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EX-31.1 - CERTIFICATION OF PEO REQUIRED UNDER RULE 13A-14(A) AND 15D-14(A) - LINKEDIN CORPlnkd-exhibit311x9302015x10q.htm
EX-31.2 - CERTIFICATION OF PFO REQUIRED UNDER RULE 13A-14(A) AND 15D-14(A) - LINKEDIN CORPlnkd-exhibit312x9302015x10q.htm
EX-32.1 - CERTIFICATION OF PEO AND PFO REQUIRED UNDER RULE 13A-14(B) - LINKEDIN CORPlnkd-exhibit321x9302015x10q.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to         
Commission File Number: 001-35168
 
 
 
LinkedIn Corporation
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
47-0912023
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2029 Stierlin Court
Mountain View, CA 94043
(Address of principal executive offices and zip code)
(650) 687-3600
(Registrant’s telephone number, including area code)
 
 
 
 
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  T    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  T    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
T
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of October 22, 2015, there were 115,465,733 shares of the Registrant’s Class A common stock outstanding and 15,620,733 shares of the Registrant’s Class B common stock outstanding.
 




LINKEDIN CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 
  
 
Page No.
 
 
 
 
 
 
 
 
 

2


Part I. Financial Information
Item 1. Financial Statements
LINKEDIN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
631,725

 
$
460,887

Marketable securities
2,457,607

 
2,982,422

Accounts receivable (net of allowance for doubtful accounts of $14,183 and $11,944 at September 30, 2015 and December 31, 2014, respectively)
457,975

 
449,048

Deferred commissions
56,453

 
66,561

Prepaid expenses
72,752

 
52,978

Other current assets
136,225

 
110,204

Total current assets
3,812,737

 
4,122,100

Property and equipment, net
906,189

 
740,909

Goodwill
1,508,946

 
356,718

Intangible assets, net
418,050

 
131,275

Other assets
70,788

 
76,255

TOTAL ASSETS
$
6,716,710

 
$
5,427,257

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
123,329

 
$
100,297

Accrued liabilities
296,794

 
260,189

Deferred revenue
621,411

 
522,299

Total current liabilities
1,041,534

 
882,785

CONVERTIBLE SENIOR NOTES, NET
1,115,439

 
1,081,553

DEFERRED TAX LIABILITIES
46,645

 

OTHER LONG-TERM LIABILITIES
185,187

 
132,100

Total liabilities
2,388,805

 
2,096,438

COMMITMENTS AND CONTINGENCIES (Note 12)

 

REDEEMABLE NONCONTROLLING INTEREST
26,296

 
5,427

STOCKHOLDERS’ EQUITY (Note 13):
 
 
 
Class A and Class B common stock
13

 
13

Additional paid-in capital
4,405,911

 
3,285,705

Accumulated other comprehensive income (loss)
6,632

 
(198
)
Accumulated earnings (deficit)
(110,947
)
 
39,872

Total stockholders’ equity
4,301,609

 
3,325,392

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND STOCKHOLDERS’ EQUITY
$
6,716,710

 
$
5,427,257

See Notes to Condensed Consolidated Financial Statements

3


LINKEDIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Net revenue
$
779,595

 
$
568,265

 
$
2,129,017

 
$
1,575,335

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation and amortization shown separately below)
111,368

 
74,904

 
299,860

 
206,895

Sales and marketing
265,454

 
199,168

 
756,361

 
550,184

Product development
202,682

 
136,542

 
558,395

 
385,895

General and administrative
118,871

 
89,266

 
358,573

 
244,572

Depreciation and amortization
117,901

 
59,782

 
290,877

 
165,828

Total costs and expenses
816,276

 
559,662

 
2,264,066

 
1,553,374

Income (loss) from operations
(36,681
)
 
8,603

 
(135,049
)
 
21,961

Other income (expense), net:
 
 
 
 
 
 
 
Interest income
2,798

 
1,413

 
6,800

 
3,748

Interest expense
(12,773
)
 

 
(38,064
)
 

Other, net
(3,784
)
 
(1,261
)
 
(9,542
)
 
(1,373
)
Other income (expense), net
(13,759
)
 
152

 
(40,806
)
 
2,375

Income (loss) before income taxes
(50,440
)
 
8,755

 
(175,855
)
 
24,336

Provision (benefit) for income taxes
(10,429
)
 
12,917

 
(25,905
)
 
42,751

Net loss
(40,011
)
 
(4,162
)
 
(149,950
)
 
(18,415
)
Accretion of redeemable noncontrolling interest
(512
)
 
(101
)
 
(869
)
 
(327
)
Net loss attributable to common stockholders
$
(40,523
)
 
$
(4,263
)
 
$
(150,819
)
 
$
(18,742
)
 
 
 
 
 
 
 
 
Net loss per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
(0.31
)
 
$
(0.03
)
 
$
(1.18
)
 
$
(0.15
)
Diluted
$
(0.31
)
 
$
(0.03
)
 
$
(1.18
)
 
$
(0.15
)
Weighted-average shares used to compute net loss per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
130,716

 
123,427

 
128,162

 
122,197

Diluted
130,716

 
123,427

 
128,162

 
122,197

See Notes to Condensed Consolidated Financial Statements

4


­­­­­LINKEDIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(40,011
)
 
$
(4,162
)
 
$
(149,950
)
 
$
(18,415
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in unrealized gain (loss) on investments, net of tax
278

 
(189
)
 
437

 
360

Change in unrealized gain on cash flow hedges, net of tax
9,078

 

 
6,227

 

Change in foreign currency translation adjustment
153

 
11

 
166

 
11

Total other comprehensive income (loss)
9,509

 
(178
)
 
6,830

 
371

Comprehensive loss
(30,502
)
 
(4,340
)
 
(143,120
)
 
(18,044
)
Accretion of redeemable noncontrolling interest
(512
)
 
(101
)
 
(869
)
 
(327
)
Comprehensive loss attributable to common stockholders
$
(31,014
)
 
$
(4,441
)
 
$
(143,989
)
 
$
(18,371
)
See Notes to Condensed Consolidated Financial Statements

5


LINKEDIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Nine Months Ended
September 30,
 
2015
 
2014
OPERATING ACTIVITIES:
 
 
 
Net loss
$
(149,950
)
 
$
(18,415
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
290,877

 
165,828

Provision for doubtful accounts and sales returns
8,448

 
9,130

Amortization of investment premiums, net
15,877

 
9,304

Amortization of debt discount and transaction costs
33,967

 

Stock-based compensation
375,474

 
225,507

Excess income tax benefit from stock-based compensation
1,726

 
(47,735
)
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
(1,566
)
 
(34,569
)
Deferred commissions
11,696

 
6,664

Prepaid expenses and other assets
(46,154
)
 
(37,649
)
Accounts payable and other liabilities
67,188

 
60,315

Income taxes, net
(32,906
)
 
