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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
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: 001-36131
 
Endurance International Group Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
46-3044956
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
10 Corporate Drive,
Suite 300
 
01803
Burlington,
Massachusetts
 
(Address of principal executive offices)
 
(Zip Code)

(781) 852-3200
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value
EIGI
The Nasdaq Global Select Market
 

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.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ý    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.

1


Large accelerated filer
ý
  
Accelerated filer
 
¨
Non-accelerated filer
¨
  
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      No  ý
As of October 31, 2019, there were 146,405,002 shares of the issuer’s common stock, $0.0001 par value per share, outstanding.
 

2


TABLE OF CONTENTS
 
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements (unaudited)
 
 


3


Endurance International Group Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)

December 31, 2018
 
September 30, 2019
Assets

 
(unaudited)
Current assets:

 

Cash and cash equivalents
$
88,644

 
$
84,465

Restricted cash
1,932

 
1,832

Accounts receivable
12,205

 
12,139

Prepaid domain name registry fees
56,779

 
56,555

Prepaid commissions
41,458

 
40,528

Prepaid and refundable taxes
7,235

 
13,070

Prepaid expenses and other current assets
27,855

 
23,137

Total current assets
236,108

 
231,726

Property and equipment—net
92,275

 
86,318

Operating lease right-of-use assets

 
98,064

Goodwill
1,849,065

 
1,854,829

Other intangible assets—net
352,516

 
273,329

Deferred financing costs—net
2,656

 
2,000

Investments
15,000

 
15,000

Prepaid domain name registry fees, net of current portion
11,207

 
11,139

Prepaid commissions, net of current portion
42,472

 
47,776

Other assets
5,208

 
2,292

Total assets
$
2,606,507

 
$
2,622,473

Liabilities and stockholders’ equity

 

Current liabilities:

 

Accounts payable
$
12,449

 
$
10,171

Accrued expenses
79,279

 
67,267

Accrued taxes
2,498

 
1,783

Accrued interest
25,259

 
14,526

Deferred revenue
371,758

 
375,729

Operating lease liabilities—short term

 
22,474

Current portion of notes payable
31,606

 
31,606

Current portion of financed equipment
8,379

 
2,637

Deferred consideration—short term
2,425

 
2,181

Other current liabilities
3,147

 
2,216

Total current liabilities
536,800

 
530,590

Long-term deferred revenue
96,140

 
99,257

Operating lease liabilities—long term

 
84,594

Notes payable—long term, net of original issue discounts of $21,349 and $18,013 and deferred financing costs of $31,992 and $27,318, respectively
1,770,055

 
1,703,065

Deferred tax liability
16,457

 
20,231

Deferred consideration—long term
1,364

 

Other liabilities
11,237

 
6,308

Total liabilities
2,432,053

 
2,444,045

Stockholders’ equity:

 

Preferred Stock—par value $0.0001; 5,000,000 shares authorized; no shares issued or outstanding

 

Common Stock—par value $0.0001; 500,000,000 shares authorized; 143,444,515 and 146,140,876 shares issued at December 31, 2018 and September 30, 2019, respectively; 143,444,178 and 146,140,876 outstanding at December 31, 2018 and September 30, 2019, respectively
14

 
15

Additional paid-in capital
961,235

 
988,773

Accumulated other comprehensive loss
(3,211
)
 
(4,876
)
Accumulated deficit
(783,584
)
 
(805,484
)
Total stockholders’ equity
174,454

 
178,428

Total liabilities and stockholders’ equity
$
2,606,507

 
$
2,622,473

See accompanying notes to consolidated financial statements.

4


Endurance International Group Holdings, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(unaudited)
(in thousands, except share and per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018

2019
 
2018
 
2019
Revenue
$
283,770


$
277,193

 
$
862,896

 
$
836,080

Cost of revenue (including impairment of $0 and $17,892, respectively, for the three and nine months ended September 30, 2019)
128,945


120,755

 
393,597

 
384,196

Gross profit
154,825


156,438

 
469,299

 
451,884

Operating expense:
 
 
 
 
 
 
 
Sales and marketing
63,831


59,143

 
197,733

 
191,221

Engineering and development
22,683


28,257

 
64,559

 
77,299

General and administrative
25,693


30,309

 
95,212

 
92,826

Total operating expense
112,207


117,709

 
357,504

 
361,346

Income from operations
42,618


38,729

 
111,795

 
90,538

Other income (expense):



