Medidata Solutions, Inc. - FORM 10-Q - May 8, 2017

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EX-32.2 - CERTIFICATION OF CFO PURSUANT TO RULE 13A-14(B) OR 15D-14(B) - Medidata Solutions, Inc.mdso-3312017xex322.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO RULE 13A-14(B) OR 15D-14(B) - Medidata Solutions, Inc.mdso-3312017xex321.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO RULE 13A-14(A) OR 15D-14(A) - Medidata Solutions, Inc.mdso-3312017xex312.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO RULE 13A-14(A) OR 15D-14(A) - Medidata Solutions, Inc.mdso-3312017xex311.htm
EX-10.1 - EXHIBIT 10.1 - Medidata Solutions, Inc.formof2017pbrsuagreement.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-Q
 _____________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-34387
_____________________________________
medidatalogocolor63015a03.jpg
Medidata Solutions, Inc.
(Exact name of registrant as specified in its charter)
 _____________________________________
Delaware
13-4066508
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
350 Hudson Street, 9th Floor
New York, New York
10014
(Address of principal executive offices)
(Zip Code)
(212) 918-1800
(Registrant’s telephone number, including area code)
 _____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes   ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ¨  Yes    ý  No
As of May 1, 2017, the registrant had 58,358,341 shares of common stock outstanding.


MEDIDATA SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017
TABLE OF CONTENTS
 
 
Page
PART I
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 


- 1 -

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

- 2 -

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
 
March 31,
2017
 
December 31, 2016
 
(Amounts in thousands, except per share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
90,422

 
$
93,519

Marketable securities
274,602

 
281,285

Accounts receivable, net of allowance for doubtful accounts of $1,650 and $1,041, respectively
102,491

 
115,216

Prepaid commission expense
2,550

 
1,842

Prepaid expenses and other current assets
24,472

 
20,382

Deferred income taxes
—

 
6,536

Total current assets
494,537

 
518,780

Restricted cash
5,511

 
5,760

Furniture, fixtures and equipment, net
63,284

 
58,461

Marketable securities – long-term
148,359

 
140,418

Goodwill
39,075

 
30,780

Intangible assets, net
13,036

 
5,090

Deferred income taxes – long-term
43,276

 
40,415

Other assets
20,350

 
18,181

Total assets
$
827,428

 
$
817,885

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
6,699

 
$
6,202

Accrued payroll and other compensation
16,034

 
29,260

Accrued expenses and other
23,829

 
20,958

Deferred revenue
80,122

 
75,911

Total current liabilities
126,684

 
132,331

Noncurrent liabilities:
 
 
 
1.00% convertible senior notes, net
266,999

 
263,401

Deferred revenue, less current portion
1,607

 
1,703

Deferred tax liabilities
124

 
322

Other long-term liabilities
20,642

 
18,138

Total noncurrent liabilities
289,372

 
283,564

Total liabilities
416,056

 
415,895

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock, par value $0.01 per share; 5,000 shares authorized, none issued and outstanding
—

 
—

Common stock, par value $0.01 per share; 200,000 shares authorized; 62,246 and 61,393 shares issued; 58,254 and 57,733 shares outstanding, respectively
622

 
614

Additional paid-in capital
431,479

 
418,497

Treasury stock, 3,992 and 3,660 shares, respectively
(127,822
)
 
(114,204
)
Accumulated other comprehensive loss
(4,784
)
 
(5,276
)
Retained earnings
111,877

 
102,359

Total stockholders’ equity
411,372

 
401,990

Total liabilities and stockholders’ equity
$
827,428

 
$
817,885


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

- 3 -

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(Amounts in thousands, except per share data)
 
Revenues
 
 
 
 
Subscription
$
107,070

 
$
89,968

 
Professional services
19,751

 
14,270

 
Total revenues
126,821

 
104,238

 
Cost of revenues (1)(2)
 
 
 
 
Subscription
17,129

 
14,329

 
Professional services
13,485

 
10,339

 
Total cost of revenues
30,614

 
24,668

 
Gross profit
96,207

 
79,570

 
Operating costs and expenses
 
 
 
 
Research and development (1)
29,937

 
28,228

 
Sales and marketing (1)(2)
30,109

 
25,458

 
General and administrative (1)
23,988

 
19,246

 
Total operating costs and expenses
84,034

 
72,932

 
Operating income
12,173

 
6,638

 
Interest and other income (expense)
 
 
 
 
Interest expense
(4,327
)
 
(4,127
)
 
Interest income
1,171

 
872

 
Other expense, net
—

 
(4
)
 
  Total interest and other expense, net
(3,156
)
 
(3,259
)
 
Income before income taxes
9,017

 
3,379

 
Provision for income taxes
(501
)
 
(1,196
)
(3)
Net income
$
9,518

 
$
4,575

(3)
Earnings per share
 
 
 
 
Basic
$
0.17

 
$
0.08

(3)
Diluted
$
0.16

 
$
0.08

(3)
Weighted average common shares outstanding
 
 
 
 
Basic
56,072

 
55,119

 
Diluted
58,083

 
56,589

 
(1) Stock-based compensation expense included in cost of revenues and operating costs and expenses is as follows:
 
Cost of revenues
$
1,169

 
$
1,210

 
Research and development
2,835

 
2,194

 
Sales and marketing
1,175

 
1,877

 
General and administrative
5,142

 
4,969

 
Total stock-based compensation
$
10,321

 
$
10,250

 
(2) Amortization of intangible assets included in cost of revenues and operating costs and expenses is as follows:
 
Cost of revenues
$
454

 
$
79

 
Sales and marketing
83

 
24

 
Total amortization of intangible assets
$
537

 
$
103

 
(3) Prior period recast to reflect the Company's early adoption of Accounting Standards Update No. 2016-09 in the third quarter of 2016.
The accompanying notes are an integral part of the condensed consolidated financial statements.

- 4 -

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(Amounts in thousands)
 
Net income
$
9,518

 
$
4,575

(1)
Other comprehensive income (loss)
 
 
 
 
Foreign currency translation adjustments
423

 
(87
)
 
Unrealized gain on marketable securities
112

 
1,308

 
Other comprehensive income
535

 
1,221

 
Income tax related to unrealized gain or loss on marketable securities
(43
)
 
—

 
Other comprehensive income, net of tax
492

 
1,221

 
Comprehensive income, net of tax
$
10,010

 
$
5,796

(1)
(1) Prior period recast to reflect the Company's early adoption of Accounting Standards Update No. 2016-09 in the third quarter of 2016.

