29,538

Deferred revenue
55,692

 
70,602

Net cash provided by operating activities
630,369

 
438,520

INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(329,236
)
 
(306,022
)
Purchases of investments
(1,896,503
)
 
(1,888,616
)
Sales of investments
971,775

 
243,109

Maturities of investments
1,436,846

 
1,426,916

Payments for intangible assets and acquisitions, net of cash acquired
(674,872
)
 
(250,755
)
Changes in deposits and restricted cash
7,202

 
(25,265
)
Net cash used in investing activities
(484,788
)
 
(800,633
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of preferred shares in joint venture
20,000

 

Proceeds from issuance of common stock from employee stock options
15,147

 
26,555

Proceeds from issuance of common stock from employee stock purchase plan
20,799

 
16,324

Excess income tax benefit from stock-based compensation
(1,726
)
 
47,735

Repurchases of equity awards
(22,695
)
 

Other financing activities
(167
)
 
(1,875
)
Net cash provided by financing activities
31,358

 
88,739

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(6,101
)
 
(2,878
)
CHANGE IN CASH AND CASH EQUIVALENTS
170,838

 
(276,252
)
CASH AND CASH EQUIVALENTS—Beginning of period
460,887

 
803,089

CASH AND CASH EQUIVALENTS—End of period
$
631,725

 
$
526,837

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Purchases of property and equipment recorded in accounts payable and accrued liabilities
$
45,648

 
$
46,319

Issuance of Class A common stock and stock options for business combinations
$
695,028

 
$
64,207

See Notes to Condensed Consolidated Financial Statements

6


LINKEDIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.
Description of Business and Basis of Presentation
LinkedIn Corporation and its subsidiaries (the “Company”), a Delaware corporation, was incorporated on March 6, 2003. The Company operates an online professional network on the Internet through which the Company’s members are able to create, manage and share their professional identities online, build and engage with their professional networks, access shared knowledge and insights, and find business opportunities, enabling them to be more productive and successful. The Company believes it is the most extensive, accurate and accessible network focused on professionals.

Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial sta­­tements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed on February 12, 2015.
The condensed consolidated balance sheet as of December 31, 2014, included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by US GAAP on an annual reporting basis.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2015 or any future period.
 
Principles of Consolidation
The condensed consolidated financial statements include the Company, its wholly-owned subsidiaries, and variable interest entities in which LinkedIn is the primary beneficiary in accordance with the consolidation accounting guidance. All intercompany balances and transactions have been eliminated.
Redeemable noncontrolling interest ("RNCI") is included in the condensed consolidated balance sheets. RNCI is considered to be temporary equity and is therefore reported outside of permanent equity equal to its redemption value as of the balance sheet date.

 Use of Estimates
The preparation of the Company’s condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the condensed consolidated financial statements; therefore, actual results could differ from management’s estimates. 
 
Recently Issued Accounting Guidance
Business Combinations
In September 2015, the Financial Accounting Standards Board ("FASB") issued new authoritative guidance on simplifying the accounting for business combinations, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The effect on earnings of changes in depreciation or amortization, or other income effects (if any) as a result of the change to the provisional amounts, calculated as if the accounting had been completed as of the acquisition date, must be recorded in the reporting period in which the adjustment

7


amounts are determined rather than retrospectively. This standard will be applied prospectively to adjustments to provisional amounts that occur after the effective date. This standard will be effective for the Company beginning in the first quarter of 2016; however, early adoption is permitted. The Company does not expect this standard to have a material impact on its financial statements.
Debt Issuance Costs
In April 2015, the FASB issued new authoritative guidance on simplifying the presentation of debt issuance costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This standard requires retrospective adoption and will be effective for the Company beginning in its first quarter of 2016; however, the Company plans to early adopt in the fourth quarter of 2015. The Company does not expect this standard to have a material impact on its financial statements.
Cloud Computing Arrangements
In April 2015, the FASB issued new authoritative guidance on customer's accounting for fees paid in a cloud computing arrangement, which provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for a cloud computing arrangement as a service contract. This standard is effective for the Company in the first quarter of 2016. This standard may be adopted either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. The Company does not expect this standard to have a material impact on its financial statements.
Derivatives and Hedging
In November 2014, the FASB issued new authoritative guidance on determining whether the host contract in a hybrid financial instrument issued in the form of a share is more akin to debt or to equity. The guidance applies to hybrid financial instruments that include embedded derivative features, which must be evaluated to determine whether the nature of the host contract is more akin to debt or to equity and whether the economic characteristics and risks of the embedded derivative feature are clearly and closely related to the host contract. If the host contract is akin to equity, then equity-like features (for example, a conversion option) are considered clearly and closely related to the host contract and, thus, would not be separated from the host contract. If the host contract is akin to debt, then equity-like features are not considered clearly and closely related to the host contract. In the latter case, an entity may be required to separate the equity-like embedded derivative feature from the debt host contract if certain other criteria are met. Similarly, debt-like embedded derivative features may require separate accounting from an equity-like host contract.
This standard is applicable as it relates to the accounting for the preferred stock of the Company’s joint venture (see Note 3, Acquisitions and Joint Venture). This standard will be effective in the first quarter of 2016 and early adoption is permitted. The Company expects to early adopt in the fourth quarter of 2015 on a modified retrospective basis. The Company continues to evaluate this standard and believes the cumulative effect of initially applying the new standard would not be material. The impact to future periods will depend on the timing and amount of changes in fair value of the preferred stock of the Company’s joint venture and will be recorded in other income (expense), net.
Revenue Recognition
In May 2014, the FASB issued new authoritative guidance on revenue from contracts with customers. The guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that "an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." The guidance also requires significantly expanded disclosures about revenue recognition. In July 2015, the FASB voted to approve a one-year deferral of the effective date to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. This standard will therefore be effective for the Company in the first quarter of 2018. This standard will be applied using either the full or modified retrospective adoption methods. The Company is currently evaluating adoption methods and whether this standard will have a material impact on its financial results.


