
|
|
|
|
|
|
|
|
Hipercept
|
5,584
|
|
|
—
|
|
|
—
|
|
|
5,584
|
|
|
Total liabilities measured at fair value
|
$
|
12,798
|
|
|
$
|
—
|
|
|
$
|
7,214
|
|
|
$
|
5,584
|
|
(1) The fair value of foreign currency forward contracts includes those designated as cash flow hedge instruments and those designated as balance sheet hedge instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at December 31, 2019
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts(1)
|
$
|
237
|
|
|
$
|
—
|
|
|
$
|
237
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
$
|
2,193
|
|
|
$
|
—
|
|
|
$
|
2,193
|
|
|
$
|
—
|
|
|
Foreign currency forward contracts
|
14
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
Contingent consideration related to the acquisition of:
|
|
|
|
|
|
|
|
|
Hipercept
|
6,536
|
|
|
—
|
|
|
—
|
|
|
6,536
|
|
|
Total liabilities measured at fair value
|
$
|
8,743
|
|
|
$
|
—
|
|
|
$
|
2,207
|
|
|
$
|
6,536
|
|
(1) The fair value of foreign currency forward contracts includes those designated as cash flow hedge instruments and those designated as balance sheet hedge instruments.
There were no transfers between Level 2 and Level 3 measurements during the six months ended June 30, 2020.
Changes in the fair value of Level 3 measurements were as follows for the six months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
|
|
Balance at beginning of period
|
$
|
6,536
|
|
|
$
|
6,000
|
|
|
|
|
|
|
|
Settlements through cash payments
|
—
|
|
|
(5,963)
|
|
|
Net change in fair value
|
(952)
|
|
|
(37)
|
|
|
|
|
|
|
|
Balance at end of period
|
$
|
5,584
|
|
|
$
|
—
|
|
Gains and losses recognized on the change in fair value of the above liabilities are reflected in the line “General and administrative” expense in the accompanying Condensed Consolidated Statements of Operations.
Assets and liabilities measured at fair value on a non-recurring basis:
In August 2016, we acquired a $3.0 million noncontrolling interest in CompStak, Inc. (“CompStak”), which is an unrelated company that specializes in the aggregation of commercial lease data. We have elected the measurement alternative for the CompStak equity investment, whereby we measure the investment at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. During the first quarter of 2019, we recorded a gain of $2.6 million based on an observable price change, which is reflected in the line “Interest expense and other, net” in the accompanying Condensed Consolidated Statements of Operations. The factors considered in the remeasurement included the price at which the investee issued equity instruments similar to those of our investment and the rights and preferences of those equity instruments compared to ours. We concluded that this fair value measurement should be categorized within Level 2.
During the second quarter of 2019, we invested an additional $1.8 million in CompStak. The carrying value of this investment at June 30, 2020 and December 31, 2019 was $7.4 million, and is included in “Other assets” in the accompanying Condensed Consolidated Balance Sheets.
There were no liabilities measured at fair value on a non-recurring basis at June 30, 2020 and December 31, 2019.
14. Stockholders’ Equity
In November 2019, our board of directors approved a share repurchase program authorizing the repurchase of up to $100.0 million of our outstanding common stock. The share repurchase program is effective through November 7, 2020. Shares repurchased under the plan are retired. There was no repurchase activity during the three and six months ended June 30, 2020 and 2019.
On May 22, 2020, we consummated an underwritten public offering of 5.85 million shares of our common stock, which included 0.76 million shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares. The offering was priced at $59.00 per share for total gross proceeds of $345.0 million. The aggregate net proceeds to us were $334.1 million, after deducting underwriting discounts and offering expenses in the aggregate amount of $10.9 million.
Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (Loss) Gain on Derivative Instruments, Net of Tax
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
Balance at January 1, 2020
|
|
$
|
(1,461)
|
|
|
$
|
(887)
|
|
|
$
|
(2,348)
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
(3,549)
|
|
|
(505)
|
|
|
(4,054)
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
134
|
|
|
—
|
|
|
134
|
|
|
Net current period other comprehensive income (loss)
|
|
(3,415)
|
|
|
(505)
|
|
|
(3,920)
|
|
|
Balance at March 30, 2020
|
|
(4,876)
|
|
|
(1,392)
|
|
|
(6,268)
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
(414)
|
|
|
180
|
|
|
(234)
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
375
|
|
|
—
|
|
|
375
|
|
|
Net current period other comprehensive income (loss)
|
|
(39)
|
|
|
180
|
|
|
141
|
|
|
Balance at June 30, 2020
|
|
$
|
(4,915)
|
|
|
$
|
(1,212)
|
|
|
$
|
(6,127)
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019(1)
|
|
$
|
249
|
|
|
$
|
(716)
|
|
|
$
|
(467)
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
(585)
|
|
|
(99)
|
|
|
(684)
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
(221)
|
|
|
—
|
|
|
(221)
|
|
|
Net current period other comprehensive income (loss)
|
|
(806)
|
|
|
(99)
|
|
|
(905)
|
|
|
Balance at March 31, 2019
|
|
(557)
|
|
|
(815)
|
|
|
(1,372)
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
(991)
|
|
|
118
|
|
|
(873)
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
(223)
|
|
|
—
|
|
|
(223)
|
|
|
Net current period other comprehensive income (loss)
|
|
(1,214)
|
|
|
118
|
|
|
(1,096)
|
|
|
Balance at June 30, 2019
|
|
$
|
(1,771)
|
|
|
$
|
(697)
|
|
|
$
|
(2,468)
|
|
(1)Reflects the cumulative effective of adopting ASU 2017-12 in the prior period.
The loss on our derivative instruments recognized in accumulated other comprehensive income (loss) during the three and six months ended June 30, 2020 results from a reduction in current and forecasted future LIBOR rates primarily driven by the market’s response to the COVID-19 pandemic.
15. Derivative Financial Instruments
Cash Flow Hedges
Interest Rate Swap Agreements
We are exposed to interest rate risk on our variable rate debt. We have entered into interest rate swap agreements to effectively convert portions of our variable rate debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with our variable rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. These derivative instruments are designated as cash flow hedges, as defined in ASC 815, and are assessed for effectiveness against the underlying exposure every reporting period.
On March 31, 2016, we entered into two interest rate swap agreements (collectively the “2016 Swap Agreements”). The 2016 Swap Agreements covered an aggregate notional amount of $75.0 million from March 2016 to September 2019 by replacing the obligation’s variable rate with a blended fixed rate of 0.89%. The 2016 Swap Agreements matured on September 30, 2019.
On December 24, 2018, we entered into two interest rate swap agreements (collectively the “2018 Swap Agreements”). The 2018 Swap Agreements covered an aggregate notional amount of $100.0 million from December 2018 to February 2022 by replacing the obligation’s variable rate with a blended fixed rate of 2.57%.
On February 10, 2020, we entered into an interest rate swap agreement (the “2020 Swap Agreement”) that covers an aggregate notional amount of $100.0 million from February 2020 to September 2024 by replacing the obligation’s variable rate with a fixed rate of 1.89%. In connection with this transaction, we terminated the 2018 Swap Agreements on a prospective basis and designated the 2020 Swap Agreement under a new cash flow hedge relationship. The fair value of the 2018 Swap Agreements immediately prior to termination was a liability of $2.5 million. The 2020 Swap Agreement contains a blend of the current interest rate environment and the unfavorable portion of the terminated 2018 Swap Agreements, which resulted in a significant financing element at inception of the new cash flow hedge due to off-market terms. Because the forecasted transactions that the 2018 Swap Agreements were designated to hedge are still probable to occur, the unrealized loss will be reclassified into earnings through September 2024.
The changes in the fair value of the swap agreements are initially recorded in accumulated other comprehensive income (loss) net of tax and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to the swap agreements will be reclassified to “Interest expense and other, net” in the accompanying Condensed Consolidated Statements of Operations as interest payments are made on our variable rate debt.
Foreign Exchange Currency Contracts
We are exposed to market risk that includes changes in foreign exchange rates. We have operations in certain foreign countries where the functional currency is the local currency. For international operations that are determined to be extensions of the parent company, the U.S. dollar is the functional currency. As of June 30, 2020, we have entered into a series of foreign exchange forward contracts with a total notional amount of $14.8 million to hedge the effect of adverse fluctuations in foreign currency exchange rates for the Indian rupee and Philippines peso. These contracts are designated as cash flow hedges, as defined by ASC 815, of forecasted transactions, are intended to offset the impact of movement of exchange rates on future operating costs and are scheduled to mature within twelve months.
The changes in the fair value of these contracts are initially recorded in accumulated other comprehensive income (loss) net of tax and are subsequently reclassified to “Cost of revenue” and “Operating expenses” in the accompanying Condensed Consolidated Statements of Operations in the same period that the hedged transactions affect earnings.
The table below presents the fair value of the derivative instruments designated as cash flow hedges as well as their classification in the Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
|
Balance Sheet Location
|
|
June 30, 2020
|
|
December 31, 2019
|
|
|
|
|
(in thousands)
|
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
Other current assets
|
|
$
|
266
|
|
|
$
|
217
|
|
|
Total derivative assets
|
|
|
$
|
266
|
|
|
$
|
217
|
|
|
Liabilities:
|
|
|
|
|
|
|
Interest rate swaps
|
Other long-term liabilities
|
|
$
|
7,055
|
|
|
$
|
2,193
|
|
|
Foreign currency forward contracts
|
Other current liabilities
|
|
101
|
|
|
14
|
|
|
Total derivative liabilities
|
|
|
$
|
7,156
|
|
|
$
|
2,207
|
|
As of June 30, 2020, we have not posted any collateral related to our derivative instruments. If we had breached any of the default provisions at June 30, 2020, we could have been required to settle our obligations under the agreements at their termination value of $7.2 million.