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

- 5 -

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three Months Ended March 31,
 
 
2017
 
2016
 
Cash flows from operating activities
(Amounts in thousands)
 
Net income
$
9,518

 
$
4,575

(1)
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
Amortization of intangible assets and depreciation
4,476

 
3,217

 
Stock-based compensation
10,321

 
10,250

 
Amortization of discounts or premiums on marketable securities
413

 
983

 
Deferred income taxes
1,355

 
1,187

(1)
Amortization of debt issuance costs
319

 
319

 
Amortization of debt discount
3,279

 
3,089

 
Provision for doubtful accounts
680

 
371

 
(Gain) loss on fixed asset disposal
(2
)
 
4

 
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
12,045

 
4,635

 
Prepaid commission expense
(1,843
)
 
(2,738
)
 
Prepaid expenses and other current assets
(6,791
)
 
1,199

 
Other assets
1,712

 
(2,590
)
 
Accounts payable
130

 
(1,297
)
 
Accrued payroll and other compensation
(15,557
)
 
(10,052
)
 
Accrued expenses and other
(2,397
)
 
238

 
Deferred revenue
4,090

 
3,134

 
Other long-term liabilities
737

 
(2,720
)
 
Net cash provided by operating activities
22,485

 
13,804

(1)
Cash flows from investing activities
 
 
 
 
Purchases of furniture, fixtures and equipment
(6,790
)
 
(7,589
)
 
Purchases of available-for-sale securities
(81,985
)
 
(28,815
)
 
Proceeds from sale of available-for-sale securities
80,426

 
69,352

 
Acquisition of business, net of cash acquired
(8,702
)
 
—

 
Net cash (used in) provided by investing activities
(17,051
)
 
32,948

 
Cash flows from financing activities
 
 
 
 
Proceeds from exercise of stock options
2,597

 
194

 
Proceeds from employee stock purchase plan
2,090

 
1,819

 
Acquisition of treasury stock
(13,617
)
 
(10,831
)
 
Net cash used in financing activities
(8,930
)
 
(8,818
)
(1)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
150

 
173

 
Net (decrease) increase in cash, cash equivalents and restricted cash
(3,346
)
 
38,107

 
Cash, cash equivalents and restricted cash – Beginning of period
99,279

 
55,472

(2)
Cash, cash equivalents and restricted cash – End of period
$
95,933

 
$
93,579

(2)
(1) As a result of the Company's early adoption of Accounting Standards Update No. 2016-09 in the third quarter of 2016, the consolidated statement of cash flows for the three months ended March 31, 2016 has been adjusted to reflect an offsetting increase of $1,341 thousand to net cash provided by operating activities and net cash used in financing activities.
(2) As a result of the Company's early adoption of Accounting Standards Update No. 2016-18, the consolidated statements of cash flows have been adjusted to include restricted cash in beginning-of-period and end-of-period cash. Beginning- and end-of-period cash, cash equivalents and restricted cash for the three months ended March 31, 2016 include $154 thousand of short-term restricted cash; the Company records short-term restricted cash in prepaid expenses and other current assets on its consolidated balance sheets.




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

- 6 -

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited)
 
Three Months Ended March 31,
 
2017
 
2016
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
1,438

 
$
1,438

Income taxes
$
640

 
$
794

 
 
 
 
Noncash investing activities:
 
 
 
Furniture, fixtures, and equipment acquired but not yet paid for at period-end
$
2,743


$
951

Contingent consideration associated with acquisition of business, at fair value
$
5,697

 
$
—


































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

- 7 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Medidata Solutions, Inc., together with its consolidated subsidiaries (collectively, the "Company"), is the leading global provider of cloud-based solutions for clinical research in life sciences, offering platform technology that transforms clinical development and increases the value of its customers' research investments. The Company was organized as a New York corporation in June 1999 and reincorporated as a Delaware corporation in May 2000.
Except to the extent updated or described below, the Company’s significant accounting policies as of March 31, 2017 are the same as those at December 31, 2016, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2017.
Basis of Presentation — The accompanying interim condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016, the condensed consolidated statements of operations for the three months ended March 31, 2017 and 2016, the condensed consolidated statements of comprehensive income for the three months ended March 31, 2017 and 2016, and the condensed consolidated statements of cash flows for the three months ended March 31, 2017 and 2016 are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the SEC for interim financial reporting. Accordingly, certain information and footnote disclosures have been condensed or omitted pursuant to SEC rules that would ordinarily be required by U.S. GAAP for complete financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto for the fiscal year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2017.
The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments consisting of normal recurring accruals considered necessary to present fairly the Company’s financial position as of March 31, 2017, results of its operations for the three months ended March 31, 2017 and 2016, comprehensive income for the three months ended March 31, 2017 and 2016, and cash flows for the three months ended March 31, 2017 and 2016. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
Income Taxes — The Company’s interim period provision for income taxes is computed by using an estimate of the annual effective tax rate, adjusted for discrete items taken into account in the relevant period, if any. Each quarter, the annual effective income tax rate is recomputed and if there are material changes in the estimate, a cumulative adjustment is made.
Accounts Receivable — Accounts receivable are recorded at original invoice amount less an allowance that management believes will be adequate to absorb estimated losses on uncollectible accounts. This allowance is based on an evaluation of the collectability of accounts receivable and prior bad debt experience. Accounts receivable are written off when deemed uncollectible. Unbilled receivables consist of revenue recognized in excess of billings, substantially all of which is expected to be billed and collected within one year. As of March 31, 2017 and December 31, 2016, unbilled accounts receivable of $14.7 million and $14.1 million, respectively, were included in accounts receivable on the Company's consolidated balance sheets. In general, there is a direct relationship between the Company's accounts receivable balance and its transaction volume.
Recently Adopted Accounting Pronouncements — In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes by requiring that all deferred tax assets and liabilities be classified as noncurrent in the consolidated balance sheets. ASU No. 2015-17 is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods, and may be applied either prospectively or retrospectively to all periods presented. The Company adopted ASU No. 2015-17 prospectively on January 1, 2017, and the adoption did not have a material impact on its consolidated financial statements, aside from a balance sheet reclassification from short-term to long-term deferred income taxes.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize the income tax consequences of intra-entity transfers of assets other than inventory when those transfers occur. ASU No. 2016-16 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods. The Company early adopted ASU No. 2016-16 on January 1, 2017, and the adoption had no impact on its consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, which requires entities to include restricted cash in cash and cash equivalents when reconciling beginning-of-period and end-of-period cash in the statement of cash flows. ASU No. 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company early adopted ASU No. 2016-18 retrospectively on January 1, 2017 and the adoption did not have a material impact on its consolidated financial statements, aside from changes in presentation.
Recently Issued Accounting Pronouncements — There have been no changes in the expected dates of adoption or estimated effects on the Company's consolidated financial statements of recently issued accounting pronouncements from those disclosed in the Company’s Annual Report on Form 10-K.