8


2.
Fair Value Measurements

The Company’s assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy as of the periods presented, are summarized as follows (in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total
September 30, 2015:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
322,806

 
$

 
$

 
$
322,806

Commercial paper

 
60,551

 

 
60,551

US treasury securities
25,902

 

 

 
25,902

US agency securities

 
79,759

 

 
79,759

Marketable securities:
 
 
 
 
 
 
 
Commercial paper

 
49,762

 

 
49,762

Certificates of deposit

 
3,475

 

 
3,475

US treasury securities
807,246

 

 

 
807,246

US agency securities

 
687,620

 

 
687,620

Corporate debt securities

 
901,509

 

 
901,509

Municipal securities

 
7,995

 

 
7,995

Other current assets:
 
 
 
 
 
 
 
Foreign currency derivative contracts

 
11,674

 

 
11,674

Total assets
$
1,155,954

 
$
1,802,345

 
$

 
$
2,958,299

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Foreign currency derivative contracts
$

 
$
1,449

 
$

 
$
1,449

Total liabilities
$

 
$
1,449

 
$

 
$
1,449

December 31, 2014:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
95,470

 
$

 
$

 
$
95,470

Commercial paper

 
54,344

 

 
54,344

US treasury securities
54,349

 

 

 
54,349

US agency securities

 
43,000

 

 
43,000

Marketable securities:
 
 
 
 
 
 
 
Commercial paper

 
122,371

 

 
122,371

Certificates of deposit

 
5,927

 

 
5,927

US treasury securities
1,234,568

 

 

 
1,234,568

US agency securities

 
881,962

 

 
881,962

Corporate debt securities

 
722,705

 

 
722,705

Municipal securities

 
14,889

 

 
14,889

Other current assets:
 
 
 
 
 
 
 
Foreign currency derivative contracts

 
5,591

 

 
5,591

Total assets
$
1,384,387

 
$
1,850,789

 
$

 
$
3,235,176

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Foreign currency derivative contracts
$

 
$
149

 
$

 
$
149

Total liabilities
$

 
$
149

 
$

 
$
149


9


 
The fair value of the Company's Level 1 financial instruments is based on quoted market prices in active markets for identical instruments. The fair value of the Company's Level 2 fixed income securities is obtained from an independent pricing service, which may use quoted market prices for identical or comparable instruments or model driven valuations using observable market data or inputs corroborated by observable market data. The Company's procedures include controls to ensure that appropriate fair values are recorded, including comparing the fair values obtained from the Company's pricing service against fair values obtained from another independent source. The fair value of the Company's Level 2 foreign currency derivative contracts is obtained from pricing models that use observable market inputs.

See Note 9, Convertible Senior Notes, for the carrying amount and estimated fair value of the Company's convertible senior notes, which are not recorded at fair value as of September 30, 2015.    


3.
Acquisitions and Joint Venture
lynda.com
On May 14, 2015, LinkedIn completed its acquisition of lynda.com, Inc. ("lynda.com"), a Carpinteria, California-based privately held online learning company teaching business, technology, and creative skills to help people achieve their professional goals. LinkedIn's purchase price of approximately $1.5 billion for all the outstanding shares of capital stock of lynda.com consists of approximately $777.7 million in cash and 3,573,589 shares of LinkedIn Class A common stock. LinkedIn also issued 178,763 stock options related to assumed lynda.com equity awards. The fair value of the earned portion of assumed stock options of $11.2 million is included in the purchase price, with the remaining fair value of $18.9 million representing post-acquisition compensation expense that will be recognized over the requisite service period of approximately three years from the date of acquisition. LinkedIn accelerated the vesting of and settled in cash the stock options for non-continuing employees and recognized $22.4 million in stock-based compensation expense immediately. A portion of the consideration was placed in escrow to satisfy certain indemnification obligations of the former lynda.com stockholders as described in the Merger Agreement.
The following table presents the components of the preliminary purchase consideration transferred based on the closing price of $194.49 per share of LinkedIn's Class A common stock (in thousands):

Cash
$
777,745

Class A common stock
695,028

Earned portion of the assumed stock options
11,181

Other consideration
2,758

Purchase consideration
$
1,486,712



10


The acquisition has been accounted for as a business combination under the acquisition method and, accordingly, the total purchase price is allocated to the tangible and intangible assets acquired and the liabilities assumed based on the fair value on the acquisition date. The fair value of assets acquired and liabilities assumed from the acquisition of lynda.com is based on a preliminary valuation and, as such, the Company's estimates and assumptions are subject to change within the measurement period. The primary areas of the purchase price that are not yet finalized are related to income taxes and the valuation of certain receivables and contingent liabilities.
The results of operations of lynda.com are included in the consolidated financial statements from the date of acquisition. The Company has recognized $41.3 million and $58.8 million in revenue and net loss of $33.3 million and $70.0 million, related to its acquisition of lynda.com in the three and nine months ended September 30, 2015, respectively. The net loss related to lynda.com includes tax-effected one-time charges of approximately $19.4 million in the nine months ended September 30, 2015, and does not include expenses that have already been integrated with LinkedIn, such as certain operating expenses and payroll and employee benefits. The Company also recognized transaction costs of approximately $2.0 million, which is included in general and administrative expense in its condensed consolidated statements of operations for the nine months ended September 30, 2015. The following table presents the preliminary purchase price allocation recorded in the Company's consolidated balance sheets for lynda.com as of the acquisition date (in thousands):
 
 
 
Preliminary estimated useful life
 
Cash
$
136,109

 
 
 
Accounts receivable
9,215

 
 
 
Prepaid expenses
3,984

 
 
 
Other current assets
153

 
 
 
Property and equipment
16,239

 
3 years
(5) 
Goodwill (1)
1,128,595

 
 
 
Definite-lived intangible assets:
 
 
 
 
Subscriber relationships - Enterprise
164,000

 
4 years
 
Subscriber relationships - Individual
57,000

 
2 years
 
Content (2)
98,000

 
3 years
 
Developed technology
39,000

 
2 years
 
     Trade name
1,000

 
1 year
 
Other assets
367

 
 
 
Accounts payable
(8,622
)
 
 
 
Accrued liabilities
(13,582
)
 
 
 
Deferred revenue (3)
(46,994
)
 
 
 
Deferred tax liabilities
(82,965
)
 
 
 
Other long-term liabilities (3)
(14,787
)
 
 
 
Total purchase price (4)
$
1,486,712

 
 
 
____________
(1)
The goodwill represents the excess value of the purchase price over both tangible and intangible assets acquired. The goodwill in this transaction is primarily attributable to expected operating synergies, which include the lynda.com talent and their production process, the Learning & Development (“L&D”) opportunities to strengthen the skills of LinkedIn's members, as well as the L&D initiatives that the talent of lynda.com and LinkedIn will jointly develop. These attributes position the Company to be able to further expand its long-term content strategy and to realize its vision of building the world's first economic graph. None of the goodwill is expected to be deductible for tax purposes.
(2)
The amortization method for the content intangible asset is 50% the first year, 30% the second year, and 20% in the third year. The remaining definite-lived intangible assets are amortized using the straight-line method.
(3)
Other long-term liabilities include $2.8 million of long-term deferred revenue. Total deferred revenue of $49.9 million is expected to be amortized approximately 80% in 2015 and approximately 20% thereafter.
(4)
Subject to adjustment based on (i) purchase price adjustment provisions contained in the acquisition agreement and (ii) indemnification obligations of the acquired company stockholders.