The tables below present the amount of gains and losses related to the derivative instruments and their location in the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019, in thousands:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as Cash Flow Hedges
|
|
Gain (Loss) Recognized in OCI
|
|
|
|
|
Gain (Loss) Recognized in Income
|
|
|
Three months ended June 30,
|
|
2020
|
2019
|
|
Location of Gain (Loss) Recognized in Income
|
|
2020
|
2019
|
|
Swap agreements, net of tax
|
|
$
|
(696)
|
|
$
|
(1,081)
|
|
|
Interest expense and other
|
|
$
|
(390)
|
|
$
|
212
|
|
|
Foreign currency forward contracts, net of tax
|
|
282
|
|
90
|
|
|
Cost of revenue and operating expenses
|
|
15
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as Cash Flow Hedges
|
|
Gain (Loss) Recognized in OCI
|
|
|
|
|
Gain (Loss) Recognized in Income
|
|
|
Six months ended June 30,
|
|
2020
|
2019
|
|
Location of Gain (Loss) Recognized in Income
|
|
2020
|
2019
|
|
Swap agreements, net of tax
|
|
$
|
(3,971)
|
|
$
|
(1,666)
|
|
|
Interest expense and other
|
|
$
|
(545)
|
|
$
|
433
|
|
|
Foreign currency forward contracts, net of tax
|
|
8
|
|
90
|
|
|
Cost of revenue and operating expenses
|
|
36
|
|
11
|
|
As of June 30, 2020, we estimate that $2.3 million of the net loss related to derivatives designated as cash flow hedges recorded in accumulated other comprehensive loss is expected to be reclassified into earnings within the next twelve months.
Gains and losses on our cash flow hedges are net of income tax benefit of $0.4 million for the three months ended June 30, 2019, and income tax benefit of $1.2 million and $0.6 million for the six months ended June 30, 2020 and 2019, respectively. The tax impact for the three months ended June 30, 2020 was nominal. Cash flows from these derivative instruments are included within the operating activities in the Condensed Consolidated Statements of Cash Flows, as our accounting policy is to present cash flows from hedging instruments in the same category as the item being hedged. The 2020 Swap Agreement contains an other-than-insignificant financing element and, accordingly, the associated cash flows are reported as financing activities in the Condensed Consolidated Statements of Cash Flows.
Balance Sheet Hedges
We also enter into foreign currency forward contracts to hedge fluctuations associated with foreign currency denominated monetary assets and liabilities primarily associated with our lease liabilities. These forward contracts are not designated for hedge accounting treatment, therefore, the change in fair value of these derivatives is recorded as a component of “General and administrative” in the accompanying Condensed Consolidated Statements of Operations and offsets the change in fair value of the foreign currency denominated assets and liabilities, which are also recorded in “General and administrative”. As of June 30, 2020, the notional amounts of outstanding foreign currency contracts entered into under our balance sheet hedge program was $2.4 million. The effect of derivatives not designated as hedge instruments for the period ended June 30, 2020 was de minimis.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (which Sections were adopted as part of the Private Securities Litigation Reform Act of 1995). Statements preceded by, followed by, or that otherwise include the words “anticipates,” “aspires,” “believes,” “can,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” or “would” or similar expressions and the negatives of those terms are generally forward-looking in nature and not historical facts. These forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward looking statements. Factors that might cause or contribute to such differences include, but are not limited to, the potential impacts of the COVID-19 pandemic on our business, financial condition and results of operations, those discussed in the section entitled “Risk Factors” in Part II, Item 1A of this report and those discussed in our Annual Report on Form 10-K for the fiscal year 2019 previously filed with the SEC on March 2, 2020 (“Annual Report on Form 10-K”) and our Quarterly Report on Form 10-Q for the first quarter of 2020 filed on May 8, 2020 (“Quarterly Report on Form 10-Q”). You should carefully review the risks described herein and in the other documents we file from time to time with the SEC. You should not place undue reliance on forward-looking statements herein, which speak only as of the date of this report. Except as required by law, we disclaim any intention, and undertake no obligation, to revise any forward-looking statements, whether as a result of new information, a future event, or otherwise.
Overview
We are a leading global provider of software and data analytics to the real estate industry. Clients use our platform of solutions to improve operating performance and increase capital returns. By leveraging data as well as integrating and streamlining a wide range of complex processes and interactions among the rental real estate ecosystem, our platform helps our clients improve financial and operational performance and prudently place and harvest capital.
The substantial majority of our revenue is derived from sales of our on demand software solutions sold pursuant to subscription license agreements. We also derive revenue from our professional and other services. For our insurance-based solutions, we earn revenue based on a commission rate that considers earned premiums, agent commission, incurred losses, and profit retained by our underwriting partners. Our transaction-based solutions are priced based on a fixed rate per transaction. We sell our solutions through our direct sales organization and derive substantially all of our revenue from sales in the United States.
We believe there is increasing demand for solutions that bring efficiency and precision to the rental real estate industry, which has historically lacked the tools available to many other investment classes. While the use of, and transition to, data analytics and on demand software solutions in the rental real estate industry is growing rapidly, we believe it remains at a relatively early stage of adoption. Additionally, there is a modest level of penetration of our on demand software solutions in our existing client base. We believe these factors present us with significant opportunities to generate revenue through sales of additional data analytics and on demand software solutions.
Our company was formed in 1998 to acquire Rent Roll, Inc., which marketed and sold on premise property management systems for the conventional and affordable multifamily rental housing markets. In June 2001, we released OneSite, our first on demand property management system. Since 2002, we have expanded our platform of solutions to include property management, leasing and marketing, resident services, and asset optimization capabilities. In addition to the multifamily markets, we now serve the single family, senior living, student living, military housing, commercial, hospitality, homeowner association, short-term rental and vacation rental markets. Since July 2002, we have completed over 45 acquisitions of complementary technologies to supplement our internal product development and sales and marketing efforts and expand the scope of our solutions, the types of rental housing and vacation rental properties served by our solutions, and our client base. In connection with this expansion and these acquisitions, we have committed greater resources to developing and increasing sales of our platform of data analytics and on demand solutions. As of June 30, 2020, we had approximately 7,400 employees.
COVID-19 Pandemic
During the quarter ended June 30, 2020, we continued to respond to the challenges that the evolving COVID-19 virus (“COVID-19”) pandemic created for us and our customers. We completed the movement of almost all our staff to a work-from-home environment while simultaneously supporting our customers as they used our software services to sustain their operations while reducing in-person interactions with their customers. Portions of our business, particularly our electronic payment processing services, experienced growth during the quarter, while certain of our other services experienced lower transactional volumes as leasing and marketing services slowed as a result of COVID-19.
Many countries, including particularly the United States, are still experiencing high levels of new COVID-19 infections, and the ultimate severity and duration of the outbreak and its effect on our future operations is uncertain. It is possible that the COVID-19 pandemic, the measures taken by the governments of countries affected, and the resulting economic impact could still materially adversely affect our future results of operations, cash flows and financial position, as well as the financial health of our customers in the short and long term. The reduced economic activity resulting from the COVID-19 virus may impact multi-family tenants’ ability to fully meet their obligations to our customers and, in turn, our customers’ ability to meet their obligations to us or to otherwise seek modifications of such obligations, resulting in increases in uncollectible receivables and reductions in revenue. Further, the negative financial impact of the pandemic could impact our future compliance with financial covenants or our credit facility and other debt agreements, and the weaker economic conditions could cause us to recognize impairment in value of our tangible or intangible assets.
Solutions and Services
Our platform is designed to serve as a single system of record for all of the constituents of the rental real estate ecosystem; to support the entire renter life cycle, from prospect to applicant to residency or guest to post-residency or post-stay; and to optimize operational yields and returns on investment. Common authentication, workflow, and user experience across solution categories enables each of these constituents to access different applications as appropriate for their roles.
Our platform consists of four primary categories of solutions: Property Management, Leasing and Marketing, Resident Services, and Asset Optimization. These solutions provide complementary asset performance and investment decision support; risk mitigation, billing and utility management; resident engagement, spend management, operations and facilities management; and lead generation and lease management capabilities that collectively enable our clients to manage all the stages of the renter life cycle. Each of our solution categories includes multiple product centers that provide distinct capabilities that can be bundled as a package or licensed separately. Each product center integrates with a central repository of lease transaction data, including prospect, renter, and property data. In addition, our open architecture allows third-party applications to access our solutions using our RealPage Exchange platform.
We offer different versions of our platform for different types of properties in different real estate markets. For example, our platform supports the specific and distinct requirements of:
•conventional single family properties;
•conventional multifamily properties;
•affordable Housing and Urban Development ("HUD") properties;
•affordable tax credit properties;
•rural housing properties;
•privatized military housing;
•commercial properties;
•student housing;
•senior living;
•homeowner association properties;
•short-term rentals;
•vacation rentals; and
•institutional.
Property Management
Our property management solutions are referred to as ERP systems. These solutions manage core property management business processes, including leasing, accounting, budgeting, purchasing, facilities management, document management, and support and advisory services. The solutions include a central database of prospect, applicant, renter, and property information that is accessible in real time by our other solutions. Our property management solutions also interface with most popular general ledger accounting systems through our RealPage Exchange platform. This makes it possible for clients to deploy our solutions using our accounting system or a third-party accounting system. Our property management solution category consists of the following primary solutions: OneSite, Propertyware, Buildium, RealPage Financial Services, Kigo, Spend Management Solutions, SmartSource IT, and EasyLMS.
Resident Services
Our resident services solutions provide a platform to optimize the transactional and social experience of prospects and renters, and enhance a property’s reputation. These solutions facilitate core renter management business processes including
utility billing, renter payment processing, service requests, lease renewal, renter’s insurance, and consulting and advisory services. Our resident services solution category primarily consists of the following primary solutions: Resident Utility Management, SimpleBills, Resident Payments, ActiveBuilding, Contact Center Maintenance, and Renter’s Insurance.
