Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies Accounting Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, and various other assumptions that the Company believes are necessary to consider to form a basis for making judgments about the carrying values of assets and liabilities, the recorded amounts of revenue and expenses, and the disclosure of contingent liabilities. The Company is subject to uncertainties such as the impact of future events, economic and political factors, and changes in the Company’s business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the preparation of the Company’s financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in reported results of operations; if material, the effects of changes in estimates are disclosed in the notes to the consolidated financial statements. Significant estimates and assumptions by management affect the allowance for doubtful accounts, the carrying value of long-lived assets (including goodwill and intangible assets), the amortization period of long-lived assets (excluding goodwill and indefinite-lived intangible assets), the carrying value, capitalization and amortization of software and Website development costs, the carrying value of investments, the provision for income taxes and related deferred tax accounts, certain accrued liabilities, revenue recognition, contingencies, litigation and related legal accruals and the value attributed to employee stock options and other stock-based awards. Seasonality The timing of the Company’s revenue is affected by seasonal factors. The Company’s advertising and sponsorship revenue is seasonal, primarily due to the annual spending patterns of the Company’s advertising and sponsorship clients. This portion of the Company’s revenue is usually the lowest in the first quarter of each calendar year, and generally increases during each consecutive quarter throughout the year. Additionally, the timing of revenue in relation to the Company’s expenses, many of which do not vary directly with revenue, has an impact on cost of operations, sales and marketing, and general and administrative expenses as a percentage of revenue in each calendar quarter. Cash and Cash Equivalents All highly liquid investments with an original maturity from the date of purchase of three months or less are considered to be cash equivalents. These investments are stated at cost, which approximates market. The Company’s cash and cash equivalents are generally invested in various money market accounts. Fair Value The carrying amount of cash and cash equivalents, accounts receivable, accrued expenses and deferred revenue is deemed to approximate fair value due to the immediate or short-term maturity of these items. See Note 12 for further information on the fair value of the Company’s investments. Allowance for Doubtful Accounts The allowance for doubtful accounts receivable reflects the Company’s best estimate of losses inherent in the Company’s receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available evidence. Long-Lived Assets Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. The useful lives are generally as follows: Computer equipment 3 years Office equipment, furniture and fixtures 4 to 7 years Software 3 years Website development costs 3 years Leasehold improvements Shorter of useful life or lease term Expenditures for maintenance, repair and renewals of minor items are charged to expense as incurred. Major improvements are capitalized. Goodwill and Intangible Assets Goodwill and intangible assets result from business combinations accounted for under the acquisition method. Goodwill and other intangible assets with indefinite lives are not amortized and are subjected to impairment review by applying fair value based tests. Intangible assets with definite lives are amortized on a straight-line basis over the individually estimated useful lives of the related assets as follows: Content 3 to 5 years Customer relationships 5 to 12 years Acquired technology and patents 3 years Trade names Up to 10 years Recoverability The Company reviews the carrying value of goodwill and indefinite-lived intangible assets annually and whenever indicators of impairment are present. The Company has one reporting unit and tests goodwill for impairment at the reporting unit level only when, after completing a qualitative analysis, it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying value. Fair value is determined using an income approach valuation method. A reporting unit is defined as an operating segment or one level below an operating segment. Long-lived assets used in operations are reviewed for impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and the fair value. Long-lived assets held for sale are reported at the lower of cost or fair value less costs to sell. Based on the Company’s analysis, there was no impairment of goodwill or indefinite-lived intangible assets during the years ended December 31, 2016, 2015 and 2014. Internal Use Software Software development costs that are incurred in the preliminary project stage and post-implementation stage are expensed as incurred. Once certain criteria have been met, direct costs incurred in developing or obtaining computer software are capitalized. The Company capitalized $3,951 and $6,441 during the years ended December 31, 2016 and 2015, respectively. Capitalized internal use software development costs are included in property and equipment in the accompanying consolidated balance sheets. Training and data conversion costs are expensed as incurred. Capitalized software costs are depreciated over a three-year period. Depreciation expense related to internal use software was $7,001, $6,403 and $6,449 for the years ended December 31, 2016, 2015 and 2014, respectively. The remaining balance of internal use software, net of accumulated depreciation, was $8,576 and $11,630 as of