- 8 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


2. STOCKHOLDERS' EQUITY
Common Stock — Common stockholders are entitled to one vote for each share of common stock held. Common stockholders may receive dividends if and when the board of directors determines, at its sole discretion.
Treasury Stock — From time to time, the Company grants nonvested restricted stock awards ("RSAs"), restricted stock units ("RSUs"), and performance-based restricted stock units ("PBRSUs") to its employees pursuant to the terms of its Second Amended and Restated 2009 Long-Term Incentive Plan (the “2009 Plan”). Under the provisions of the 2009 Plan, unless otherwise elected, participants fulfill their related income tax obligation by having shares withheld at the time of vesting. On the date of vesting, the Company divides the participant's income tax withholding obligation in dollars by the closing price of its common stock and withholds the resulting number of vested shares. The shares withheld are then transferred to the Company's treasury stock at cost for future reissuance. During the three months ended March 31, 2017 and 2016, the Company withheld 242,998 shares at an average price of $56.04 and 257,878 shares at an average price of $33.57, respectively, in connection with the vesting of equity awards.
Nonvested restricted stock awards forfeited by plan participants are transferred to the Company's treasury stock at par. During the three months ended March 31, 2017 and 2016, 89,386 and 54,161 forfeited shares, respectively, were transferred to treasury stock at their par value of $0.01.
3. INVESTMENTS
Marketable Securities
Marketable securities, which the Company classifies as available-for-sale securities, primarily consist of high quality commercial paper, corporate bonds, and U.S. government debt obligations. Marketable securities with remaining effective maturities of twelve months or less from the balance sheet date are classified as short-term; otherwise, they are classified as long-term on the consolidated balance sheets.
The following tables provide the Company’s marketable securities by security type as of March 31, 2017 and December 31, 2016 (in thousands):
 
As of March 31, 2017
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper and corporate bonds
$
389,100

 
$
2

 
$
(713
)
 
$
388,389

U.S. government agency debt securities
34,636

 
—

 
(64
)
 
34,572

Total
$
423,736

 
$
2

 
$
(777
)
 
$
422,961

 
As of December 31, 2016
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper and corporate bonds
$
389,459

 
$
4

 
$
(827
)
 
$
388,636

U.S. government agency debt securities
33,132

 
—

 
(65
)
 
33,067

Total
$
422,591

 
$
4

 
$
(892
)
 
$
421,703

Contractual maturities of the Company’s marketable securities as of March 31, 2017 and December 31, 2016 are summarized as follows (in thousands):
 
As of March 31, 2017
 
As of December 31, 2016
 
Cost
 
Estimated
Fair
Value
 
Cost
 
Estimated
Fair
Value
Due in one year or less
$
275,007

 
$
274,602

 
$
281,591

 
$
281,285

Due in one to five years
148,729

 
148,359

 
141,000

 
140,418

Total
$
423,736

 
$
422,961

 
$
422,591

 
$
421,703

At March 31, 2017, the Company had $0.8 million of gross unrealized losses primarily due to a decrease in the fair value of certain corporate bonds.

- 9 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The Company regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Investments that are impaired are those that are considered to have losses that are other-than-temporary. Factors considered in determining whether a loss is temporary include:
•the length of time and extent to which fair value has been lower than the cost basis;
•the financial condition, credit quality and near-term prospects of the investee; and
•whether it is more likely than not that the Company will be required to sell the security prior to recovery.
As the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company has determined that the gross unrealized losses on such investments at March 31, 2017 are temporary in nature. Accordingly, the Company did not consider its investments in marketable securities to be other-than-temporarily impaired as of March 31, 2017.
The following tables provide the fair market value and gross unrealized losses of the Company's marketable securities with unrealized losses, aggregated by security type, as of March 31, 2017 and December 31, 2016 (in thousands):
 
In Loss Position for Less than 12 Months
 
As of March 31, 2017
 
As of December 31, 2016
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
Commercial paper and corporate bonds
$
351,361

 
$
(685
)
 
$
299,708

 
$
(771
)
U.S. government agency debt securities
27,454

 
(56
)
 
28,273

 
(59
)
Total
$
378,815

 
$
(741
)
 
$
327,981

 
$
(830
)
 
In Loss Position for More than 12 Months
 
As of March 31, 2017
 
As of December 31, 2016
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
Commercial paper and corporate bonds
$
35,021

 
$
(28
)
 
$
68,158

 
$
(56
)
U.S. government agency debt securities
4,792

 
(8
)
 
4,794

 
(6
)
Total
$
39,813

 
$
(36
)
 
$
72,952

 
$
(62
)
During the three months ended March 31, 2017 and 2016, the Company recorded an insignificant amount of net realized gains from the sale of marketable securities.
Cost Method Investment
The Company holds shares of Series B Preferred Stock of SHYFT Analytics, Inc. ("SHYFT"), purchased via a private placement. This investment is accounted for under the cost method and is included in other assets on the Company's consolidated balance sheet as of March 31, 2017 at its purchase price of $4.0 million.

- 10 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

4. FAIR VALUE
The following table summarizes, as of March 31, 2017 and December 31, 2016, the Company's financial assets and liabilities that are measured at fair value on a recurring basis, according to the fair value hierarchy described in the significant accounting policies included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (in thousands):
 