Leasing and Marketing
Leasing and marketing solutions aim to optimize marketing spend and the leasing process. These solutions manage core leasing and marketing processes, including websites and syndication, paid lead generation, organic lead generation, lead management, automated lead closure, lead analytics, real-time unit availability, automated online apartment leasing, applicant screening, and creative content design. Our leasing and marketing solutions category consists of the following primary solutions: Online Leasing, Contact Center, Websites & Syndication, Intelligent Lease Management, LeaseLabs, AI Resident Screening and MyNewPlace.
Asset Optimization
Our asset optimization solutions aim to optimize property financial and operational performance and provide comprehensive analytics-based decision support for optimum investment performance throughout the phases of real estate investment (e.g., acquisition, operation, renovation, and disposition). These solutions facilitate core asset management, business intelligence, performance benchmarking and investment analysis including real-time yield management, revenue growth forecasting, key variable sensitivity forecasting, internal operating metric benchmarking and external market benchmarking. Our asset optimization solution category consists of the following primary solutions: Revenue Management, Business Intelligence, and Asset and Investment Management.
Professional Services
We have developed repeatable, cost-effective consulting and implementation services to assist our clients in taking advantage of our capabilities and solutions. Our consulting and implementation methodology leverages the nature of our on demand software architecture, the industry-specific expertise of our professional services employees, and the design of our platform to simplify and expedite the implementation process. Our consulting and implementation services include project and application management procedures, business process evaluation, business model development and data conversion. Our consulting teams work closely with customers to facilitate the smooth transition and operation of our solutions.
We offer training programs for training administrators and onsite property managers on the use of our solutions. Training options include regularly hosted classroom and online instruction (through our online learning courseware), as well as online webinars. Our clients can integrate their own training content with our content to deliver an integrated and customized training program for their on-site property managers.
Recent Developments
Acquisition Activity
On January 22, 2020, we entered into an Agreement and Plan of Merger, by which we acquired all of the outstanding stock of Modern Message Inc. (“Modern Message”), a provider of resident engagement solutions to the multifamily housing industry. Aggregate purchase consideration was $64.7 million, comprised of $62.7 million paid at closing and deferred cash obligations of up to $2.0 million, subject to working capital adjustments and indemnification claims. A portion of the deferred cash obligations will be released within 180 days of closing, a portion on the first anniversary of the closing, and the remainder on the second anniversary of closing. In addition, the Agreement and Plan of Merger provided for retention incentives for certain executives in the form of restricted stock grants that are tied to post-acquisition employment service. These shares were granted during the first quarter of 2020, and had an aggregate grant date fair value of $10.7 million which will be recognized as stock-based compensation over the requisite service period. The acquisition was financed with cash on hand.
Refer to Note 3 of the accompanying Condensed Consolidated Financial Statements for further discussion of this acquisition.
Key Business Metrics
In addition to traditional financial measures, we monitor our operating performance using a number of financially and non-financially derived metrics that are not included in our Condensed Consolidated Financial Statements. We monitor the key performance indicators reflected in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in thousands, except dollar per unit data)
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Total revenue
|
$
|
285,607
|
|
|
$
|
243,861
|
|
|
$
|
562,280
|
|
|
$
|
478,167
|
|
|
On demand revenue
|
$
|
278,559
|
|
|
$
|
235,185
|
|
|
$
|
547,030
|
|
|
$
|
461,704
|
|
|
On demand revenue as a percentage of total revenue
|
97.5
|
%
|
|
96.4
|
%
|
|
97.3
|
%
|
|
96.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP total revenue
|
$
|
286,032
|
|
|
$
|
244,018
|
|
|
$
|
563,105
|
|
|
$
|
478,548
|
|
|
Non-GAAP on demand revenue
|
$
|
278,984
|
|
|
$
|
235,342
|
|
|
$
|
547,855
|
|
|
$
|
462,085
|
|
|
Adjusted EBITDA
|
$
|
79,904
|
|
|
$
|
68,231
|
|
|
$
|
151,382
|
|
|
$
|
133,407
|
|
|
|
|
|
|
|
|
|
|
|
Ending on demand units
|
18,880
|
|
|
16,505
|
|
|
|
|
|
|
Average on demand units
|
18,844
|
|
|
16,453
|
|
|
|
|
|
|
On demand annual client value
|
$
|
1,118,074
|
|
|
$
|
942,436
|
|
|
|
|
|
|
Annualized on demand revenue per ending on demand unit
|
$
|
59.22
|
|
|
$
|
57.10
|
|
|
|
|
|
On demand revenue: This metric represents the GAAP revenue derived from license and subscription fees relating to our on demand software solutions, typically licensed over one year terms; commission income from sales of renter’s insurance policies; and transaction fees for certain of our on demand software solutions. We consider on demand revenue to be a key business metric because we believe the market for our on demand software solutions represents the largest growth opportunity for our business.
On demand revenue as a percentage of total revenue: This metric represents on demand revenue for the period presented divided by total revenue for the same period. We use on demand revenue as a percentage of total revenue to measure our success executing our strategy to increase the penetration of our on demand software solutions and expand our recurring revenue streams attributable to these solutions. We expect our on demand revenue to remain a significant percentage of our total revenue although the actual percentage may vary from period to period due to a number of factors, including the timing of acquisitions, professional and other revenues, and on premise perpetual license sales and maintenance fees.
Non-GAAP total revenue: This metric is calculated by adding acquisition-related deferred revenue to total revenue. We believe it is useful to include deferred revenue written down for GAAP purposes under purchase accounting rules in order to appropriately measure the underlying performance of our business operations in the period of activity and associated expense. Further, we believe this measure is useful to investors as a way to evaluate our ongoing performance because it provides a more accurate depiction of revenue arising from our strategic acquisitions.
The following provides a reconciliation of GAAP to non-GAAP total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Total revenue
|
$
|
285,607
|
|
|
$
|
243,861
|
|
|
$
|
562,280
|
|
|
$
|
478,167
|
|
|
Acquisition-related deferred revenue
|
425
|
|
|
157
|
|
|
825
|
|
|
381
|
|
|
Non-GAAP total revenue
|
$
|
286,032
|
|
|
$
|
244,018
|
|
|
$
|
563,105
|
|
|
$
|
478,548
|
|
Non-GAAP on demand revenue: This metric reflects total on demand revenue plus acquisition-related deferred revenue, as described above. We believe inclusion of these items provides a useful measure of the underlying performance of our on demand business operations in the period of activity and associated expense. Further, we believe that investors and financial
analysts find this measure to be useful in evaluating our ongoing performance because it provides a more accurate depiction of on demand revenue arising from our strategic acquisitions.
The following provides a reconciliation of GAAP to non-GAAP on demand revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
On demand revenue
|
$
|
278,559
|
|
|
$
|
235,185
|
|
|
$
|
547,030
|
|
|
$
|
461,704
|
|
|
Acquisition-related deferred revenue
|
425
|
|
|
157
|
|
|
825
|
|
|
381
|
|
|
Non-GAAP on demand revenue
|
$
|
278,984
|
|
|
$
|
235,342
|
|
|
$
|
547,855
|
|
|
$
|
462,085
|
|
Adjusted EBITDA: We define Adjusted EBITDA as net income, plus (1) acquisition-related deferred revenue, (2) depreciation, asset impairment, and loss on disposal of assets, (3) amortization of product technologies and intangible assets, (4) change in fair value of equity investment, (5) acquisition-related expense, (6) organizational realignment, (7) regulatory and legal matters, (8) stock-based expense, (9) interest expense, net, and (10) income tax expense (benefit). We believe that investors and financial analysts find this non-GAAP financial measure to be useful in analyzing our financial and operational performance, comparing this performance to our peers and competitors, and understanding our ability to generate income from ongoing business operations.
The following provides a reconciliation of net income to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Net income
|
$
|
11,301
|
|
|
$
|
15,063
|
|
|
$
|
16,906
|
|
|
$
|
26,335
|
|
|
Acquisition-related deferred revenue
|
425
|
|
|
157
|
|
|
825
|
|
|
381
|
|
|
Depreciation, asset impairment, and loss on disposal of assets
|
8,566
|
|
|
8,697
|
|
|
16,949
|
|
|
17,457
|
|
|
Amortization of product technologies and intangible assets
|
25,778
|
|
|
20,302
|
|
|
50,969
|
|
|
39,652
|
|
|
Change in fair value of equity investment
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,600)
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related expense
|
3,137
|
|
|
376
|
|
|
6,861
|
|
|
405
|
|
|
Organizational realignment
|
1,220
|
|
|
—
|
|
|
2,431
|
|
|
—
|
|
|
Regulatory and legal matters
|
2,150
|
|
|
352
|
|
|
2,509
|
|
|
352
|
|
|
Stock-based expense
|
12,331
|
|
|
15,865
|
|
|
28,532
|
|
|
30,778
|
|
|
Interest expense, net
|
13,129
|
|
|
8,241
|
|
|
26,034
|
|
|
16,822
|
|
|
Income tax expense (benefit)
|
1,867
|
|
|
(822)
|
|
|
(634)
|
|
|
3,825
|
|
|
Adjusted EBITDA
|
$
|
79,904
|
|
|
$
|
68,231
|
|
|
$
|
151,382
|
|
|
$
|
133,407
|
|
Ending on demand units: This metric represents the number of units managed by our clients with one or more of our on demand software solutions at the end of the period. We use ending on demand units to measure the success of our strategy of increasing the number of units managed with our on demand software solutions. Property unit counts are provided to us by our clients as new sales orders are processed. Property unit counts may be adjusted periodically as information related to our clients’ properties is updated or supplemented, which could result in adjustments to the number of units previously reported.