 

 

Interest income
289


305

 
720

 
910

Interest expense
(37,527
)

(36,057
)
 
(111,923
)
 
(110,308
)
Total other expense—net
(37,238
)

(35,752
)
 
(111,203
)
 
(109,398
)
Income (loss) before income taxes and equity earnings of unconsolidated entities
5,380


2,977

 
592

 
(18,860
)
Income tax expense (benefit)
11,715


(4,839
)
 
8,826

 
3,040

(Loss) income before equity earnings of unconsolidated entities
(6,335
)

7,816

 
(8,234
)
 
(21,900
)
Equity loss of unconsolidated entities, net of tax



 
2

 

Net (loss) income
$
(6,335
)

$
7,816

 
$
(8,236
)
 
$
(21,900
)
Comprehensive (loss) income:



 

 

Foreign currency translation adjustments
(644
)

(1,001
)
 
(2,489
)
 
(1,054
)
Unrealized gain (loss) on cash flow hedge, net of tax (expense) benefit of ($182) and $626 for the three and nine months ended September 30, 2018, respectively, and ($70) and $200 for the three and nine months ended September 30, 2019, respectively
812


240

 
1,996

 
(611
)
Total comprehensive (loss) income
$
(6,167
)

$
7,055

 
$
(8,729
)
 
$
(23,565
)
Basic net (loss) income per share
$
(0.04
)

$
0.05

 
$
(0.06
)
 
$
(0.15
)
Diluted net (loss) income per share
$
(0.04
)

$
0.05

 
$
(0.06
)
 
$
(0.15
)
Weighted-average common shares used in computing net (loss) income per share:
 
 
 
 
 
 
 
Basic
143,107,122

 
145,951,755

 
141,946,574

 
144,932,834

Diluted
143,107,122

 
146,301,595

 
141,946,574

 
144,932,834


See accompanying notes to consolidated financial statements.

5


Endurance International Group Holdings, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except share amounts)
(unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
(Loss) Gain
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Number
 
Amount
 
Balance—December 31, 2017
140,190,695

 
$
14

 
$
931,033

 
$
(541
)
 
$
(847,501
)
 
$
83,005

Vesting of restricted shares
262,454

 

 

 

 

 

Exercise of stock options
4,338

 

 
25

 

 

 
25

Other comprehensive gain (loss)

 

 

 
1,621

 

 
1,621

Adjustment to beginning retained earnings resulting from adoption of ASC 606, net of tax impact of $7.0 million

 

 

 

 
59,383

 
59,383

Net loss

 

 

 

 
(2,528
)
 
(2,528
)
Reclassification of stock-compensation liability award

 

 
250

 

 

 
250

Stock-based compensation

 

 
6,992

 

 

 
6,992

Balance—March 31, 2018
140,457,487

 
14

 
938,300

 
1,080

 
(790,646
)
 
148,748

Vesting of restricted shares
2,342,606

 

 

 

 

 

Exercise of stock options
67,899

 

 
431

 

 

 
431

Other comprehensive gain (loss)

 

 

 
(2,281
)
 

 
(2,281
)
Net income

 

 

 

 
627

 
627

Stock-based compensation

 

 
7,390

 

 

 
7,390

Balance—June 30, 2018
142,867,992

 
14

 
946,121

 
(1,201
)
 
(790,019
)
 
154,915

Vesting of restricted shares
399,378

 

 

 

 

 

Exercise of stock options
39,041

 

 
300

 

 

 
300

Other comprehensive gain (loss)

 

 

 
168

 

 
168

Net loss

 

 

 

 
(6,335
)
 
(6,335
)
Stock-based compensation

 

 
7,550

 

 

 
7,550

Balance—September 30, 2018
143,306,411

 
$
14

 
$
953,971

 
$
(1,033
)
 
$
(796,354
)
 
$
156,598

Vesting of restricted shares
117,641

 

 

 

 

 

Exercise of stock options
20,126

 

 
131

 

 

 
131

Other comprehensive gain (loss)

 

 

 
(2,178
)
 

 
(2,178
)
Net income

 

 

 

 
12,770

 
12,770

Stock-based compensation

 

 
7,133

 

 

 
7,133

Balance—December 31, 2018
143,444,178

 
14

 
961,235

 
(3,211
)
 
(783,584
)
 
174,454





6


 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
(Loss) Gain
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Number
 
Amount
 
Balance—December 31, 2018
143,444,178

 
$
14

 
$
961,235

 
$
(3,211
)
 
$
(783,584
)
 
$
174,454

Vesting of restricted shares
116,526

 

 

 

 

 

Exercise of stock options
892

 

 
5

 

 

 
5

Other comprehensive gain (loss)

 

 

 
(1,362
)
 

 
(1,362
)
Net loss

 

 

 

 
(3,488
)
 
(3,488
)
Stock-based compensation

 

 
9,016

 

 

 
9,016

Balance—March 31, 2019
143,561,596

 
14

 
970,256

 
(4,573
)
 
(787,072
)
 
178,625

Vesting of restricted shares
2,176,738

 

 

 

 

 

Exercise of stock options
2,918

 

 
16

 

 

 
16

Other comprehensive gain (loss)

 

 

 
458

 

 
458

Net loss

 

 

 

 
(26,228
)
 
(26,228
)
Stock-based compensation

 

 
9,354

 

 

 
9,354

Balance—June 30, 2019
145,741,252

 
14

 
979,626

 
(4,115
)
 
(813,300
)
 
162,225

Vesting of restricted shares
398,293

 
1

 
(1
)
 

 

 

Exercise of stock options
1,331

 

 
5

 

 

 
5

Other comprehensive gain (loss)

 

 

 
(761
)
 

 
(761
)
Net income

 

 

 

 
7,816

 
7,816

Stock-based compensation

 

 
9,143

 

 

 
9,143

Balance—September 30, 2019
146,140,876

 
$
15

 
$
988,773

 
$
(4,876
)
 
$
(805,484
)
 
$
178,428


See accompanying notes to consolidated financial statements.

7


Endurance International Group Holdings, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
 
Nine Months Ended September 30,
 
 
2018
 
2019
Cash flows from operating activities:
 

 

Net loss
 
$
(8,236
)
 
$
(21,900
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 

Depreciation of property and equipment
 
36,753

 
33,385

Amortization of other intangible assets
 
77,890

 
64,137

Impairment of long-lived assets
 

 
17,892

Amortization of deferred financing costs
 
4,708

 
5,331

Amortization of net present value of deferred consideration
 
311

 
143

Amortization of original issue discounts
 
3,209

 
3,336

Stock-based compensation
 
21,932

 
27,513

Deferred tax expense
 
8,839

 
1,942

Loss on sale of assets
 
191

 
128

Loss from unconsolidated entities
 
2

 

Financing costs expensed
 
1,228

 

Loss on early extinguishment of debt
 
331

 

Changes in operating assets and liabilities, net of acquisitions:
 
 
 

Accounts receivable
 
1,687

 
34

Prepaid and refundable taxes
 
(3,446
)
 
(5,908
)
Prepaid expenses and other current assets
 
2,703

 
5,108

Leases right-of-use asset, net
 

 
395

Accounts payable and accrued expenses
 
(18,011
)
 
(23,492
)
Deferred revenue
 
3,502

 
7,636

Net cash provided by operating activities
 
133,593

 
115,680

Cash flows from investing activities:
 

 

Businesses acquired in purchase transactions, net of cash acquired
 

 
(8,875
)
Purchases of property and equipment
 
(22,343
)
 
(26,796
)
Proceeds from sale of assets
 
6

 
1

Net cash used in investing activities
 
(22,337
)
 
(35,670
)
Cash flows from financing activities:
 
 
 

Proceeds from issuance of term loan and notes, net of original issue discounts
 
1,580,305

 

Repayments of term loans
 
(1,656,094
)
 
(75,000
)
Payment of financing costs
 
(1,580
)
 

Payment of deferred consideration
 
(4,500
)
 
(2,500
)
Principal payments on financed equipment
 
(5,609
)
 
(6,332
)
Proceeds from exercise of stock options
 
756

 
26

Net cash used in financing activities
 
(86,722
)
 
(83,806
)
Net effect of exchange rate on cash and cash equivalents and restricted cash
 
(2,146
)
 
(483
)
Net increase (decrease) in cash and cash equivalents and restricted cash
 
22,388

 
(4,279
)
Cash and cash equivalents and restricted cash:
 

 

Beginning of period
 
69,118

 
90,576

End of period
 
$
91,506

 
$
86,297

Supplemental cash flow information:
 

 

Interest paid
 
$
110,139

 
$
110,886

Income taxes paid
 
$
3,725

 
$
1,715

See accompanying notes to consolidated financial statements.

