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EX-32.1 - EXHIBIT 32.1 - LINKEDIN CORPlnkd-exhibit321x09302016x1.htm
EX-31.2 - EXHIBIT 31.2 - LINKEDIN CORPlnkd-exhibit312x09302016x1.htm
EX-31.1 - EXHIBIT 31.1 - LINKEDIN CORPlnkd-exhibit311x09302016x1.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, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to         
Commission File Number: 001-35168
 
 
 
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 20, 2016, there were 120,883,109 shares of the Registrant’s Class A common stock outstanding and 14,656,083 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,
2016
 
December 31,
2015
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
697,113

 
$
546,237

Marketable securities
2,667,883

 
2,573,145

Accounts receivable (net of allowance for doubtful accounts of $18,783 and $17,970 at September 30, 2016 and December 31, 2015, respectively)
541,325

 
603,060

Deferred commissions
72,290

 
87,706

Prepaid expenses
79,104

 
62,992

Other current assets
45,298

 
61,949

Total current assets
4,103,013

 
3,935,089

Property and equipment, net
1,508,480

 
1,047,005

Goodwill
1,609,492

 
1,507,093

Intangible assets, net
262,986

 
373,087

Other assets
72,441

 
148,925

TOTAL ASSETS
$
7,556,412

 
$
7,011,199

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
189,073

 
$
162,176

Accrued liabilities
321,507

 
316,792

Deferred revenue
749,491

 
709,116

Total current liabilities
1,260,071

 
1,188,084

CONVERTIBLE SENIOR NOTES, NET
1,162,141

 
1,126,534

OTHER LONG-TERM LIABILITIES
231,981

 
201,128

Total liabilities
2,654,193

 
2,515,746

COMMITMENTS AND CONTINGENCIES (Note 12)

 

REDEEMABLE NONCONTROLLING INTEREST
28,400

 
26,810

STOCKHOLDERS’ EQUITY (Note 13):
 
 
 
Class A and Class B common stock
14

 
13

Additional paid-in capital
5,141,257

 
4,588,578

Accumulated other comprehensive income
18,153

 
9,124

Accumulated deficit
(285,605
)
 
(129,072
)
Total stockholders’ equity
4,873,819

 
4,468,643

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND STOCKHOLDERS’ EQUITY
$
7,556,412

 
$
7,011,199

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,
 
2016
 
2015
 
2016
 
2015
Net revenue
$
959,787

 
$
779,595

 
$
2,753,151

 
$
2,129,017

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation and amortization shown separately below)
119,772

 
111,368

 
357,826

 
299,860

Sales and marketing
311,222

 
265,454

 
921,474

 
756,361

Product development
246,423

 
202,682

 
719,975

 
558,395

General and administrative
121,391

 
118,871

 
382,981

 
358,573

Depreciation and amortization
137,934

 
117,901

 
419,620

 
290,877

Total costs and expenses
936,742

 
816,276

 
2,801,876

 
2,264,066

Income (loss) from operations
23,045

 
(36,681
)
 
(48,725
)
 
(135,049
)
Other expense, net:
 
 
 
 
 
 
 
Interest income
6,422

 
2,798

 
17,369

 
6,800

Interest expense
(13,110
)
 
(12,773
)
 
(38,867
)
 
(38,064
)
Other, net
(3,550
)
 
(10,684
)
 
(13,341
)
 
(16,442
)
Other expense, net
(10,238
)
 
(20,659
)
 
(34,839
)
 
(47,706
)
Income (loss) before income taxes
12,807

 
(57,340
)
 
(83,564
)
 
(182,755
)
Provision (benefit) for income taxes
3,694

 
(10,429
)
 
71,379

 
(25,905
)
Net income (loss)
9,113

 
(46,911
)
 
(154,943
)
 
(156,850
)
Accretion of redeemable noncontrolling interest
(554
)
 
(512
)
 
(1,590
)
 
(869
)
Net income (loss) attributable to common stockholders
$
8,559

 
$
(47,423
)
 
$
(156,533
)
 
$
(157,719
)
 
 
 
 
 
 
 
 
Net income (loss) per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.06

 
$
(0.36
)
 
$
(1.18
)
 
$
(1.23
)
Diluted
$
0.06

 
$
(0.36
)
 
$
(1.18
)
 
$
(1.23
)
Weighted-average shares used to compute net income (loss) per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
135,141

 
130,716

 
133,213

 
128,162

Diluted
138,200

 
130,716

 
133,213

 
128,162

See Notes to Condensed Consolidated Financial Statements

4


LINKEDIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
9,113

 
$
(46,911
)
 