Average on demand units: We calculate average on demand units as the average of the beginning and ending on demand units for each quarter in the period presented. This metric is a measure of our success increasing the number of on demand software solutions utilized by our clients to manage their property units, our overall revenue, and profitability.
On demand annual client value (“ACV”): ACV represents our estimate of the annual value of our on demand revenue contracts at a point in time. We monitor this metric to measure our success in increasing the number of on demand units, and the amount of software solutions utilized by our clients to manage their property units.
On demand revenue per ending on demand unit (“RPU”): We define RPU as ACV divided by ending on demand units. We monitor this metric to measure our success in increasing the penetration of on demand software solutions utilized by our clients to manage their property units.
Non-GAAP Financial Measures
We report our financial results in accordance with GAAP; however, we believe that, in order to properly understand our short-term and long-term financial, operational, and strategic trends, it may be helpful for investors to exclude certain non-cash or non-recurring items when used as a supplement to financial performance measures in accordance with GAAP. These items result from facts and circumstances that vary in both frequency and impact on continuing operations. We also use results of operations excluding such items to evaluate our operating performance compared against prior periods, make operating decisions, determine executive compensation, and serve as a basis for long-term strategic planning. These non-GAAP financial measures provide us with additional means to understand and evaluate the operating results and trends in our ongoing business by eliminating certain non-cash expenses and other items that we believe might otherwise make comparisons of our ongoing business with prior periods more difficult, obscure trends in ongoing operations, reduce our ability to make useful forecasts, or obscure the ability to evaluate the effectiveness of certain business strategies and management incentive structures. In addition, we also believe that investors and financial analysts find this information helpful in analyzing our financial and operational performance and comparing this performance to our peers and competitors. These non-GAAP financial measures are used in conjunction with traditional GAAP financial measures as part of our overall assessment of our performance.
We do not place undue reliance on non-GAAP financial measures as measures of operating performance. Non-GAAP financial measures should not be considered substitutes for other measures of financial performance or liquidity reported in accordance with GAAP. There are limitations to using non-GAAP financial measures, including that other companies may calculate these measures differently than we do; that they do not reflect changes in, or cash requirements for, our working capital; and that they do not reflect our capital expenditures or future requirements for capital expenditures. We compensate for the inherent limitations associated with using non-GAAP financial measures through disclosure of these limitations, presentation of our financial statements in accordance with GAAP, and reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures.
We exclude or adjust each of the items identified below from the applicable non-GAAP financial measure referenced above for the reasons set forth with respect to each excluded item:
Acquisition-related deferred revenue: This item is included to reflect deferred revenue written down for GAAP purposes under purchase accounting in order to appropriately measure the underlying performance of our business operations in the period of activity and associated expense.
Asset impairment and (gain) loss on disposal of assets: This item comprises gains and/or losses on the disposal and impairment of long-lived assets, and impairment of intangible assets, which are not reflective of our ongoing operations. We believe exclusion of this item facilitates a more accurate comparison of our results of operations between periods.
Depreciation of long-lived assets: Long-lived assets are depreciated over their estimated useful lives in a manner reflecting the pattern in which the economic benefit is consumed. Management is limited in its ability to change or influence these charges after the asset has been acquired and placed in service. We do not believe that depreciation expense accurately reflects the performance of our ongoing operations for the period in which the charges are incurred, and it is therefore not considered by management in making operating decisions.
Amortization of product technologies and intangible assets: Intangible assets are amortized over their estimated useful lives and generally cannot be changed or influenced by management after initial capitalization. Accordingly, this item is not considered by us in making operating decisions. We do not believe such charges accurately reflect the performance of our ongoing operations for the period in which such charges are incurred.
Change in fair value of equity investment: This item represents changes in fair value of our equity investment based on observable price changes in orderly transactions for an identical or similar investment of the same issuer. We believe exclusion of this item facilitates a more accurate comparison of our results of operations between periods as this item is not reflective of our ongoing operations.
Acquisition-related expense: This item consists of direct costs incurred in our business acquisition transactions and expenses related to integration activities, and the impact of changes in the fair value of acquisition-related contingent consideration obligations. Examples of these direct costs include transaction fees, due diligence costs, acquisition retention bonuses and severance, and third-party consultants to assist with integration. We believe exclusion of this item facilitates a more accurate comparison of the results of our ongoing operations across periods and eliminates volatility related to changes in the fair value of acquisition-related contingent consideration obligations.
Organizational realignment: This item consists of direct costs associated with the alignment of our business strategies. In connection with these actions, we recognize costs related to termination benefits, exit costs associated with closure of facilities, certain asset impairments, cancellation of certain contracts, and other professional and consulting fees associated with these initiatives. We believe exclusion of this item facilitates a more accurate comparison of our ongoing results of operations between periods.
Regulatory and legal matters: This item is comprised of certain regulatory and similar costs and certain legal settlement costs, such as costs related to the company’s Hart-Scott-Rodino Antitrust Improvements Act review process incurred in connection with our acquisitions or the settlement of certain legal matters. These costs are excluded as they are irregular in timing and scope and may not be indicative of our past and future performance. We believe exclusion of this item facilitates a more accurate comparison of the company’s results of operations between periods.
Stock-based expense: This item is excluded because these are non-cash expenditures that we do not consider part of ongoing operating results when assessing the performance of our business, and also because the total amount of the expenditure is partially outside of management’s control because it is based on factors such as stock price, volatility, and interest rates, which may be unrelated to our performance during the period in which the expenses are incurred.
Key Components of Our Results of Operations
Revenue
We derive our revenue from two primary sources: our on demand software solutions and our professional and other services.
On demand revenue: Revenue from our on demand software solutions is comprised of license and subscription fees relating to our on demand software solutions, typically licensed for one year terms; commission income from sales of renter’s insurance policies; and transaction fees for certain on demand software solutions, such as payment processing, spend management, and billing services. For our insurance based solutions, our agreements provide for a fixed commission on earned premiums related to the policies sold by us. The agreements also provide for a contingent commission to be paid to us in accordance with the agreements. Our transaction-based solutions are priced based on a fixed rate per transaction.
Professional and other revenue: Revenue from professional and other services consists of consulting and implementation services; training; and other ancillary services. We complement our solutions with professional and other services for our clients willing to invest in enhancing the value or decreasing the implementation time of our solutions. Our professional and other services are typically priced as time and materials engagements. Professional and other revenue also includes revenues generated from sub-meter installation services under our resident utility management solutions, and our on premise solutions.
Cost of Revenue
Cost of revenue consists primarily of personnel costs related to our operations; support services; training and implementation services; expenses related to the operation of our data centers; transaction processing fees; and fees paid to third-party service providers. Personnel costs include salaries, bonuses, stock-based expense, and employee benefits. Cost of revenue also includes an allocation of facilities costs, overhead costs, and depreciation, which are allocated based on headcount.
Amortization of Product Technologies
Amortization of product technologies includes amortization of developed product technologies related to strategic acquisitions and amortization of capitalized development costs.
Operating Expenses
We classify our operating expenses into four primary categories: product development, sales and marketing, general and administrative, and amortization of intangible assets. Our operating expenses primarily consist of personnel costs, costs for third-party contracted development, marketing, legal, accounting and consulting services, and other professional service fees. Personnel costs for each category of operating expenses include salaries, bonuses, stock-based expense, and employee benefits for employees in that category. Our operating expenses also include an allocation of facilities costs, overhead costs, and depreciation based on headcount for the product development, sales and marketing, and general and administrative categories.
Product development: Product development expense consists primarily of personnel costs for our product development employees and executives, information technology and facilities, and fees to contract development vendors. Our product development efforts are focused primarily on increasing the functionality and enhancing the ease of use of our platform of solutions and expanding our suite of data analytics and on demand software solutions. In addition to our locations in the United States, we maintain product development and service centers in Hyderabad, India; Manila, Philippines; Medellin, Colombia; and Cebu City, Philippines.
Sales and marketing: Sales and marketing expense consists primarily of personnel costs for our sales, marketing, and business development employees and executives, information technology, travel and entertainment, and marketing programs. Marketing programs consist of amounts paid for product marketing, renter’s insurance, other advertising, trade shows, user conferences, public relations, and industry sponsorships and affiliations.
General and administrative: General and administrative expense consists of personnel costs for our executives, finance and accounting, human resources, management information systems, and legal personnel. In addition, general and administrative expense includes fees for professional services, including legal, accounting, and other consulting services,
information technology and facilities costs, and acquisition-related costs, including direct costs incurred to complete our acquisitions and changes in the fair value of our acquisition-related contingent consideration obligations.
Amortization of intangible assets: Amortization of intangible assets consist of amortization of purchased intangible assets, including client relationships, key vendor and supplier relationships, finite-lived trade names, and non-compete agreements, obtained in connection with our acquisitions.
Interest Expense and Other, Net
Interest expense and other, net, consists primarily of interest income, interest expense, and impairments on investments. Interest income represents earnings from our cash and cash equivalents. Interest expense is associated with amounts borrowed under the Amended Credit Facility, Convertible Notes, finance lease obligations, and certain acquisition-related liabilities, and includes expense from the amortization of related discounts and debt issuance costs. We participate in interest rate swap agreements, the purpose of which is to eliminate variability in interest rate payments on a portion of the Term Loans. For that portion, the swap agreements replace the Term Loan’s variable rate with a fixed rate.
Critical Accounting Policies and Estimates
Our Condensed Consolidated Financial Statements are prepared in accordance with GAAP. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, management’s significant judgment is required to make estimates, assumptions, and judgments that affect the reported amount of assets, liabilities, revenue, expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. In some instances, we could reasonably use different accounting estimates, and in other instances, results could differ significantly from our estimates. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.
We believe that the following critical accounting policies involve our more significant judgments, assumptions and estimates, and therefore, could have the greatest potential impact on our Condensed Consolidated Financial Statements:
•Revenue recognition;
•Deferred commissions;
•Stock-based expense;
•Income taxes, including deferred tax assets and liabilities;
•Business combinations;
•Goodwill and indefinite-lived intangible assets; and
•Internally developed software
Please refer to our Annual Report on Form 10-K for a discussion of such policies.
Recently Adopted Accounting Standards
Accounting Standards Update 2016-13
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU replaced the incurred loss impairment methodology in GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Our financial assets in the scope of ASU 2016-13 mainly consist of short-term trade receivables. We have also considered contract assets in our evaluation. Historically, our actual credit losses have not been material. In addition to continuing to individually assess overdue customer balances for expected credit losses, we have implemented modifications to our historical methodology that reflect the expected credit losses on receivables considering both historical experience and forward-looking assumptions. We adopted ASU 2016-13 using the modified retrospective approach on January 1, 2020, resulting in no cumulative adjustment to retained earnings. The adoption of this ASU did not have a material impact on our Condensed Consolidated Financial Statements. We will continue to actively monitor the impact of the COVID-19 pandemic on expected credit losses.
See Note 2 of the accompanying Condensed Consolidated Financial Statements for additional information regarding recently adopted or issued accounting standards.
Results of Operations
The following tables set forth our unaudited results of operations for the specified periods and the components of such results as a percentage of total revenue for the respective periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2020
|
|
2019
|
|
2019
|
|
|
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
On demand
|
$
|
278,559
|
|
|
97.5
|
%
|
|
$
|
235,185
|
|
|
96.4
|
%
|
|
Professional and other
|
7,048
|
|
|
2.5
|
|
|
8,676
|
|
|
3.6
|
|
|
Total revenue
|
285,607
|
|
|
100.0
|
|
|
243,861
|
|
|
100.0
|
|
|
Cost of revenue(1)
|
110,713
|
|
|
38.8
|
|
|
95,708
|
|
|
39.2
|
|
|
Amortization of product technologies
|
14,531
|
|
|
5.1
|
|
|
9,900
|
|
|
4.1
|
|
|
Gross profit
|
160,363
|
|
|
56.1
|
|
|
138,253
|
|
|
56.7
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Product development(1)
|
31,433
|
|
|
11.0
|
|
|
28,151
|
|
|
11.5
|
|
|
Sales and marketing(1)
|
49,424
|
|
|
17.3
|
|
|
49,120
|
|
|
20.1
|
|
|
General and administrative(1)
|
42,399
|
|
|
14.8
|
|
|
28,310
|
|
|
11.6
|
|
|
Amortization of intangible assets
|
11,247
|
|
|
3.9
|
|
|
10,402
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
134,503
|
|
|
47.1
|
|
|
115,983
|
|
|
47.6
|
|
|
Operating income
|
25,860
|
|
|
9.1
|
|
|
22,270
|
|
|
9.1
|
|
|
Interest expense and other, net
|
(12,692)
|
|
|
(4.4)
|
|
|
(8,029)
|
|
|
(3.3)
|
|
|
Income before income taxes
|
13,168
|
|
|
4.6
|
|
|
14,241
|
|
|
5.8
|
|
|
Income tax expense (benefit)
|
1,867
|
|
|
0.7
|
|
|
(822)
|
|
|
(0.3)
|
|
|
Net income
|
$
|
11,301
|
|
|
4.0
|
%
|
|
$
|
15,063
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.12
|
|
|
|
|
$
|
0.16
|
|
|
|
|
Diluted
|
$
|
0.11
|
|
|
|
|
$
|
0.16
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
95,752
|
|
|
|
|
91,914
|
|
|
|
|
Diluted
|
100,254
|
|
|
|
|
96,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes stock-based expense as follows:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
$
|
2,257
|
|
|
|
|
$
|
1,447
|
|
|
|
|
Product development
|
1,629
|
|
|
|
|
2,016
|
|
|
|
|
Sales and marketing
|
2,296
|
|
|
|
|
6,383
|
|
|
|
|
General and administrative
|
6,149
|
|
|
|
|
6,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2020
|
|
2019
|
|
2019
|
|
|
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
On demand
|
$
|
547,030
|
|
|
97.3
|
%
|
|
$
|
461,704
|
|
|
96.6
|
%
|
|
Professional and other
|
15,250
|
|
|
2.7
|
|
|
16,463
|
|
|
3.4
|
|
|
Total revenue
|
562,280
|
|
|
100.0
|
|
|
478,167
|
|
|
100.0
|
|
|
Cost of revenue(1)
|
219,623
|
|
|
39.1
|
|
|
185,902
|
|
|
38.9
|
|
|
Amortization of product technologies
|
28,303
|
|
|
5.0
|
|
|
19,414
|
|
|
4.1
|
|
|
Gross profit
|
314,354
|
|
|
55.9
|
|
|
272,851
|
|
|
57.1
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Product development(1)
|
62,981
|
|
|
11.2
|
|
|
58,048
|
|
|
12.1
|
|
|
Sales and marketing(1)
|
104,081
|
|
|
18.5
|
|
|
93,943
|
|
|
19.6
|
|
|
General and administrative(1)
|
82,927
|
|
|
14.7
|
|
|
56,453
|
|
|
11.8
|
|
|
Amortization of intangible assets
|
22,666
|
|
|
4.0
|
|
|
20,238
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
272,655
|
|
|
48.5
|
|
|
228,682
|
|
|
47.8
|
|
|
Operating income
|
41,699
|
|
|
7.4
|
|
|
44,169
|
|
|
9.2
|
|
|
Interest expense and other, net
|
(25,427)
|
|
|
(4.5)
|
|
|
(14,009)
|
|
|
(2.9)
|
|
|
Income before income taxes
|
16,272
|
|
|
2.9
|
|
|
30,160
|
|
|
6.3
|
|
|
Income tax benefit
|
(634)
|
|
|
(0.1)
|
|
|
3,825
|
|
|
0.8
|
|
|
Net income
|
$
|
16,906
|
|
|
3.0
|
%
|
|
$
|
26,335
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.18
|
|
|
|
|
$
|
0.29
|
|
|
|
|
Diluted
|
$
|
0.17
|
|
|
|
|
$
|
0.27
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
94,203
|
|
|
|
|
91,703
|
|
|
|
|
Diluted
|
98,143
|
|
|
|
|
96,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes stock-based expense as follows:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
$
|
4,267
|
|
|
|
|
$
|
2,778
|
|
|
|
|
Product development
|
3,566
|
|
|
|
|
4,496
|
|
|
|
|
Sales and marketing
|
8,184
|
|
|
|
|
11,733
|
|
|
|
|
General and administrative
|
12,515
|
|
|
|
|
11,771
|
|
|
|
Comparison of the Three and Six Months Ended June 30, 2020 and 2019
Our discussion and analysis below is specific to changes during the three and six month periods ended June 30, 2020 as compared to the same periods in the prior year, unless otherwise noted.
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
|
(in thousands, except per unit data)
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
On demand
|
$
|
278,559
|
|
|
$
|
235,185
|
|
|
$
|
43,374
|
|
|
18.4
|
%
|
|
Professional and other
|
7,048
|
|
|
8,676
|
|
|
(1,628)
|
|
|
(18.8)
|
|
|
Total revenue
|
$
|
285,607
|
|
|
$
|
243,861
|
|
|
$
|
41,746
|
|
|
17.1
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP on demand revenue
|
$
|
278,984
|
|
|
$
|
235,342
|
|
|
$
|
43,642
|
|
|
18.5
|
|
|
|
|
|
|
|
|
|
|
|
Ending on demand units
|
18,880
|
|
|
16,505
|
|
|
2,375
|
|
|
14.4
|
|
|
Average on demand units
|
18,844
|
|
|
16,453
|
|
|
2,391
|
|
|
14.5
|
|
|
On demand annual client value
|
$
|
1,118,074
|
|
|
$
|
942,436
|
|
|
$
|
175,638
|
|
|
18.6
|
|
|
Annualized on demand revenue per ending on demand unit
|
$
|
59.22
|
|
|
$
|
57.10
|
|
|
$
|
2.12
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
On demand
|
$
|
547,030
|
|
|
$
|
461,704
|
|
|
$
|
85,326
|
|
|
18.5
|
%
|
|
Professional and other
|
15,250
|
|
|
16,463
|
|
|
(1,213)
|
|
|
(7.4)
|
|
|
Total revenue
|
$
|
562,280
|
|
|
$
|
478,167
|
|
|
$
|
84,113
|
|
|
17.6
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP on demand revenue
|
$
|
547,855
|
|
|
$
|
462,085
|
|
|
$
|
85,770
|
|
|
18.6
|
%
|
Our on demand products and services facilitate our customers’ abilities to operate cost-effectively and to respond to certain of the challenges presented by the COVID-19 pandemic. Many of our products facilitate leasing-related and other transactional services with current or potential residents without person-to-person contact, benefiting both residents and our customers who are operating with significantly reduced numbers of on-site employees. There are, however, challenges to some of our revenue streams, particularly in our leasing and marketing solutions, where the uncertain economic environment coupled with protocols that inhibit person-to-person contact and normal activity levels are leading to reduced transactional volumes and lower leasing velocity. Similarly, we have seen reductions in our vacation rental business due to concerns about safety of travel and the rental properties and the uncertainties around the timing of a return to a more normal environment. The change in total revenue for the three and six months ended June 30, 2020, as compared to the same period in 2019, was due to the following:
On demand revenue: On demand revenue increased $43.4 million and $85.3 million, or 18.4% and 18.5%, respectively. These increases were attributable to growth across our platform, primarily in resident services and property management. This includes organic growth and acquired revenue from our 2019 and 2020 acquisitions. Annualized on demand revenue per ending on demand unit as of June 30, 2020 increased year-over-year by 3.7%, primarily due to organic growth of our solutions.
On demand revenue generated by our property management solutions increased $9.1 million and $21.5 million, or 17.8% and 21.3%, respectively. These increases were primarily attributable to incremental revenues of $10.7 million and $22.6 million, respectively, from acquisitions during 2019 and organic growth within certain other product offerings. These increases were partially offset by lower volumes in our vacation rental and spend management businesses as a direct result of the effects of COVID-19.
On demand revenue from our resident services solutions continued to experience significant growth, increasing $28.0 million and $50.2 million, or 27.6% and 25.4%, respectively. These increases were primarily from continued strong growth of our payments solutions, as well as incremental revenue from our 2019 acquisitions of Buildium, Simple Bills, and LeaseTerm Solutions. Our payments business benefited from increased transactional volumes as residents and our clients moved towards payment mechanisms that allowed for reduced personal contact coupled with a greater mix of higher margin transactions processed.
On demand revenue from our leasing and marketing solutions increased $1.0 million and $3.6 million, or 2.2% and 3.9%, respectively. During the three and six months ended June 30, 2020, we recognized incremental revenues from recent acquisitions of $4.7 million and $8.5 million, respectively, that were largely offset by a reduction in leasing velocity associated with COVID-19.
On demand revenue derived from our asset optimization solutions increased $5.3 million and $10.0 million, or 14.6% and 14.0%, respectively. These increases were largely attributable to incremental revenue from our acquisition of IMS in the fourth quarter of 2019 and organic growth across our revenue management and business intelligence solutions.
On demand unit metrics: As of June 30, 2020, one or more of our on demand solutions was utilized in the management of 18.9 million rental property units, representing a year-over-year net increase of 2.4 million units, or 14.4%. This growth is primarily attributable to our 2019 acquisitions, which accounted for approximately 10.8% of total ending on demand units, as well as organic unit growth. On demand units managed by our clients renewed at an average rate of 95.9% over the trailing twelve-month period ended June 30, 2020.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
$
|
104,626
|
|
|
$
|
90,244
|
|
|
$
|
14,382
|
|
|
15.9
|
%
|
|
$
|
207,746
|
|
|
$
|
175,436
|
|
|
$
|
32,310
|
|
|
18.4
|
%
|
|
Stock-based expense
|
2,257
|
|
|
1,447
|
|
|
810
|
|
|
56.0
|
|
|
4,267
|
|
|
2,778
|
|
|
1,489
|
|
|
53.6
|
|
|
Depreciation
|
3,830
|
|
|
4,017
|
|
|
(187)
|
|
|
(4.7)
|
|
|
7,610
|
|
|
7,688
|
|
|
(78)
|
|
|
(1.0)
|
|
|
Total cost of revenue
|
$
|
110,713
|
|
|
$
|
95,708
|
|
|
$
|
15,005
|
|
|
15.7
|
%
|
|
$
|
219,623
|
|
|
$
|
185,902
|
|
|
$
|
33,721
|
|
|
18.1
|
%
|
Cost of revenue, excluding stock-based expense and depreciation, increased $14.4 million and $32.3 million, or 15.9% and 18.4%, respectively. Direct costs increased $9.3 million and $19.6 million during the three and six months ended June 30, 2020, respectively, driven by higher transaction volume from our payment processing solutions and incremental costs from our recent acquisitions. Personnel expense for the same periods increased $6.0 million and $13.2 million, respectively, primarily attributable to new employees from our recent acquisitions and investments to accelerate implementations of our product offerings.
Amortization of Product Technologies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of product technologies
|
$
|
14,531
|
|
|
$
|
9,900
|
|
|
$
|
4,631
|
|
|
46.8
|
%
|
|
$
|
28,303
|
|
|
$
|
19,414
|
|
|
$
|
8,889
|
|
|
45.8
|
%
|
Amortization of product technologies increased $4.6 million and $8.9 million, or 46.8% and 45.8%, respectively. Higher amortization expense was driven by the addition of developed product technologies in connection with our recent acquisitions and an increase in amortization of developed software related to investment in innovation and product solutions.
Gross profit as a percentage of total revenue decreased to 56.1% from 56.7% and to 55.9% from 57.1%, respectively. This margin compression was a result of revenue growth from lower margin products, the impact from our recent acquisitions, and investments to accelerate implementation of our solutions.
Operating Expenses
Product development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
$
|
28,238
|
|
|
$
|
24,503
|
|
|
$
|
3,735
|
|
|
15.2
|
%
|
|
$
|
56,337
|
|
|
$
|
50,269
|
|
|
$
|
6,068
|
|
|
12.1
|
%
|
|
Stock-based expense
|
1,629
|
|
|
2,016
|
|
|
(387)
|
|
|
(19.2)
|
|
|
3,566
|
|
|
4,496
|
|
|
(930)
|
|
|
(20.7)
|
|
|
Depreciation
|
1,566
|
|
|
1,632
|
|
|
(66)
|
|
|
(4.0)
|
|
|
3,078
|
|
|
3,283
|
|
|
(205)
|
|
|
(6.2)
|
|
|
Total product development expense
|
$
|
31,433
|
|
|
$
|
28,151
|
|
|
$
|
3,282
|
|
|
11.7
|
%
|
|
$
|
62,981
|
|
|
$
|
58,048
|
|
|
$
|
4,933
|
|
|
8.5
|
%
|
Product development expense, excluding stock-based expense and depreciation, increased $3.7 million and $6.1 million or 15.2% and 12.1%, respectively. Personnel expense, net of capitalized software development costs, increased $4.3 million and $6.6 million during the three and six months ended June 30, 2020, respectively. This increase was primarily attributable to incremental personnel costs from our recent acquisitions, partially offset by decreases associated with our efficiency initiatives implemented in 2019 to centralize our product development team and direct a greater portion of work effort towards major new development projects.
Product development expense as a percentage of total revenue decreased to 11.0% from 11.5% and to 11.2% from 12.1%, respectively, due to the organizational initiatives described above.
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
$
|
45,458
|
|
|
$
|
41,171
|
|
|
$
|
4,287
|
|
|
10.4
|
%
|
|
$
|
92,608
|
|
|
$
|
79,138
|
|
|
$
|
13,470
|
|
|
17.0
|
%
|
|
Stock-based expense
|
2,296
|
|
|
6,383
|
|
|
(4,087)
|
|
|
(64.0)
|
|
|
8,184
|
|
|
11,733
|
|
|
(3,549)
|
|
|
(30.2)
|
|
|
Depreciation
|
1,670
|
|
|
1,566
|
|
|
104
|
|
|
6.6
|
|
|
3,289
|
|
|
3,072
|
|
|
217
|
|
|
7.1
|
|
|
Total sales and marketing expense
|
$
|
49,424
|
|
|
$
|
49,120
|
|
|
$
|
304
|
|
|
0.6
|
%
|
|
$
|
104,081
|
|
|
$
|
93,943
|
|
|
$
|
10,138
|
|
|
10.8
|
%
|
Sales and marketing expense, excluding stock-based expense and depreciation, increased $4.3 million and $13.5 million or 10.4% and 17.0%, respectively. Personnel expense increased $5.3 million and $12.3 million during the three and six months ended June 30, 2020, respectively, driven by incremental headcount from our recent acquisitions, and our continued investments in our sales force and product marketing team. These investments also resulted in an increase in information technology and facility related expenses of $1.0 million and $1.8 million, respectively. These increases were partially offset by a decline in marketing and travel expenses of $3.2 million and $2.5 million, respectively, driven by travel restrictions implemented by management during the three months ended June 30, 2020 in response to the COVID-19 pandemic.
Sales and marketing expense as a percentage of total revenue decreased to 17.3% from 20.1% and to 18.5% from 19.6%, respectively. These changes were a result of the reductions in marketing and travel expenses discussed above, coupled with reduced stock compensation expense during the three months ended June 30, 2020 related to the reversal of market-based restricted stock award expense associated with forfeitures.
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
$
|
34,750
|
|
|
$
|
20,792
|
|
|
$
|
13,958
|
|
|
67.1
|
%
|
|
$
|
67,452
|
|
|
$
|
41,537
|
|
|
$
|
25,915
|
|
|
62.4
|
%
|
|
Stock-based expense
|
6,149
|
|
|
6,019
|
|
|
130
|
|
|
2.2
|
|
|
12,515
|
|
|
11,771
|
|
|
744
|
|
|
6.3
|
|
|
Depreciation
|
1,500
|
|
|
1,499
|
|
|
1
|
|
|
0.1
|
|
|
2,960
|
|
|
3,145
|
|
|
(185)
|
|
|
(5.9)
|
|
|
Total general and administrative expense
|
$
|
42,399
|
|
|
$
|
28,310
|
|
|
$
|
14,089
|
|
|
49.8
|
%
|
|
$
|
82,927
|
|
|
$
|
56,453
|
|
|
$
|
26,474
|
|
|
46.9
|
%
|
General and administrative expense, excluding stock-based expense and depreciation, increased $14.0 million and $25.9 million, or 67.1% and 62.4%, respectively. Personnel expenses for the three and six months ended June 30, 2020 increased $7.8
and $13.7 million, respectively, reflecting investments to support our continued growth and incremental headcount from recent acquisitions. Legal and professional fees increased $3.6 million and $7.4 million, respectively, primarily associated with costs incurred in connection with our recent acquisitions and integration activity and with increases in our accruals for legal contingencies. IT and facility related costs for the same periods increased $2.0 million and $2.7 million, respectively, primarily attributable to incremental costs from our recent acquisitions.
General and administrative expense as a percentage of total revenue increased to 14.8% from 11.6% and to 14.7% from 11.8%, respectively. These increases were primarily attributable to our increase in headcount and legal and professional costs discussed above.