December 31, 2016 and 2015, respectively. Website Development Costs Costs related to the planning and post-implementation phases of WebMD’s Website development efforts, as well as minor enhancements and maintenance, are expensed as incurred. Direct costs incurred in the development phase are capitalized. The Company capitalized $8,899 and $4,861 during the years ended December 31, 2016 and 2015, respectively. These capitalized costs are included in property and equipment in the accompanying consolidated balance sheets and are depreciated over a three-year period. Depreciation expense related to Website development costs was $6,020, $6,580 and $6,421 during the years ended December 31, 2016, 2015 and 2014, respectively. The remaining balance of Website development costs, net of accumulated depreciation, was $12,503 and $9,624 as of December 31, 2016 and 2015, respectively. Restricted Cash The Company’s restricted cash primarily relates to collateral for letters of credit obtained to support the Company’s operations. Total restricted cash was $2,116 and $3,547 as of December 31, 2016 and 2015, respectively, and is included in other assets in the accompanying consolidated balance sheets. Deferred Revenue Deferred revenue consists of invoices sent to customers where the Company has the contractual right to bill or payments received from customers, in advance of revenue recognition and is recognized as the revenue recognition criteria are met. Deferred revenue is influenced by several factors, including the timing of invoices to our customers and the timing of payments received from our customers in relation to the timing of the revenue recognition for the related customer contract. Deferred revenue at each balance sheet date is expected to be recognized during the succeeding twelve month period and is therefore classified as a current liability within the accompanying consolidated balance sheets. Leases The Company recognizes rent expense on a straight-line basis, including predetermined fixed escalations, over the initial lease term including reasonably assured renewal periods, net of lease incentives, from the time that the Company controls the leased property. Leasehold improvements made at the inception of the lease are amortized over the shorter of the useful life of the asset or the lease term. Lease incentives are recorded as a deferred credit and recognized as a reduction to rent expense on a straight-line basis over the lease term as described above. Presentation of Segment Information The Company generates revenue in four groups, as set forth in the table below. The first group is “Advertising and Sponsorship – Biopharma and Medical Device” and consists of advertising and sponsorship revenue from pharmaceutical, biotechnology and medical device clients relating to prescription pharmaceutical products or other regulated devices or products or for sponsoring educational programs. The second category is “Advertising and Sponsorship – OTC, CPG and Other” and consists of advertising and sponsorship revenue relating to non-Rx over-the-counter WebMD Health Services The following table presents the revenues recognized from the four revenue groups described above: Years Ended December 31, 2016 2015 2014 Advertising and sponsorship Biopharma and medical device $ 428,519 $ 371,220 $ 329,329 OTC, CPG and other 132,754 127,805 124,636 561,273 499,025 453,965 Health services 113,937 110,441 103,182 Information services 29,836 26,933 23,302 $ 705,046 $ 636,399 $ 580,449 The Company’s revenue is principally generated in the United States. An adverse change in economic conditions in the United States could negatively affect the Company’s revenue and results of operations. The Company recorded revenue from its international operations of $65,763, $56,979 and $46,095 during the years ended December 31, 2016, 2015 and 2014, respectively. Sales, Use and Value Added Tax The Company excludes sales, use and value-added tax from revenue in the accompanying consolidated statements of operations. Advertising Costs Advertising costs are generally expensed as incurred and totaled $5,903, $4,359 and $4,196 in 2016, 2015 and 2014, respectively. Foreign Currency The functional currency of the Company’s foreign operations is the U.S. dollar. Fluctuations in foreign currency monetary assets and liabilities result in gains or losses which are credited or charged to income. Foreign currency transactional gains or losses are also credited or charged to income. The Company is exposed to fluctuations in foreign currencies primarily through contracts with certain of the Company’s customers that are denominated in foreign currencies. In order to manage this risk, the Company has hedged portions of its foreign currency denominated customer contracts with foreign currency forward contracts. See Note 12 for further information on the Company’s foreign currency forward contracts. Concentration of Credit Risk None of the Company’s customers individually accounted for more than 10% of the Company’s revenue in 2016, 2015 or 2014, or more than 10% of the Company’s accounts receivable as of December 31, 2016 or 2015. Loss Contingencies The Company accounts for loss contingencies in accordance with Financial Accounting Standards Board (“FASB”) ASC No. 450, “Contingencies.” Under ASC No. 450, accruals for loss contingencies are recorded when both (i) the information available indicates that it is probable that a liability has been incurred and (ii) the amount of the loss can be reasonably estimated. The Company records adjustments to these accruals to reflect the status of negotiations, settlements, advice of counsel and other information and events related to an individual matter. Income Taxes Deferred income taxes are recognized for the future tax consequence of differences between the tax and financial reporting basis of assets and liabilities at each reporting