$
(154,943
)
 
$
(156,850
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in unrealized net gain (loss) on investments, net of tax
(2,735
)
 
278

 
6,024

 
437

Change in unrealized gain (loss) on cash flow hedges, net of tax
(1,254
)
 
9,078

 
2,748

 
6,227

Change in foreign currency translation adjustment
65

 
153

 
257

 
166

Total other comprehensive income (loss)
(3,924
)
 
9,509

 
9,029

 
6,830

Comprehensive income (loss)
5,189

 
(37,402
)
 
(145,914
)
 
(150,020
)
Accretion of redeemable noncontrolling interest
(554
)
 
(512
)
 
(1,590
)
 
(869
)
Comprehensive income (loss) attributable to common stockholders
$
4,635

 
$
(37,914
)
 
$
(147,504
)
 
$
(150,889
)
See Notes to Condensed Consolidated Financial Statements

5


LINKEDIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Nine Months Ended
September 30,
 
2016
 
2015
OPERATING ACTIVITIES:
 
 
 
Net loss
$
(154,943
)
 
$
(156,850
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
419,620

 
290,877

Provision for doubtful accounts and sales returns
12,586

 
8,448

Amortization of investment premiums, net
10,716

 
15,877

Amortization of debt discount and issuance costs
35,607

 
33,967

Stock-based compensation
432,014

 
375,474

Excess income tax benefit from stock-based compensation
(237
)
 
1,726

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
50,464

 
(1,566
)
Deferred commissions
19,101

 
11,696

Prepaid expenses and other assets
(9,203
)
 
(46,154
)
Accounts payable and other liabilities
44,444

 
74,088

Income taxes, net
59,857

 
(32,906
)
Deferred revenue
37,861

 
55,692

Net cash provided by operating activities
957,887

 
630,369

INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(686,576
)
 
(329,236
)
Purchases of investments
(2,098,595
)
 
(1,896,503
)
Sales of investments
555,632

 
971,775

Maturities of investments
1,442,245

 
1,436,846

Payments for intangible assets and acquisitions, net of cash acquired
(62,866
)
 
(674,872
)
Changes in deposits and restricted cash
2,392

 
7,202

Net cash used in investing activities
(847,768
)
 
(484,788
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of preferred shares in joint venture

 
20,000

Proceeds from issuance of common stock from employee stock options
7,041

 
15,147

Proceeds from issuance of common stock from employee stock purchase plan
35,979

 
20,799

Excess income tax benefit from stock-based compensation
237

 
(1,726
)
Repurchases of equity awards
(3,251
)
 
(22,695
)
Other financing activities

 
(167
)
Net cash provided by financing activities
40,006

 
31,358

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
751

 
(6,101
)
CHANGE IN CASH AND CASH EQUIVALENTS
150,876

 
170,838

CASH AND CASH EQUIVALENTS—Beginning of period
546,237

 
460,887

CASH AND CASH EQUIVALENTS—End of period
$
697,113

 
$
631,725

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Purchases of property and equipment recorded in accounts payable and accrued liabilities
$
101,762

 
$
45,648

Issuance of Class A common stock and equity awards for business combinations
$
56,517

 
$
695,028

Land, buildings, and other assets and liabilities exchanged for other land, buildings, and leases
$
212,999

 
$

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 ("LinkedIn", 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, 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. The Company also offers diverse products that can be used by customers to transform the way they hire, market, sell, and learn.

Proposed Transaction with Microsoft
On June 11, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Microsoft Corporation (“Microsoft”) and Liberty Merger Sub Inc., a wholly owned subsidiary of Microsoft (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation and as a wholly-owned subsidiary of Microsoft. As a result of the Merger, LinkedIn will cease to be a publicly traded company.
At the effective time of the Merger, each share of Class A common stock and Class B common stock of the Company (together, the “Common Stock”) issued and outstanding as of immediately prior to the effective time will be canceled and automatically converted into the right to receive cash in an amount equal to $196.00, without interest thereon (the “Per Share Amount”). All shares of vested stock-based awards and option awards with an exercise price per share of less than $196.00 will be converted into the right to receive the Per Share Amount (or, in the case of options, the difference between the Per Share Amount and the applicable exercise price), less any applicable tax withholdings. Unvested stock-based awards and option awards with an exercise price per share less than $196.00 will be converted into corresponding awards with no less favorable terms that are subject to shares of Microsoft common stock based on an exchange ratio that will be determined at the effective time of the Merger. Unvested option awards with an exercise price per share equal to or greater than $196.00 will be canceled for no payment.
At the effective time of the Merger, holders of the convertible senior notes (the "Notes") can require the Company (the surviving entity following the Merger as a wholly-owned subsidiary of Microsoft) to repurchase for cash the Notes at a repurchase price equal to 100% of the principal amount thereof, plus accrued interest.
The transaction is expected to close in the 2016 calendar year. Consummation of the Merger is subject to certain conditions, including the satisfaction of regulatory approval and other customary closing conditions.
The Merger Agreement contains certain termination rights for the Company and Microsoft. Upon termination of the Merger Agreement under specified circumstances, the Company may be required to pay Microsoft a termination fee of $725 million.
Other than transaction expenses associated with the proposed Merger of $2.0 million and $15.5 million for the three and nine months ended September 30, 2016, the terms of the Merger Agreement did not impact the Company's condensed consolidated financial statements.