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
$
|
11,247
|
|
|
$
|
10,402
|
|
|
$
|
845
|
|
|
8.1
|
%
|
|
$
|
22,666
|
|
|
$
|
20,238
|
|
|
$
|
2,428
|
|
|
12.0
|
%
|
Amortization of intangible assets increased $0.8 million and $2.4 million, or 8.1% and 12.0%, respectively. These increases were a result of incremental amortization expense from the addition of finite-lived client relationship and trade name assets in connection with our recent acquisitions. The change in amortization of intangible assets as a percentage of total revenue was not material for either period shown.
Stock-based expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Stock-based expense
|
$
|
12,331
|
|
|
$
|
15,865
|
|
|
$
|
(3,534)
|
|
|
(22.3)
|
%
|
|
$
|
28,532
|
|
|
$
|
30,778
|
|
|
$
|
(2,246)
|
|
|
(7.3)
|
%
|
Stock-based expense declined $3.5 million and $2.2 million, or 22.3% and 7.3%, respectively. Forfeitures of certain market-based restricted stock awards resulted in the reversal of $4.2 million of expense during the three months ended June 30, 2020. These reversals, coupled with normal forfeiture activity during the periods, more than offset incremental awards in connection with our 2019 and 2020 acquisitions. Stock-based expense as a percent of total revenue declined to 4.3% from 6.5% and to 5.1% from 6.4%, respectively, driven by the activity discussed above.
Depreciation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Depreciation expense
|
$
|
8,566
|
|
|
$
|
8,714
|
|
|
$
|
(148)
|
|
|
(1.7)
|
%
|
|
$
|
16,937
|
|
|
$
|
17,188
|
|
|
$
|
(251)
|
|
|
(1.5)
|
%
|
Depreciation expense decreased a nominal $0.1 million and $0.3 million, or 1.7% and 1.5%, respectively. The change in depreciation expense as a percentage of total revenue was not material for either period shown.
Interest Expense and Other, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
2020
|
|
2019
|
|
Change
|
|
% Change
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
$
|
(13,136)
|
|
|
$
|
(8,864)
|
|
|
$
|
(4,272)
|
|
|
48.2
|
%
|
|
$
|
(26,051)
|
|
|
$
|
(18,066)
|
|
|
$
|
(7,985)
|
|
|
44.2
|
%
|
|
Interest income
|
7
|
|
|
622
|
|
|
(615)
|
|
|
(98.9)
|
|
|
17
|
|
|
1,243
|
|
|
(1,226)
|
|
|
(98.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of equity investment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,600
|
|
|
(2,600)
|
|
|
(100.0)
|
|
|
Other income
|
437
|
|
|
213
|
|
|
224
|
|
|
105.2
|
|
|
607
|
|
|
214
|
|
|
393
|
|
|
183.6
|
|
|
Total interest expense and other, net
|
$
|
(12,692)
|
|
|
$
|
(8,029)
|
|
|
$
|
(4,663)
|
|
|
58.1
|
%
|
|
$
|
(25,427)
|
|
|
$
|
(14,009)
|
|
|
$
|
(11,418)
|
|
|
81.5
|
%
|
Interest expense and other, net increased $4.7 million and $11.4 million, or 58.1% and 81.5%, respectively. Interest expense increased $4.3 million and $8.0 million, respectively, primarily due to increased borrowings under our Amended Credit Facility and from the convertible debt offering that we completed in May 2020. Our 2019 results also benefited from a $2.6 million increase in the fair value of our equity investment following an observable price change during the first quarter of 2019. There was no similar event in 2020.
Provision for Taxes
We compute our provision for income taxes on a quarterly basis by applying an estimated annual effective tax rate to income from recurring operations and by calculating the tax effect of discrete items recognized during the quarter. Our effective income tax rate was (3.9)% and 12.7% for the six months ended June 30, 2020 and 2019, respectively. Our effective rate is lower than the statutory rate for the six months ended June 30, 2020 primarily due to $4.6 million of excess tax benefits from stock-based compensation recognized as discrete items as required by ASU 2016-09.
Liquidity and Capital Resources
Our primary sources of liquidity as of June 30, 2020, consisted of $638.6 million of unrestricted cash and cash equivalents, $600.0 million available under our Revolving Facility, amounts available under the Amended Credit Facility’s Accordion Feature, and $20.3 million of working capital (excluding $638.6 million of unrestricted cash and cash equivalents, $311.6 million of convertible notes, and $132.8 million of deferred revenue).
Our principal uses of liquidity have been to fund our working capital requirements, capital expenditures and acquisitions, to service our debt obligations, and to repurchase shares of our common stock. We expect that working capital requirements, capital expenditures, acquisitions, debt service, and share repurchases will continue to be our principal needs for liquidity for at least the next year. We made capital expenditures of $29.7 million, approximately 5% of total revenues, during the six months ended June 30, 2020. We expect capital expenditures to remain at 5% of total revenues during the next few years. In addition, we have made several acquisitions in which a portion of the purchase consideration is payable at various times through 2023, with a majority of the deferred cash obligations payable during 2020 and 2021. We expect to fund these obligations totaling approximately $35.4 million from cash provided by operating activities or funds available under our Amended Credit Facility.
In February 2020, we entered into an interest rate swap agreement to effectively convert the LIBOR-based variable interest obligation on a $100.0 million notional portion of our variable rate debt into a fixed rate obligation at a rate of 1.89% from February 2020 to September 2024. In connection with this transaction, we terminated our previous cash flow hedge relationships, which had a blended fixed rate of 2.57%, and designated the 2020 Swap Agreement under a new cash flow hedge relationship. The fair value of the 2018 Swap Agreements immediately prior to termination and of the 2020 Swap Agreement at inception was a liability of $2.5 million. Due to the COVID-19 pandemic’s impact on macroeconomic trends and the resulting significant declines in LIBOR rates, the fair value of this interest rate cash flow hedge at June 30, 2020 was a liability of $7.1 million. The changes in fair value of this derivative instrument are initially recorded in accumulated other comprehensive loss and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. As of June 30, 2020, we estimate that $2.4 million of the total net loss related to our swap agreement recorded in accumulated other comprehensive loss will be reclassified into earnings within the next twelve months. Because the 2020 Swap Agreement contained an other-than-insignificant financing element at its inception, the associated cash flows are reported as a financing activity in our Condensed Consolidated Statement of Cash Flows.
For the six months ended June 30, 2020, we spent $1.9 million on computer equipment and other capital items to facilitate our shift to an almost entirely work-from-home environment, and we expect to spend up to an additional $1.3 million for this purpose during our third fiscal quarter. During the three months ended June 30, 2020 we also incurred incremental operating
costs totaling approximately $1.5 million in our response to COVID-19, including costs to support our work-from-home strategy, costs for temporary staffing, additional facilities expenses, and other expenses incurred to help ensure our ability to deliver uninterrupted services to our clients even in the event of a temporary decline in the availability of our internal labor force. We expect to continue to incur some of these costs in future quarters until the pandemic abates, but we currently expect such costs for the balances of the year to total less than $1.0 million. As allowed by the Coronavirus, Aid, Relief and Economic Security Act (the “CARES Act”), we deferred payment of $5.2 million of employment taxes as of June 30, 2020. Under the terms of the CARES Act, we will be required to pay these and any similar amounts we defer during the second half of 2020 in two installments with half of the amount to be paid by the end of 2021 and half by the end of 2022. We made no significant changes to customer payment terms or contracts during the period, nor did we identify significant changes in customer payment behavior as a result of the COVID-19 pandemic. Nevertheless, our future operating results and related cash flows could be adversely effected if the COVID-19 pandemic continues to negatively affect the general economy in ways that cause our customers to be unable to meet their payment obligations to us in a timely manner, or to slow purchase or implementation decisions, or if a reduction in overall leasing velocity as a result of the pandemic leads to a significant reduction in our transactional revenues.
We believe that our existing cash and cash equivalents, working capital (excluding unrestricted cash and cash equivalents, convertible notes, and deferred revenue), and our cash flows from operations will be sufficient to fund our working capital requirements and planned capital expenditures, and to service our debt obligations for at least the next twelve months. Our future working capital requirements will depend on many factors, including our rate of revenue growth, the timing and size of future acquisitions, the expansion of our sales and marketing activities, the timing and extent of spending to support product development efforts, the timing of introductions of new solutions and enhancements to existing solutions, and the continuing market acceptance of our solutions. We expect to enter into acquisitions of complementary businesses, applications, or technologies in the future that could require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us, or at all.
As of December 31, 2019, we had federal and state net operating loss (“NOL”) carryforwards of $237.7 million and $97.7 million, respectively. Our federal and state NOL carryforwards may be available to offset potential payments of future income tax liabilities. If unused, the federal NOLs will begin to expire in 2026, and the state NOLs will begin to expire in 2020. Total state NOLs expiring in the next five years is approximately $1.1 million.
The following table sets forth cash flow data for the periods indicated therein:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
|
|
Net cash provided by operating activities
|
$
|
157,629
|
|
|
$
|
73,377
|
|
|
Net cash used in investing activities
|
$
|
(89,246)
|
|
|
$
|
(42,744)
|
|
|
Net cash provided by (used in) financing activities
|
$
|
392,418
|
|
|
$
|
(38,480)
|
|
Net Cash Provided by Operating Activities
During the six months ended June 30, 2020, net cash provided by operating activities consisted of net income of $16.9 million, net non-cash adjustments to net income of $110.5 million, and net changes in operating assets and liabilities of $30.2 million. Non-cash adjustments to net income primarily consisted of depreciation and amortization expense of $67.9 million, stock-based expense of $28.5 million, amortization of debt discount and issuance costs of $8.4 million, and amortization of our right-of-use assets of $7.0 million.
Changes in working capital during the six months ended June 30, 2020 included net cash inflows for customer deposits of$16.4 million, and accounts receivable of $14.6 million, reflecting increased collections during the period. Other changes in working capital included a $4.1 million increase in accrued compensation related expenses, a $4.5 million increase in prepaid expenses and other current assets, and a $3.4 million decrease in deferred revenue balances.
Net Cash Used in Investing Activities
During the six months ended June 30, 2020, we used $89.2 million for investing activities, including $59.5 million, net of cash and restricted cash acquired, for the acquisition of Modern Message, and $29.7 million for capital expenditures. Capital expenditures during the period primarily included capitalized software development costs and expenditures to support our information technology infrastructure.
Net Cash Provided by Financing Activities
During the six months ended June 30, 2020, we received net proceeds of $334.4 million from our May 2020 public offering of 5.85 million shares of our common stock and net proceeds of $337.8 million from our simultaneous offering of $345.0 million of convertible notes, and we paid $39.4 million to purchase capped call instruments related to the convertible notes. We used $230.0 million of the offering proceeds to retire all amounts then outstanding under our revolving credit facility. We also made principal payments on our Term Loans, payments of finance lease obligations and payments of acquisition-related consideration of $7.5 million, $1.6 million and $2.4 million, respectively, and received net cash of $1.1 million from employee stock and other transactions.
Contractual Obligations, Commitments, and Contingencies
The following table summarizes, as of June 30, 2020, our minimum payments, including interest when applicable, for long-term debt and other obligations for the next five years and thereafter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less Than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More Than
5 years
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Convertible Notes (1)
|
$
|
728,764
|
|
|
$
|
10,307
|
|
|
$
|
363,107
|
|
|
$
|
355,350
|
|
|
$
|
—
|
|
|
Term Loans (2)
|
628,184
|
|
|
36,332
|
|
|
89,950
|
|
|
501,902
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and finance lease obligations
|
182,984
|
|
|
21,749
|
|
|
42,907
|
|
|
35,903
|
|
|
82,425
|
|
|
Acquisition-related liabilities (3)
|
35,398
|
|
|
28,333
|
|
|
7,065
|
|
|
—
|
|
|
—
|
|
|
|
$
|
1,575,330
|
|
|
$
|
96,721
|
|
|
$
|
503,029
|
|
|
$
|
893,155
|
|
|
$
|
82,425
|
|
(1)Represents the aggregate principal amount of $690.0 million related to our 2022 and 2025 Convertible Notes, and anticipated coupon interest payments related to these convertible notes. The unamortized discounts and debt issuance costs associated with these convertible notes that are reflected in our Condensed Consolidated Balance Sheets are excluded from this table.
(2)Represents the contractually required principal payments for our Term Loan and Delayed Draw Term Loan. These amounts exclude unamortized debt issuance costs reflected in our Condensed Consolidated Balance Sheets. These amounts also include the anticipated interest obligations under our Amended Credit Facility, which were estimated using a LIBOR forward rate curve and include the related effect of our interest rate swap agreement.
(3)Represents obligations in connection with our acquisitions comprised of undiscounted amounts payable for our deferred cash obligations. These amounts exclude deferred stock obligations, contingent consideration of up to $25.3 million with a fair value of $5.6 million, and potential reductions related to the sellers’ indemnification obligations.
Credit Facility
The Amended Credit Facility matures on September 5, 2024 (subject to early maturity provisions in certain circumstances, as described below), and includes the following:
Revolving Facility: The Amended Credit Facility provides $600.0 million in aggregate commitments for secured revolving loans, with sublimits of $10.0 million for the issuance of letters of credit and $20.0 million for swingline loans (“Revolving Facility”). During the three months ended June 30, 2020, we repaid the previous amount outstanding under the revolving facility.
Initial Term Loan: An initial term loan of $300.0 million was borrowed on the closing date for the Amended Credit Facility (the “Term Loan”). The proceeds of the Term Loan were used to repay the term loan balances outstanding under the 2014 Credit Facility.
Delayed Draw Term Loan: In December 2019, we drew funds of $300.0 million available under the delayed draw term loan (“Delayed Draw Term Loan”).
Revolving loans under the Amended Credit Facility may be voluntarily prepaid and re-borrowed. Principal payments on the Term Loan and Delayed Draw Term Loan (collectively, the “Term Loans”) are due in quarterly installments equal to an initial
amount of $3.8 million, which increases to $7.5 million beginning on December 31, 2020, increases to $11.3 million beginning on December 31, 2022, and increases to $15.0 million beginning on December 31, 2023. Once repaid or prepaid, the Term Loans may not be re-borrowed. All outstanding principal and accrued but unpaid interest is due, and the commitments for the Revolving Facility terminate, on the maturity date. The Term Loans are subject to mandatory repayment requirements in the event of certain asset sales or if certain insurance or condemnation events occur, subject to customary reinvestment provisions. We may prepay the Term Loans in whole or in part at any time without premium or penalty.
Accordion Feature: The Amended Credit Facility also allows us, subject to certain conditions, to request additional term loan commitments and/or additional revolving commitments in an aggregate principal amount of up to the greater of $250.0 million or 100% of consolidated EBITDA (as defined within the agreement) for the most recent four fiscal quarters, plus an amount that would not cause our Senior Leverage Ratio, as defined below, to exceed 3.50 to 1.00.
All outstanding revolving loans and term loans under the Amended Credit Facility mature on September 5, 2024. If on or prior to August 16, 2022, we have failed to demonstrate to the Agent that we would be in compliance with each financial covenant after giving pro forma effect to the repayment in full of the Convertible Notes which mature on November 15, 2022, then the Amended Credit Facility will mature on August 16, 2022. In addition, if on any business day during the period beginning on August 16, 2022 until the Convertible Notes are paid in full, our available liquidity is less than an amount equal to 125% of the outstanding principal amount of the Convertible Notes, then amounts outstanding under the Amended Credit Facility are due the next business day
Refer to Note 8 of the accompanying Condensed Consolidated Financial Statements for further discussion of the Amended Credit Facility, including its terms and conditions.
Convertible Notes
2025 Convertible Notes
In May 2020, we issued convertible senior notes with an aggregate principal amount of $345.0 million which will mature on May 15, 2025. The 2025 Convertible Notes were issued pursuant to an Indenture dated May 22, 2020, by and between us and U.S. Bank National Association, as Trustee. We received net proceeds from the offering of approximately $337.5 million after adjusting for debt issuance costs, including the underwriting discount.
The 2025 Convertible Notes accrue interest at a rate of 1.50% per year until maturity, payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2020. On or after February 15, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert at their option all or any portion of their 2025 Convertible Notes at the then applicable conversion rate. Prior to February 15, 2025, holders may convert their notes, and we may redeem the 2025 Convertible Notes, under certain circumstances specified in the Indenture. The 2025 Convertible Notes are convertible at an initial rate of 13.04 shares of our common stock per $1,000 of principal amount of 2025 Convertible Notes (equivalent to an initial conversion price of approximately $76.70 per share of our common stock). Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. Upon any conversion of the 2025 Convertible Notes, it is our current intent to settle the first $1,000 of conversion value for each $1,000 principal amount of the 2025 Convertible Notes through combination settlement, which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount in shares of our common stock.
In conjunction with the 2025 Convertible Notes offering, we purchased the Capped Calls initially covering approximately 5.8 million shares of our common stock at a cost of $39.4 million. The Capped Calls are subject to anti-dilution provisions substantially similar to those of the 2025 Convertible Notes, have a strike price of approximately $76.70 per share, are subject to a cap price of $118 per share, are exercisable by us upon any conversion under the 2025 Convertible Notes, and expire on May 15, 2025. The Capped Calls are generally expected to reduce the potential dilution to our common stock (or, in the event the conversion is settled in cash, to reduce our cash payment obligation) in the event that at the time of conversion our stock price exceeds the conversion price under the 2025 Convertible Notes.
2022 Convertible Notes
In May 2017, we issued convertible senior notes with an aggregate principal amount of $345.0 million which will mature on November 15, 2022. The 2022 Convertible Notes were issued pursuant to an indenture dated May 23, 2017, by and between us and Wells Fargo Bank, N.A., as Trustee. We received net proceeds from the offering of approximately $304.2 million after adjusting for debt issuance costs, including the underwriting discount, the net cash used to purchase the Note Hedges and the proceeds from the issuance of the Warrants which are discussed below.
The 2022 Convertible Notes accrue interest at a rate of 1.50% per year until maturity, payable semi-annually in arrears on May 15 and November 15 of each year. On or after May 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert at their option all or any portion of their 2022 Convertible Notes at the then applicable conversion rate. Prior to May 15, 2022, holders may convert their notes under certain
circumstances specified in the indenture. The 2022 Convertible Notes are convertible at an initial rate of 23.84 shares of our common stock per $1,000 of principal amount of 2022 Convertible Notes (equivalent to an initial conversion price of approximately $41.95 per share of our common stock). Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. Upon any conversion of the 2022 Convertible Notes, it is our current intent to settle the first $1,000 of conversion value for each $1,000 principal amount of the 2022 Convertible Notes through combination settlement, which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount in shares of our common stock.
In conjunction with the 2022 Convertible Notes offering, we purchased Note Hedges and issued Warrants initially covering approximately 8.2 million shares of our common stock. We paid $62.5 million to purchase the Note Hedges and received proceeds of $31.5 million from the issuance of the Warrants. The Note Hedges have an exercise price of $41.95 per share, consistent with the conversion price of the 2022 Convertible Notes, and expire in November 2022. The Note Hedges are generally expected to reduce the potential dilution to our common stock (or, in the event the conversion is settled in cash, to reduce our cash payment obligation) in the event that at the time of conversion our stock price exceeds the conversion price under the 2022 Convertible Notes. The Warrants have a strike price of $57.58 per share and expire in ratable portions on a series of expiration dates commencing on February 15, 2023.
Refer to Note 8 of the accompanying Condensed Consolidated Financial Statements for further discussion of these transactions and their accounting implications.
Other than the matters discussed above, there have been no other material changes outside normal operations in our contractual obligations from our disclosures in our Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing arrangements, and we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.