period. A valuation allowance is established to reduce deferred tax assets to the amount expected to be realized. Tax contingencies are recorded to address potential exposure involving tax positions the Company has taken that could be challenged by tax authorities. These potential exposures result from applications of various statutes, rules, regulations and interpretations. The Company’s estimates of tax contingencies contain assumptions and judgments about potential actions by taxing jurisdictions. The Company reflects interest and penalties related to uncertain tax positions as part of the income tax provision in the accompanying consolidated statements of operations. Accounting for Stock-Based Compensation Stock-based compensation expense for all share-based payment awards granted is determined based on the grant-date fair value. The grant-date fair value for stock options is estimated using the Black-Scholes Option Pricing Model. The Company recognizes these compensation costs, net of an estimated forfeiture rate, on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the share-based payment award. Revenue Recognition Revenue from advertising is recognized as advertisements are delivered or as publications are distributed. Revenue from sponsorship arrangements, content syndication and distribution arrangements and subscriptions to our WebMD Health Services Contracts that contain multiple deliverables are subject to Accounting Standards Update (“ASU”) No. 2009-13 2009-13”). 2009-13 Pursuant to the guidance of ASU 2009-13, Net Income per Common Share Basic income per common share has been computed using the weighted-average number of shares of Common Stock outstanding during the periods presented. Diluted income per common share has been computed using the weighted-average number of shares of Common Stock outstanding during the periods, increased to give effect to potentially dilutive securities and assumes that any dilutive convertible notes were converted, only in the periods in which such effect is dilutive (shares in thousands): Years Ended December 31, 2016 2015 2014 Numerator: Income from continuing operations – Basic $ 91,304 $ 64,024 $ 40,941 Interest expense on 1.50% Notes, net of tax 3,513 3,456 3,456 Interest expense on 2.50% Notes, net of tax 7,307 7,189 — Interest expense on 2.25% Notes, net of tax 457 3,460 — Interest expense on 2.625% Notes, net of tax 3,911 — — Income from continuing operations – Diluted $ 106,492 $ 78,129 $ 44,397 Income from discontinued operations, net of tax – Basic and Diluted $ — $ — $ 1,122 Denominator: Weighted-average shares – Basic 37,854 36,600 37,869 Stock options and restricted stock 1,658 1,412 2,060 1.50% Notes 5,695 5,694 5,685 2.50% Notes 6,206 6,205 — 2.25% Notes 353 2,742 — 2.625% Notes 2,413 — — Adjusted weighted-average shares after assumed conversions – Diluted 54,179 52,653 45,614 Basic income per common share: Income from continuing operations $ 2.41 $ 1.75 $ 1.08 Income from discontinued operations — — 0.03 Net income $ 2.41 $ 1.75 $ 1.11 Diluted income per common share: Income from continuing operations $ 1.97 $ 1.48 $ 0.97 Income from discontinued operations — — 0.03 Net income $ 1.97 $ 1.48 $ 1.00 The Company has excluded certain of its convertible notes, as well as certain outstanding stock options and restricted stock, from the calculation of diluted income per common share during the periods in which such securities were anti-dilutive. The following table presents the total weighted-average number of potentially dilutive common shares that were excluded from the computation of diluted income per common share during the periods presented (shares in thousands): Years Ended December 31, 2016 2015 2014 Options and restricted stock 625 3,678 2,594 2.25% Notes — — 3,506 2.50% Notes — — 6,195 625 3,678 12,295 Discontinued Operations A business unit is reported as a discontinued operation if its disposal represents a strategic shift that has, or will have, a major effect on the Company’s operations and financial results. Significant judgments are involved in determining whether a business component meets the criteria for discontinued operation reporting and the period in which these criteria are met. Reclassifications Certain reclassifications have been made to the prior period financial statements to conform with the current period presentation. Recent Accounting Pronouncements Accounting Pronouncements Adopted During 2016 In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30): In April 2015, the FASB issued ASU No. 2015-05, Intangibles – Goodwill and Other – Internal-Use 350-40): In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes The following table summarizes the reclassifications made to the consolidated balance sheet as of December 31, 2015 in connection with the adoption of ASU No. 2015-03 No. 2015-17: December 31, 2015 As Reported As Adjusted Current assets: Deferred tax assets 16,126 — Total current assets 850,602 834,476 Deferred tax assets — 15,694 Other assets 20,464 10,852 TOTAL ASSETS $ 1,165,967 $ 1,155,923 Current liabilities: 2.25% convertible notes due 2016 102,682 102,523 Total current liabilities 286,061 285,902 2.50% convertible notes due 2018 400,000 396,281 1.50% convertible notes due 2020 300,000 294,266 Other long-term liabilities 23,678 23,246 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 1,165,967 $ 1,155,923 Accounting Pronouncements to Be Adopted in the Future In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date No. 2014-09 No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers No. 2016-08, No. 2016-10, No. 2016-12 No. 2014-09, No. 2014-09. In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): No. 2016-01 In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) right-of-use In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting No. 2016-09 In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment |