Leases (Notes)

9 Months Ended

Sep. 30, 2019

On January 1, 2019, the Company adopted ASU No. 2016-02, “Leases (Topic 842),” which requires leases with durations greater than twelve months to be recognized on the balance sheet. We adopted the standard using the current period adjustment method with an effective date of January 1, 2019. Prior year financial statements were not restated under the new standard and, therefore, those amounts are not presented below. For both operating and finance leases, we recognize a right-of-use asset, which represents our right to use the underlying asset for the lease term, and a lease liability, which represents the present value of our obligation to make payments arising over the lease term. The present value of the lease payments is calculated using the incremental borrowing rate for operating and finance leases. The incremental borrowing rate is determined using a portfolio approach based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term.

Where the Company is the lessee, we have elected to account for non-lease components associated with our leases (e.g., common area maintenance costs) and lease components separately for substantially all of our asset classes. In arrangements where we are the lessor, we apply the lease and non-lease component practical expedient and we account for lease components (e.g., customer premise equipment) and non-lease components (e.g., service revenue) as combined components and account for the combined components under the revenue recognition guidance in Topic 606 as the service revenues are the predominant components in the arrangements.

We lease property and equipment under finance and operating leases. For leases with terms greater than 12 months, we record the related asset and obligation at the present value of lease payments over the term. Many of our leases include rental escalation clauses, renewal options and/or termination options that are factored into our determination of lease payments when appropriate.

When available, we use the rate implicit in the lease to discount lease payments to present value; however, most of our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement.

The table below presents the lease-related assets and liabilities recorded on the balance sheet.



		September 30,
(in thousands)	Classification on the Balance Sheet	2019
Assets
Operating lease assets	Operating lease - right of use asset	$	27,043
Finance lease assets	Property and equipment, net	1,591
Total lease assets		$	28,634

Liabilities
Current
Operating	Operating lease liabilities, current	$	6,937
Finance	Accrued liabilities	528
Noncurrent
Operating	Operating lease liabilities, noncurrent	30,696
Finance	Other noncurrent liabilities	85
Total lease liabilities		$	38,246

The Company leases certain computer equipment and its corporate office and data center facilities under non-cancelable operating leases for varying periods through 2028. In January 2018, the Company entered into a $3.5 million financing arrangement for data center storage equipment, accounted for as a finance lease, with an implied interest rate of 5%.

The following are the minimum annual lease payments due under these leases at September 30, 2019 (in thousands):



	Operating Leases			Finance Leases
	(in thousands)
2019 (remaining three months)	$	2,292		$	443
2020	8,037			130
2021	6,530			54
2022	4,657			—
2023	4,298			—
2024 and thereafter	19,299			—
Total minimum lease payments	45,113			627
Less: amount representing interest	(7,480		)	(14		)
Present value of minimum payments	37,633			613
Less: current portion	(6,937		)	(528		)
Lease obligations, noncurrent	$	30,696		$	85

Lease expense was $1.8 million and $1.4 million for the three months ended September 30, 2019 and 2018, respectively, and $5.3 million and $3.9 million for the nine months ended September 30, 2019 and 2018, respectively.

The weighted average remaining lease term and the weighted average discount rate of our leases were as follows:



	September 30, 2019
Weighted average remaining lease term (years)
Operating leases	7.1
Finance leases	0.8
Weighted average discount rates
Operating leases	4.6	%
Finance leases	5.0	%

Leases

The table below presents the lease-related assets and liabilities recorded on the balance sheet.



		September 30,
(in thousands)	Classification on the Balance Sheet	2019
Assets
Operating lease assets	Operating lease - right of use asset	$	27,043
Finance lease assets	Property and equipment, net	1,591
Total lease assets		$	28,634

Liabilities
Current
Operating	Operating lease liabilities, current	$	6,937
Finance	Accrued liabilities	528
Noncurrent
Operating	Operating lease liabilities, noncurrent	30,696
Finance	Other noncurrent liabilities	85
Total lease liabilities		$	38,246

The following are the minimum annual lease payments due under these leases at September 30, 2019 (in thousands):



	Operating Leases			Finance Leases
	(in thousands)
2019 (remaining three months)	$	2,292		$	443
2020	8,037			130
2021	6,530			54
2022	4,657			—
2023	4,298			—
2024 and thereafter	19,299			—
Total minimum lease payments	45,113			627
Less: amount representing interest	(7,480		)	(14		)
Present value of minimum payments	37,633			613
Less: current portion	(6,937		)	(528		)
Lease obligations, noncurrent	$	30,696		$	85

The weighted average remaining lease term and the weighted average discount rate of our leases were as follows:



	September 30, 2019
Weighted average remaining lease term (years)
Operating leases	7.1
Finance leases	0.8
Weighted average discount rates
Operating leases	4.6	%
Finance leases	5.0	%