As of March 31, 2017
 
As of December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash
$
90,174

 
$
—

 
$
—

 
$
90,174

 
$
93,384

 
$
—

 
$
—

 
$
93,384

Money market funds
248

 
—

 
—

 
248

 
135

 
—

 
—

 
135

Total cash and cash equivalents
90,422

 
—

 
—

 
90,422

 
93,519

 
—

 
—

 
93,519

Commercial paper and corporate bonds
—

 
388,389

 
—

 
388,389

 
—

 
388,636

 
—

 
388,636

U.S. government agency debt securities
—

 
34,572

 
—

 
34,572

 
—

 
33,067

 
—

 
33,067

Total marketable securities
—

 
422,961

 
—

 
422,961

 
—

 
421,703

 
—

 
421,703

Total financial assets measured at fair value on a recurring basis
$
90,422

 
$
422,961

 
$
—

 
$
513,383

 
$
93,519

 
$
421,703

 
$
—

 
$
515,222

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration – short-term
$
—

 
$
—

 
$
3,930

 
$
3,930

 
$
—

 
$
—

 
$
—

 
$
—

Contingent consideration – long-term
—

 
—

 
1,767

 
1,767

 
—

 
—

 
—

 
—

Total financial liabilities measured at fair value on a recurring basis
$
—

 
$
—

 
$
5,697

 
$
5,697

 
$
—

 
$
—

 
$
—

 
$
—

Investments in commercial paper, corporate bonds, and U.S. government agency debt securities have been classified as Level 2 as they are valued using quoted prices in less active markets or other directly or indirectly observable inputs. Fair values of corporate bonds and U.S. government agency debt securities were derived from a consensus or weighted-average price based on input of market prices from multiple sources at each reporting period. With regard to commercial paper, all of the securities had high credit ratings and one year or less to maturity; therefore, fair value was derived from accretion of purchase price to face value over the term of maturity or quoted market prices for similar instruments if available. During the three months ended March 31, 2017 and 2016, there were no transfers of financial assets between Level 1 and Level 2.
Contingent consideration liabilities associated with acquisition-related earn-out payments are classified as Level 3 in the fair value hierarchy because they rely significantly on inputs that are unobservable in the market. The fair value of short-term contingent consideration, which is related to the achievement of a technical milestone, has been estimated using situation-based modeling, which considers the probability-weighted present value of the expected payout amount. Significant assumptions include the Company's expectations with regard to the likelihood and timing of achievement of the related technical milestone and a discount rate of 2.9%. The fair value of long-term contingent consideration, which is related to achievement of revenue targets, has been estimated using a Monte Carlo simulation to simulate future performance of the acquired business under a risk-neutral framework; significant assumptions include a risk-adjusted discount rate of 10.2% and revenue volatility of 8.0%. Short-term and long-term contingent consideration are recorded in accrued expenses and other and other long-term liabilities, respectively, on the Company's consolidated balance sheet as of March 31, 2017.
The carrying amounts of all other current financial assets and current financial liabilities reflected in the consolidated balance sheets approximate fair value due to their short-term nature.
5. ACQUISITION
On February 17, 2017, the Company acquired all outstanding equity interests in CHITA Inc. ("CHITA") and its parent company, Daybreak Information Technologies Holdings Limited. CHITA provides regulated content management for the life sciences industry. With this acquisition, the Company adds regulated document and standard operating procedure ("SOP") management to its portfolio of offerings, and expects to add an electronic trial master file ("eTMF") solution built on CHITA's technology in the near future.
The total purchase consideration of $14.7 million consisted of initial cash consideration of $9.0 million and additional contingent consideration that had a fair value of $5.7 million as of the acquisition date.
In connection with this acquisition, the Company recognized $0.1 million in net tangible assets, $8.5 million in finite-lived intangible assets, and a deferred tax liability of $2.1 million, resulting in the recognition of $8.2 million in goodwill.

- 11 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Intangible assets acquired were as follows (in thousands):
 
Acquisition Date Fair Value
 
Weighted-Average Useful Life
Developed technology
$
8,423

 
5 years
Non-competition agreements
60

 
4 years
Total
$
8,483

 
 
The Company does not consider this acquisition to be significant to its financial condition or results of operations; its consolidated results of operations for the three months ended March 31, 2017 include the revenues and expenses of CHITA since the date of acquisition.
6. GOODWILL AND INTANGIBLE ASSETS
The change in the carrying amount of goodwill during the three months ended March 31, 2017 was as follows (in thousands):
Balance as of January 1, 2017
$
30,780

Additions related to acquisition
8,248

Foreign currency translation adjustments
47

Balance as of March 31, 2017
$
39,075

Total intangible assets are summarized as follows (in thousands):
 
As of March 31, 2017
 
As of December 31, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Developed technology
$
17,153

 
$
(5,568
)
 
$
11,585

 
$
8,714

 
$
(5,098
)
 
$
3,616

Customer relationships
3,570

 
(2,254
)
 
1,316

 
3,566

 
(2,176
)
 
1,390

Non-competition agreements
210

 
(75
)
 
135

 
150

 
(66
)
 
84

Total
$
20,933

 
$
(7,897
)
 
$
13,036

 
$
12,430

 
$
(7,340
)
 
$
5,090

Future amortization of intangible assets is expected to be as follows (in thousands):
Remainder of year ending December 31, 2017
$
2,447

Years ending December 31,
 
2018
3,187

2019
2,930

2020
2,198

2021
1,932

2022
342

Total
$
13,036


- 12 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

7. DEBT
The Company's 1.00% convertible senior notes (the "Notes"), issued in August 2013, consisted of the following components as of March 31, 2017 and December 31, 2016 (in thousands):
 
March 31,
2017
 
December 31,
2016
Equity component, net of equity issue costs
$
60,222

 
$
60,222

Liability component:
 
 
 
Principal
287,500

 
287,500

Less: unamortized debt discount
(18,797
)
 
(22,076
)
Less: unamortized debt issuance costs
(1,704
)
 
(2,023
)
Net carrying amount
$
266,999

 
$
263,401

As of March 31, 2017 and December 31, 2016, the estimated fair value of the Notes was $326.6 million and $314.4 million, respectively. The Company considers this disclosure to be a Level 2 measurement because it is based upon a recent modeled bid-price quote for the Notes, reflecting activity in a less active market. As of March 31, 2017, the Notes are not convertible. Based on the closing price of the Company's common stock as of March 31, 2017 of $57.69, which is less than the Notes' initial conversion price of $58.05, the if-converted value of the Notes was less than their principal amount.
As of March 31, 2017, the remaining life of the Notes is approximately 16 months.
The following table sets forth total interest expense recognized related to the Notes for the three months ended March 31, 2017 and 2016 (in thousands except percentages):
 
Three Months Ended March 31,
 
2017
 
2016
Contractual interest expense
$
719

 
$
719

Amortization of debt issuance costs
319

 
319

Amortization of debt discount
3,279

 
3,089

Total
$
4,317

 
$
4,127

 
 
 
 
Effective interest rate
6.5
%
 
6.5
%

- 13 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

8. STOCK-BASED COMPENSATION
For the three months ended March 31, 2017 and 2016, the components of stock-based compensation expense were as follows (in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Stock options
$
917

 
$
1,055

Restricted stock awards and units
6,919

 
5,478

Performance-based restricted stock units
1,628

 
2,634

Employee stock purchase plan
928

 
1,083

Total stock-based compensation (1)
$
10,392

 
$
10,250

(1) Total stock-based compensation is presented in this table on a gross basis, consistent with the additional paid-in capital impact recorded in stockholders' equity. On the Company's consolidated statements of operations and consolidated statements of cash flows, stock-based compensation is presented net of foreign exchange impact and capitalization of eligible software development-related costs.
Stock Options
The fair value of each stock option granted during the three months ended March 31, 2017 and 2016 was estimated on the date of grant using a Black-Scholes pricing model with the following weighted-average assumptions:
 
Three Months Ended March 31,
 
2017
 
2016
Expected volatility
44
%
 
43
%
Expected life
6 years

 
6 years

Risk-free interest rate
2.09
%
 
1.50
%
Dividend yield
—

 
—

The following table summarizes the status of the Company's stock options as of March 31, 2017, and changes during the three months then ended (in thousands, except per share data):
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
(years)
 
Aggregate
Intrinsic
Value
Outstanding at January 1, 2017
1,793

 

$23.39

 
 
 
 
Granted
57

 
56.74

 
 
 
 
Exercised
(117
)
 
22.20

 
 
 
 
Forfeited
(26
)
 
45.66

 
 
 
 
Expired
(7
)
 
58.92

 
 
 
 
Outstanding at March 31, 2017
1,700

 

$24.10

 
5.06
 

$57,328

Exercisable at March 31, 2017
1,347

 

$18.08

 
4.13
 

$53,538

Vested and expected to vest at March 31, 2017
1,663

 

$23.60

 
4.97
 

$56,900

The weighted-average grant-date fair value of stock options granted during the three months ended March 31, 2017 and 2016 was $25.33 and $16.94, respectively. The total intrinsic value of stock options exercised during the three months ended March 31, 2017 and 2016 was $4.0 million and $0.7 million, respectively. The total fair value of stock options vested during the three months ended March 31, 2017 and 2016 was $1.1 million and $0.8 million, respectively. As of March 31, 2017, there was $6.7 million in unrecognized compensation cost related to all non-vested stock options granted. This cost is expected to be recognized over a weighted-average remaining period of 2.60 years.