11


(5)
Represents an average estimated life.
Supplemental information on an unaudited pro forma basis, as if the acquisition of lynda.com had been consummated on January 1, 2014, is presented as follows (in thousands, except per share amounts):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
787,046

 
$
604,276

 
$
2,205,918

 
$
1,674,191

Net loss attributable to common stockholders
(35,935
)
 
(26,290
)
 
(167,947
)
 
(87,308
)
Net loss per share attributable to common stockholders - diluted
$
(0.27
)
 
$
(0.21
)
 
$
(1.27
)
 
$
(0.69
)

These pro forma results are based on estimates and assumptions, which the Company believes are reasonable. They are not necessarily indicative of the Company's consolidated results of operations in future periods or the results that actually would have been realized had the companies operated on a combined basis during the periods presented. The pro forma results include adjustments primarily related to amortization of intangible assets, accelerated vesting of options for non-continuing employees, and stock-based compensation expenses for assumed unearned equity awards.
Other acquisitions
LinkedIn completed five other acquisitions during the nine months ended September 30, 2015 for a total purchase price of $39.7 million, which consisted of $34.0 million in cash and 22,898 shares of LinkedIn Class A common stock. These acquisitions have been accounted for as business combinations under the acquisition method and, accordingly, the total purchase price is allocated to the tangible and intangible assets acquired and the liabilities assumed based on their respective fair values on the acquisition dates. The results of operations of these acquisitions have been included in the consolidated financial statements from the date of each respective acquisition. The following table presents the purchase price allocations recorded in the Company's condensed consolidated balance sheets as of the acquisition dates (in thousands):

 
 
Other Acquisitions
Goodwill (1)
 
$
23,633

Intangible assets (2)
 
12,331

Net tangible assets
 
3,740

Total purchase price (3) 
 
$
39,704

 _______________________
(1)
The goodwill represents the excess value of the purchase price over both tangible and intangible assets acquired. The goodwill in this transaction is primarily attributable to expected operational synergies, the assembled workforce, and the future development initiatives of the assembled workforce. None of the goodwill is expected to be deductible for tax purposes.
(2)
Identifiable definite-lived intangible assets were comprised of developed technology of $12.3 million with an estimated useful life of 2.0 years, which will be amortized on a straight-line basis over the estimated useful lives.
(3)
Subject to adjustment based on (i) purchase price adjustment provisions contained in the acquisition agreements and (ii) indemnification obligations of the acquired company stockholders.

Joint Venture
On November 3, 2013, the Company entered into an agreement to create LinkedIn CN Limited, a joint venture (“JV”) with Dragon Networking, an affiliate of China Broadband Capital, and SCCV IV Success HoldCo, Ltd., an affiliate of Sequoia Capital, (collectively, the “Partners”) to engage in the investment, organization, management and operation of a professional social network in the People’s Republic of China (“PRC”). In the fourth quarter of 2013, the Partners had contributed $5.0 million in cash in exchange for 7% of the outstanding equity interests in the form of preferred shares. In the second quarter of 2015, the Partners contributed an additional $20.0 million in cash in exchange for additional preferred shares ("Second Closing"). As a result, the Company and the Partners own

12


approximately 65% and 25% of the outstanding equity interests in the JV, respectively, with the remaining 10% related to authorized stock options of the JV, as of September 30, 2015.
The preferred shares may be callable or puttable, generally at fair value, subject to a floor and cap, following the fifth anniversary of the Second Closing or at the occurrence of certain events.
The Company has determined it is the primary beneficiary of the JV due to the percentage ownership as well as the power to direct the activities that most significantly impact the JV's economic performance. Furthermore, the Company has the right to receive benefits and obligation to absorb losses from the entity. The liabilities of the JV are recourse solely to the JV’s assets.
The noncontrolling interest in the JV is classified outside of permanent equity in the Company’s consolidated balance sheet as of September 30, 2015, as the preferred shares include a put right available to the noncontrolling interest holders in the future. Net income attributable to common stockholders on the Company's condensed consolidated statements of operations includes the accretion of the RNCI to its redemption value.



13


4.
Cash and Investments
The following table presents cash, cash equivalents, and available-for-sale investments for the periods presented (in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Market
Value
September 30, 2015:
 
 
 
 
 
 
 
Cash
$
142,707

 
$

 
$

 
$
142,707

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
322,806

 

 

 
322,806

Commercial paper
60,543

 
8

 

 
60,551

US treasury securities
25,903

 

 
(1
)
 
25,902

US agency securities
79,758

 
1

 

 
79,759

Marketable securities:
 
 
 
 
 
 
 
Commercial paper
49,737

 
25

 

 
49,762

Certificates of deposit
3,475

 

 

 
3,475

US treasury securities
807,106

 
277

 
(137
)
 
807,246

US agency securities
687,361

 
269

 
(10
)
 
687,620

Corporate debt securities
901,500

 
754

 
(745
)
 
901,509

Municipal securities
7,980

 
15

 

 
7,995

Total cash, cash equivalents, and marketable securities
$
3,088,876

 
$
1,349

 
$
(893
)
 
$
3,089,332

December 31, 2014:
 
 
 
 
 
 
 
Cash
$
213,724

 
$

 
$

 
$
213,724

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
95,470

 

 

 
95,470

Commercial paper
54,340

 
4

 

 
54,344

US treasury securities
54,349

 

 

 
54,349

US agency securities
42,999

 
1

 

 
43,000

Marketable securities:
 
 
 
 
 
 
 
Commercial paper
122,345

 
33

 
(7
)
 
122,371

Certificates of deposit
5,925

 
2

 

 
5,927

US treasury securities
1,234,870

 
64

 
(366
)
 
1,234,568

US agency securities
881,843

 
393

 
(274
)
 
881,962

Corporate debt securities
723,412

 
225

 
(932
)
 
722,705

Municipal securities
14,893

 
4

 
(8
)
 
14,889

Total cash, cash equivalents, and marketable securities
$
3,444,170

 
$
726

 
$
(1,587
)
 
$
3,443,309


The following table presents available-for-sale investments by contractual maturity date (in thousands) as of September 30, 2015:
 
Amortized
Cost
 
Estimated Fair Market Value
Due in one year or less
$
1,713,211

 
$
1,713,414

Due after one year through three years
743,948

 
744,193

Total
$
2,457,159

 
$
2,457,607






5.
Derivative Instruments
The Company has global operations and transacts business in multiple currencies, which exposes it to foreign currency exchange rate risk. The Company enters into foreign currency derivative contracts with financial institutions to reduce the risk that its cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. The Company’s program is not designated for trading or speculative purposes.

These derivative instruments expose the Company to credit risk to the extent that the counterparties may be unable to meet the terms of the arrangement. The Company seeks to mitigate this credit risk by transacting with major financial institutions with high credit ratings. In addition, the Company generally enters into master netting arrangements, which mitigate credit risk by permitting net settlement of transactions with the same counterparty. The Company is not required to pledge, and is not entitled to receive, cash collateral related to these derivative instruments.

Cash Flow Hedges
Beginning in the first quarter of 2015, the Company uses foreign currency derivative contracts designated as cash flow hedges to hedge forecasted revenue transactions denominated in currencies other than the US dollar. The Company's cash flow hedges consist of forward and option contracts with maturities of 12 months or less.

The Company evaluates the effectiveness of its cash flow hedges on a quarterly basis. Effectiveness represents a derivative instrument's ability to generate offsetting changes in cash flows related to the hedged risk. The Company records the gains or losses, net of tax, related to the effective portion of its cash flow hedges as a component of accumulated other comprehensive income (loss) ("AOCI") in stockholders' equity and subsequently reclassifies the gains or losses into revenue when the underlying hedged revenue is recognized. The Company records the gains or losses related to the ineffective portion of the cash flow hedges, if any, immediately in other income (expense), net. The change in time value related to the Company's cash flow hedges is excluded from the assessment of hedge effectiveness and is recorded immediately in other income (expense), net. If the hedged transaction becomes probable of not occurring, the corresponding amounts in AOCI would immediately be reclassified as ineffectiveness to other income (expense), net. Cash flows related to the Company's cash flow hedging program are recognized as cash flows from operating activities in its statements of cash flows.

As of September 30, 2015, the Company had outstanding cash flow hedges with a total notional amount of $296.2 million.

Balance Sheet Hedges
The Company uses foreign currency derivative contracts not designated as hedging instruments (“balance sheet hedges”) to reduce the exchange rate risk associated with its foreign currency denominated monetary assets and liabilities. These balance sheet hedges are marked-to-market at the end of each reporting period and the related gains and losses are recognized in other income (expense), net.

As of September 30, 2015 and December 31, 2014, the Company had outstanding balance sheet hedges with a total notional amount of $170.8 million and $190.1 million, respectively.

Fair Value of Foreign Currency Derivatives
The foreign currency derivative contracts that were not settled at the end of the period are recorded at fair value, on a gross basis, in the condensed consolidated balance sheets. The following table presents the fair value of the Company’s foreign currency derivative contracts as of the periods presented (in thousands):



 
September 30,
2015
 
December 31,
2014
Derivative assets:
 
 
 
Cash flow hedges
$
9,337

 
$

Balance sheet hedges
2,337

 
5,591

     Total derivative assets
11,674

 
5,591

Derivative liabilities:
 
 
 
Cash flow hedges
69

 

Balance sheet hedges
1,380

 
149

     Total derivative liabilities
1,449

 
149

Total fair value of derivative instruments
$
10,225

 
$
5,442


See Note 2, Fair Value Measurements, for additional information related to the fair value of the Company’s foreign currency derivative contracts.    

Financial Statement Effect of Foreign Currency Derivative Contracts

The following table presents the activity of the Company’s cash flow hedges in AOCI in stockholders' equity for the period presented (1) (in thousands):
 
December 31,
2014
 
Amount of gain recognized in other comprehensive income before tax effect (effective portion)
 
Amount of loss reclassified from AOCI before tax effect to net revenue (effective portion)
 
September 30,
2015
Cash flow hedges
$

 
5,165

 
1,953

 
$
7,118

__________
(1)    The Company did not have any cash flow hedges in the prior period.

The amount recognized in earnings related to the ineffective portion of the Company's cash flow hedges was insignificant for the quarter.

As of September 30, 2015, the Company estimates approximately $7.1 million of net derivative gains related to our cash flow hedges will be reclassified from AOCI into earnings within the next 12 months.

The following table presents the impact of the Company’s foreign currency derivative contracts on the condensed consolidated statement of operations for the periods presented (in thousands):
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Location
 
2015
 
2014
 
2015
 
2014
Cash flow hedges
Net revenue
 
$
(1,019
)
 
$

 
$
(1,953
)
 
$

Cash flow hedges
Other expense, net (1)
 
(2,464
)
 

 
(4,871
)
 

Balance sheet hedges
Other expense, net
 
4,175

 
7,423

 
9,894

 
5,199

Total gain from foreign currency derivative contracts
 
 
$
692

 
$
7,423

 
$
3,070

 
$
5,199

____________
(1)
Balances relate to changes in fair value that are excluded from the Company's assessment of hedge effectiveness.





6.
Property and Equipment
The following table presents the detail of property and equipment, net, for the periods presented (in thousands): 
 
September 30,
2015
 
December 31,
2014
Land
$
215,040

 
$
179,232

Computer equipment
636,923

 
489,763

Software
52,552

 
47,157

Capitalized website, internal-use software, and production costs
204,984

 
131,182

Furniture and fixtures
84,281

 
64,180

Leasehold improvements
300,651

 
235,845

Building
15,376

 

Total
1,509,807

 
1,147,359

Less accumulated depreciation and amortization
(603,618
)
 
(406,450
)
Property and equipment, net
$
906,189

 
$
740,909


During the three months ended September 30, 2015, the Company purchased property for $36.5 million, of which $21.5 million was accounted for as a business combination in accordance with US GAAP. The Company allocated approximately $20.5 million to land and $1.0 million to leases currently in place.

 
7.
Goodwill and Other Intangible Assets
Goodwill
Goodwill is generally not deductible for tax purposes. The following table presents the goodwill activity for the periods presented (in thousands):
Goodwill—December 31, 2014
$
356,718

lynda.com acquisition
1,128,595

Other acquisitions
23,633

Goodwill—September 30, 2015
$
1,508,946





Other Intangible Assets
The following table presents the detail of other intangible assets for the periods presented (dollars in thousands):
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Weighted-
Average
Remaining
Life (1)
September 30, 2015:
 
 
 
 
 
 
 
Developed technology
$
164,948

 
$
(73,426
)
 
$
91,522

 
1.6 years
Trade name
8,000

 
(6,850
)
 
1,150

 
0.6 years
Patents
55,256

 
(8,833
)
 
46,423

 
9.6 years
Customer and subscriber relationships
226,100

 
(28,379
)
 
197,721

 
3.1 years
Content (2)
98,000

 
(18,375
)
 
79,625

 
2.1 years
Other intangible assets
5,242

 
(3,633
)
 
1,609

 
1.4 years
Total
$
557,546

 
$
(139,496
)
 
$
418,050

 
3.3 years
December 31, 2014:
 
 
 
 
 
 
 
Developed technology
$
113,466

 
$
(37,936
)
 
$
75,530

 
2.2 years
Trade name
7,000

 
(5,203
)
 
1,797

 
1.0 year
Patents
53,256

 
(5,046
)
 
48,210

 
10.3 years
Customer relationships
5,100

 
(1,161
)
 
3,939

 
2.6 years
Other intangible assets
4,152

 
(2,353
)
 
1,799

 
0.9 years
Total
$
182,974

 
$
(51,699
)
 
$
131,275

 
5.2 years
 __________________
(1)
The weighted-average remaining life of other intangible assets excludes the impact of $0.6 million and $0.4 million in indefinite-lived intangible assets, which consists of domain names, as of September 30, 2015 and December 31, 2014, respectively.
(2)
The amortization method for the content intangible asset is 50% the first year, 30% the second year, and 20% in the third year. The remaining definite-lived intangible assets are amortized using the straight-line method.
Amortization expense for the three months ended September 30, 2015 and 2014 was $46.5 million and $10.0 million, respectively, and $87.7 million and $22.0 million for the nine months ended September 30, 2015 and 2014, respectively. Estimated amortization expense of purchased intangible assets for future periods as of September 30, 2015 is as follows (in thousands):
Year Ending December 31,
Amortization expense
Remainder of 2015
$
46,996

2016
169,113

2017
102,360

2018
53,605

2019
20,381

Thereafter
25,017

Total
$
417,472

 

18


8.
Accrued Liabilities
The following table presents the detail of accrued liabilities as of the periods presented (in thousands):
 
September 30,
2015
 
December 31,
2014
Accrued vacation and employee-related expenses
$
134,579

 
$
88,100

Accrued incentives
69,880

 
69,583

Accrued commissions
27,670

 
59,357

Accrued sales tax and value-added taxes
17,123

 
11,249

Other accrued expenses
47,542

 
31,900

Total
$
296,794

 
$
260,189


9.
Convertible Senior Notes
On November 12, 2014, the Company issued $1,322.5 million aggregate principal amount of convertible senior notes (the “Notes”). The total net proceeds from this offering were $1,305.3 million, after deducting the initial purchasers’ discount and debt issuance costs.
The Notes are governed by an indenture agreement between the Company, as the issuer, and US Bank National Association, as Trustee. The Notes are unsecured and do not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by the Company. The Notes mature on November 1, 2019, unless converted, and bear interest at a rate of 0.50% payable semi-annually in arrears on May 1 and November 1 of each year, commencing May 1, 2015.
The Notes are convertible at an initial conversion rate of 3.3951 shares of common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $294.54 per share of common stock.
Holders may convert their notes under the following circumstances:

during any calendar quarter beginning after the calendar quarter ending on March 31, 2015 (and only during such calendar quarter), if, for at least 20 trading days during the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter the last reported sale price of the Company’s Class A common stock is greater than or equal to 130% of the conversion price;
during the five business day period after any five consecutive trading day period when the trading price per $1,000 principal amount of notes for each trading day is less than 98% of the product of the last reported sales price of the Company’s Class A common stock and the conversion rate; or
upon the occurrence of specified corporate events.
On or after May 1, 2019, up until the close of business on the second trading day immediately preceding the maturity date, a holder may convert all or any portion of its notes regardless of the foregoing conditions. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its Class A common stock, or a combination of cash and shares of its Class A common stock, at the Company’s election. The Company intends to settle the principal and interest due on the Notes in cash.
The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued or unpaid interest. A holder who converts its notes in connection with certain corporate events that constitute a “make-whole fundamental change” per the indenture governing the Notes are, under certain circumstances, entitled to an increase in the conversion rate. In addition, if the Company undergoes a fundamental change prior to the maturity date, holders may require the Company to repurchase for cash all or a portion of its notes at a repurchase price equal to 100% of the principal amount of the repurchased notes, plus accrued and unpaid interest.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated conversion feature. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the proceeds received upon issuance of the Notes. The difference between the principal amount of the Notes and the liability component (the “debt discount”) is amortized to interest expense using the effective interest method over the term of the Notes. The equity component of the Notes is included in additional paid-in capital in the condensed

19


consolidated balance sheet and is not remeasured as long as it continues to meet the conditions for equity classification.
The Company incurred transaction costs of approximately $0.7 million related to the issuance of the Notes. In accounting for the transaction costs, the Company allocated the total amount incurred to the liability and equity components using the same proportions as the proceeds from the Notes. Transaction costs attributable to the liability component were recorded in other assets in the condensed consolidated balance sheet and are being amortized to interest expense over the term of the Notes, and transaction costs attributable to the equity component were netted with the equity component in stockholders’ equity.
The Notes consisted of the following (in thousands):
 
September 30,
2015
Liability:
 
Principal
$
1,322,500

Less: debt discount, net of amortization
(207,061
)
Net carrying amount
$
1,115,439

 
 
Equity
$
236,752


The Company recognized interest expense on the Notes as follows (in thousands, except for percentage):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2015
Contractual interest expense based on 0.50% per annum
$
1,653

 
$
4,978

Amortization of debt issuance costs
27

 
81

Amortization of debt discount
11,429

 
33,886

Total
$
13,109

 
$
38,945

Effective interest rate of the liability component
4.7
%
 
4.7
%
The total estimated fair value of the Notes as of September 30, 2015 was $1,304.7 million. The fair value was determined based on the closing trading price of the Notes as of the last day of trading for the period. The Company considers the fair value of the Notes to be a Level 2 measurement due to the limited trading activity of the Notes.
Based on the closing price of our Class A common stock of $190.13 on September 30, 2015, the if-converted value of the Notes was less than the principal amount.
Note Hedges and Warrants
Concurrently with the issuance of the Notes, the Company purchased options (“Note Hedges”) with respect to its Class A common stock for $248.0 million with certain bank counterparties. The Note Hedges cover up to 4,490,020 shares of the Company's Class A common stock at a strike price of $294.54 per share, which corresponds to the initial conversion price of the Notes, and are exercisable by the Company upon conversion of the Notes. The Note Hedges are intended to reduce the potential economic dilution upon conversion of the Notes. The Note Hedges are separate transactions and are not part of the terms of the Notes. Holders of the Notes will not have any rights with respect to the Note Hedges.
Concurrently with the issuance of the Notes, the Company sold warrants to bank counterparties for total proceeds of $167.3 million that provides the counterparties with the right to buy up to 4,490,020 shares of our Class A common stock at a strike price of $381.82 per share. The warrants are separate transactions and are not part of the Notes or Note Hedges. Holders of the Notes and Note Hedges will not have any rights with respect to the Warrants.
The amounts paid and received for the Note Hedges and warrants have been recorded in additional paid-in capital in the condensed consolidated balance sheets. The fair value of the Note Hedges and warrants are not remeasured through earnings each reporting period. The amounts paid for the Note Hedges are tax deductible expenses, while the proceeds received from the warrants are not taxable.

20



Impact to Earnings per Share

The Notes will have no impact to diluted earnings per share until the average price of our Class A common stock during the reporting period exceeds the conversion price of $294.54 per share because the principal amount of the Notes is intended to be settled in cash upon conversion. Under the treasury stock method, in periods the Company reports net income, the Company is required to include the effect of additional shares that may be issued under the Notes when the price of the Company’s Class A common stock exceeds the conversion price. Under this method, the cumulative dilutive effect of the Notes would be approximately 1,026,000 shares if the average price of the Company’s Class A common stock is $381.82. However, upon conversion, there will be no economic dilution from the Notes, as exercise of the Note Hedges eliminates any dilution from the Notes that would have otherwise occurred when the price of the Company’s Class A common stock exceeds the conversion price. The Note Hedges are required to be excluded from the calculation of diluted earnings per share, as they would be anti-dilutive under the treasury stock method.

The warrants will have a dilutive effect when the average share price exceeds the warrant’s strike price of $381.82 per share. As the price of the Company’s Class A common stock continues to increase above the warrant strike price, additional dilution would occur at a declining rate so that a $10 increase from the warrant strike price would yield cumulative dilution of approximately 1,229,000 diluted shares for EPS purposes. However, upon conversion, the Note Hedges would neutralize the dilution from the Notes so that there would only be dilution from the warrants, which would result in actual dilution of approximately 115,000 shares at a common stock price of $391.82.

10.
Other Income (Expense), Net
The following table presents the detail of other income (expense), net, for the periods presented (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Interest income
$
2,798

 
$
1,413

 
$
6,800

 
$
3,748

Interest expense (1)
(12,773
)
 

 
(38,064
)
 

Net loss on foreign exchange and foreign currency derivative contracts
(3,577
)
 
(1,282
)
 
(9,957
)
 
(1,477
)
Net realized gain (loss) on sales of marketable securities
(127
)
 
26

 
34

 
96

Other non-operating income (expense), net
(80
)
 
(5
)
 
381

 
8

Total other income (expense), net
$
(13,759
)
 
$
152

 
$
(40,806
)
 
$
2,375

 __________________
(1)
The Company capitalized $0.3 million and $0.9 million of interest expense related to properties under construction for the three and nine months ended September 30, 2015, respectively. The Company did not capitalize interest expense in 2014.


11.
Loss Per Share
Basic and diluted net loss per common share is presented in conformity with the two-class method required for participating securities.
Class A and Class B common stock are the only outstanding equity in the Company. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Shares of Class B common stock may be converted into Class A common stock at any time at the option of the stockholder, and are automatically converted to Class A common stock upon sale or transfer, subject to certain limited exceptions.
Basic net loss per share attributable to common stockholders is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per share attributable to common stockholders is computed using the weighted-average number of common shares and, if dilutive, potential common shares outstanding during the period. The Company’s potential common shares consist of shares issuable upon the

21


release of RSUs, and to a lesser extent, the incremental common shares issuable upon the exercise of stock options and purchases related to the 2011 Employee Stock Purchase Plan. The dilutive effect of these potential common shares is reflected in diluted earnings per share by application of the treasury stock method. The computation of the diluted net loss per share of Class A common stock assumes the conversion of Class B common stock, while the diluted net loss per share of Class B common stock does not assume the conversion of Class A common stock as Class A common stock is not convertible into Class B common stock.
The undistributed earnings are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the year had been distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. Further, as the conversion of Class B common stock is assumed in the computation of the diluted net loss per share of Class A common stock, the undistributed earnings are equal to net loss for that computation.


22


The following table presents the calculation of basic and diluted net loss per share attributable to common stockholders (in thousands, except per share data):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
Basic net loss per share attributable to common stockholders:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allocation of undistributed earnings
$
(35,673
)
 
$
(4,850
)
 
$
(3,711
)
 
$
(552
)
 
$
(132,368
)
 
$
(18,451
)
 
$
(16,221
)
 
$
(2,521
)
Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
115,071

 
15,645

 
107,448

 
15,979

 
112,483

 
15,679

 
105,761

 
16,436

Basic net loss per share attributable to common stockholders
$
(0.31
)
 
$
(0.31
)
 
$
(0.03
)
 
$
(0.03
)
 
$
(1.18
)
 
$
(1.18
)
 
$
(0.15
)
 
$
(0.15
)
Diluted net loss per share attributable to common stockholders:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allocation of undistributed earnings for basic computation
$
(35,673
)
 
$
(4,850
)
 
$
(3,711
)
 
$
(552
)
 
$
(132,368
)
 
$
(18,451
)
 
$
(16,221
)
 
$
(2,521
)
Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares
(4,850
)
 

 
(552
)
 

 
(18,451
)
 

 
(2,521
)
 

Allocation of undistributed earnings
$
(40,523
)
 
$
(4,850
)
 
$
(4,263
)
 
$
(552
)
 
$
(150,819
)
 
$
(18,451
)
 
$
(18,742
)
 
$
(2,521
)
Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares used in basic calculation
115,071

 
15,645

 
107,448

 
15,979

 
112,483

 
15,679

 
105,761

 
16,436

Weighted-average effect of dilutive securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Add:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Conversion of Class B to Class A common shares outstanding
15,645

 

 
15,979

 

 
15,679

 

 
16,436

 

Number of shares used in diluted calculation
130,716

 
15,645

 
123,427

 
15,979

 
128,162

 
15,679

 
122,197

 
16,436

Diluted net loss per share attributable to common stockholders
$
(0.31
)
 
$
(0.31
)
 
$
(0.03
)
 
$
(0.03
)
 
$
(1.18
)
 
$
(1.18
)
 
$
(0.15
)
 
$
(0.15
)
The following weighted-average employee equity awards were excluded from the calculation of diluted net loss per share attributable to common stockholders because their effect would have been anti-dilutive for the periods presented (in thousands):

23


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Employee stock options
2,833

 
3,857

 
2,870

 
4,395

RSUs and other equity
6,117

 
5,179

 
6,020

 
4,635

Total
8,950

 
9,036

 
8,890

 
9,030


12.
Commitments and Contingencies
Aggregate Future Lease Commitments
The Company leases its office facilities and data centers under operating lease agreements, the longest of which is expected to expire in 2029. The Company’s future minimum payments, which exclude operating expenses, under non-cancelable operating leases for office facilities and data centers having initial terms in excess of one year, and sublease income as of September 30, 2015 are as follows (in thousands):
 
Year Ending December 31,
Gross Operating Lease Commitments (1)
 
Sublease
Income (2)
 
Net Operating Lease Commitments
Remainder of 2015
$
32,819

 
$
(3,947
)
 
$
28,872

2016
149,956

 
(18,197
)
 
131,759

2017
155,041

 
(18,021
)
 
137,020

2018
174,392

 
(18,208
)
 
156,184

2019
177,461

 
(18,726
)
 
158,735

Thereafter
1,183,665

 
(140,428
)
 
1,043,237

Total minimum lease payments
$
1,873,334

 
$
(217,527
)
 
$
1,655,807

 __________________
(1)
In October 2015, the Company entered into a lease with a provider of data center space for total future minimum payments of $94.3 million over the next 11.0 years.
(2)
Primarily represents sublease income for several buildings the Company leases in Sunnyvale, California to be recognized over the next 12 years.
Legal Proceedings
The Company is subject to legal proceedings and litigation arising in the ordinary course of business, including, but not limited to, certain pending patent and privacy matters, including class action lawsuits, as well as inquiries, investigations, audits and other regulatory proceedings. Although occasional adverse decisions or settlements may occur, the Company does not believe that the final disposition of any of these matters will have a material adverse effect on the business. Certain of these matters include speculative claims for substantial or indeterminate amounts of damages, and include claims for injunctive relief. Additionally, the Company's litigation costs can be significant. Other regulatory matters could result in fines and penalties being assessed against the Company, and it may become subject to mandatory periodic audits, which would likely increase its regulatory compliance costs. Adverse results of litigation or regulatory matters could also result in the Company being required to change its business practices, which could negatively impact its membership and revenue growth.
The Company records a liability when it believes that it is both probable that a loss has been incurred and the amount can be reasonably estimated. The Company periodically evaluates developments in its legal matters that could affect the amounts that have been previously accrued, if any, and makes adjustments as appropriate. Significant judgment is required to determine both likelihood of there being, and the estimated amount of, a loss related to such matters, and the Company’s judgment may be incorrect. The outcome of any proceeding is not determinable in advance. Until the final resolution of any such matters that the Company may be required to accrue for, it may be exposed to loss in excess of the amount accrued, and such amounts could be material.

24


Indemnifications
In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements and out of intellectual property infringement claims made by third parties. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, the Company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, it may have recourse against third parties for certain payments. In addition, the Company has indemnification agreements with certain of its directors and executive officers that require it, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers with the Company. The terms of such obligations may vary.
 
13.
Stockholders’ Equity
Common Stock
As of September 30, 2015, the Company had 115,446,198 shares and 15,629,555 shares of Class A common stock and Class B common stock outstanding, respectively. As of December 31, 2014, the Company had 109,259,689 and 15,782,261 shares of Class A common stock and Class B common stock outstanding, respectively.
Stock Option Activity
A summary of stock option activity for the nine months ended September 30, 2015 is as follows: 
 
Options Outstanding
 
Weighted-Average
Remaining
Contractual 
Term
(in years)
 
Aggregate
Intrinsic
Value
(in thousands)
 
Number of
Shares
 
Weighted-Average
Exercise Price
 
 
 
 
Outstanding—December 31, 2014
3,027,717

 
$
69.53

 
 
 
 
Assumed options from acquisitions
178,763

 
29.92

 
 
 
 
Granted
236,326

 
263.00

 
 
 
 
Exercised
(647,150
)
 
23.40

 
 
 
 
Canceled or expired
(13,269
)
 
51.22

 
 
 
 
Outstanding—September 30, 2015
2,782,387

 
$
94.24

 
6.08
 
$
291,770

Options expected to vest as of September 30, 2015
2,682,781

 
$
90.52

 
5.99
 
$
289,415

Options exercisable as of September 30, 2015
1,916,339

 
$
52.25

 
5.07
 
$
268,962

Aggregate intrinsic value represents the difference between the Company's closing stock price of its common stock and the exercise price of outstanding, in-the-money options. The Company’s closing stock price as reported on the New York Stock Exchange (“NYSE”) as of September 30, 2015 was $190.13. The total intrinsic value of options exercised was approximately $19.3 million and $168.2 million for the three months ended September 30, 2015 and 2014, respectively, and $139.5 million and $350.3 million for the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options was approximately $67.5 million, which is expected to be recognized over the next 2.6 years.

25


RSU Activity
A summary of RSU activity for the nine months ended September 30, 2015 is as follows: 
 
Number of
Shares
 
Weighted-
Average
Grant Date
Fair Value
 
Aggregate
Intrinsic
Value
(in thousands)
Unvested—December 31, 2014
5,140,627

 
$
176.78

 
 
Granted
2,996,876

 
240.72

 
 
Vested
(1,643,432
)
 
172.35

 
 
Canceled
(510,509
)
 
187.83

 
 
Unvested—September 30, 2015
5,983,562

 
$
209.08

 
$
1,137,655

Expected to vest as of September 30, 2015
5,239,505

 


 
$
996,187

The intrinsic value of RSUs released was approximately $116.3 million and $94.1 million in the three months ended September 30, 2015 and 2014, respectively, and $350.8 million and $225.7 million for the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015, the total unrecognized compensation cost, adjusted for estimated forfeitures, related to RSUs was approximately $1.0 billion, which is expected to be recognized over the next 2.8 years.
Restricted Stock
As of September 30, 2015, the total unrecognized compensation cost related to restricted stock was approximately $23.9 million, which is expected to be recognized over the next 0.9 years.
Stock-Based Compensation
The following table presents the amount of stock-based compensation related to stock-based awards to employees recognized in the Company’s condensed consolidated statements of operations during the periods presented (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Cost of revenue
$
12,934

 
$
7,336

 
$
34,637

 
$
20,003

Sales and marketing
26,609

 
15,334

 
69,367

 
41,441

Product development
58,419

 
40,014

 
168,236

 
110,722

General and administrative
28,912

 
20,226

 
103,234

 
53,341

Total stock-based compensation
126,874

 
82,910

 
375,474

 
225,507

Tax benefit from stock-based compensation
(39,308
)
 
(23,490
)
 
(105,891
)
 
(63,429
)
Total stock-based compensation, net of tax effect
$
87,566

 
$
59,420

 
$
269,583

 
$
162,078


The Company capitalized $8.6 million and $3.2 million for the three months ended September 30, 2015 and 2014, respectively, and $18.5 million and $9.4 million for the nine months ended September 30, 2015 and 2014, respectively, of stock-based compensation as website development and production costs.


26


14.
Accumulated Other Comprehensive Income
The following table presents the components of AOCI, net of tax, for the periods presented (in thousands):
 
Unrealized Gains/Losses on Investments
 
Unrealized Gains on Cash Flow Hedges
 
Foreign Currency Translation Adjustments
 
Total
AOCI—June 30, 2015

$
10

 
$
(2,851
)
 
$
(36
)
 
$
(2,877
)
Other comprehensive income before adjustments
520

 
8,059

 
153

 
8,732

Amounts reclassified from AOCI
(242
)
 
1,019

 

 
777

     Other comprehensive income
$
278

 
$
9,078

 
$
153

 
$
9,509

AOCI—September 30, 2015

$
288

 
$
6,227

 
$
117

 
$
6,632


 
Unrealized Gains/Losses on Investments
 
Unrealized Gains on Cash Flow Hedges
 
Foreign Currency Translation Adjustments
 
Total
AOCI—December 31, 2014

$
(149
)
 
$

 
$
(49
)
 
$
(198
)
Other comprehensive income before adjustments
593

 
4,274

 
166

 
5,033

Amounts reclassified from AOCI
(156
)
 
1,953

 

 
1,797

     Other comprehensive income
$
437

 
$
6,227

 
$
166