8


Endurance International Group Holdings, Inc.
Notes to Consolidated Financial Statements
(unaudited)
1. Nature of Business
Formation and Nature of Business
Endurance International Group Holdings, Inc. (“Holdings”) is a Delaware corporation, which, together with its wholly owned subsidiary, EIG Investors Corp. (“EIG Investors”), its primary operating subsidiary, The Endurance International Group, Inc. (“EIG”), and other subsidiaries of EIG, collectively form the “Company.” The Company is a leading provider of cloud-based platform solutions designed to help small- and medium-sized businesses succeed online.
EIG and EIG Investors were incorporated in April 1997 and May 2007, respectively, and Holdings was originally formed as a limited liability company in October 2011 in connection with the acquisition of a controlling interest in EIG Investors, EIG and EIG's subsidiaries by investment funds and entities affiliated with Warburg Pincus and Goldman, Sachs & Co. ("Goldman") on December 22, 2011. On November 7, 2012, Holdings reorganized as a Delaware limited partnership and on June 25, 2013, Holdings converted into a Delaware C-corporation and changed its name to Endurance International Group Holdings, Inc.
2. Summary of Significant Accounting Policies
Basis of Preparation
The accompanying consolidated financial statements, which include the accounts of Holdings and its subsidiaries, have been prepared using accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany transactions were eliminated on consolidation.
Although the Company believes the disclosures included herein are adequate to ensure that the consolidated financial statements are fairly presented, certain information and footnote disclosures to the financial statements have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, the consolidated financial statements and the footnotes included herein should be read in conjunction with the audited financial statements and the footnotes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Segment Information
Operating segments are defined as components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker ("CODM"). The Company has determined that its chief executive officer is the Company's CODM.
The Company has identified three reportable segments: web presence, domains and email marketing. The Company has determined that it does not satisfy aggregation criteria for these operating segments, and that each segment meets the quantitative threshold of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 280, Segment Reporting. Therefore, all three operating segments are reportable segments.
The Company's segments share certain resources, primarily related to sales and marketing, engineering and development, and general and administrative functions. Management allocates these costs to each respective segment based on a consistently applied methodology, primarily based on a percentage of revenue.
Use of Estimates
U.S. GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates, judgments and assumptions used in preparing the accompanying consolidated financial statements are based on the relevant facts and circumstances as of the date of the consolidated financial statements. Although the Company regularly assesses these estimates, judgments and assumptions used in preparing the consolidated financial statements, actual results could differ from those estimates. Changes in estimates are recorded in the period in which they become known. The more significant estimates reflected in these consolidated financial statements include estimates of fair value of assets acquired and liabilities assumed under purchase accounting related to the Company’s acquisitions and when evaluating goodwill and long-lived assets for potential impairment, the estimated useful lives of intangible and depreciable assets, revenue recognition for multiple-element arrangements, stock-based compensation, contingent consideration, derivative instruments, certain accruals, reserves and deferred taxes.

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Unaudited Interim Financial Information
The accompanying interim consolidated balance sheet as of September 30, 2019, and the related consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2018 and 2019, the consolidated statements of cash flows for the nine months ended September 30, 2018 and 2019, the consolidated statements of changes in stockholders' equity for the three and nine months ended September 30, 2018 and 2019, and the notes to consolidated financial statements are unaudited. These unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements. The unaudited consolidated financial statements include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments that are necessary for a fair presentation of the Company’s financial position as of September 30, 2019, results of operations for the three and nine months ended September 30, 2018 and 2019, cash flows for the nine months ended September 30, 2018 and 2019, and changes in stockholders' equity for the three and nine months ended September 30, 2018 and 2019. The results in the consolidated statements of operations and comprehensive income (loss) are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2019.
Cash Equivalents
Cash and cash equivalents include all highly liquid investments with remaining maturities of three months or less at the date of purchase.
Restricted Cash
Restricted cash is composed of certificates of deposit and cash held by merchant banks and payment processors, which provide collateral against any chargebacks, fees, or other items that may be charged back to the Company by credit card companies and other merchants, and collateral for certain facility leases.
Accounts Receivable
Accounts receivable is primarily composed of cash due from credit card companies for unsettled transactions charged to customers’ credit cards. As these amounts reflect authenticated transactions that are fully collectible, the Company does not maintain an allowance for doubtful accounts. The Company also accrues for earned referral fees and commissions, which are governed by reseller or affiliate agreements, when the amount is reasonably estimable.
Prepaid Domain Name Registry Fees
Prepaid domain name registry fees represent amounts that are paid in full at the time a domain is registered by one of the Company’s registrars on behalf of a customer. The registry fees are recognized on a straight-line basis over the term of the domain registration period.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include cash equivalents, accounts receivable, accounts payable and certain accrued expenses, approximate their fair values due to their short maturities. The fair value of the Company's notes payable is based on the borrowing rates currently available to the Company for debt with similar terms and average maturities and approximates their carrying value.
Derivative Instruments and Hedging Activities
FASB ASC 815, Derivatives and Hedging, provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit risk-related contingent features in derivative instruments.
As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the

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hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
In accordance with the FASB’s fair value measurement guidance in FASB Accounting Standards Update ("ASU") No. 2011-4, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Property and Equipment
Property and equipment is recorded at cost, or at fair value if the property and equipment is acquired in an acquisition. The Company also capitalizes the direct costs of constructing additional computer equipment for internal use, as well as upgrades to existing computer equipment which extend the useful life, capacity or operating efficiency of the equipment. Capitalized costs include the cost of materials, shipping and taxes. Materials used for repairs and maintenance of computer equipment are expensed and recorded as a cost of revenue. Materials on hand and construction-in-process are recorded as property and equipment. Assets recorded under equipment financing are depreciated over the lease term. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets as follows: 
Building
 
Thirty-five years
Software
 
Two to three years
Computers and office equipment
 
Three years
Furniture and fixtures
 
Five years
Leasehold improvements
 
Shorter of useful life or remaining term of the lease

Software Development Costs
The Company accounts for software development costs for internal-use software under the provisions of FASB ASC 350-40, Internal-Use Software. Accordingly, certain costs to develop internal-use computer software are capitalized, provided these costs are expected to be recoverable. During the three and nine months ended September 30, 2018, the Company capitalized internal-use software development costs of $2.8 million and $7.1 million, respectively. During the three and nine months ended September 30, 2019, the Company capitalized internal-use software development costs of $3.8 million and $11.1 million, respectively.
Goodwill
Goodwill relates to amounts that arose in connection with the Company’s various business combinations and represents the difference between the purchase price and the fair value of the identifiable intangible and tangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized, but is subject to periodic review for impairment. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, including a decline in the equity value of the Company's business, a significant adverse change in agreements that would materially affect reported operating results, business climate or operational performance of the business and an adverse action or assessment by a regulator. Additionally, a reorganization or change in the number of reporting units could result in the reassignment of goodwill between reporting units and may trigger an impairment assessment.
In accordance with ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350), the Company is required to review goodwill by reporting unit for impairment at least annually or more often if there are indicators of impairment present. Under U.S. GAAP, a reporting unit is either the equivalent of, or one level below, an operating segment. The Company performs its annual goodwill test as of October 31 of each fiscal year. The Company has identified a total of ten reporting units, and goodwill has been allocated to six of these reporting units. The Company also early adopted the provisions of ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350), which eliminates the second step of the goodwill impairment test. As a result, the Company's goodwill impairment test includes only one step, which is a comparison of the carrying value of each reporting unit to its fair value, and any excess carrying value, up to the amount of goodwill allocated, is impaired. Goodwill has been allocated to each reporting unit in accordance with ASC 350-20-40, which requires that goodwill be allocated based on the relative fair values of each reporting unit.
The carrying value of each reporting unit is based on the assignment of the appropriate assets and liabilities to each reporting unit. Assets and liabilities are assigned to each reporting unit if the assets or liabilities are employed in the operations of the reporting unit and the asset and liability is considered in the determination of the reporting unit's fair value. Certain assets and liabilities are shared by multiple reporting units, and are allocated to each reporting unit based on its relative size, primarily based on revenue.

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The fair value of each reporting unit is determined by the income approach and the market approach. For the income approach, fair value is determined based on the present value of estimated future after-tax cash flows, discounted at an appropriate risk adjusted rate. The Company derives its discount rates using a capital asset pricing model and by analyzing published rates for industries relevant to the reporting units to estimate the weighted-average cost of capital. The Company uses discount rates that are commensurate with the risks and uncertainty inherent in the business and in internally developed forecasts. For fiscal year 2018, the Company used a discount rate of 10.0% for all but one of its reporting units. The Company also performed sensitivity analysis on its discount rates. The Company uses internal forecasts to estimate future after-tax cash flows, which include an estimate of long-term future growth rates based on the Company's view of the long-term outlook for each reporting unit. Actual results may differ from those assumed in the Company's forecasts.
For the market approach, the Company utilizes two different approaches: market multiples for publicly traded companies, and market multiples based on the acquisition value of comparable companies that were sold.
For the fiscal year 2018 goodwill impairment analysis, the Company compared the fair value from the income approach to the two market approaches. For three of the Company's reporting units, which represent approximately 95% of the Company's goodwill, the fair value derived from the income approach was consistent with the fair value derived from the two market approaches. The Company established the fair value for these reporting units based on the average fair value from all three valuation approaches. For two of the Company's reporting units, which represent approximately 3% of the Company's goodwill, the Company based their fair value entirely upon the income approach, as these two reporting units are experiencing declining cash flows and are expected to continue to experience declines over time. The fair values from the income approach for these two reporting units were materially below the fair values derived from both market approaches. The goodwill allocated to these two reporting units is approximately $64.2 million as of December 31, 2018. Although the Company does not expect an impairment of goodwill for these two reporting units in the near term, the Company expects that cash flows will continue to decline, which could result in goodwill impairment charges for these two reporting units at some point in the future. For one of the reporting units, which represents approximately 2% of the Company's goodwill, the fair values derived from the market approaches were much lower than the income approach using a discount rate of 10%. The Company determined that more risk was present in the projected future cash flows of this reporting unit as compared to the Company's other reporting units and determined that a discount rate of 17% was appropriate. The fair value of this reporting unit under the income approach at a discount rate of 17% was consistent with the fair values determined under the two market approaches. The Company established fair value for this reporting unit based on the average fair value from all three valuation approaches.
As of the test date of October 31, 2018, the fair value for all reporting units was higher than their respective carrying values, and no impairment has been recorded. No triggering events were identified between the October 31, 2018 test and December 31, 2018.
Goodwill as of December 31, 2018 was $1,849.1 million. The carrying value of goodwill that was allocated to the domain, email marketing and web presence reporting segments was approximately $29.9 million, $604.3 million and $1,214.9 million, respectively. The fair value of all reporting units with goodwill at December 31, 2018 exceeded each reporting unit's carrying value by at least 20%.
Goodwill as of September 30, 2019 was $1,854.8 million. The carrying value of goodwill that was allocated to the domain, email marketing and web presence reporting segments was approximately $29.9 million, $611.3 million and $1,213.7 million, respectively. For the three and nine months ended September 30, 2019, no impairment triggering events were identified and no impairment has been recorded.
Long-Lived Assets
The Company’s long-lived assets consist primarily of intangible assets, including acquired subscriber relationships, trade names, intellectual property, developed technology and domain names available for sale. The Company also has long-lived tangible assets, primarily consisting of property and equipment. The majority of the Company’s intangible assets are recorded in connection with its various acquisitions. The Company’s intangible assets are recorded at fair value at the time of their acquisition. The Company amortizes intangible assets over their estimated useful lives.
Determination of the estimated useful lives of the individual categories of intangible assets is based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with finite lives other than developed technology is recognized in accordance with their estimated projected cash flows.
The Company evaluates long-lived intangible and tangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indicators of impairment are present and undiscounted future cash flows are less than the carrying amount, the fair value of the assets is determined and compared to the carrying value. If the fair value is less than the carrying value, then the carrying value of the asset is reduced to the estimated fair value and an impairment loss is charged to expense in the period the impairment is identified.

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