- 14 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Restricted Stock Awards and Units
The following table summarizes the status of the Company’s nonvested time-based RSAs and RSUs as of March 31, 2017, and changes during the three months then ended (in thousands, except per share data):
 
Number of
Shares
 
Weighted-
Average
Grant-Date
Fair Value
Nonvested at January 1, 2017
1,850

 

$40.89

Granted
648

 
56.10

Vested
(468
)
 
37.82

Forfeited
(89
)
 
40.97

Nonvested at March 31, 2017
1,941

 

$46.70

The total fair value of RSAs and RSUs vested during the three months ended March 31, 2017 and 2016 was $26.3 million and $9.4 million, respectively. As of March 31, 2017, there was $82.1 million in unrecognized compensation cost related to all nonvested RSAs and RSUs granted. This cost is expected to be recognized over a weighted-average remaining period of 2.94 years.
Performance-Based Restricted Stock Units
During the three months ended March 31, 2017, the Company granted: (1) 132 thousand PBRSUs ("2017 TSR PBRSUs") with market conditions based on the Company's total stockholder return ("TSR") relative to that of the Russell 2000 Index over the three-year period ending December 31, 2019, vesting in full in three years with the number of shares ultimately earned ranging from zero to 200% of the target number of shares; (2) 132 thousand PBRSUs ("2017 Net Income PBRSUs") with performance conditions based on the compound annual growth rate of net income over the three-year period ending December 31, 2019, vesting in full in three years with the number of shares ultimately earned ranging from zero to 200% of the target number of shares.
During the three months ended March 31, 2016, the Company granted 223 thousand PBRSUs ("2016 TSR PBRSUs") with market conditions based on the Company's TSR relative to that of the Russell 2000 Index over the three-year period ending December 31, 2018, vesting in full in three years with the number of shares ultimately earned ranging from zero to 200% of the target number of shares. The Company also granted an insignificant number of other PBRSUs with performance conditions based on achievement of certain individual performance objectives.
The fair value of PBRSUs with market conditions granted during the three months ended March 31, 2017 and 2016 was estimated as of the date of grant using a Monte Carlo valuation model with the following weighted average assumptions:
 
2017 TSR PBRSUs
 
2016 TSR PBRSUs
Expected volatility - Medidata
42
%
 
48
%
Expected volatility - comparison index
43
%
 
43
%
Expected life
2.85 years

 
2.84 years

Risk-free interest rate
1.40
%
 
0.91
%
Dividend yield
—

 
—


- 15 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table summarizes the status of the Company’s PBRSUs based upon expected performance as of March 31, 2017, and changes during the three months then ended (in thousands, except per share data):
 
Net Income
 
TSR
 
Other
 
Total Number of Shares
 
Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2017
—

 
390

 
2

 
392

 
$
57.05

Granted (based on performance at 100% of targeted levels)
132

 
132

 
—

 
264

 
71.51

Adjustment related to expected performance
66

 
152

 
—

 
218

 
62.06

Vested
—

 
(92
)
 
—

 
(92
)
 
67.30

Forfeited
—

 
(26
)
 
—

 
(26
)
 
59.60

Nonvested at March 31, 2017
198

 
556

 
2

 
756

 
$
62.21

The total fair value of PBRSUs vested during the three months ended March 31, 2017 and 2016 was $5.1 million and $10.0 million, respectively. As of March 31, 2017, there was $29.5 million in unrecognized compensation cost related to all nonvested PBRSUs. This cost is expected to be recognized over a weighted-average remaining period of 2.24 years.
Employee Stock Purchase Plan
The fair value of shares granted under the Company's employee stock purchase plan ("ESPP") was estimated using a Black-Scholes pricing model with the following weighted-average assumptions:
 
Three Months Ended March 31,
 
2017
 
2016
Expected volatility
40
%
 
46
%
Expected life
1.51 years

 
1.68 years

Risk-free interest rate
0.63
%
 
0.58
%
Dividend yield
—

 
—

No shares were purchased under the ESPP during the three months ended March 31, 2017 and 2016. As of March 31, 2017, there was $4.4 million in unrecognized compensation cost related to ESPP shares. This cost is expected to be recognized over a weighted-average remaining period of 1.24 years.
Modifications
Incremental expense associated with modifications to stock options, RSAs and PBRSUs during the three months ended March 31, 2017 and 2016 was $0.1 million and $0.2 million, respectively.

9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in the balances of each component of accumulated other comprehensive loss during the three months ended March 31, 2017 are as follows (in thousands):
 
Foreign currency translation adjustments
 
Unrealized gains (losses) on marketable securities
 
Total
Balance as of January 1, 2017
$
(4,729
)
 
$
(547
)
 
$
(5,276
)
Other comprehensive income
423

 
69

 
492

Balance as of March 31, 2017
$
(4,306
)
 
$
(478
)
 
$
(4,784
)
For the three months ended March 31, 2017 and 2016, reclassifications of items from accumulated other comprehensive loss to net income were insignificant.

- 16 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

10. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted-average number of shares outstanding during the period. The holders of unvested RSAs do not have nonforfeitable rights to dividends or dividend equivalents and therefore, such vested awards do not qualify as participating securities and are excluded from the basic earnings per share calculation. Diluted earnings per share includes the determinants of basic net income per share and, in addition, gives effect to the potential dilution that would occur if securities or other contracts to issue common stock are exercised, vested, or converted into common stock, unless they are anti-dilutive. As the Company intends to settle the principal amount of the Notes (see Note 7, "Debt") in cash upon conversion, their dilutive effect, if any, will be reflected in diluted earnings per share using the treasury stock method, which considers the number of shares that would be required to settle any premium above principal at the average stock price for the period. During the three months ended March 31, 2017 and 2016, the average price of the Company's stock was below the conversion price of the Notes; as a result the Notes were not dilutive for these periods.
A reconciliation of the numerator and denominator of basic earnings per share and diluted earnings per share for the three months ended March 31, 2017 and 2016 is shown in the following table (in thousands, except per share data):
 
Three Months Ended March 31,
 
2017
 
2016 (1)
Numerator
 
 
 
Net income
$
9,518

 
$
4,575

Denominator
 
 
 
Denominator for basic earnings per share:
 
 
 
Weighted average common shares outstanding
56,072

 
55,119

Denominator for diluted earnings per share:
 
 
 
Dilutive potential common shares:
 
 
 
Stock options
932

 
970

Restricted stock awards and units
735

 
348

Performance-based restricted stock units
298

 
152

Employee stock purchase plan
46

 
—

Weighted average common shares outstanding with assumed conversion
58,083

 
56,589

Basic earnings per share
$
0.17

 
$
0.08

Diluted earnings per share
$
0.16

 
$
0.08

(1) Prior period recast to reflect the Company's early adoption of ASU No. 2016-09 in the third quarter of 2016.
Anti-dilutive common stock equivalents excluded from the calculation of diluted earnings per share for the three months ended March 31, 2017 and 2016 are shown in the following table (in thousands, except per share data):
 
 
Three Months Ended March 31,
 
 
2017
 
2016 (1)
Stock options
 
343

 
623

Restricted stock awards and units
 
252

 
181

Performance-based restricted stock units
 
157

 
196

Employee stock purchase plan
 
365

 
417

Total
 
1,117

 
1,417

(1) Prior period recast to reflect the Company's early adoption of ASU No. 2016-09 in the third quarter of 2016.
11. INCOME TAXES
The Company's unrecognized tax benefits were approximately $2.9 million as of March 31, 2017, and were unchanged from December 31, 2016.
12. COMMITMENTS AND CONTINGENCIES
Legal Matters — The Company is subject to legal proceedings and claims that arise in the ordinary course of business and records an estimated liability for these matters when an adverse outcome is considered to be probable and can be reasonably

- 17 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

estimated. Although the outcome of the litigation cannot be predicted with certainty and some lawsuits, claims, or proceedings may be disposed of unfavorably to the Company, which could materially and adversely affect its financial condition or results of operations, the Company does not believe that it is currently a party to any material legal proceedings.
Contractual Warranties — The Company typically provides contractual warranties to its customers covering its solutions and services. To date, any refunds provided to customers have been immaterial.
Change in Control Agreements — The Company has change in control agreements with its chief executive officer and certain other executive officers. These agreements provide for payments to be made to such officers upon involuntary termination of their employment by the Company without cause or by such officers for good reason as defined in the agreements, within a period of 2 years following a change in control. The agreements provide that, upon a qualifying termination event, such officers will be entitled to (a) a severance payment equal to the sum of the officer’s base salary and target bonus amount (except that such payment for the Company's chief executive officer and president would be two times such sum); (b) continuation of health benefits for one year (except that such continuation for the Company's chief executive officer and president would be for two years); and (c) immediate vesting of remaining unvested equity awards, unless otherwise specified in the equity award agreements.
13. SUBSEQUENT EVENT
On April 18, 2017, the Company acquired Mytrus, Incorporated ("Mytrus") for total cash consideration of approximately $14 million. Mytrus provides cloud-based software for electronic informed consent ("eConsent"), which replaces traditional paper patient consent forms. By adding an eConsent solution to its growing mobile health portfolio, the Company seeks to increase client adoption of its mobile technology while modernizing clinical trials for patients, sites, and sponsors.

- 18 -

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). Forward-looking statements reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of management’s goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in the future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Important factors that could cause such differences include, but are not limited to the factors discussed under the “Risk Factors” section included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed with the Securities and Exchange Commission ("SEC") on February 28, 2017.
The following is a discussion and analysis of our financial condition and results of operations and should be read together with our condensed consolidated financial statements and related notes to condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes to audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
Overview
Medidata is a global provider of a platform of cloud-based solutions for life sciences, enabling efficiency and quality through clinical development programs, aimed at accelerating processes, enhancing decision making, minimizing operational risk, saving resources, and enabling transformational trial strategies. We are committed to powering smarter treatments and healthier people while advancing the competitive and scientific goals of our life sciences customers worldwide. As of March 31, 2017, our industry-leading technology platform, the Medidata Clinical Cloud®, was the primary technology solution powering clinical trials for 17 of the world's top 25 global pharmaceutical companies, and was used by 16 of the top 20 medical device developers, from study design and planning through execution, management and reporting.
Subscription revenues, which are comprised of fees from clients accessing our cloud-based solutions, represented 84% of our revenues for the first three months of 2017. Professional services revenues, which are derived from the provision of services that help our clients realize higher value in their clinical development processes, represented 16% of total revenues.
First Quarter 2017 Highlights
•
Total revenues increased 22% compared with the first quarter of 2016, with subscription and professional services revenues growing 19% and 38%, respectively.
•
Operating income was $12.2 million, up 83% compared with $6.6 million in the first quarter of 2016.
•
Net income for the first quarter of 2017 was $9.5 million, up 108% compared with $4.6 million in the first quarter of 2016.
•
Cash flow from operations was $22.5 million in the first quarter of 2017, an increase of $8.7 million, or 63%, compared with $13.8 million a year ago.

- 19 -

Results of Operations
Revenues
Revenues for the three months ended March 31, 2017 and 2016 were as follows:
 
Three Months Ended March 31,
 
2017
 
2016
 
Change
Revenues:
(amounts in thousands except percentages)
Subscription
$
107,070

 
$
89,968

 
19.0
%
Percentage of total revenues
84.4
%
 
86.3
%
 
 
Professional services
19,751

 
14,270

 
38.4
%
Percentage of total revenues
15.6
%
 
13.7
%
 
 
Total revenues
$
126,821

 
$
104,238

 
21.7
%
Year-over-year growth in subscription revenues was driven by major platform customer wins and sales growth among both new and existing customers, with strong contributions from our risk-based monitoring and data analytics solutions. As of March 31, 2017, we had remaining subscription backlog of $278 million, representing the future contract value of outstanding arrangements, billed and unbilled, to be recognized during the remainder of 2017, excluding renewals. This reflects an increase of 18% compared with remaining backlog of $235 million at March 31, 2016.
Year-over-year growth in professional services revenues was driven by increased demand from new and existing customers, including high utilization associated with large scale enterprise implementation projects.
Cost of Revenues
Cost of revenues for the three months ended March 31, 2017 and 2016 was as follows:
 
Three Months Ended March 31,
 
2017
 
2016
 
Change
Cost of revenues:
(amounts in thousands except percentages)
Subscription
$
17,129

 
$
14,329

 
19.5
%
Percentage of total revenues
13.5
%
 
13.8
%
 
 
Professional services
13,485

 
10,339

 
30.4
%
Percentage of total revenues
10.6
%
 
9.9
%
 
 
Total cost of revenues
$
30,614

 
$
24,668

 
24.1
%
Percentage of total revenues
24.1
%
 
23.7
%
 
 
 
 
 
 
 
 
Gross profit
$
96,207

 
$
79,570

 
20.9
%
Gross margin
75.9
%
 
76.3
%
 
 
 
 
 
 
 
 
Subscription margin
84.0
%
 
84.1
%
 
 
Professional services margin
31.7
%
 
27.5
%
 
 
Year-over-year growth in cost of subscription revenues was driven by an increase in vendor software and third-party cloud hosting costs of $1.5 million for the three months ended March 31, 2017 resulting from increased platform activity and platform enhancements, and by investment in hosting infrastructure at our data center in Europe. In addition, our business growth drove a year-over-year headcount increase of roughly 14%, resulting in increased personnel costs. Subscription gross margin decreased to 84.0% for the three months ended March 31, 2017 compared with 84.1% for the three months ended March 31, 2016 as a result of these infrastructure and skill set investments.
Year-over-year growth in cost of professional fees was partially driven by an increase in consulting costs of $1.2 million for the three months ended March 31, 2017. Personnel costs were also a contributing factor, increasing in response to 15% year-over-year headcount growth. Professional services gross margin increased to 31.7% for the three months ended March 31, 2017 compared with 27.5% for the three months ended March 31, 2016, benefiting significantly from effective project mix and more efficient use of resources in the current period.
Overall gross margin decreased to 75.9% for the three months ended March 31, 2017 compared with 76.3% for the three months ended March 31, 2016, primarily driven by a greater mix of professional services in the current period.

- 20 -

Operating Costs and Expenses
Operating costs and expenses for the three months ended March 31, 2017 and 2016 were as follows:
 
Three Months Ended March 31,
 
2017
 
2016
 
Change
Operating costs and expenses:
(amounts in thousands except percentages)
Research and development
$
29,937

 
$
28,228

 
6.1
%
Percentage of total revenues
23.6
%
 
27.1
%
 
 
Sales and marketing
30,109

 
25,458

 
18.3
%
Percentage of total revenues
23.8
%
 
24.4
%
 
 
General and administrative
23,988

 
19,246

 
24.6
%
Percentage of total revenues
18.9
%
 
18.4
%
 
 
Total operating costs and expenses
$
84,034

 
$
72,932

 
15.2
%
Percentage of total revenues
66.3
%
 
69.9
%
 
 
 
 
 
 
 
 
Operating income
$
12,173

 
$
6,638

 
83.4
%
Operating margin
9.6
%
 
6.4
%
 
 
The year-over-year growth in research and development expenses was primarily driven by a net increase in personnel-related costs of $3.7 million for the three months ended March 31, 2017, resulting from a 19% year-over-year headcount increase due to our hiring of skilled engineering talent, partially offset by capitalization of internal-use software development costs associated with our Clinical Cloud platform.
The year-over-year growth in sales and marketing expenses was predominantly driven by a net increase in personnel-related costs of $2.0 million for the three months ended March 31, 2017, resulting from a 14% year-over-year headcount increase to expand our global sales organization and partner team. On a comparable basis, the current period lacks the benefit of the $1.4 million in grant income that was recorded as a result of the enactment of the New Jersey Business Employment Incentive Program ("NJ BEIP") during the three months ended March 31, 2016. Higher professional fees also impacted expenses in the current period.
The year-over-year increase in general and administrative expenses for the three months ended March 31, 2017 was driven by a net increase in personnel-related costs of $2.3 million, resulting for a 15% year-over-year headcount increase, as a well as a $1.8 million increase in legal fees for the three months ended March 31, 2017 associated with acquisitions and litigation matters.
Income Taxes
Provision for income taxes for the three months ended March 31, 2017 and 2016 was as follows:
 
Three Months Ended March 31,
 
2017
 
2016
 
(amounts in thousands)
Provision for income taxes
$
(501
)
 
$
(1,196
)
The difference between our effective tax rate and the U.S. statutory rate is primarily due to the relative mix of pre-tax income subject to tax in various jurisdictions, state taxes, share-based compensation, and U.S. tax credits and incentives. The benefits from U.S. credits and incentives will likely continue to have a favorable impact on our overall effective tax rate in the future. Share-based compensation will also continue to have an impact on our effective tax rate which may or may not be favorable.
Our quarterly tax provision and quarterly estimate of the annual effective tax rate are subject to significant variation due to several factors, including variability in accuracy of predictions of pre-tax book and taxable income or loss, the mix of jurisdictions to which they relate, and changes in tax law in the jurisdictions in which we conduct business.
Critical Accounting Estimates
Our condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions about certain items and future events. These estimates inherently involve levels of subjectivity and judgment and may have a material impact on our financial condition or results of operations. Accordingly, actual results could differ from those estimates. Our critical accounting estimates as of March 31, 2017 are the same as those at December 31, 2016, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Also see Note 1, "Summary of Significant Accounting Policies," to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, which discusses our significant accounting policies.

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Effects of Recently Issued Accounting Pronouncements on Current and Future Trends
Refer to Note 1, "Summary of Significant Accounting Policies — Recently Issued Accounting Pronouncements," to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. No other recently issued accounting pronouncements have had or are expected to have a material impact on our current or future trends.
Liquidity and Capital Resources
We believe that our cash flows from operations, cash and cash equivalents, and highly liquid marketable securities will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for the foreseeable future. Our future capital expenditures and other cash requirements could be higher than we currently expect as a result of various factors, including any expansion of our business that we may complete. The following table presents selected financial information related to our liquidity and capital resources as of March 31, 2017 and December 31, 2016, and for the three-month periods ended March 31, 2017 and 2016 (in thousands):
 
March 31,
2017
 
December 31,
2016
 
Cash, cash equivalents, and marketable securities
$
513,383

 
$
515,222

 
Furniture, fixtures and equipment, net
63,284

 
58,461

 
1.00% convertible senior notes, net
266,999

 
263,401

 
 
 
 
 
 
 
Three months ended March 31,
 
 
2017
 
2016
 
Cash provided by operating activities
$
22,485

 
$
13,804

(1)
Cash (used in) provided by investing activities
(17,051
)
 
32,948

 
Cash used in financing activities
(8,930
)
 
(8,818
)
(1)
(1) As a result of the Company's early adoption of ASU No. 2016-09 in the third quarter of 2016, the consolidated statement of cash flows for the three months ended March 31, 2016 has been adjusted to reflect an offsetting increase of $1,341 thousand to net cash provided by operating activities and net cash used in financing activities.
Cash, Cash Equivalents, and Marketable Securities
For the three months ended March 31, 2017, cash provided by operating activities of $22.5 million was driven by strong customer collections, partially offset by operating expenditures and cash interest expense on our 1.00% convertible senior notes. Cash used in investing activities of $17.1 million consisted of a net payment of $8.7 million to acquire CHITA Inc. ("CHITA"), cash payments for capital expenditures of $6.8 million, and net purchases of marketable securities of $1.6 million. Cash used in financing activities of $8.9 million resulted primarily from the acquisition of $13.6 million of treasury stock in connection with equity plan participant tax withholdings upon vesting, partially offset by equity plan proceeds of $4.7 million.
For the three months ended March 31, 2016, cash provided by operating activities of $13.8 million was driven by strong customer collections, partially offset by operating expenditures and cash interest expense on our 1.00% convertible senior notes. Cash provided by investing activities of $32.9 million consisted of net sales of marketable securities of $40.5 million partially offset by cash payments for capital expenditures of $7.6 million. Cash used in financing activities of $8.8 million resulted primarily from the acquisition of $10.8 million of treasury stock in connection with equity plan participant tax withholdings upon vesting, partially offset by equity plan proceeds of $2.0 million.
Capital Assets
We acquired $8.4 million in capital assets during the three months ended March 31, 2017, predominantly related to our new office space in Seoul, South Korea, continued enhancements to our infrastructure, and capitalization of software development costs. On a cash basis, our capital expenditures during the three months ended March 31, 2017 were $6.8 million and included payments for previously accrued assets. We expect to acquire approximately $25 to $30 million in additional capital assets during the remainder of 2017.
Debt
In August 2013, we issued $287.5 million of 1.00% convertible senior notes (the "Notes") that will mature on August 1, 2018 unless earlier repurchased or converted. Upon conversion, we will deliver to the holders of the Notes either cash, shares of our common stock, or a combination thereof, at our election. If converted, we intend to settle the principal amount of the Notes in cash and any excess conversion value beyond the principal amount in shares of our common stock, cash, or a combination thereof. As of March 31, 2017, the Notes are not convertible and therefore are classified as long term liabilities in our condensed consolidated balance sheet. For further information, see Note 7, “Debt,” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

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Contractual Obligations, Commitments and Contingencies
The table below summarizes the aggregate effect that our material contractual obligations as of March 31, 2017 are expected to have on our cash flows in the periods indicated (in thousands):
 
Payments Due by Period
 
Total
 
Remainder of 2017
 
2018 - 2019
 
2020 - 2021
 
2022 and later
Contractual Obligations:
 
 
 
 
 
 
 
 
 
1.00% convertible senior notes
$
287,500

 
$
—

 
$
287,500

 
$
—

 
$
—

Interest payments on convertible senior notes
4,313

 
1,438

 
2,875

 
—

 
—

Operating lease obligations
119,515

 
11,276

 
30,344

 
32,249

 
45,646

Contingent consideration obligations
5,697

 
3,930

 
1,767

 
—

 
—

Total
$
417,025

 
$
16,644

 
$
322,486

 
$
32,249

 
$
45,646

Legal Matters
For a discussion of legal matters, refer to Note 12, "Commitments and Contingencies — Legal Matters," to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Item 3.     Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
We had unrestricted cash and cash equivalents totaling $90.4 million at March 31, 2017. Our cash equivalents are invested principally in commercial paper and money market funds. We also had investments in marketable securities, which we classify as available-for-sale securities, totaling $423.0 million at March 31, 2017. Substantially all of our marketable securities are fixed income securities, which primarily consist of high quality commercial paper and corporate bonds. Due to the short duration, laddered maturities, and high credit ratings of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates.
Exchange Rate Sensitivity
Our non-U.S. operating subsidiaries are located in the United Kingdom, Japan, South Korea, Singapore, China, and Germany. The functional currencies for these subsidiaries are the respective local currencies. We have exposure to exchange rate movements that are captured in translation adjustments for these subsidiaries. Such cumulative adjustments are recorded in accumulated other comprehensive income (loss). The estimated potential translation loss for the three months ended March 31, 2017 resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates amounted to $2.5 million.
We bill our customers primarily in U.S. dollars. The majority of our foreign billings are billed from Medidata Solutions, Inc., a U.S. entity, and are mainly denominated in Euros, British pounds sterling, Australian dollars, and Canadian dollars. Our foreign currency-denominated costs and expenses are mainly incurred by our non-U.S. operating subsidiaries. Accordingly, future changes in currency exchange rates will impact our future operating results. For the three months ended March 31, 2017, 4.7% of our revenues and 15.8% of our expenses were denominated in foreign currencies. Gains and losses arising from transactions denominated in foreign currencies are recorded as foreign currency transaction gains (losses) in general and administrative expenses on our condensed consolidated statements of operations and amounted to $(0.2) million for the three months ended March 31, 2017.
Impact of Inflation
We do not believe that inflation has had a material impact on our business, financial condition, or results of operations.
Item 4.    Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of March 31, 2017, an evaluation was performed with the participation of our Disclosure Committee and our management, including the Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Based upon

- 23 -

such evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of March 31, 2017.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

- 24 -

Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
MEDIDATA SOLUTIONS, INC.
 
 
 
 
By:
/s/ ROUVEN BERGMANN
 
 
Rouven Bergmann
Chief Financial Officer (Principal Financial and Principal Accounting Officer)
Date: May 8, 2017

- 25 -

PART II - OTHER INFORMATION
Item 1.    Legal Proceedings
See Note 12, “Commitments and Contingencies – Legal Matters,” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of current legal proceedings.
Item 1A.    Risk Factors
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. The risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 are those that we believe are the material risks we face. There have been no material changes in our risk factors since our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Any of those disclosed risk factors or additional risks and uncertainties not presently known to us, or that we currently deem immaterial, could have a material adverse effect on our business, financial condition and results of operations.
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
From time to time, we grant nonvested restricted stock awards, restricted stock units, or performance-based restricted stock units to our employees pursuant to the terms of our Second Amended and Restated 2009 Long-Term Incentive Plan ("2009 Plan"). Under the provisions of the 2009 Plan, unless otherwise elected, participants fulfill their related income tax withholding obligation by having shares withheld at the time of vesting. On the date of vesting, we divide the participant's income tax withholding obligation in dollars by the closing price of our common stock and withhold the resulting number of vested shares.
A summary of our repurchases of shares of our common stock for the three months ended March 31, 2017 is as follows: 
 
 
Total Number of Shares Purchased (1)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet be Purchased under the Plans or Programs
January 1 – January 31, 2017
 
1,568

 
$
51.39

 
—

 
—

February 1 – February 28, 2017
 
239,671

 
$
56.06

 
—

 
—

March 1 – March 31, 2017
 
1,759

 
$
57.02

 
—

 
—

Total
 
242,998

 
$
56.04

 
—

 
—

(1) Represents the number of shares acquired as payment by employees of applicable statutory withholding taxes owed upon vesting of restricted stock awards, restricted stock units, or performance-based restricted stock units granted under the 2009 Plan.
Item 3.    Defaults upon Senior Securities
None.
Item 4.    Mine Safety Disclosures
Not applicable.
Item 5.     Other Information
None.
Item 6.    Exhibits
The information required by this Item 6 is set forth on the exhibit index that follows the signature page of this report.

- 26 -

EXHIBIT INDEX
Exhibit No.
Description
10.1*
Form of Medidata Solutions, Inc. 2017 Performance-Based Restricted Stock Unit Agreement
31.1*
Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Exchange Act
31.2*
Certification of CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Exchange Act
32.1**
Certification of CEO pursuant to Rules 13a-14(b) or 15d-14(b) under the Exchange Act and 18 U.S.C. 1350
32.2**
Certification of CFO pursuant to Rules 13a-14(b) or 15d-14(b) under the Exchange Act and 18 U.S.C. 1350
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
*
Filed herewith.
**
Furnished herewith.


- 27 -

Medidata Solutions, Inc. Reports