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, 2015, filed on February 12, 2016.

7


The condensed consolidated balance sheet as of December 31, 2015, 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 income (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 2016 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 Adopted Accounting Guidance
Business Combinations
In September 2015, the Financial Accounting Standards Board ("FASB") issued new authoritative accounting guidance on simplifying the accounting for measurement-period adjustments in 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 for 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 amounts are determined rather than retrospectively. This standard became effective for the Company in the first quarter of 2016, and is applied on a prospective basis to adjustments to provisional amounts that occur after the effective date, with no impact to its financial statements.

Recently Issued Accounting Guidance
Credit Losses
In June 2016, the FASB issued new authoritative accounting guidance on credit losses on financial instruments which replaces the incurred-loss impairment methodology. The new guidance requires immediate recognition of estimated credit losses expected to occur for most financial assets and certain other instruments. The standard is effective for the Company in the first quarter of 2020; however early adoption is permitted beginning in the first quarter of 2019. The Company is currently evaluating whether this standard will have a material impact on its financial statements.
Stock Compensation
In March 2016, the FASB issued new authoritative accounting guidance on the accounting for certain aspects of share-based payments to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The standard is effective for the Company in the first quarter of 2017 and will be applied using the modified retrospective approach; however, early adoption is permitted. The Company is currently evaluating whether this standard will have a material impact on its financial statements.
Leases

8


In February 2016, the FASB issued new authoritative accounting guidance on leasing arrangements. The guidance outlines a comprehensive model for entities to use in accounting for leases, and supersedes most current lease accounting guidance, including industry-specific guidance. The core principle of the new lease accounting model is that lessees are required, among other things, to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous authoritative guidance. The guidance also introduces new disclosure requirements for leasing arrangements. The standard is effective for the Company in the first quarter of 2019; however, early adoption is permitted. This standard is required to be applied using the modified retrospective approach. The Company is currently evaluating the impact of this guidance on its financial statements and expects that its operating leases will be recognized in its condensed consolidated balance sheets.
Financial Instruments
In January 2016, the FASB issued new authoritative accounting guidance on the classification and measurement of financial instruments. The requirement to disclose the methods and significant assumptions used to estimate fair value is removed. In addition, financial assets and financial liabilities are to be presented separately in the notes to the financial statements, grouped by measurement category and form of financial asset. This standard will be effective for the Company in the first quarter of 2018; however, early adoption is permitted. The Company does not expect this standard to have a material impact on its financial statements.
Revenue Recognition
In May 2014, the FASB issued new authoritative accounting 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 and will be applied using either the full or modified retrospective adoption methods. In March, April and May 2016, the FASB issued additional implementation guidance related to the new standard. The Company is currently evaluating whether this standard will have a material impact on its financial statements.


9


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, 2016:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
361,008

 
$

 
$

 
$
361,008

Commercial paper

 
21,521

 

 
21,521

US treasury securities
157,022

 

 

 
157,022

US agency securities

 
24,999

 

 
24,999

Marketable securities:
 
 
 
 
 
 
 
Commercial paper

 
71,667

 

 
71,667

Certificates of deposit

 
64,654

 

 
64,654

US treasury securities
983,739

 

 

 
983,739

US agency securities

 
484,422

 

 
484,422

Corporate debt securities

 
1,055,400

 

 
1,055,400

Municipal securities

 
8,001

 

 
8,001

Other current assets:
 
 
 
 
 
 
 
Foreign currency derivative contracts

 
16,199

 

 
16,199

Total assets
$
1,501,769

 
$
1,746,863

 
$

 
$
3,248,632

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Foreign currency derivative contracts
$

 
$
1,131

 
$

 
$
1,131

Other long-term liabilities
 
 
 
 
 
 
 
Other derivative

 

 
19,200

 
19,200

Total liabilities
$

 
$
1,131

 
$
19,200

 
$
20,331



10


 
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2015:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
276,898

 
$

 
$

 
$
276,898

Commercial paper

 
12,049

 

 
12,049

US treasury securities
25,000

 

 

 
25,000

US agency securities

 
51,500

 

 
51,500

Marketable securities:
 
 
 
 
 
 
 
Commercial paper

 
55,374

 

 
55,374

US treasury securities
874,029

 

 

 
874,029

US agency securities

 
606,202

 

 
606,202

Corporate debt securities

 
1,026,898

 

 
1,026,898

Municipal securities

 
10,642

 

 
10,642

Other current assets:
 
 
 
 
 
 
 
Foreign currency derivative contracts

 
14,508

 

 
14,508

Total assets
$
1,175,927

 
$
1,777,173

 
$

 
$
2,953,100

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Foreign currency derivative contracts
$

 
$
1,847

 
$

 
$
1,847

Other long-term liabilities:
 
 
 
 
 
 
 
Other derivative

 

 
11,600

 
11,600

Total liabilities
$

 
$
1,847

 
$
11,600

 
$
13,447

 
The fair value of the Company's Level 1 financial instruments, which are traded in active markets, is based on quoted market prices 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.
The Company's Level 3 other derivative is related to the embedded features in the preferred stock of the Company's joint venture, which is expected to be settled in cash. The fair value of this other derivative is categorized as Level 3 in the fair value hierarchy due to the use of significant unobservable inputs in the Black-Scholes option pricing model ("OPM") used in the valuation. The key significant unobservable inputs in the OPM are the enterprise value of the Company's joint venture, volatility, and expected term of when the embedded features will be exercised. The enterprise value of the joint venture is estimated quarterly using a combination of market and income approach methodologies. The volatility is based on historic volatilities of companies who have recently had initial public offerings. The expected term of when the embedded conversion feature will be exercised was assumed to be 3.7 years, which is the earliest date that the embedded features could be exercised.
The actual and projected performance of the joint venture as well as the term of when the embedded features are exercised may drive unpredictable changes in the valuation that could materially impact the Company's financial results.
The following is a reconciliation of the Company's Level 3 other derivative for the periods presented (in thousands):


11


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
($ in thousands)
 
($ in thousands)
Balance, beginning of period
$
16,100

 
$
2,800

 
$
11,600

 
$
2,800

Fair value adjustments (1)
3,100

 
6,900

 
7,600

 
6,900

Balance, end of period
$
19,200

 
$
9,700

 
$
19,200

 
$
9,700

____________
(1)
Changes in the fair value are recorded in Other expense, net in the condensed consolidated statements of operations.

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, 2016.    

3.
Acquisitions
Connectifier
On February 19, 2016, LinkedIn completed its acquisition of Connectifier, Inc. ("Connectifier") for a total purchase price of $105.5 million, which consisted of $49.0 million in cash and 485,166 shares of LinkedIn Class A common stock. The Company also issued restricted stock and equity awards related to assumed Connectifier equity awards, of which the earned portion is included in the purchase price.
Other acquisitions
LinkedIn completed two other acquisitions during the nine months ended September 30, 2016, for a total cash purchase price of $16.4 million.
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 the acquisitions have been included in the condensed consolidated financial statements from the acquisition dates. The following table presents the preliminary purchase price allocations recorded in the Company's condensed consolidated balance sheet as of the acquisition dates (in thousands):
 
 
Connectifier
 
Other acquisitions
 
Total
Net tangible assets
 
$
7,098

 
$
19

 
$
7,117

Goodwill (1)
 
90,120

 
12,626

 
102,746

Intangible assets (2)
 
8,300

 
3,705

 
12,005

Total purchase price (3) 
 
$
105,518

 
$
16,350

 
$
121,868

 _______________________
(1)
The goodwill represents the excess value of the purchase price over both tangible and intangible assets acquired. The goodwill in these transactions 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 and customer relationships of $11.6 million and $0.4 million, respectively, with estimated useful lives of 2.0 years and 1.0 year, respectively, which will be amortized on a straight-line basis over their 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.
Actual and pro forma results for these acquisitions have not been presented as the financial impact to the Company's condensed consolidated financial statements, individually and in the aggregate, is not material.


12


4.
Cash and Investments
The following table presents cash, cash equivalents, and available-for-sale marketable securities for the periods presented (in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Market
Value
September 30, 2016:
 
 
 
 
 
 
 
Cash
$
132,563

 
$

 
$

 
$
132,563

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
361,008

 

 

 
361,008

Commercial paper
21,518

 
4

 
(1
)
 
21,521

US treasury securities
157,020

 
4

 
(2
)
 
157,022

US agency securities
24,998

 
1

 

 
24,999

Marketable securities:
 
 
 
 
 
 
 
Commercial paper
71,678

 
16

 
(27
)
 
71,667

Certificates of deposit
64,640

 
21

 
(7
)
 
64,654

US treasury securities
983,372

 
455

 
(88
)
 
983,739

US agency securities
484,005

 
458

 
(41
)
 
484,422

Corporate debt securities
1,052,695

 
3,087

 
(382
)
 
1,055,400

Municipal securities
8,000

 
1

 

 
8,001

Total cash, cash equivalents, and marketable securities
$
3,361,497

 
$
4,047

 
$
(548
)
 
$
3,364,996

December 31, 2015:
 
 
 
 
 
 
 
Cash
$
180,790

 
$

 
$

 
$
180,790

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
276,898

 

 

 
276,898

Commercial paper
12,048

 
1

 

 
12,049

US treasury securities
24,999

 
1

 

 
25,000

US agency securities
51,500

 

 

 
51,500

Marketable securities:
 
 
 
 
 
 
 
Commercial paper
55,350

 
47

 
(23
)
 
55,374

US treasury securities
874,968

 
20

 
(959
)
 
874,029

US agency securities
606,924

 
17

 
(739
)
 
606,202

Corporate debt securities
1,029,463

 
96

 
(2,661
)
 
1,026,898

Municipal securities
10,636

 
6

 

 
10,642

Total cash, cash equivalents, and marketable securities
$
3,123,576

 
$
188

 
$
(4,382
)
 
$
3,119,382


The following table presents unrealized losses on investments by investment category and length of time the investment has been in a continuous unrealized loss position as of the periods presented (in thousands):



 
Less than 12 months
 
12 Months or Greater
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
September 30, 2016:
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
$
34,869

 
$
(28
)
 
$

 
$

 
$
34,869

 
$
(28
)
Certificates of deposit
10,153

 
(7
)
 

 

 
10,153

 
(7
)
US treasury securities
240,507

 
(90
)
 

 

 
240,507

 
(90
)
US agency securities
72,200

 
(41
)
 

 

 
72,200

 
(41
)
Corporate debt securities
321,906

 
(381
)
 
1,499

 
(1
)
 
323,405

 
(382
)
Total
$
679,635

 
$
(547
)
 
$
1,499

 
$
(1
)
 
$
681,134

 
$
(548
)
December 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
$
28,482

 
$
(23
)
 
$

 
$

 
$
28,482

 
$
(23
)
US treasury securities
777,237

 
(959
)
 

 

 
777,237

 
(959
)
US agency securities
472,236

 
(739
)
 

 

 
472,236

 
(739
)
Corporate debt securities
943,276

 
(2,661
)
 

 

 
943,276

 
(2,661
)
Total
$
2,221,231

 
$
(4,382
)
 
$

 
$

 
$
2,221,231

 
$
(4,382
)


The following table presents available-for-sale marketable securities by contractual maturity date (in thousands) as of September 30, 2016:
 
Amortized
Cost
 
Estimated Fair Market Value
Due in one year or less
$
1,517,136

 
$
1,517,691

Due after one year through two years
789,018

 
790,476

Due after two years through three years
358,236

 
359,716

Total
$
2,664,390

 
$
2,667,883



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
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, 2016 and December 31, 2015, the Company had outstanding cash flow hedges with a total notional amount of $457.6 million and $321.5 million, respectively.

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, 2016 and December 31, 2015, the Company had outstanding balance sheet hedges with a total notional amount of $183.4 million and $239.9 million, respectively.

Other Derivative
The Company's other derivative is related to the accounting for the embedded features on the preferred stock of the Company's joint venture, which is expected to be settled in cash at a value equal to the fair value of the preferred stock, subject to a floor and a cap.

Fair Value of Derivative Contracts
The foreign currency derivative contracts that were not settled at the end of the period and other derivative contract 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 derivative contracts as of the periods presented (in thousands):
 
September 30,
2016
 
December 31,
2015
Derivative assets:
 
 
 
Cash flow hedges
$
15,044

 
$
11,897

Balance sheet hedges
1,155

 
2,611

     Total derivative assets
16,199

 
14,508

Derivative liabilities:
 
 
 
Cash flow hedges
529

 
790

Balance sheet hedges
602

 
1,057

Other derivative
19,200

 
11,600

     Total derivative liabilities
20,331

 
13,447

Total fair value of derivative instruments, net
$
(4,132
)
 
$
1,061


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

Financial Statement Effect of Derivative Contracts

The following table presents the activity of the Company’s cash flow hedges in AOCI in stockholders' equity for the periods presented (in thousands):





 
December 31,
2015
 
Amount of gain (loss) recognized in other comprehensive income before tax effect (effective portion)
 
Amount of (gain) loss reclassified from AOCI before tax effect to net revenue (effective portion)
 
September 30,
2016
Cash flow hedges
$
11,857

 
14,111

 
(11,445
)
 
$
14,523


 
December 31,
2014
 
Amount of gain (loss) recognized in other comprehensive income before tax effect (effective portion)
 
Amount of (gain) loss reclassified from AOCI before tax effect to net revenue (effective portion)
 
September 30,
2015
Cash flow hedges
$

 
5,165

 
1,953

 
$
7,118



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, 2016, the Company estimates approximately $14.5 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 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 of Gain (Loss)
 
2016
 
2015
 
2016
 
2015
Cash flow hedges
Net revenue
 
$
4,011

 
$
(1,019
)
 
$
11,445

 
$
(1,953
)
Cash flow hedges
Other expense, net (1)
 
(2,070
)
 
(2,464
)
 
(8,258
)
 
(4,871
)
Balance sheet hedges
Other expense, net
 
1,389

 
4,175

 
3,932

 
9,894

Other derivative
Other expense, net
 
(3,100
)
 
(6,900
)
 
(7,600
)
 
(6,900
)
Total gain (loss) from derivative contracts
 
 
$
230

 
$
(6,208
)
 
$
(481
)
 
$
(3,830
)
____________
(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,
2016
 
December 31,
2015
Computer equipment
$
890,237

 
$
736,176

Leasehold improvements
549,054

 
330,436

Capitalized website, internal-use software, and production costs
334,847

 
236,124

Land
251,210

 
224,040

Furniture and fixtures
125,703

 
87,221

Software
69,129

 
55,935

Buildings
219,362

 
39,351

Total
2,439,542

 
1,709,283

Less accumulated depreciation and amortization
(931,062
)
 
(662,278
)
Property and equipment, net
$
1,508,480

 
$
1,047,005





In July 2016, the Company executed an agreement with Google Inc. ("Google"), a subsidiary of Alphabet Inc., to acquire or assume approximately 738,000 square feet of Google's owned or leased properties in Mountain View and Sunnyvale, California in exchange for approximately 474,000 square feet of the Company's owned or leased properties in Mountain View, California. As a result of the transaction, the Company recorded $409.6 million of land, buildings, and an other intangible asset, in exchange for $213.0 million in land and buildings and a net cash payment of approximately $180.2 million. In addition, $15.0 million was paid to a third party in connection with the transaction. The Company recognized an immaterial gain in connection with this transaction. The assets acquired have been recorded based on the fair value of the assets surrendered by the Company.

Depreciation expense for the three months ended September 30, 2016 and 2015 was $96.7 million and $71.4 million, respectively, and $286.6 million and $203.2 million for the nine months ended September 30, 2016 and 2015, respectively.

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, 2015
$
1,507,093

Acquisitions
102,746

Other
(347
)
Goodwill—September 30, 2016
$
1,609,492





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, 2016:
 
 
 
 
 
 
 
Customer and subscriber relationships
$
226,500

 
$
(99,653
)
 
$
126,847

 
2.3 years
Developed technology
176,792

 
(133,214
)
 
43,578

 
0.9 years
Content (2)
98,000

 
(60,025
)
 
37,975

 
1.6 years
Patents
63,128

 
(14,415
)
 
48,713

 
8.5 years
Other intangible assets
17,306

 
(11,433
)
 
5,873

 
8.1 years
Total
$
581,726

 
$
(318,740
)
 
$
262,986

 
3.2 years
December 31, 2015:
 
 
 
 
 
 
 
Customer and subscriber relationships
$
226,100

 
$
(46,139
)
 
$
179,961

 
2.9 years
Developed technology
165,187

 
(88,361
)
 
76,826

 
1.4 years
Content (2)
98,000

 
(30,625
)
 
67,375

 
2.4 years
Patents
56,878

 
(10,120
)
 
46,758

 
9.5 years
Other intangible assets
13,434

 
(11,267
)
 
2,167

 
1.4 years
Total
$
559,599

 
$
(186,512
)
 
$
373,087

 
3.2 years
 __________________
(1)
The weighted-average remaining life of other intangible assets excludes the impact of $0.8 million in indefinite-lived intangible assets, which consists of domain names, as of September 30, 2016 and December 31, 2015.
(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, 2016 and 2015 was $41.2 million and $46.5 million, respectively, and $133.0 million and $87.7 million for the nine months ended September 30, 2016 and 2015, respectively. Estimated amortization expense of intangible assets for future periods as of September 30, 2016, is as follows (in thousands):
Year Ending December 31,
Amortization Expense
Remainder of 2016
$
41,468

2017
109,922

2018
56,844

2019
21,978

2020
6,574

Thereafter
25,424

Total
$
262,210

 

18


8.
Accrued Liabilities
The following table presents the detail of accrued liabilities as of the periods presented (in thousands):
 
September 30,
2016
 
December 31,
2015
Accrued payroll taxes and other employee-related expenses
$
108,509

 
$
75,881

Accrued incentives
97,357

 
96,708

Other accrued expenses
47,321

 
44,987

Accrued commissions
33,231

 
65,794

Accrued sales tax and value-added taxes
23,056

 
23,681

Accrued vacation
12,033

 
9,741

Total
$
321,507

 
$
316,792


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 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 various circumstances and 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. 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 Notes consisted of the following (in thousands):
 
September 30,
2016
 
December 31,
2015
Liability:
 
 
 
Principal
$
1,322,500

 
$
1,322,500

Less: debt discount, net of amortization
(160,359
)
 
(195,966
)
Net carrying amount
$
1,162,141

 
$
1,126,534

 
 
 
 
Equity
$
230,191

 
$
230,191


The Company recognized interest expense on the Notes as follows (in thousands, except for percentages):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Contractual interest expense based on 0.50% per annum
$
1,653

 
$
1,653

 
$
4,959

 
$
4,978

Amortization of debt discount and issuance costs
12,009

 
11,456

 
35,607

 
33,967

Total
$
13,662

 
$
13,109

 
$
40,566

 
$
38,945

Effective interest rate of the liability component
4.7
%
 
4.7
%
 
4.7
%
 
4.7
%

The total estimated fair value of the Notes as of September 30, 2016, was $1,303.3 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 $191.12 on September 30, 2016, the if-converted value of the Notes was less than the principal amount.

19


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.
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 warrants will have a dilutive effect when the average share price exceeds the warrant’s strike price of $381.82 per share, which would result in actual dilution of approximately 115,000 shares at a common stock price of $391.82.

10.
Other Expense, Net
The following table presents the detail of other expense, net, for the periods presented (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Interest income
$
6,422

 
$
2,798

 
$
17,369

 
$
6,800

Interest expense (1)
(13,110
)
 
(12,773
)
 
(38,867
)
 
(38,064
)
Net loss on foreign exchange and foreign currency derivative contracts
(2,267
)
 
(3,577
)
 
(8,179
)
 
(9,957
)
Fair value adjustment on other derivative
(3,100
)
 
(6,900
)
 
(7,600
)
 
(6,900
)
Other non-operating income, net
1,504

 
(80
)
 
2,020

 
381

Net realized gain (loss) on sales of marketable securities
313

 
(127
)
 
418

 
34

Total other expense, net
$
(10,238
)
 
$
(20,659
)
 
$
(34,839
)
 
$
(47,706
)
 __________________
(1)
The Company capitalized $0.6 million and $0.3 million of interest expense related to properties under construction for the three months ended September 30, 2016 and 2015, respectively, and $1.7 million and $0.9 million for the nine months ended September 30, 2016 and 2015, respectively.

11.
Income (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 income (loss) per share attributable to common stockholders is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share attributable to common stockholders would be 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 release of restricted stock units ("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 would be 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 income (loss) per share of Class A common stock, the undistributed earnings are equal to net loss for that computation.

21


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,
 
2016
 
2015
 
2016
 
2015
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
Basic net income per share attributable to common stockholders:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allocation of undistributed earnings
$
7,602

 
$
957

 
$
(41,747
)
 
$
(5,676
)
 
$
(138,419
)
 
$
(18,114
)
 
$
(138,423
)
 
$
(19,296
)
Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
120,024

 
15,117

 
115,071

 
15,645

 
117,798

 
15,415

 
112,483

 
15,679

Basic net income per share attributable to common stockholders
$
0.06

 
$
0.06

 
$
(0.36
)
 
$
(0.36
)
 
$
(1.18
)
 
$
(1.18
)
 
$
(1.23
)
 
$
(1.23
)
Diluted net income per share attributable to common stockholders:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allocation of undistributed earnings for basic computation
$
7,602

 
$
957

 
$
(41,747
)
 
$
(5,676
)
 
$
(138,419
)
 
$
(18,114
)
 
$
(138,423
)
 
$
(19,296
)
Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares
957

 

 
(5,676
)
 

 
(18,114
)
 

 
(19,296
)
 

Reallocation of undistributed earnings to Class B shares

 
(21
)
 

 

 

 

 

 

Allocation of undistributed earnings
$
8,559

 
$
936

 
$
(47,423
)
 
$
(5,676
)
 
$
(156,533
)
 
$
(18,114
)
 
$
(157,719
)
 
$
(19,296
)
Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares used in basic calculation
120,024

 
15,117

 
115,071

 
15,645

 
117,798

 
15,415

 
112,483

 
15,679

Weighted-average effect of dilutive securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Add:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Conversion of Class B to Class A common shares outstanding
15,118

 

 
15,645

 

 
15,415

 

 
15,679

 

Employee stock options
1,101

 

 

 

 

 

 

 

Employee stock purchase plan
102

 

 

 

 

 

 

 

Restricted stock units
1,855

 

 

 

 

 

 

 

Number of shares used in diluted calculation
138,200

 
15,117

 
130,716

 
15,645

 
133,213

 
15,415

 
128,162

 
15,679

Diluted net loss per share attributable to common stockholders
$
0.06

 
$
0.06

 
$
(0.36
)
 
$
(0.36
)
 
$
(1.18
)
 
$
(1.18
)
 
$
(1.23
)
 
$
(1.23
)
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):

22


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Employee stock options
1,591

 
2,833

 
2,482

 
2,870

RSUs and other equity
6,130

 
6,117

 
7,619

 
6,020

Total
7,721

 
8,950

 
10,101

 
8,890


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, 2016, are as follows (in thousands):
 
Year Ending December 31,
Gross Operating Lease Commitments (1)
 
Sublease
Income (2)
 
Net Operating Lease Commitments
Remainder of 2016
$
42,278

 
$
(4,492
)
 
$
37,786

2017
177,351

 
(17,869
)
 
159,482

2018
206,836

 
(18,109
)
 
188,727

2019
205,804

 
(18,653
)
 
187,151

2020
196,974

 
(19,222
)
 
177,752

Thereafter
1,146,733

 
(121,185
)
 
1,025,548

Total minimum lease payments
$
1,975,976

 
$
(199,530
)
 
$
1,776,446

 __________________

(1)
In July 2016, the Company executed an agreement with Google Inc. ("Google"), a subsidiary of Alphabet Inc., to assume Google's leased properties in Sunnyvale, California, in exchange for the Company's leased properties in Mountain View, California. The impact of this transaction on the Company's future net operating lease commitments is not material. Refer to Note 6, Property and Equipment, for additional information regarding this agreement.
(2)
Primarily represents sublease income for several buildings the Company leases in Sunnyvale, California, to be recognized over the next 10 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 its business. In addition, litigation that the Company previously disclosed related to its merger with Microsoft has been dismissed.
Certain litigation matters include speculative claims for substantial or indeterminate amounts of damages, and include claims for injunctive relief. Additionally, 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 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 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. Periodically, the Company evaluates developments in its legal matters that could affect the amounts that have been previously accrued, if any, and make 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

23


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.
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, 2016, the Company had 120,880,883 shares and 14,656,083 shares of Class A common stock and Class B common stock outstanding, respectively. As of December 31, 2015, the Company had 116,468,385 and 15,580,510 shares of Class A common stock and Class B common stock outstanding, respectively.
RSU Activity
A summary of RSU activity for the nine months ended September 30, 2016, is as follows: 
 
Number of
Shares
 
Weighted-
Average
Grant Date
Fair Value
 
Aggregate
Intrinsic
Value
(in thousands)
Unvested—December 31, 2015
6,136,702

 
$
211.77

 
 
Assumed RSUs from acquisition
42,157

 
114.12

 
 
Granted
4,058,897

 
133.42

 
 
Released
(2,115,582
)
 
188.90

 
 
Forfeited
(725,160
)
 
194.98

 
 
Unvested—September 30, 2016
7,397,014

 
$
176.41

 
$
1,413,717

Expected to vest as of September 30, 2016
6,476,569

 
 
 
$
1,237,802

The intrinsic value of RSUs released was approximately $141.4 million and $116.3 million in the three months ended September 30, 2016 and 2015, respectively, and $304.9 million and $350.8 million for the nine months ended September 30, 2016 and 2015, respectively.
As of September 30, 2016, 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.

24



Stock Option Activity
A summary of stock option activity for the nine months ended September 30, 2016, 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, 2015
2,582,517

 
$
102.64

 
 
 
 
Assumed options from acquisition
33,586

 
11.31

 
 
 
 
Granted
7,236

 
109.97