CITRIX SYSTEMS, INC.
See accompanying notes.
See accompanying notes.
See accompanying notes.
See accompanying notes.
CITRIX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BACKGROUND AND BASIS OF PRESENTATION
Background
On January 31, 2017, Citrix Systems, Inc. ("Citrix" or the "Company") completed the spin-off of its GoTo family of service offerings (the “Spin-off”) and subsequent merger of that business with LogMeIn, Inc. (the “Merger”) pursuant to a pro rata distribution to its stockholders of 100% of the shares of common stock of GetGo, Inc., its wholly-owned subsidiary ("GetGo"). Pursuant to the transaction, the Company transferred its GoTo Business to GetGo, and after the close of business on January 31, 2017, the Company distributed approximately 26.9 million shares of GetGo common stock to the Company’s stockholders of record as of the close of business on January 20, 2017 (the “Record Date”). Immediately following the distribution, Lithium Merger Sub, Inc., a wholly-owned subsidiary of LogMeIn, merged with and into GetGo, with GetGo as the surviving corporation (the “Merger”). In connection with the Merger, GetGo became a wholly-owned subsidiary of LogMeIn, and each share of GetGo common stock was converted into the right to receive one share of LogMeIn common stock. As a result of these transactions, the Company’s stockholders received approximately 26.9 million shares of LogMeIn common stock in the aggregate, or 0.171844291 of a share of LogMeIn common stock for each share of the Company’s common stock held of record by such stockholders on the Record Date. No fractional shares of LogMeIn were issued, and the Company’s stockholders instead received cash in lieu of any fractional shares.
The Company's revenues are derived from sales of its Workspace Services products, Networking products (formerly Delivery Networking), Data offerings (formerly Cloud) and related License updates and maintenance and Professional services. Prior to the Spin-off, the Company also derived its revenues from sales of the GoTo Business, which were delivered as cloud-based Software as a service ("SaaS"), and included Communications Cloud and Workflow Cloud service offerings. Subsequent to the Spin-off, the Company determined that it has one reportable segment. The Company identified its segment using the “management approach” which designates the internal organization that is used by management for making operating decisions and assessing performance. See Note 10 for more information on the Company's segment.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements of the CompanyCitrix Systems, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. All adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown, are of a normal recurring nature and have been reflected in the condensed consolidated financial statements and accompanying notes. The results of operations for the periods presented are not necessarily indicative of the results expected for the full year or for any future period partially because of the seasonality of the Company’s business. Historically, the Company’s revenue for the fourth quarter of any year is typically higher than the revenue for the first quarter of the subsequent year. The information included in these condensed consolidated financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report and the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162018.
The condensed consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries in the Americas,Americas; Europe, the Middle East and Africa (“EMEA”),; and Asia-Pacific and Japan ("APJ"(“APJ”). All significant transactions and balances between the Company and its subsidiaries have been eliminated in consolidation.
The Company's revenues are derived from sales of its Digital Workspace solutions, Networking products and related Support and services. The Company operates under one reportable segment. See Note 10 for more information on the Company's segment.
2. SIGNIFICANT ACCOUNTING POLICIES
During the first quarter of 2019, the Company adopted new accounting guidance related to leases, which is described below. There have been no other significant changes in the Company’s accounting policies during the three and six months ended June 30, 2019 as compared to the significant accounting policies described in its Annual Report on Form 10-K for the year ended December 31, 2018.
Recent Accounting Pronouncements
Leases
In theseFebruary 2016, the Financial Accounting Standards Board issued an accounting standard update on the accounting for leases (“ASC 842”). The new guidance requires that lessees in a leasing arrangement recognize a right-of-use (“ROU”) asset and a lease liability for most leases (other than leases that meet the definition of a short-term lease). The Company adopted this standard as of January 1, 2019 using a modified retrospective approach and recognized a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification and not reassess whether any expired or existing contract is a lease or contains a lease.
Adoption of this standard had a material impact in the Company’s condensed consolidated financial statements, unless otherwise indicated, references to Citrixbalance sheets, but did not have a material impact on its condensed consolidated income statements. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while its accounting for finance leases remained substantially unchanged. Adoption of the Company, refer to Citrix Systems, Inc. and its consolidated subsidiaries after giving effectnew standard resulted in the recording of additional right-of-use assets for operating leases (net of previously recorded lease losses related to the Spin-off.
As a resultconsolidation of leased facilities of $42.2 million and deferred rent liability of $20.5 million under the old guidance) of approximately $194.5 million and operating lease liabilities of approximately $256.4 million, as of January 1, 2019. The difference between the additional lease assets and lease liabilities, net of the Spin-off,deferred tax impact, was recorded as an adjustment to retained earnings of $0.8 million. Adoption of this standard had no impact to cash from or used in operating, financing, or investing in the Company’s condensed consolidated financial statements reflect the GoTo Business operations, assets and liabilities, and cash flows as discontinued operations for all periods presented. Refer tostatements. Adoption of this standard had no impact on the Company's debt covenant compliance under its current agreement or on liquidity. See Note 319 for additional information regarding the Spin-off.Company’s leases.
2. SIGNIFICANT ACCOUNTING POLICIES
Premium Amortization on Call Debt Securities
In March 2017, the Financial Accounting Standards Board issued an accounting standard update on the accounting for amortization of premium costs on purchased callable debt securities. The new guidance amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The standard does not require any accounting change for debt securities held at a discount; the discount continues to be amortized to maturity. The Company adopted the standard effective January 1, 2019 on a modified retrospective basis. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial position, results of operations and cash flows.
Accounting for Cloud Computing Costs
In August 2018, the Financial Accounting Standards Board issued an accounting standard update on the accounting for implementation costs incurred by customers in cloud computing arrangements that are service contracts. The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company early adopted this standard on a prospective basis effective January 1, 2019. Adoption of this standard did not have a material impact on the Company's condensed consolidated financial position, results of operations and cash flows.
Fair Value Measurements
In August 2018, the Financial Accounting Standards Board issued an accounting standard update on fair value measurements. The new guidance modifies the disclosure requirements on fair value measurements by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty, and adding new disclosure requirements. The new guidance is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's condensed consolidated financial position, results of operations and cash flows.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant estimates made by management include the standalone selling price related to revenue recognition, the provision for doubtful accounts receivable, the provision to reduce obsolete or excess inventory to market, the provision for estimated returns, as well as sales allowances, the assumptions used in the valuation of stock-based awards, the assumptions used in the discounted cash flows to mark certain of its investments to market, the valuation of the Company’s goodwill, net realizable value of product related and other intangible assets, the fair value of convertible senior notes, the provision for lease losses, the provision for income taxes, valuation allowance for deferred tax assets, uncertain tax positions, and the amortization and depreciation periods for contract acquisition costs, intangible and long-lived assets. While the Company believes that such estimates are fair when considered in conjunction with the condensed consolidated financial position and results of operations taken as a whole, the actual amounts of such items, when known, will vary from these estimates.
Available-for-sale Investments
Short-term and long-term available-for-sale investments as of SeptemberJune 30, 20172019 and December 31, 20162018 primarily consist of agency securities, corporate securities, municipal securities and government securities. Investments classified as available-for-sale are stated at fair value with unrealized gains and losses, net of taxes, reported in Accumulated other comprehensive loss. The Company classifies its available-for-sale investments as current and non-current based on their actual remaining time to maturity. The Company does not recognize changes in the fair value of its available-for-sale investments in income unless a decline in value is considered other-than-temporary in accordance with the authoritative guidance.
The Company’s investment policy is designed to limit exposure to any one issuer depending on credit quality. The Company uses information provided by third parties to adjust the carrying value of certain of its investments to fair value at the end of each period. Fair values are based on a variety of inputs and may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. See Note 6 for additional information regarding the Company’s investments.
Net revenues include the following categories: Product and licenses, Software as a Service (SaaS), License updates and maintenance and Professional services. Product and licenses revenues primarily represent fees related to the licensing of the Company’s software and hardware appliances. These revenues are reflected net of sales allowances, cooperative advertising agreements, partner incentive programs and provisions for returns. SaaS revenues consist primarily of fees related to online service agreements, which are recognized ratably over the contract term. Should the Company charge set-up fees, they would be recognized ratably over the contract term or the expected customer life, whichever is longer. License updates and maintenance revenues consist of fees related to maintenance and support fees, which include technical support and hardware and software maintenance. Maintenance and support fees are recognized ratably over the term of the contract, which is typically 12 to 24 months. The Company capitalizes certain third-party commissions related to maintenance and support renewals. The capitalized commissions are amortized to Sales, marketing and services expense at the time the related deferred revenue is recognized as revenue. Hardware and software maintenance and support contracts are typically sold separately. Hardware maintenance includes technical support, the latest software upgrades when and if they become available, and replacement of malfunctioning appliances. Dedicated account management is available as an add-on to the program for a higher level of service. Software maintenance, including the new Customer Success Services, includes unlimited technical support, immediate access to software upgrades, enhancements and maintenance releases when and if they become available during the term of the contract and configuration and installation support along with acceleration and automation tools. Professional services revenues are comprised of fees from consulting services related to the implementation of the Company’s products and fees from product training and certification, which are recognized as the services are provided.
The Company recognizes revenue when it is earned and when all of the following criteria are met: (1) persuasive evidence of the arrangement exists; (2) delivery has occurred or the service has been provided and the Company has no remaining obligations; (3) the fee is fixed or determinable; and (4) collectability is probable.
The majority of the Company’s product and license revenue consists of revenue from the sale of software products. Software sales generally include a perpetual license to the Company’s software and is subject to the industry specific software revenue recognition guidance. In accordance with this guidance, the Company allocates revenue to license updates related to its stand-alone software and any other undelivered elements of the arrangement based on vendor specific objective evidence (“VSOE”) of fair value of each element and such amounts are deferred until the applicable delivery criteria and other revenue recognition criteria described above have been met. The balance of the revenues, net of any discounts inherent in the
arrangement, is recognized at the outset of the arrangement using the residual method as the product licenses are delivered. If management cannot objectively determine the fair value of each undelivered element based on VSOE of fair value, revenue recognition is deferred until all elements are delivered, all services have been performed, or until fair value can be objectively determined.
For hardware appliance and software transactions, the arrangement consideration is allocated to stand-alone software deliverables as a group and the non-software deliverables based on the relative selling prices using the selling price hierarchy in the revenue recognition guidance. The selling price hierarchy for a deliverable is based on its VSOE if available, third-party evidence of selling price ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available. The Company then recognizes revenue on each deliverable in accordance with its policies for product and service revenue recognition. VSOE of selling price is based on the price charged when the element is sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices fall within a reasonable range based on historical discounting trends for specific products and services. TPE of selling price is established by evaluating competitor products or services in stand-alone sales to similarly situated customers. However, as the Company’s products contain a significant element of proprietary technology and its solutions offer substantially different features and functionality, the comparable pricing of products with similar functionality typically cannot be obtained. Additionally, as the Company is unable to reliably determine what competitors products’ selling prices are on a stand-alone basis, the Company is not typically able to determine TPE. The estimate of selling price is established considering multiple factors including, but not limited to, pricing practices in different geographies and through different sales channels and competitor pricing strategies.
The Citrix Service Provider ("CSP") program provides subscription-based services in which the CSP partners host software services to their end users. The fees from the CSP program are recognized based on usage and as the CSP services are provided to their end users.
For the Company’s non-software transactions, it allocates the arrangement consideration based on the relative selling price of the deliverables. For the Company’s hardware appliances, it uses ESP as its selling price. For the Company’s support and services, it generally uses VSOE as its selling price. When the Company is unable to establish selling price using VSOE for its support and services, the Company uses ESP in its allocation of arrangement consideration.
The majority of the Company's SaaS offerings are considered hosted service arrangements per the authoritative guidance.
In the normal course of business, the Company is not obligated to accept product returns from its resellers or end customers under any conditions, unless the product item is defective in manufacture. The Company establishes provisions for estimated returns, as well as other sales allowances, concurrently with the recognition of revenue. The provisions are established based upon consideration of a variety of factors, including, among other things, recent and historical return rates for both specific products and distributors and the impact of any new product releases and projected economic conditions. Product returns are provided for in the condensed consolidated financial statements and have historically been within management’s expectations. Allowances for estimated product returns amounted to $0.8 million and $2.0 million at September 30, 2017 and December 31, 2016, respectively. The Company also records estimated reductions to revenue for customer programs and incentive offerings, including volume-based incentives. The Company could take actions to increase its customer incentive offerings, which could result in an incremental reduction to revenue at the time the incentive is offered.
Foreign Currency
The functional currency for all of the Company’s wholly-owned foreign subsidiaries is the U.S. dollar. Monetary assets and liabilities of such subsidiaries are remeasured into U.S. dollars at exchange rates in effect at the balance sheet date, and revenues and expenses are remeasured at average rates prevailing during the year.Foreign currency transaction gains and losses are the result of exchange rate changes on transactions denominated in currencies other than the functional currency, including U.S. dollars. The remeasurement of those foreign currency transactions is included in determining net income or loss for the period of exchange. Prior to January 1, 2015, the functional currency of the Company’s wholly-owned foreign subsidiaries of its former GoTo Business was the currency of the country in which each subsidiary is located. The Company translated assets and liabilities of these foreign subsidiaries at exchange rates in effect at the balance sheet date and included accumulated net translation adjustments in equity as a component of Accumulated other comprehensive loss. As a result of the change in functional currency, the gains and losses that were previously recorded in Accumulated other comprehensive loss prior to January 1, 2015 were kept constant. As a result of the Spin-off, accumulated net translation adjustments associated with the GoTo Business recorded in Accumulated other comprehensive loss of $13.4 million were reclassified to Retained earnings during the period ended September 30, 2017. See Note 3 for additional information regarding discontinued operations.
Accounting for Stock-Based Compensation Plans
The Company has various stock-based compensation plans for its employees and outside directors and accounts for stock-based compensation arrangements in accordance with the authoritative guidance, which requires the Company to measure and record compensation expense in its condensed consolidated financial statements using a fair value method. See Note 8 for further information regarding the Company’s stock-based compensation plans.
Reclassifications3. REVENUE
Certain reclassificationsThe following is a description of the prior years' amounts have beenprincipal activities from which the Company generates revenue.
Subscription
Subscription revenues primarily consist of cloud-hosted offerings which provide customers a right to use, or a right to access, one or more of the Company’s cloud-hosted subscription offerings, with routine customer support, as well as revenues from the Citrix Service Provider ("CSP") program and on-premise subscription software licenses. For the Company’s cloud-hosted performance obligations, revenue is generally recognized on a ratable basis over the contract term beginning on the date that the Company's service is made to conformavailable to the current year's presentation.
3. DISCONTINUED OPERATIONS
On January 31, 2017,customer, as the Company completedcontinuously provides online access to the Spin-offweb-based software that the customer can use at any time. The CSP program provides subscription-based services in which the CSP partners host software services to their end users.
Product and license
Product and license revenues are primarily derived from perpetual offerings related to the Company’s Digital Workspace solutions and Networking products. For performance obligations related to perpetual software license agreements, the Company determined that its licenses are functional intellectual property that are distinct as the user can benefit from the software on its own.
Support and services
Support and services includes license updates, maintenance and professional services revenues. License updates and maintenance revenues are primarily comprised of software and hardware maintenance, when and if-available updates and technical support. For performance obligations related to license updates and maintenance, revenue is generally recognized on a straight-line basis over the period of service because the Company transfers control evenly by providing a stand-ready service. That is, the Company is continuously working on improving its products and pushing those updates through to the customer, and stands ready to provide software updates on a when and if-available basis. Services revenues are comprised of fees from consulting services primarily related to the implementation of the GoTo Business. ReferCompany’s products and fees from product training and certification.
The Company’s typical performance obligations include the following:
|
| |
| Performance Obligation | When Performance Obligation is Typically Satisfied |
| Subscription | |
| Cloud hosted offerings | Over the contract term, beginning on the date that service is made available to the customer (over time) |
| CSP | As the usage occurs (over time) |
| On-premise subscription software licenses | When software activation keys have been made available for download (point in time) |
| Product and license | |
| Software Licenses | When software activation keys have been made available for download (point in time) |
| Hardware | When control of the product passes to the customer; typically upon shipment (point in time) |
| Support and services | |
| License updates and maintenance | Ratably over the course of the service term (over time) |
| Professional services | As the services are provided (over time) |
Significant Judgments
At contract inception, the Company assesses the solutions or services, or bundles of solutions and services, obligated in the contract with a customer to Note 1 for additional information regardingidentify each performance obligation within the Spin-off. The financial resultscontract, and then evaluates whether the performance obligations are capable of being distinct and distinct within the context of the GoTo Businesscontract. Solutions and services that are presentednot both capable of being distinct and distinct within the context of the contract are combined and treated as Income (loss)a single performance obligation in determining the allocation and recognition of revenue.
The standalone selling price is the price at which the Company would sell a promised product or service separately to the customer. For the majority of the Company's software licenses and hardware, CSP and on-premise subscription software licenses, the Company uses the observable price in transactions with multiple performance obligations. For the majority of the Company’s support and services, and cloud-hosted subscription offerings, the Company uses the observable price when the Company sells that support and service and cloud-hosted subscription separately to similar customers. If the standalone selling price for a performance obligation is not directly observable, the Company estimates it. The Company estimates standalone selling price by taking into consideration market conditions, economics of the offering and customers’ behavior. The Company maximizes the use of observable inputs and applies estimation methods consistently in similar circumstances. The Company allocates the transaction price to each distinct performance obligation on a relative standalone selling price basis.
Revenues are recognized when control of the promised products or services are transferred to customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those products or services. The Company generates all of its revenues from discontinued operations,contracts with customers.
Sales tax
The Company records revenue net of income taxessales tax.
Timing of revenue recognition
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2019 | | 2018(1) | | 2019 | | 2018(1) |
| | | (In thousands) |
| Products and services transferred at a point in time | | $ | 178,160 |
| | $ | 215,523 |
| | $ | 341,124 |
| | $ | 397,849 |
|
| Products and services transferred over time | | 570,537 |
| | 526,842 |
| | 1,126,716 |
| | 1,041,708 |
|
| Total net revenues | | $ | 748,697 |
| | $ | 742,365 |
| | $ | 1,467,840 |
| | $ | 1,439,557 |
|
| |
| (1) | Includes a net reclassification from Products and services transferred at a point in time to Products and services transferred over time of $10.0 million for the six months ended June 30, 2018. For the three months ended March 31, 2018, the Company reclassified $11.6 million from Product and services transferred over time to Product and services transferred at a point in time. For the three months ended June 30, 2018, the Company reclassified $21.6 million from Product and services transferred at a point in time to Product and services transferred over time. The change in presentation does not affect the Company's condensed consolidated financial position, results from operations or cash flows. |
Contract balances
The Company's short-term and long-term contract assets were $4.6 million and $3.7 million, respectively as of December 31, 2018, and $8.1 million and $14.3 million, respectively as of June 30, 2019. The Current portion of deferred revenues and the Long-term portion of deferred revenues were $1.35 billion and $489.3 million, respectively, as of December 31, 2018 and $1.29 billion and $455.8 million, respectively, as of June 30, 2019. The difference in the condensed consolidated statementsopening and closing balances of income. the Company’s contract assets and liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment. During the three and six months ended June 30, 2019, the Company recognized $467.6 million and $835.9 million, respectively, of revenue that was included in the deferred revenue balance as of March 31, 2019 and December 31, 2018, respectively.
The Company performs its obligations under a contract with a customer by transferring solutions and services in exchange for consideration from the customer. Accounts receivable are recorded when the right to consideration becomes unconditional. The timing of the Company’s performance often differs from the timing of the customer’s payment, which results in the recognition of a contract asset or a contract liability. The Company recognizes a contract asset when the Company transfers products or services to a customer and the right to consideration is conditional on something other than the passage of time. The Company recognizes a contract liability when it has received consideration or an amount of consideration is due from the customer and the Company has a future obligation to transfer products or services. The Company had no asset impairment charges related to contract assets for the three and six months ended June 30, 2019 and 2018.
For the Company’s software and hardware products, the timing of payment is typically upfront for its perpetual offerings and the Company’s on-premise subscriptions. Therefore, deferred revenue is created when a contract includes performance obligations such as license updates and maintenance or certain professional services that are satisfied over time. For subscription contracts, the timing of payment is typically in advance of services, and deferred revenue is created as these services are provided over time.
A significant portion of the Company’s contracts have an original duration of one year or less; therefore, the Company applies a practical expedient to determine whether a significant financing component exists and does not consider the effects of the time value of money. For multi-year contracts, the Company bills annually.
Transaction price allocated to the remaining performance obligations
The following table presentsincludes estimated revenue expected to be recognized in the financial resultsfuture related to performance obligations that are unsatisfied or partially unsatisfied at the end of the GoTo Business through the date of the Spin-off for the indicated periods and do not include corporate overhead allocations:
Major classes of line items constituting Income (loss) from discontinued operations related to the GoTo Businessreporting period (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | <1-3 years | | 3-5 years | | 5 years or more | | Total |
| Subscription | | $ | 577,291 |
| | $ | 65,164 |
| | $ | 2,128 |
| | $ | 644,583 |
|
| Support and services | | 1,534,685 |
| | 47,078 |
| | 2,581 |
| | 1,584,344 |
|
| Total net revenues | | $ | 2,111,976 |
| | $ | 112,242 |
| | $ | 4,709 |
| | $ | 2,228,927 |
|
|
| | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2016 | | 2017 | | 2016 |
| | (in thousands) |
| Net revenues | $ | 172,515 |
| | $ | 58,215 |
| | $ | 508,413 |
|
| Cost of net revenues | 39,804 |
| | 15,456 |
| | 116,216 |
|
| Gross margin | 132,711 |
| | 42,759 |
| | 392,197 |
|
| Operating expenses: | | | | | |
| Research and development | 25,146 |
| | 9,108 |
| | 70,983 |
|
| Sales, marketing and services | 47,353 |
| | 20,881 |
| | 158,702 |
|
| General and administrative | 14,986 |
| | 7,636 |
| | 46,572 |
|
| Amortization of other intangible assets | 3,480 |
| | 1,176 |
| | 10,618 |
|
| Restructuring | (115 | ) | | 3,189 |
| | 830 |
|
| Separation | 16,663 |
| | 40,573 |
| | 44,444 |
|
| Total operating expenses | 107,513 |
| | 82,563 |
| | 332,149 |
|
Income (loss) from discontinued operations before income taxes
| 25,198 |
| | (39,804 | ) | | 60,048 |
|
| Income tax expense | 5,034 |
| | 2,900 |
| | 15,066 |
|
| Income (loss) from discontinued operations, net of income tax | $ | 20,164 |
| | $ | (42,704 | ) | | $ | 44,982 |
|
Contract acquisition costs
The Company incurred significantis required to capitalize certain contract acquisition costs in connectionconsisting primarily of commissions paid and related payroll taxes when contracts are signed. The asset recognized from capitalized incremental and recoverable acquisition costs is amortized on a basis consistent with the separationpattern of its GoTo Business. These costs relate primarilytransfer of the products or services to third-party advisory and consulting services, retention payments to certain employees, incremental stock-based compensation and other costs directlywhich the asset relates.
The Company’s typical contracts include performance obligations related to product and licenses and support. In these contracts, incremental costs of obtaining a contract are allocated to the separationperformance obligations based on the relative estimated standalone selling prices and then recognized on a basis that is consistent with the transfer of the GoTo Business. Duringgoods or services to which the asset relates. The commissions paid on annual renewals of support for product and licenses are not commensurate with the initial commission. The costs allocated to product and licenses are expensed at the time of sale, when revenue for the product and functional software licenses is recognized. The costs allocated to customer support for product and licenses are amortized ratably over a period of the greater of the contract term or the average customer life, the expected period of benefit of the asset capitalized. The Company currently estimates an average customer life of three years to five years, which it believes is appropriate based on consideration of the historical average customer life and the estimated useful life of the underlying product and license sold as part of the transaction. Amortization of contract acquisition costs related to support are limited to the contractual period of the arrangement as the Company intends to pay a commensurate commission upon renewal of the related support. For contracts that contain multi-year services or subscriptions, the amortization period of the capitalized costs is the expected period of benefit, which is the greater of the contractual term or the expected customer life.
The Company elects to apply a practical expedient to expense contract acquisition costs as incurred where the expected period of benefit is one year or less.
For the three and six months ended SeptemberJune 30, 2016,2019, the Company incurred $0.9recorded amortization of capitalized contract acquisition costs of $10.9 million and $21.6 million, respectively, and for the three and six months ended June 30, 2018, the Company recorded amortization of separationcapitalized contract acquisition costs of $8.3 million and $16.2 million, respectively, which are includedis recorded in GeneralSales, marketing and administrativeservices expense from continuing operations in the accompanying condensed consolidated statementsstatement of income. No separationThe Company's short-term and long-term contract acquisition costs were incurred$43.7 million and $66.5 million, respectively, as of June 30, 2019. There was no impairment loss in continuing operationsrelation to costs capitalized during the three and six months ended SeptemberJune 30, 2017. During the nine months ended September 30, 20172019 and 2016, the Company incurred $0.5 million and $1.7 million of separation costs, respectively, which are included in General and administrative expense from continuing operations in the accompanying condensed consolidated statements of income.
The assets and liabilities of the GoTo Business were re-classified as discontinued operations as of December 31, 2016.
Carrying amounts of major classes of assets and liabilities included as part of discontinued operations related to the GoTo Business
|
| | | |
| | December 31, 2016 |
| | (in thousands) |
| Assets | |
| Current assets: | |
| Cash | $ | 120,861 |
|
| Accounts receivable, net | 44,734 |
|
| Prepaid expenses and other current assets | 14,094 |
|
| Total current assets of discontinued operations | 179,689 |
|
| Property and equipment, net | 81,866 |
|
| Goodwill | 380,917 |
|
| Other intangible assets, net | 54,312 |
|
| Deferred tax assets, net | 18,496 |
|
| Other assets | 3,340 |
|
| Long-term assets of discontinued operations | $ | 538,931 |
|
Total major classes of assets of discontinued operations
| $ | 718,620 |
|
| | |
| Liabilities | |
| Current liabilities: | |
| Accounts payable | $ | 11,333 |
|
| Accrued expenses and other current liabilities | 46,088 |
|
| Current portion of deferred revenues | 115,249 |
|
| Total current liabilities of discontinued operations | 172,670 |
|
| Long-term portion of deferred revenues | 4,224 |
|
| Other liabilities | 3,484 |
|
| Long-term liabilities of discontinued operations | $ | 7,708 |
|
Total major classes of liabilities of discontinued operations
| $ | 180,378 |
|
As a result of the Spin-off, the Company recorded a $478.2 million reduction in retained earnings which included net assets of $464.8 million. Of this amount, $28.5 million represents cash transferred to the GoTo Business, with the remainder considered a non-cash activity in the condensed consolidated statements of cash flows. The Spin-off also resulted in a reduction of Accumulated other comprehensive loss associated with foreign currency translation adjustments of $13.4 million, which was reclassified to Retained earnings.
Citrix and GetGo entered into several agreements in connection with the Spin-off, including a transition services agreement ("TSA"), separation and distribution agreement, tax matters agreement, intellectual property matters agreement, and an employee matters agreement. Pursuant to the TSA, Citrix, GetGo and their respective subsidiaries are providing various services to each other on an interim, transitional basis. Services being provided by Citrix include, among others, finance, information technology and certain other administrative services. The services generally commenced on February 1, 2017 and are generally expected to terminate within 12 months of that date. Billings by Citrix under the TSA were not material for the three or nine months ended September 30, 2017.2018.
4. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted-average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise or settlement of stock awards and shares issuable under the employee stock purchase plan (calculated using the treasury stock method) during the period they were outstanding.outstanding and potential dilutive common shares from the conversion spread on the Company’s 0.500% Convertible Notes due 2019 (the “Convertible Notes”) and the Company's warrants.
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share information):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Numerator: | | | | | | | |
| Net income | $ | 93,495 |
| | $ | 106,833 |
| | $ | 203,843 |
| | $ | 251,092 |
|
| Denominator: | | | | | | | |
| Denominator for basic earnings per share - weighted-average shares outstanding | 131,309 |
| | 135,993 |
| | 131,396 |
| | 137,614 |
|
| Effect of dilutive employee stock awards | 1,453 |
| | 1,940 |
| | 2,145 |
| | 2,360 |
|
| Effect of dilutive Convertible Notes | 782 |
| | 6,023 |
| | 2,867 |
| | 5,258 |
|
| Effect of dilutive warrants | 733 |
|
| 1,491 |
| | 1,227 |
| | 477 |
|
| Denominator for diluted earnings per share - weighted-average shares outstanding | 134,277 |
| | 145,447 |
| | 137,635 |
| | 145,709 |
|
| | | | | | | | |
| Basic earnings per share | $ | 0.71 |
| | $ | 0.79 |
| | $ | 1.55 |
| | $ | 1.82 |
|
| | | | | | | | |
| Diluted earnings per share | $ | 0.70 |
| | $ | 0.73 |
| | $ | 1.48 |
| | $ | 1.72 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Numerator: | | | | | | | |
| Income from continuing operations | $ | 126,720 |
| | $ | 111,737 |
| | $ | 305,874 |
| | $ | 291,280 |
|
Income (loss) from discontinued operations, net of income taxes
| — |
| | 20,164 |
| | (42,704 | ) | | 44,982 |
|
| Net income | $ | 126,720 |
| | $ | 131,901 |
| | $ | 263,170 |
| | $ | 336,262 |
|
| Denominator: | | | | | | | |
| Denominator for basic net earnings per share - weighted-average shares outstanding | 151,156 |
| | 155,525 |
| | 151,896 |
| | 154,847 |
|
| Effect of dilutive employee stock awards | 1,987 |
| | 2,007 |
| | 2,538 |
| | 1,850 |
|
| Effect of dilutive Convertible Notes | 1,484 |
| | — |
| | 1,950 |
| | — |
|
| Denominator for diluted net earnings per share - weighted-average shares outstanding | 154,627 |
| | 157,532 |
| | 156,384 |
| | 156,697 |
|
| | | | | | | | |
| Basic earnings (loss) per share: | | | | | | | |
| Income from continuing operations | $ | 0.84 |
| | $ | 0.72 |
| | $ | 2.01 |
| | $ | 1.88 |
|
| Income (loss) from discontinued operations | — |
| | 0.13 |
| | (0.28 | ) | | 0.29 |
|
| Basic net earnings per share | $ | 0.84 |
| | $ | 0.85 |
| | $ | 1.73 |
| | $ | 2.17 |
|
| Diluted earnings (loss) per share: | | | | | | | |
| Income from continuing operations | $ | 0.82 |
| | $ | 0.71 |
| | $ | 1.96 |
| | $ | 1.86 |
|
| Income (loss) from discontinued operations | — |
| | 0.13 |
| | (0.28 | ) | | 0.29 |
|
| Diluted net earnings per share: | $ | 0.82 |
| | $ | 0.84 |
| | $ | 1.68 |
| | $ | 2.15 |
|
| Anti-dilutive weighted-average shares from stock awards | 393 |
| | 60 |
| | 225 |
| | 460 |
|
TheFor the three and six months ended June 30, 2019, the weighted-average number of shares outstanding used in the computation of basic and diluted earnings per share does not include common stock issuable uponincludes the exercisedilutive effect of the Company's warrants. The effectswarrants, as the average stock price during the quarters was above the weighted-average warrant strike price of these potentially issuable$94.53 per share and $94.69 per share, respectively. For the three and six months ended June 30, 2018, the weighted-average number of shares were not includedoutstanding used in the calculationcomputation of diluted earnings per share becauseincludes the dilutive effect would have been anti-dilutive.of the Company's warrants, as the average stock price during the quarters was above the weighted-average warrant strike price of $95.25 per share. Anti-dilutive stock-based awards excluded from the calculations of diluted earnings per share were immaterial during the periods presented.
The Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on its Convertible Notes on diluted earnings per share if applicable, because upon conversion the Company will paypaid cash up to the aggregate principal amount of the Convertible Notes to be converted and pay or deliver, as the case may be, cash,delivered shares of common stock or a combination of cash and shares of common stock, at the Company’s election, in respect of the remainder if any, of the Company’s conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted. The conversion spread will havehad a dilutive impact on diluted earnings per share when the average market price of the Company’s common stock for a given period exceedsexceeded the conversion price. Prior to the separation of the GoTo Business on January 31, 2017, the conversion price was $90.00 per share. As a result of the Spin-off, the conversion rate for the Convertible Notes was re-set as of the opening of business on February 1, 2017 to 13.9061 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which corresponds to a conversion price of $71.91 per share of common stock. Similar adjustments were made to the conversion rates for the Convertible Note Hedge and Warrant Transactions as of the opening of business on February 1, 2017. For the three and ninesix months ended SeptemberJune 30, 2017,2019 and 2018, the average market price of the Company's common stock exceeded the new conversion price; therefore, the dilutive effect of the Convertible Notes was included in the denominator of diluted earnings per share. For the three and nine months ended September 30, 2016, the Convertible Notes have been excluded from the computation of diluted earnings per share as the effect would be anti-dilutive since the prior conversion price of the Convertible Notes exceeded the average market price of the Company’s common stock. In addition, the Company uses the treasury stock method for calculating any potential dilutive effect related to the warrants. See Note 11 for detailed information on the Convertible Notes offering.
5. ACQUISITIONS AND DIVESTITURES
20172018 Business CombinationCombinations
Sapho, Inc.
On January 3, 2017,November 13, 2018, the Company acquired all of the issued and outstanding securities of Unidesk CorporationSapho, Inc. (“Unidesk” orSapho”), whose technology is intended to advance the “2017 Business Combination"). CitrixCompany’s development of the intelligent workspace. The acquired Unidesk to enhance its application managementtechnology enables efficient workstyles by creating a unified and delivery offerings.customizable notification experience for business applications. The total cash consideration for this transaction was $60.4$182.7 million, net of $2.7$3.7 million of cash acquired. Transaction costs associated with the acquisition were $0.4 million. No transaction costs were incurred during the three months ended September 30, 2017. The Company expensed $0.1 million of transaction costs during the nine months ended September 30, 2017, which were included in General and administrative expense in the accompanying condensed consolidated statements of income.
Purchase Accounting for the 2017 Business Combination
The purchase price for Unidesk was allocated to the acquired net tangible and intangible assets based on estimated fair values as of the date of the acquisition. The allocation of the total purchase price is summarized below (in thousands):
|
| | | | | |
| | Unidesk |
| | Purchase Price Allocation | | Asset Life |
| Current assets | $ | 5,321 |
| | |
| Property and equipment | 131 |
| | |
| Intangible assets | 39,470 |
| | 4 years |
| Goodwill | 31,231 |
| | Indefinite |
| Other assets | 90 |
| | |
| Assets acquired | 76,243 |
| | |
| Other current liabilities assumed | 2,290 |
| | |
| Current portion of deferred revenues | 3,042 |
| | |
| Long term portion of deferred revenues | 2,412 |
| | |
| Long-term liabilities assumed | 4,086 |
| | |
| Deferred taxes | 1,266 |
| | |
| Net assets acquired | $ | 63,147 |
| | |
Current assets acquired in connection with the Unidesk acquisition consisted primarily of cash, accounts receivable and other short term assets. Current liabilities assumed in connection with the acquisition consisted primarily of accounts payable and other accrued expenses. Long-term liabilities assumed in connection with the acquisition consisted primarily of long-term debt, which was paid in full subsequent to the acquisition date.not significant. The Company continues to evaluate certain income tax assets and liabilities related to the Unidesk acquisition.
The goodwill relatedSapho acquisition that may be subject to change through the Unidesk acquisition is not deductible for tax purposes and is comprised primarily of expected synergies from combining operations and other intangible assets that do not qualify for separate recognition.
The Company has included the effectremainder of the Unidesk acquisition in its results of operations prospectivelymeasurement period, which will extend not more than twelve months from the date of acquisition. The effect of the acquisition was not material to the Company's consolidated results for the periods presented; accordingly, pro forma financial disclosures have not been presented.date.
Identifiable intangible assets acquired in connection with the Unidesk acquisition (in thousands) and the weighted-average lives are as follows:
|
| | | | | |
| | Unidesk | | Asset Life |
| Developed technology | $ | 35,230 |
| | 4 years |
| Customer contracts | 4,240 |
| | 4 years |
| Total | $ | 39,470 |
| | |
2016 Business Combination
On September 7, 2016,February 6, 2018, the Company acquired all of the issued and outstanding securities of Cedexis, Inc. (“Cedexis”), whose solution is a privately held company. The acquisitionreal-time data driven service for dynamically optimizing the flow of traffic across public clouds and data centers that provides a software solution that cuts the cost of desktopdynamic and application virtualizationreliable way to route and delivers workspacemanage Internet performance by accelerating desktop logonfor customers moving towards
hybrid and application response times for any Microsoft Windows-based environment.multi-cloud deployments. The total cash consideration for this transaction was $11.5$66.0 million, net of $0.8$6.0 million cash acquired. Transaction costs were $0.4 million, none of which were incurred during the three and nine months ended September 30, 2017. The Company expensed $0.3 million of transaction costs during the three months ended September 30, 2016 and $0.4 million of transaction costs during the nine months ended September 30, 2016. The assets related to this acquisition relate primarily to $8.2 million of product technology identifiable intangible assets with a 4 year life and goodwill of $4.7 million.
2016 Asset Acquisition
On January 8, 2016, the Company acquired certain monitoring technology assets from a privately-held company for total cash consideration of $23.6 million. The acquisition provides a monitoring solution for Citrix's products as it relates to Microsoft Windows applications and desktop delivery. The identifiable intangible assets acquired related primarily to product technologies.
2016 Divestiture
On February 29, 2016, the Company sold its CloudPlatform and CloudPortal Business Manager products to Persistent Telecom Solutions, Inc. The agreement included contingent consideration in the form of an earnout provision based on revenue for a period of five years following the closing date. Any income associated with the contingent consideration will be recognized if the earnout provisions are met. No earnout provisionsacquisition were met during the three and nine months ended September 30, 2017. Therefore, no income was recognized during the three and nine months ended September 30, 2017.not significant.
6. INVESTMENTS
Available-for-sale Investments
Investments in available-for-sale securities at fair value were as follows for the periods ended (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| Description of the Securities | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Agency securities | $ | 1,680 |
| | $ | — |
| | $ | (4 | ) | | $ | 1,676 |
| | $ | 314,982 |
| | $ | 333 |
| | $ | (2,367 | ) | | $ | 312,948 |
|
| Corporate securities | 73,291 |
| | 1 |
| | (205 | ) | | 73,087 |
| | 612,698 |
| | 116 |
| | (4,156 | ) | | 608,658 |
|
| Municipal securities | — |
| | — |
| | — |
| | — |
| | 2,500 |
| | 4 |
| | — |
| | 2,504 |
|
| Government securities | 14,160 |
| | 6 |
| | (20 | ) | | 14,146 |
| | 234,668 |
| | 91 |
| | (935 | ) | | 233,824 |
|
| Total | $ | 89,131 |
| | $ | 7 |
| | $ | (229 | ) | | $ | 88,909 |
| | $ | 1,164,848 |
| | $ | 544 |
| | $ | (7,458 | ) | | $ | 1,157,934 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Description of the Securities | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Agency securities | $ | 483,398 |
| | $ | 557 |
| | $ | (1,297 | ) | | $ | 482,658 |
| | $ | 411,963 |
| | $ | 699 |
| | $ | (1,169 | ) | | $ | 411,493 |
|
| Corporate securities | 802,969 |
| | 576 |
| | (1,065 | ) | | 802,480 |
| | 842,887 |
| | 193 |
| | (2,114 | ) | | 840,966 |
|
| Municipal securities | 3,965 |
| | 12 |
| | — |
| | 3,977 |
| | 9,989 |
| | 3 |
| | (4 | ) | | 9,988 |
|
| Government securities | 329,245 |
| | 55 |
| | (570 | ) | | 328,730 |
| | 445,083 |
| | 135 |
| | (600 | ) | | 444,618 |
|
| Total | $ | 1,619,577 |
| | $ | 1,200 |
| | $ | (2,932 | ) | | $ | 1,617,845 |
| | $ | 1,709,922 |
| | $ | 1,030 |
| | $ | (3,887 | ) | | $ | 1,707,065 |
|
The change in net unrealized gains (losses) on available-for-sale securities recorded in Other comprehensive income includes unrealized gains (losses) that arose from changes in market value of specifically identified securities that were held during the period, gains (losses) that were previously unrealized, but have been recognized in current period net income due to sales and other than temporary impairments, as well as prepayments of available-for-sale investments purchased at a premium. This reclassification has no effect on total comprehensive income or equity and was not material for all periods presented. See Note 1413 for more information related to comprehensive income.
The average remaining maturities of the Company’s short-term and long-term available-for-sale investments at SeptemberJune 30, 20172019 were approximately seven months and two years, respectively.
Realized Gains and Losses on Available-for-sale Investments
For the three and ninesix months ended SeptemberJune 30, 2017,2019, the Company received proceeds from the sales of available-for-sale investments of $116.4$165.0 million and $678.5$938.0 millionrespectively, and for the three and ninesix months ended SeptemberJune 30, 2016, it2018, the Company received proceeds from the sales of available-for-sale investments of $709.2$76.4 million and $1.16 billion,$434.9 million, respectively.
For the three and six months ended June 30, 2019, the Company had realized gains on the sales of available-for-sale investments of $0.5 million and $1.5 million respectively. For the three months ended SeptemberJune 30, 2017,2018, the Company had no realized gains on the sales of available-for-sale investments, and duringinvestments. For the ninesix months ended SeptemberJune 30, 2017,2018, the Company had $0.7$0.1 million in realized gains on the
sales of available-for-sale investments. For the three and nine months ended September 30, 2016, it had realized gains on the sales of available-for-sale investments of $1.0 million and $1.6 million, respectively.investments.
For the three and ninesix months ended SeptemberJune 30, 2017,2019, the Company had realized losses on available-for-sale investments of $0.2$0.5 million and $0.4$0.9 million, respectively, and for the three and ninesix months ended SeptemberJune 30, 2016, it2018, the Company had realized losses on available-for-sale investments of $0.1$0.3 million and $0.3$1.4 million, respectively, primarily related to sales of these investments during these periods.
All realized gains and losses related to the sales of available-for-sale investments are included in Other (expense) income, (expense)net, net, in the accompanying condensed consolidated statements of income.
Unrealized Losses on Available-for-Sale Investments
The gross unrealized losses on the Company’s available-for-sale investments that are not deemed to be other-than-temporarily impaired as of SeptemberJune 30, 20172019 and December 31, 20162018 were $2.9$0.2 million and $3.9$2.9 million, respectively. Because the Company does not currently intend to sell any of its investments in an unrealized loss position and it is more likely than not that it will not be required to sell the securities before the recovery of its amortized cost basis, which may not occur until maturity, it does not consider the securities to be other-than-temporarily impaired.
Equity Securities without Readily Determinable Fair Values
The Company held direct investments in privately-held companies of $19.1$12.4 million and $19.2$13.4 million as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively, which are accounted for based onat cost, less impairment plus or minus adjustments resulting from observable price changes in orderly transactions for an identical or a similar investment of the cost method andsame issuer. These investments are included in Other assets in the accompanying condensed consolidated balance sheets. The Company periodically reviews these investments for impairment. Ifimpairment and observable price changes on a quarterly basis, and adjusts the carrying value accordingly. The Company determinesdetermined that an other-than-temporary impairment has occurred, it will write-downthere were no material adjustments resulting from observable price changes to the investment to itsCompany's investments in privately-held companies without a readily determinable fair value. Forvalue for the three and six months ended SeptemberJune 30, 2017, no cost method investments were determined to be impaired. For the nine months ended September 30, 2017, certain cost method investments with a combined carrying2019. The fair value of $2.6these investments represents a Level 3 valuation as the assumptions used in valuing these investments are not directly or indirectly observable. See Note 7 for detailed information on fair value measurements.
Equity Securities Accounted for at Net Asset Value
The Company held equity interests in certain private equity funds of $11.7 million were determined to be impaired and written down to their estimated fair values$10.9 million as of $1.2 million. Accordingly,June 30, 2019 and December 31, 2018, respectively, which are accounted for under the Company recorded $1.4 million in impairment charges during the nine months ended September 30, 2017, whichnet asset value practical expedient. These investments are included in Other income (expense), netassets in the accompanying condensed consolidated statements of income. For the three and nine months ended September 30, 2016, the Company determined that certain cost method investments were impaired and recorded a charge of $0.9 million and $1.1 million, respectively, which was included in Other income (expense),balance sheets. The net in the accompanying condensed consolidated statements of income. During the nine months ended September 30, 2017, certain companies in which the Company held direct investments were acquired by third parties and as a resultasset value of these sales transactionsinvestments is determined using quarterly capital statements from the funds, which are based on the Company’s contributions to the funds, allocation of profit and loss and changes in fair value of the underlying fund investments. These private equity funds focus on making venture capital investments, principally by investing in equity securities of early and late stage privately held corporations. The funds’ general partner shall determine the amount, timing and form (whether cash or in kind) of all distributions made by the funds. The Company recorded gainsmay only transfer its investments in private equity fund interests subject to the general partner’s written consent and cannot trade its fund interests in established securities markets, secondary markets or equivalents thereof. The Company has unfunded commitments of $1.2$0.7 million which were included in Other income (expense), net, in the accompanying condensed consolidated statementsas of income. No gains were recognized during the three months ended SeptemberJune 30, 2017.2019.
7. FAIR VALUE MEASUREMENTS
The authoritative guidance defines fair value as an exit price, representing the amount that would either be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
| |
| • | Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities; |
| |
| • | Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
| |
| • | Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Available-for-sale securities included in Level 2 are valued utilizing inputs obtained from an independent pricing service (the “Service”) which uses quoted market prices for identical or comparable instruments rather than direct observations of quoted prices in active markets. The Service applies a four level hierarchical pricing methodology to all of the Company’s fixed income securities based on the circumstances. The hierarchy starts with the highest priority pricing source, then subsequently uses inputs obtained from other third-party sources and large custodial institutions. The Service’s providers utilize a variety of inputs to determine their quoted prices. These inputs may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. Substantially all of the Company’s available-for-sale investments are valued utilizing inputs obtained from the Service and accordingly are categorized as Level 2 in the table below. The Company periodically independently assesses the pricing obtained from the Service and historically has
not adjusted the Service's pricing as a result of this assessment. Available-for-sale securities are included in Level 3 when relevant observable inputs for a security are not available.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and liabilities within the fair value hierarchy. In certain instances, the inputs used to measure fair value may meet the definition of more than one level of the fair value hierarchy. The input with the lowest level priority is used to determine the applicable level in the fair value hierarchy.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
|
| | | | | | | | | | | | | | | |
| | As of June 30, 2019 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | (In thousands) |
| Assets: | | | | | | | |
| Cash and cash equivalents: | | | | | | | |
| Cash | $ | 417,088 |
| | $ | 417,088 |
| | $ | — |
| | $ | — |
|
| Money market funds | 84,666 |
| | 84,666 |
| | — |
| | — |
|
| Corporate securities | 2,966 |
| | — |
| | 2,966 |
| | — |
|
| Available-for-sale securities: | | | | | | | |
| Agency securities | 1,676 |
| | — |
| | 1,676 |
| | — |
|
| Corporate securities | 73,087 |
| | — |
| | 72,087 |
| | 1,000 |
|
| Government securities | 14,146 |
| | — |
| | 14,146 |
| | — |
|
| Prepaid expenses and other current assets: | | | | | | | |
| Foreign currency derivatives | 1,355 |
| | — |
| | 1,355 |
| | — |
|
| Total assets | $ | 594,984 |
| | $ | 501,754 |
| | $ | 92,230 |
| | $ | 1,000 |
|
| Accrued expenses and other current liabilities: | | | | | | | |
| Foreign currency derivatives | 1,239 |
| | — |
| | 1,239 |
| | — |
|
| Total liabilities | $ | 1,239 |
| | $ | — |
| | $ | 1,239 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | As of September 30, 2017 | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | (In thousands) |
| Assets: | | | | | | | |
| Cash and cash equivalents: | | | | | | | |
| Cash | $ | 869,770 |
| | $ | 869,770 |
| | $ | — |
| | $ | — |
|
| Money market funds | 66,245 |
| | 66,245 |
| | — |
| | — |
|
| Corporate securities | 4,854 |
| | — |
| | 4,854 |
| | — |
|
| Available-for-sale securities: | | | | | | | |
| Agency securities | 482,658 |
| | — |
| | 482,658 |
| | — |
|
| Corporate securities | 802,480 |
| | — |
| | 802,086 |
| | 394 |
|
| Municipal securities | 3,977 |
| | — |
| | 3,977 |
| | — |
|
| Government securities | 328,730 |
| | — |
| | 328,730 |
| | — |
|
| Prepaid expenses and other current assets: | | | | | | | |
| Foreign currency derivatives | 4,531 |
| | — |
| | 4,531 |
| | — |
|
| Total assets | $ | 2,563,245 |
| | $ | 936,015 |
| | $ | 1,626,836 |
| | $ | 394 |
|
| Accrued expenses and other current liabilities: | | | | | | | |
| Foreign currency derivatives | 622 |
| | — |
| | 622 |
| | — |
|
| Total liabilities | $ | 622 |
| | $ | — |
| | $ | 622 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | As of December 31, 2018 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | (In thousands) |
| Assets: | | | | | | | |
| Cash and cash equivalents: | | | | | | | |
| Cash | $ | 505,363 |
| | $ | 505,363 |
| | $ | — |
| | $ | — |
|
| Money market funds | 88,126 |
| | 88,126 |
| | — |
| | — |
|
| Agency securities | 3,296 |
| | — |
| | 3,296 |
| | — |
|
| Corporate securities | 9,371 |
| | — |
| | 9,371 |
| | — |
|
| Government securities | 12,610 |
| | — |
| | 12,610 |
| | — |
|
| Available-for-sale securities: | | | | | | | |
| Agency securities | 312,948 |
| | — |
| | 312,948 |
| | — |
|
| Corporate securities | 608,658 |
| | — |
| | 607,945 |
| | 713 |
|
| Municipal securities | 2,504 |
| | — |
| | 2,504 |
| | — |
|
| Government securities | 233,824 |
| | — |
| | 233,824 |
| | — |
|
| Prepaid expenses and other current assets: | | | | | | | |
| Foreign currency derivatives | 764 |
| | — |
| | 764 |
| | — |
|
| Total assets | $ | 1,777,464 |
| | $ | 593,489 |
| | $ | 1,183,262 |
| | $ | 713 |
|
| Accrued expenses and other current liabilities: | | | | | | | |
| Foreign currency derivatives | 2,543 |
| | — |
| | 2,543 |
| | — |
|
| Total liabilities | $ | 2,543 |
| | $ | — |
| | $ | 2,543 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | As of December 31, 2016 | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | (In thousands) |
| Assets: | | | | | | | |
| Cash and cash equivalents: | | | | | | | |
| Cash | $ | 528,637 |
| | $ | 528,637 |
| | $ | — |
| | $ | — |
|
| Money market funds | 224,765 |
| | 224,765 |
| | — |
| | — |
|
| Corporate securities | 82,693 |
| | — |
| | 82,693 |
| | — |
|
| Available-for-sale securities: | | | | | | | |
| Agency securities | 411,493 |
| | — |
| | 411,493 |
| | — |
|
| Corporate securities | 840,966 |
| | — |
| | 839,968 |
| | 998 |
|
| Municipal securities | 9,988 |
| | — |
| | 9,988 |
| | — |
|
| Government securities | 444,618 |
| | — |
| | 444,618 |
| | — |
|
| Prepaid expenses and other current assets: | | | | | | | |
| Foreign currency derivatives | 2,506 |
| | — |
| | 2,506 |
| | — |
|
| Total assets | $ | 2,545,666 |
| | $ | 753,402 |
| | $ | 1,791,266 |
| | $ | 998 |
|
| Accrued expenses and other current liabilities: | | | | | | | |
| Foreign currency derivatives | 4,435 |
| | — |
| | 4,435 |
| | — |
|
| Total liabilities | $ | 4,435 |
| | $ | — |
| | $ | 4,435 |
| | $ | — |
|
The Company’s fixed income available-for-sale security portfolio generally consists of investment grade securities from diverse issuers with a minimum credit rating of A-/A3 and a weighted-average credit rating of AA-/Aa3. The Company values these securities based on pricing from the Service, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value, and accordingly, the Company classifies all of its fixed income available-for-sale securities as Level 2.
The Company measures its cash flow hedges, which are classified as Prepaid expenses and other current assets and Accrued expenses and other current liabilities, at fair value based on indicative prices in active markets (Level 2 inputs).
Assets Measured at Fair Value on a Non-recurring Basis Using Significant Unobservable Inputs (Level 3)
ForDuring the three and six months ended SeptemberJune 30, 2017, no cost method investments were determined to be impaired. During the nine months ended September 30, 2017,2019, a certain cost method investmentsdirect investment in a privately-held company with a combined carrying value of $2.6$1.9 million were determined to be impairedwas acquired by a third party and written down to their estimated fair values of $1.2 million. Accordingly, the Company received proceeds of $0.2 million. As a result, the Company wrote down the investment to a fair value of zero and recorded $1.4an impairment charge of $1.7 million, of impairment charges during the nine months ended September 30, 2017, which areis included in Other (expense) income, (expense), net in the accompanying condensed consolidated statements of income.
For the three and ninesix months ended SeptemberJune 30, 2016,2018, the Company determined that certain cost methoddirect investments in privately-held companies were impaired and recorded a chargecharges of $0.9$0.4 million and $1.1$0.9 million, respectively, which waswere included in Other (expense) income, (expense), net in the accompanying condensed consolidated statements of income. In determining the fair value of cost methodthe investments, the Company considers many factors including but not limited to operating performance of the investee, the amount of cash that the investee has on-hand, the ability to obtain additional financing and the overall market conditions in which the investee operates. The fair value of the cost method investments represent a Level 3 valuation as the assumptions used in valuing these investments were not directly or indirectly observable.
For certain intangible assets where the unamortized balances exceeded the undiscounted future net cash flows, the Company measures the amount of the impairment by calculating the amount by which the carrying values exceed the estimated fair values, which are based on projected discounted future net cash flows. These non-recurring fair value measurements are categorized as Level 3 significant unobservable inputs. See Note 9 for detailed information related to Goodwill and Other Intangible Assets.
Additional Disclosures Regarding Fair Value Measurements
The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short maturity of these items.
As of SeptemberJune 30, 2017,2019, the fair value of the Convertible Notes,$750.0 million of unsecured senior notes due December 1, 2027 (the “2027 Notes"), which was determined based on inputs that are observable in the market (Level 2) based on the closing trading price per $100 as of the last day of trading for the quarter ended SeptemberJune 30, 20172019, and carrying value of debt instruments (carrying value excludes the equity component of the Company’s Convertible2027 Notes classified in equity) was as follows (in thousands):
|
| | | | | | | |
| | Fair Value | | Carrying Value |
| 2027 Notes | $ | 777,015 |
| | $ | 742,482 |
|
|
| | | | | | | |
| | Fair Value | | Carrying Value |
| Convertible Senior Notes | $ | 1,672,095 |
| | $ | 1,376,673 |
|
8. STOCK-BASED COMPENSATION
The Company’s stock-based compensation program is a long-term retention program that is intended to attract and reward talented employees and align stockholder and employee interests. As of SeptemberJune 30, 2017,2019, the Company had one stock-based compensation plan under which it was granting equity awards. The Company is currently granting stock-based awards from its Amended and Restated 2014 Equity Incentive Plan (the "2014 Plan"), which was approved at the Company's Annual Meeting of Stockholders on June 22, 2017. In connection with certain ofMarch 2019, the Company’s acquisitions, the Company has assumed certain plans from acquired companies. The Company’sCompany's Board of Directors has provided that no new awards will be granted underadopted an amendment to the Company’s acquired stock plans. Awards previously granted underAmended and Restated 2014 Equity Incentive Plan, which was approved at the Company's superseded stock plans that are still outstanding typically expire between five and ten years from the dateAnnual Meeting of grant and will continue to be subject to all the terms and conditions of such plans, as applicable.Stockholders on June 4, 2019. The Company’s superseded stock plans with outstanding awards include the Amended and Restated 2005 Equity Incentive Plan ("2005(the "2005 Plan").
Under the terms of the 2014 Plan, the Company is authorized to grant incentive stock options (“ISOs”), non-qualified stock options (“NSOs”), non-vested stock, non-vested stock units, stock appreciation rights (“SARs”), and performance units and to make stock-based awards to full and part-time employees of the Company and its subsidiaries or affiliates, where legally eligible to participate, as well as to consultants and non-employee directors of the Company. SARsISOs, NSOs, and ISOsSARs are not currently being granted. Currently,Pursuant to the 2014 Plan provides forJune 2019 amendment, the issuancemaximum number of46,000,000 shares of common stock. In addition, shares of
common stock underlying any awards granted under the Company’s 2014 Plan or the 2005 Plan that are forfeited, canceled or otherwise terminated (other than by exercise) are added to the shares of common stock available for issuance under the 2014 Plan.Plan was reduced to 43,400,000. In addition, the amendment removes the fungible share adjustment used to determine shares available for issuance. Under the original terms of the 2014 Plan, shares available for issuance were adjusted by a 2.75 fungible share factor. Pursuant to the amendment, beginning on June 4, 2019, each share award granted under the 2014 Plan will reduce the share reserve by one share and all share awards granted on June 4, 2019 and thereafter that are later forfeited, canceled or terminated will be returned to the share reserve in the same manner. Under the 2014 Plan, NSOs must be granted at exercise prices no less than fair market value on the date of grant. Non-vested stock awards may be granted for such consideration in cash, other property or services, or a combination thereof, as determined by the Company’s Compensation Committee of its Board of Directors. Stock-based awards are generally exercisable or issuable upon vesting. The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. As of SeptemberJune 30, 2017,2019, there were 29,119,13312,232,522 shares of common stock reserved for issuance pursuant to the Company’s stock-based compensation plans including authorization under its 2014 Plan to grant stock-based awards covering 24,185,5485,797,048 shares of common stock. In connection with the completion of the Spin-off, these awards were modified as described below.
In December 2014, the Company’s Board of Directors approved the 2015 Employee Stock Purchase Plan (the “2015 ESPP”), which was approved by stockholders at the Company’s Annual Meeting of Stockholders held on May 28, 2015. Under the 2015 ESPP, all full-time and certain part-time employees of the Company are eligible to purchase common stock of the Company twice per year at the end of a six-month payment period (a “Payment Period”). During each Payment Period, eligible employees who so elect may authorize payroll deductions in an amount no less than 1% nor greater than 10% of his or her base pay for each payroll period in the Payment Period. At the end of each Payment Period, the accumulated deductions are used to purchase shares of common stock from the Company up to a maximum of 12,000 shares for any one employee during a Payment Period. Shares are purchased at a price equal to 85% of the fair market value of the Company's common stock, on either the first business day of the Payment Period or the last business day of the Payment Period, whichever is lower. Employees who, after exercising their rights to purchase shares of common stock in the 2015 ESPP, would own shares representing 5% or more of the voting power of the Company’s common stock, are ineligible to continue to participate under the 2015 ESPP. The 2015 ESPP provides for the issuance of a maximum of 16,000,000 shares of common stock. As of SeptemberJune 30, 2017, 1,260,4202019, 1,937,455 shares have been issued under the 2015 ESPP. The Company recorded stock-based compensation costs related to the 2015 ESPP of $4.4$2.6 million and $2.3$2.5 million for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and it recorded $7.9 million and $6.7$5.5 million for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.
The Company used the Black-Scholes model to estimate the fair value of 2015 ESPP awards with the following weighted-average assumptions: |
| | | | |
| | Six Months Ended |
| | June 30, 2019 | | June 30, 2018 |
| Expected volatility factor | 0.26 - 0.29 | | 0.27 - 0.29 |
|
| Risk free interest rate | 2.19% - 2.49% | | 1.12% - 1.63% |
|
| Expected dividend yield | 1.27% - 1.31% | | 0 | % |
| Expected life (in years) | 0.5 | | 0.5 |
|
|
| | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
| Expected volatility factor | 0.27 - 0.29 |
| | 0.27 - 0.41 |
| | 0.27 - 0.29 |
| | 0.27 - 0.41 |
|
| Risk free interest rate | 0.60% - 1.12% |
| | 0.35% - 0.42% |
| | 0.60% - 1.12% |
| | 0.25% - 0.42% |
|
| Expected dividend yield | 0 | % | | 0 | % | | 0 | % | | 0 | % |
| Expected life (in years) | 0.5 |
| | 0.5 |
| | 0.5 |
| | 0.5 |
|
The Company determined the expected volatility factor by considering the implied volatility in six-month market-traded options of the Company's common stock based on third partythird-party volatility quotes. The Company's decision to use implied volatility was based upon the availability of actively traded options on the Company's common stock and its assessment that implied volatility is more representative of future stock price trends than historical volatility. The risk-free interest rate was based on a U.S. Treasury instrument whose term is consistent with the expected term of the stock options. The Company's expectedhistorical dividend yield input was zero in prior periods as it hashad not historically paid nor expects in the future to pay, cash dividends on its common stock. The current dividend yield has been updated for expected dividend yield payout due to the Company's intention to pay a recurring quarterly dividend beginning in December 2018. The expected term is based on the term of the purchase period for grants made under the ESPP.
Modifications of Share-Based Awards
In connection with the completion of the Spin-off, the terms of the Company's existing stock-based compensation arrangements required adjustments to the number and exercise price of outstanding stock options, non-vested stock units, non-vested stock, performance units, and other share-based awards to preserve the intrinsic value of the awards immediately before and after the Spin-off. The outstanding awards continue to vest over the original vesting periods. Certain outstanding awards at the time of the Spin-off held by employees of the GoTo Business were forfeited at the time of the separation. The stock awards held as of January 31, 2017 were adjusted as follows:
The number of shares of common stock subject to each outstanding stock option was increased and the corresponding exercise price was decreased to maintain the intrinsic value of each outstanding stock option immediately before and after the Spin-off. There was no incremental expense related to this adjustment.
The number of shares of common stock underlying each outstanding non-vested stock unit and performance unit was increased to preserve the intrinsic value of such award immediately prior to the Spin-off.
The opening prices of the performance units granted in 2015 and 2016 were adjusted to reflect the value of the shares of LogMeIn stock distributed to the Company's shareholders as a result of the Spin-off. These adjustments resulted in $6.5 million in incremental compensation expense to be recognized over the remaining vesting life of the underlying awards.
Stock-Based Compensation
The detail of the total stock-based compensation recognized by income statement classification is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| Income Statement Classifications | June 30, 2019 |
| June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
| Cost of subscription, support and services | $ | 2,956 |
| | $ | 2,241 |
| | $ | 5,158 |
| | $ | 3,721 |
|
| Research and development | 25,419 |
| | 17,715 |
| | 53,256 |
| | 28,508 |
|
| Sales, marketing and services | 24,424 |
| | 19,618 |
| | 44,350 |
| | 33,185 |
|
| General and administrative | 15,521 |
| | 16,270 |
| | 30,790 |
| | 26,153 |
|
| Total | $ | 68,320 |
| | $ | 55,844 |
| | $ | 133,554 |
| | $ | 91,567 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| Income Statement Classifications | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
| Cost of services and maintenance revenues | $ | 1,132 |
| | $ | 590 |
| | $ | 2,539 |
| | $ | 1,626 |
|
| Research and development | 14,365 |
| | 10,501 |
| | 35,691 |
| | 27,945 |
|
| Sales, marketing and services | 16,063 |
| | 13,405 |
| | 42,388 |
| | 36,909 |
|
| General and administrative | 20,172 |
| | 16,347 |
| | 46,601 |
| | 48,791 |
|
| Total | $ | 51,732 |
| | $ | 40,843 |
| | $ | 127,219 |
| | $ | 115,271 |
|
Non-vested Stock Units
Market Performance and Service Condition Stock Units
In March 2017, the Company granted senior level employees non-vested stock unit awards representing, in the aggregate, 275,148 non-vested stock units that vest based on certain target performance and service conditions. The number of non-vested stock units underlying the award will be determined within sixty days of the three-year performance period ending December 31, 2019. The attainment level under the award will be based on the Company's relative total return to stockholders over the performance period compared to a pre-established custom index group. If the Company’s relative total return to stockholders is between the 41st percentile and the 80th percentile when compared to the index companies, the number of non-vested stock
units earned will be based on interpolation. The maximum number of non-vested stock units that may vest pursuant to the awards is capped at 200% of the target number of non-vested stock units set forth in the award agreement and is earned if the Company's relative total return to stockholders when compared to the index companies is at or greater than the 80th percentile. If the Company’s total return to stockholders is negative, the number of non-vested stock units earned will be no more than 100% regardless of the Company’s relative total return to stockholders compared to the index companies. If the awardee is not employed by the Company at the end of the performance period, the extent to which the awardee will vest in the award, if at all, is dependent upon the timing and character of the termination as provided in the award agreement. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company's common stock.
In January 2016, the Company granted its former Chief Executive Officer 220,235 non-vested stock units that vest based onDecember 2018, certain target performance conditions; and in March 2016, the Company grantedawards for senior level employees, 234,816 non-vested stock unitsnone of whom were executive officers, were modified to replace the pre-established custom index group used to measure performance and related award payout with companies that vest based on certain target performance conditions. Theseare part of the Nasdaq Composite index. As a result, the awards were modifiedrevalued as described above as a result of the Spin-off.modification date. The attainment level under the awards will be based on the Company's compound annualized total return to stockholders over a three-year performance period, with 100% of such stock units earned if the Company achieves total shareholder return of 10% over the performance period. Further, if the Company achieves annualized total shareholder return of less than 10% during the performance period, the awardees may earn all or a portionimpact of the target award, butmodification was not in excess of 100% of such stock units, depending uponmaterial to the Company’s relative total shareholder return compared to companies listed in the S&P Computer Software Select Index. If the Company's compound annualized total shareholder return is 5% or above, the number of non-vested stock units earned will be based on interpolation, with the maximum number of non-vested stock units earned capped at 200% of the target number of non-vested stock units for a compound annualized total return to stockholders of 30% over a three-year performance period as set forth in the award agreement. Within sixty days following an interim measurement period of 18 months, the Compensation Committee will determine the number of restricted stock units that would be deemed earned based on performance to date, and up to 33% of the target award may be earned based on such performance; however, any stock units that are deemed earned will remain subject to continued service vesting until the end of the three-year performance period, or a change in control, if earlier. Within sixty days following the conclusion of the performance period, the Company’s Compensation Committee will determine the number of restricted stock units that would vest upon the final day of the performance period based on the Company’s performance during the period and in accordance with the terms of the award.condensed consolidated financial statements.
On the vesting date, the greater of the full period restricted stock units, or the interim earned restricted stock units, will vest in one installment.
The market condition requirements are reflected in the grant date fair value of the award, and the compensation expense for the award will be recognized assuming that the requisite service is rendered regardless of whether the market conditions are achieved. The grant date fair value of the non-vested performance stock unit awards was determined through the use of a Monte Carlo simulation model, which utilized multiple input variables that determined the probability of satisfying the market condition requirements applicable to each award as follows: |
| | | | |
| | March 2017 Grant (Modified) | March 2017 Grant |
| Expected volatility factor | 0.16-0.32 |
| 0.27-0.32 |
|
| Risk free interest rate | 2.67 | % | 1.48 | % |
| Expected dividend yield | 0 | % | 0 | % |
|
| | | | | | |
| | March 2017 Grant | March 2016 Grant | January 2016 Grant |
| Expected volatility factor | 0.27-0.32 |
| 0.29 - 0.39 |
| 0.29 - 0.37 |
|
| Risk free interest rate | 1.48 | % | 0.91 | % | 1.10 | % |
| Expected dividend yield | 0 | % | 0 | % | 0 | % |
For the unmodified March 2017 grant, the range of expected volatilities utilized was based on the historical volatilities of the Company's common stock and the average of its peer group. The Company chose to use historical volatility to value these awards because historical stock prices were used to develop the correlation coefficients between the Company and its peer group in order to model the stock price movements. The volatilities used were calculated over the most recent 2.75 year period, which is commensurate with the awards' performance period at the date of grant.grant date. The risk free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues with remaining terms equivalent to the performance period. The Company does not intend to pay dividends on its common stock in the foreseeable future. Accordingly,In addition, the Company used a dividend yield of zero in its model. The estimated fair value of each award as of the date of grant was $104.05.
For the modified March 2016 and January 2016 grants,2017 grant, all input variables chosen are as of the modification date. The range of expected volatilities utilized was based on the historical volatilities of the Company's common stock and the average of itsthe Nasdaq
Composite index peer group. The Company chose to use historical volatility to value these awards because historical stock
prices were used to develop the correlation coefficients between the Company and its peer group in order to model the stock
price movements. The volatilities used were calculated over a threethe most recent 1.06 year period, which is commensurate with
the awards’awards' remaining performance period at the date of grant.modification date. The risk free interest rate was based on the implied yield
available on U.S. Treasury zero-coupon issues with remaining terms equivalent to the remaining performance period. The Company does not intend to pay dividends on its common stock in the foreseeable future. Accordingly, the Company used a zero dividend yield of zero in its model.input for this award as dividends are assumed to be reinvested. The estimated
incremental fair value of each modified award as of the modification date of grant was $66.18 for the March 2016 grant and $49.68 for the January 2016 grant.$99.54.
Service BasedService-Based Stock Units
The Company also awards senior level employees, certain other employees and new non-employee directors, non-vested stock units granted under the 2014 Plan that vest based on service. The majority of these non-vested stock unit awards generally vest 33.33% on each anniversary subsequent to the date of the award. The Company also assumes non-vested stock units in connection with certain of its acquisitions. The assumed awards have the same three year vesting schedule. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. In addition, the Company awards non-vested stock units to all of its continuing non-employee directors. These awards vest monthly in 12 equal installments based on service and, upon vesting, each stock unit represents the right to receive one share of the Company's common stock.
Company Performance Stock Units
In April 2019, the Company awarded senior level employees 293,991 non-vested performance stock unit awards granted under the 2014 Plan. The number of non-vested stock units underlying the award will be determined within sixty days following completion of the performance period ending December 31, 2021 and will be based on the achievement of specific corporate financial performance goals related to subscription bookings as a percentage of total subscription and product bookings measured during the period from January 1, 2021 to December 31, 2021. The number of non-vested stock units issued will be based on a graduated slope, with the maximum number of non-vested stock units issuable pursuant to the award capped
at 200% of the target number of non-vested stock units set forth in the award agreement. The Company is required to estimate the attainment expected to be achieved related to the defined performance goals and the number of non-vested stock units that will ultimately be awarded in order to recognize compensation expense over the vesting period. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. Compensation expense will be recorded through the end of the performance period on December 31, 2021 if it is deemed probable that the performance goals will be met. If the performance goals are not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed.
In February 2019, the Company awarded certain senior level employees 93,500 non-vested performance stock units granted under the 2014 Plan. The number of non-vested stock units underlying the award will be determined within sixty days following the completion of the performance period ending December 31, 2020 and will be based on the achievement of specific corporate financial performance goals related to annual free cash flow per share growth between the fiscal years ended December 31, 2018 and December 31, 2020. Within sixty days following an interim measurement period of 12 months, the Compensation Committee will determine the number of restricted stock units that would be deemed earned based on performance to date and up to 50% of the target award may be earned based on such performance. However, any stock units that are deemed earned will remain subject to continued service vesting until the end of the performance period, or a change in control, if earlier. The number of non-vested stock units issued will be based on a graduated slope, with the maximum number of non-vested stock units issuable pursuant to the award capped at 200% of the target number of non-vested stock units set forth in the award agreement. The Company is required to estimate the attainment expected to be achieved related to the defined performance goals and the number of non-vested stock units that will ultimately be awarded in order to recognize compensation expense over the vesting period. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. Compensation expense will be recorded through the end of the performance period on December 31, 2020 if it is deemed probable that the performance goals will be met. If the performance goals are not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed.
In March 2018, the Company awarded senior level employees 268,729 non-vested performance stock unit awards granted under the 2014 Plan. The number of non-vested stock units underlying the award will be determined within sixty days following completion of the performance period ending December 31, 2020 and will be based on the achievement of specific corporate financial performance goals related to subscription bookings as a percentage of total product bookings measured during the period from January 1, 2020 to December 31, 2020. As defined in the applicable award agreements, total product bookings includes subscription bookings. The number of non-vested stock units issued will be based on a graduated slope, with the maximum number of non-vested stock units issuable pursuant to the award capped at 200% of the target number of non-vested stock units set forth in the award agreement. The Company is required to estimate the attainment expected to be achieved related to the defined performance goals and the number of non-vested stock units that will ultimately be awarded in order to recognize compensation expense over the vesting period. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. Compensation expense will be recorded through the end of the performance period on December 31, 2020 if it is deemed probable that the performance goals will be met. If the performance goals are not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed.
On August 1, 2017, the Company awarded certain senior level employees 184,322 non-vested performance stock units granted under the 2014 Plan. The number of non-vested stock units underlying each award will be determined within sixty days following completion of the performance period ending December 31, 2019 and will be based on achievement of specific corporate financial performance goals related to non-GAAP net operating margin and subscription bookings as a percent of total product bookings measured during the period from January 1, 2019 to December 31, 2019. As defined in the applicable award agreements, total product bookings includes subscription bookings. The number of non-vested stock units issued will be based on a graduated slope, with the maximum number of non-vested stock units issuable pursuant to the award capped at 200% of the target number of non-vested stock units set forth in the award agreement. The Company is required to estimate the attainment expected to be achieved related to the defined performance goals and the number of non-vested stock units that will ultimately be awarded in order to recognize compensation expense over the vesting period. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. The non-GAAP net operating margin and subscription bookings as a percent of total product bookings targets were set in the first quarter of 2018. As a result, such awards were not outstanding under U.S. GAAP until the first quarter of 2018 when the performance goals were determined and subsequently communicated to employees who received the awards. Compensation expense will be recorded through the end of the performance period on December 31, 2019 if it is deemed probable that the performance goals will be met. If the performance goals are not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed.
Unrecognized Compensation Related to Stock Units
As of SeptemberJune 30, 20172019, the total number of all non-vested stock units outstanding, including company performance awards, market performance and service condition awards and service-based awards including service-based awards assumed in connection with acquisitions, was 4,876,8116,387,078. As of SeptemberJune 30, 20172019, there was $257.8479.8 million of total unrecognized compensation cost related to non-vested stock units. The unrecognized cost of the awards legally granted through June 30, 2019 is expected to be recognized over a weighted-average period of 2.051.96 years.
Non-vestedModification of Market and Company Performance Stock Units
During
On April 22, 2019, the nine months ended September 30, 2016,change in control provisions of the Company granted non-vestedunvested and outstanding March 2017 market performance stock unit awards and the February 2019, March 2018 and August 2017 company performance stock unit awards were modified such that if a change in control were to occur prior to the end of 118,588 shares to its former Chief Executive Officer, with a vestingthe award’s performance period, the award would be deemed earned at 200% of approximately three years from the date of grant,target award, subject to time-based vesting and the holder’s continuedawardee’s continuous employment withthrough the Company and accelerated vesting under certain circumstances. Non-vested stock is issued and outstanding upon grant; however, award holders are restricted from selling the shares until they vest. If the vesting conditions are not met, the award will be forfeited.Compensation expense is measured based on the closing market priceend of the Company’s common stock ataward’s performance periods. Previously, the date of grant and is recognized on a straight-line basis over the vesting period. In connection with the departure of its former Chief Executive officer, the Company recognized $4.0 million of stock-based compensation expense during the three months ended September 30, 2017 related to the accelerationchange in control provisions of these awards allowed for either pro rata vesting or vesting based on interim performance through the change in accordance with his separation agreement. For the nine months ended September 30, 2017, the Company recognized $5.3 million of stock-basedcontrol date. No incremental compensation expense related to non-vested stock awards. At September 30, 2017, no additional stock-based compensation expense is expected to be recognized related to these awards.was recorded as a result of this modification given the improbable nature of a change in control event.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The Company accounts for goodwill in accordance with the authoritative guidance, which requires that goodwill and certain intangible assets are not amortized, but are subject to an annual impairment test. As part of its continued transformation, effective January 1, 2016, theThe Company reorganizedperformed a part of its business by creating a new Data (formerly Cloud) product grouping. Inqualitative assessment in connection with this change, duringits annual goodwill impairment test in the fourth quarter of 2016,2018. As a result of the Company performed an assessment of its goodwill reporting units and determined that the reorganization resulted in the identification of two goodwill reporting units (excluding the GoTo Business).qualitative analysis, a quantitative impairment test was not deemed necessary. There was no impairment of goodwill or indefinite lived intangible assets as a result of the annual impairment test analysis completed during the fourth quarter of 2016.
On January 31, 2017, the Company completed the Spin-off of the GoTo Business and $380.9 million of the goodwill attributable to the GoTo Business as of December 31, 2016 was distributed to GetGo. As a result of the Spin-off, the Company performed an assessment of the two remaining goodwill reporting units for the quarter ended March 31, 2017 and determined that these goodwill reporting units remain unchanged. There were no changes in reporting units nor indicators of impairment during the three months ended September 30, 2017. See Note 5 for more information regarding the Company's acquisitions and divestitures.2018.
The following table presents the change in goodwill during the three and ninesix months ended SeptemberJune 30, 20172019 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| | Balance at January 1, 2019 | | Additions | | | Other | | | Balance at June 30, 2019 |
| Goodwill | $ | 1,802,670 |
| | $ | — |
| | | $ | (2,395 | ) | (1) | | $ | 1,800,275 |
|
|
| | | | | | | | | | | | | | | | | |
| | Balance at January 1, 2017 | | Additions | | | Other | | | Balance at September 30, 2017 |
| Goodwill | $ | 1,585,893 |
| | $ | 31,231 |
| (1) | | $ | — |
| | | $ | 1,617,124 |
|
| |
| (1) | Amount relates to preliminaryadjustments to the purchase price allocation of goodwill associated with the 2017 Business Combination. See Note 5 for more information regarding the Company's2018 acquisitions. |
Intangible Assets
The Company has intangible assets which were primarily acquired in conjunction with business combinations and technology purchases. Intangible assets with finite lives are recorded at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally three to seven years, except for patents, which are amortized over the lesser of their remaining life or seven to ten years. In-process R&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When in-process R&D projects are completed, the corresponding amount is reclassified as an amortizable intangible asset and is amortized over the asset's estimated useful life.
Intangible assets consist of the following (in thousands):
|
| | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| Product related intangible assets | $ | 750,832 |
| | $ | 622,078 |
| | $ | 746,152 |
| | $ | 601,993 |
|
| Other | 227,923 |
| | 211,629 |
| | 227,922 |
| | 204,894 |
|
| Total | $ | 978,755 |
| | $ | 833,707 |
| | $ | 974,074 |
| | $ | 806,887 |
|
|
| | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| Product related intangible assets | $ | 686,901 |
| | $ | 558,809 |
| | $ | 647,594 |
| | $ | 520,746 |
|
| Other | 227,932 |
| | 187,931 |
| | 223,692 |
| | 176,859 |
|
| Total | $ | 914,833 |
| | $ | 746,740 |
| | $ | 871,286 |
| | $ | 697,605 |
|
Amortization of product-related intangible assets, which consists primarily of product-related technologies and patents, was $17.6$9.8 million and $14.8$11.5 million for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and $43.1$20.1 million and $43.2$22.5 million for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and is classified as a component of Cost of net revenues in the accompanying condensed consolidated statements of income. Amortization of other intangible assets, which consist primarily of customer relationships, trade names and covenants not to compete was $3.7$3.2 million and $3.94.0 million for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and $11.1$6.7 million and $11.4$7.7 million for the ninesix months ended September
June 30, 20172019 and 2016,2018, respectively, and is classified as a component of Operating expenses in the accompanying condensed consolidated statements of income.
The Company monitors its intangible assets for indicators of impairment. If the Company determines that an impairment has occurred, it will write-down the intangible asset to its fair value. For certain intangible assets where the unamortized balances exceeded the undiscounted future net cash flows, the Company measures the amount of the impairment by calculating the amount by which the carrying values exceed the estimated fair values, which are based on projected discounted future net cash flows.
Estimated future amortization expense of intangible assets with finite lives as of SeptemberJune 30, 20172019 is as follows (in thousands):
|
| | | |
| Year ending December 31, | |
| 2019 (remaining six months) | $ | 24,676 |
|
| 2020 | 39,148 |
|
| 2021 | 25,159 |
|
| 2022 | 23,309 |
|
| 2023 | 19,958 |
|
| Thereafter | 12,798 |
|
| Total | $ | 145,048 |
|
|
| | | |
| Year ending December 31, | Amount |
|
| 2017 (remaining three months) | $ | 15,664 |
|
| 2018 | 59,816 |
|
| 2019 | 39,191 |
|
| 2020 | 25,032 |
|
| 2021 | 9,070 |
|
| Thereafter | 19,320 |
|
| Total | $ | 168,093 |
|
10. SEGMENT INFORMATION
On January 31, 2017, Citrix completed the Spin-off of the GoTo Business. As a result, the Company re-evaluated its operating segments in the first quarter of 2017, and determined that it has one reportable segment. The Company's chief operating decision maker (“CODM”) reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company's CEO is the CODM. During the first quarter of 2017, the Company classified the results of the GoTo Business, formerly a reportable segment, as discontinued operations in its financial statements for all periods presented. See Note 3 for more information regarding discontinued operations.
On July 7, 2017, the Company's board of directors appointed David J. Henshall, formerly the chief financial officer and chief operating officer of the Company, as the Company's president, chief executive officer and a member of the board of directors. As a result, during the third quarter of 2017, the Company re-evaluated its CODM and determined that the CODM continues to be the CEO and that the Company's operating segment remains unchanged.
Revenues by Product Grouping
Revenues by product grouping were as follows (in thousands):
| | | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended |
| | September 30, | | September 30, | June 30, | | June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2019 |
| 2018 | | 2019 | | 2018 |
| Net revenues: | | | | | | | | | | | | | | |
Workspace Services revenues(1) | $ | 431,592 |
| | $ | 412,773 |
| | $ | 1,255,728 |
| | $ | 1,222,786 |
| |
Digital Workspace revenues(1) | | $ | 535,063 |
| | $ | 501,121 |
| | $ | 1,049,670 |
| | $ | 958,381 |
|
Networking revenues(2) | 185,539 |
| | 191,243 |
| | 575,827 |
| | 581,612 |
| 178,204 |
| | 207,342 |
| | 349,437 |
| | 415,965 |
|
Data revenues(3) | 41,632 |
| | 34,806 |
| | 121,566 |
| | 99,615 |
| |
Professional services(4) | 32,162 |
| | 29,914 |
| | 93,708 |
| | 97,483 |
| |
Professional services(3) | | 35,430 |
| | 33,902 |
| | 68,733 |
| | 65,211 |
|
| Total net revenues | $ | 690,925 |
| | $ | 668,736 |
| | $ | 2,046,829 |
| | $ | 2,001,496 |
| $ | 748,697 |
| | $ | 742,365 |
| | $ | 1,467,840 |
| | $ | 1,439,557 |
|
| |
| (1) | Digital Workspace Services revenues are primarily comprised of sales from the Company’s application virtualization products,solutions, which include XenDesktopCitrix Virtual Apps and XenApp,Desktops, the Company's enterprise mobilityunified endpoint management products,solutions, which include XenMobile andCitrix Endpoint Management, related license updates and maintenance and support, Citrix Content Collaboration and related cloud offerings. |
| |
| (2) | Networking revenues primarily include NetScalerCitrix ADC and NetScalerCitrix SD-WAN, related license updates and maintenance and support and related cloud offerings. |
| |
| (3) | Data revenues primarily include ShareFile, Podio, and related cloud offerings. |
| |
(4) | Professional services revenues are primarily comprised of revenues from consulting services and product training and certification services. |
Revenues by Geographic Location
The following table presents revenues by geographic location, for the following periods (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 |
| 2018 | | 2019 | | 2018 |
| Net revenues: | | | | | | | |
| Americas | $ | 432,281 |
| | $ | 430,184 |
| | $ | 833,428 |
| | $ | 844,184 |
|
| EMEA | 240,388 |
| | 234,131 |
| | 477,201 |
| | 448,706 |
|
| APJ | 76,028 |
| | 78,050 |
| | 157,211 |
| | 146,667 |
|
| Total net revenues | $ | 748,697 |
| | $ | 742,365 |
| | $ | 1,467,840 |
| | $ | 1,439,557 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net revenues: | | | | | | | |
| Americas | $ | 406,322 |
| | $ | 397,349 |
| | $ | 1,200,740 |
| | $ | 1,188,719 |
|
| EMEA | 213,954 |
| | 199,837 |
| | 633,119 |
| | 611,832 |
|
| APJ | 70,649 |
| | 71,550 |
| | 212,970 |
| | 200,945 |
|
| Total net revenues | $ | 690,925 |
| | $ | 668,736 |
| | $ | 2,046,829 |
| | $ | 2,001,496 |
|
As of June 30, 2019, one distributor, The Arrow Group, accounted for 15% of the Company's total gross accounts receivable.
Strategic Service Providers
The Company defines Strategic Service Providers (SSP) as its three historically largest hyperscale Networking customers. The following table summarizes SSP revenue for the following periods (in thousands): |
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Net revenues: | | | | | | | |
| SSP revenue | $ | 23,731 |
| | $ | 39,167 |
| | $ | 45,832 |
| | $ | 101,483 |
|
| Non-SSP revenue | 724,966 |
| | 703,198 |
| | 1,422,008 |
| | 1,338,074 |
|
| Total net revenues | $ | 748,697 |
| | $ | 742,365 |
| | $ | 1,467,840 |
| | $ | 1,439,557 |
|
Subscription Revenue
Subscription revenue relates to fees which are generally recognized ratably over the contractual term. The Company's subscription revenue includes Software as a Service (SaaS), which primarily consists of subscriptions delivered via a cloud service whereby the customer does not take possession of the software and hybrid subscription offerings; and non-SaaS, which consists primarily of on-premise licensing, hybrid subscription offerings, CSP services and the related support. The Company's hybrid subscription offerings are allocated between SaaS and non-SaaS, which are generally recognized at a point in time. The following table presents subscription revenues by SaaS and non-SaaS components, for the following periods (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Subscription: | | | | | | | |
| SaaS | $ | 91,208 |
| | $ | 64,843 |
| | $ | 176,655 |
| | $ | 124,759 |
|
| Non-SaaS | 64,625 |
| | 45,953 |
| | 120,784 |
| | 89,195 |
|
| Total Subscription revenue | $ | 155,833 |
| | $ | 110,796 |
| | $ | 297,439 |
| | $ | 213,954 |
|
11. CONVERTIBLE SENIOR NOTESDEBT
ConvertibleSenior Notes Offering
During 2014,
On November 15, 2017, the Company completedissued $750.0 million of unsecured senior notes due December 1, 2027. The 2027 Notes accrue interest at a private placementrate of approximately $1.44 billion principal amount4.500% per annum. Interest on the 2027 Notes is due semi-annually on June 1 and December 1 of 0.500% Convertible Notes due 2019.each year, beginning on June 1, 2018. The net proceeds from this offering were approximately $1.42 billion,$741.0 million, after deducting the initial purchasers’ discountsunderwriting discount and commissions and the estimated offering expenses payable by the Company. The CompanyNet proceeds from this offering were used approximately $82.6 millionto repurchase shares of the net proceeds to pay the cost of the Bond Hedges described below (after such cost was partially offset by the proceeds to the Company from the Warrant Transactions described below). The Company used the remainder of the net proceeds from the offering and a portion of its existing cash and investments to purchase an aggregate of approximately $1.5 billion of its common stock, as authorized under its share repurchase program. The Company used approximately $101.0 million to purchase shares of common stock from certain purchasers of the Convertible Notes in privately negotiated transactions concurrently with the closing of the offering, and the remaining $1.4 billion to purchase additional shares ofCompany's common stock through an Accelerated Share Repurchase ("ASR") transaction which the Company entered into with Citibank, N.A. (the “ASR Counterparty”"ASR Counterparty") on April 25, 2014 (the “ASR Agreement”).
November 13, 2017. The Convertible Notes are governed by the terms of an indenture, dated as of April 30, 2014 (the “Indenture”), between the Company and Wilmington Trust, National Association, as trustee (the “Trustee”). The Convertible Notes are the senior unsecured obligations of the Company and bear interest at a rate of 0.500% per annum, payable semi-annually in arrears on April 15 and October 15 of each year. The Convertible2027 Notes will mature on April 15, 2019,December 1, 2027, unless earlier repurchasedredeemed in accordance with their terms prior to such date. The Company may
redeem the 2027 Notes at its option at any time in whole or converted. Upon conversion, the Company will pay cash upfrom time to time in part prior to September 1, 2027 at a redemption price equal to the aggregate principal amountgreater of the Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, in respect of the remainder, if any, of the Company’s conversion obligation in excess(i) 100% of the aggregate principal amount of the Convertible2027 Notes being converted.
The initial conversion rate forto be redeemed and (ii) the Convertible Notes was 11.1111 shares of common stock per $1,000 principal amount of Convertible Notes, which corresponds to a conversion price of $90.00 per share of common stock. The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of certain stock dividends on common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, the payment of cash dividends and certain issuer tender or exchange offers. As a resultsum of the Spin-off, the conversion rate for the Convertible Notes was adjusted under the termspresent values of the Indenture. As a result of this adjustment,remaining scheduled payments under such 2027 Notes, plus in each case, accrued and unpaid interest to, but excluding, the conversion rate for the Convertible Notes was re-set as of the opening of business on February 1, 2017 to 13.9061 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which corresponds to a conversion price of $71.91 per share of common stock. Similar adjustments were made to the conversion rates for the Convertible Note Hedge and Warrant Transactions (as defined below) as of the opening of business on February 1, 2017.
The Company may not redeem the Convertible Notes prior to the maturity date and no “sinking fund” is provided for the Convertible Notes, which means that the Company is not required to periodically redeem or retire the Convertible Notes. Upon the occurrence ofredemption date. Among other terms, under certain fundamental changes involving the Company,circumstances, holders of the Convertible2027 Notes may require the Company to repurchase their 2027 Notes upon the occurrence of a change of control prior to maturity for cash all or part of their Convertible Notes in principal amounts of $1,000 or an integral multiple thereof at a repurchase price equal to 100%101% of the principal amount of the Convertible2027 Notes to be repurchased plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
In accounting for the issuance of the Convertible Notes, the Company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Convertible Notes as a whole. The excess of the principal amount of the liability component over its carrying amount ("debt discount") is amortized to interest expense over the term of the Convertible Notes using the effective interest method with an effective interest rate of 3.0 percent per annum. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the Convertible Note issuance, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Issuance costs attributable to the $1.4 billion liability component are being amortized to expense over the term of the Convertible Notes, and issuance costs attributable to the equity component are included along with the equity component in stockholders' equity. Additionally, a deferred tax liability of $8.2 million related to a portion of the equity component transaction costs which are deductible for tax purposes is included in Other liabilities in the accompanying condensed consolidated balance sheets.
As a result of the structure of the Reverse Morris Trust (RMT) transaction with LogMeIn, Inc., and the notification on October 10, 2016 to noteholders in accordance with the Indenture, the Convertible Notes became convertible until the earlier of (1) the close of business on the business day immediately preceding the ex-dividend date for the distribution of the outstanding shares of GetGo common stock to the Company’s stockholders by way of a pro rata dividend, and (2) the Company’s announcement that such distribution will not take place, even though the Convertible Notes were not otherwise convertible at December 31, 2016. The $1.44 billion Convertible Notes became convertible with the notice to noteholders. Accordingly, as of December 31, 2016, the carrying amount of the Convertible Notes of $1.3 billion was reclassified from Other liabilities to Current liabilities and the difference between the face value and carrying value of $79.5 million was reclassified from stockholders’ equity to temporary equity in the accompanying condensed consolidated balance sheets. The conversion period terminated as of the close of business on January 31, 2017 in connection with the Spin-off. As a result, the Convertible Notes were reclassified to Other liabilities from Current liabilities, and the amount previously recorded as Temporary equity was reclassified to Stockholders' equity as of March 31, 2017. See Note 3 for more information on the Company's separation of its GoTo Business.
The Convertible Notes consist of the following (in thousands):
|
| | | | | | |
| | September 30, 2017 | December 31, 2016 |
| Liability component | | |
| Principal | $ | 1,437,483 |
| $ | 1,437,500 |
|
| Less: note discount and issuance costs | (60,810 | ) | (89,344 | ) |
| Net carrying amount | $ | 1,376,673 |
| $ | 1,348,156 |
|
| | | |
| Equity component | |
|
|
| Temporary equity | $ | — |
| $ | 79,495 |
|
| Additional paid-in capital | 162,869 |
| 83,374 |
|
| Total equity (including temporary equity) | $ | 162,869 |
| $ | 162,869 |
|
The following table includes total interest expense recognized related to the Convertible Notes (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Contractual interest expense | $ | 1,797 |
| | $ | 1,797 |
| | $ | 5,391 |
| | $ | 5,391 |
|
| Amortization of debt issuance costs | 1,045 |
| | 1,021 |
| | 3,117 |
| | 3,045 |
|
| Amortization of debt discount | 8,536 |
| | 8,284 |
| | 25,418 |
| | 24,667 |
|
| | $ | 11,378 |
| | $ | 11,102 |
| | $ | 33,926 |
| | $ | 33,103 |
|
See Note 7 to the Company's condensed consolidated financial statements for fair value disclosures related to the Company's Convertible Notes.
Convertible Note Hedge and Warrant Transactions
In connection with the pricing of the Convertible Notes, the Company entered into convertible note hedge transactions relating to approximately 16.0 million shares of common stock (the "Bond Hedges"), with JPMorgan Chase Bank, National Association, London Branch; Goldman, Sachs & Co.; Bank of America, N.A.; and Royal Bank of Canada (the “Option Counterparties”) and also entered into separate warrant transactions (the "Warrant Transactions") with each of the Option Counterparties relating to approximately 16.0 million shares of common stock. As a result of the Spin-off, the number of shares of the Company's common stock covered by the Bond Hedges and Warrant Transactions was adjusted to approximately 20.0 million shares.
The Bond Hedges are generally expected to reduce the potential dilution upon conversion of the Convertible Notes and/or offset any payments in cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, that the Company is required to make in excess of the principal amount of the Convertible Notes upon conversion of any Convertible Notes, as the case may be, in the event that the market price per share of common stock, as measured under the terms of the Bond Hedges, is greater than the strike price of the Bond Hedges, which initially corresponds to the conversion price of the Convertible Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Convertible Notes. The Warrant Transactions will separately have a dilutive effect to the extent that the market value per share of common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants issued pursuant to the Warrant Transactions (the “Warrants”). The initial strike price of the Warrants is $120.00 per share. Subsequent to the Spin-off, the strike price of the Warrants was adjusted to a weighted-average strike price of $95.25 as of February 1, 2017. The Warrants will expire in ratable portions on a series of expiration dates commencing after the maturity of the Convertible Notes. The Bond Hedges and Warrants are not marked to market. The value of the Bond Hedges and Warrants were initially recorded in stockholders' equity and continue to be classified within stockholders' equity. As of September 30, 2017, no warrants have been exercised.
Aside from the initial payment of a premium to the Option Counterparties under the Bond Hedges, which amount is partially offset by the receipt of a premium under the Warrant Transactions, the Company is not required to make any cash payments to the Option Counterparties under the Bond Hedges and will not receive any proceeds if the Warrants are exercised.
12. CREDIT FACILITYCredit Facility
Effective January 7, 2015, the Company entered into a Credit Facilitycredit agreement (the "Credit Agreement") with a group of financial institutions (the “Lenders”). The Credit Facilitycredit facility provides for a five year revolving line of credit in the aggregate amount of $250.0 million, subject to continued covenant compliance. The Company may elect to increase the revolving credit facility by up to $250.0 million if existing or new lenders provide additional revolving commitments in accordance with the terms of the Credit Agreement. A portion of the revolving line of credit (i) in the aggregate amount of $25.0 million may be available for issuances of letters of credit and (ii) in the aggregate amount of $10.0 million may be available for swing line loans, as part of, not in addition to, the aggregate revolving commitments. The Credit Facilitycredit facility bears interest at LIBOR plus 1.10% and adjusts in the range of 1.00% to 1.30% above LIBOR based on the ratio of the Company’s total debt to its adjusted earnings before interest, taxes, depreciation, amortization and certain other items (“EBITDA”) as defined in the agreement.Credit Agreement. In addition, the Company is required to pay a quarterly facility fee ranging from 0.125% to 0.20% of the aggregate revolving commitments under the Credit Facilitycredit facility and based on the ratio of the Company’s total debt to the Company’s consolidated EBITDA. The weighted average interest rate for the period thatAs of June 30, 2019, there were no amounts were outstanding under the Credit Facility was 1.57%. As of September 30, 2017, there was $40.0 million outstanding under the Credit Facility.credit facility.
The Credit Agreement contains certain financial covenants that require the Company to maintain a consolidated leverage ratio of not more than 3.5:1.0 and a consolidated interest coverage ratio of not less than 3.0:1.0. In addition, the Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the ability of the Company to grant liens, merge, dissolve or consolidate, dispose of all or substantially all of its assets, pay dividends during the existence of a default under the Credit Agreement, change its business and incur subsidiary indebtedness, in each case subject to customary exceptions for a credit facility of this size and type. The Company was in compliance with these covenants as of SeptemberJune 30, 2017.2019.
Convertible Notes
During 2014, the Company completed a private placement of approximately $1.44 billion principal amount of 0.500% Convertible Notes due 2019. As of October 15, 2018, the Company had received conversion notices from noteholders with respect to $273.0 million in aggregate principal amount of Convertible Notes requesting conversion as a result of the sales price condition having been met during the second and third quarter of 2018. In accordance with the terms of the Convertible Notes, in the fourth quarter of 2018, the Company made cash payments of this aggregate principal amount and delivered 1.3 million newly issued shares of its common stock in respect of the remainder of the Company's conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted, in full satisfaction of such converted notes. The Company received shares of its common stock under the Bond Hedges (as defined below) that offset the issuance of shares of common stock upon conversion of the Convertible Notes. In addition, on or after October 15, 2018 until the close of business on the second scheduled trading day immediately preceding the April 15, 2019 maturity date, holders of the Convertible Notes had the right to convert their notes at any time, regardless of whether the sales price condition was met. All Convertible Notes were converted by their beneficial owners prior to their maturity on April 15, 2019. In accordance with the terms of the indenture governing the Convertible Notes, on April 15, 2019 the Company paid $1.16 billion in the outstanding aggregate principal amount of the Convertible Notes and delivered 4.9 million newly issued shares of its common stock in respect of the remainder of the Company's conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted, in full satisfaction of such converted notes. The Company received shares of its common stock under the Bond Hedges that offset the issuance of shares of common stock upon conversion of the Convertible Notes.
In accounting for the settlement of the Convertible Notes, the Company allocated the fair value of the settlement consideration remitted to the noteholders between the liability and equity components. The portion of the settlement consideration allocated to the extinguishment of the liability component was based on the fair value of that component immediately before extinguishment.The Company allocated the remaining settlement consideration to the reacquisition of the equity component and recognized this amount as a reduction of Stockholders' equity.
The following table includes total interest expense recognized related to the Convertible Notes and the 2027 Notes (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 |
| 2018 | | 2019 | | 2018 |
| Contractual interest expense | $ | 8,614 |
| | $ | 10,327 |
| | $ | 18,507 |
| | $ | 20,562 |
|
| Amortization of debt issuance costs | 317 |
| | 1,374 |
| | 1,306 |
| | 2,379 |
|
| Amortization of debt discount | 1,204 |
| | 8,811 |
| | 8,191 |
| | 17,476 |
|
| | $ | 10,135 |
| | $ | 20,512 |
| | $ | 28,004 |
| | $ | 40,417 |
|
See Note 7 to the Company's condensed consolidated financial statements for fair value disclosures related to the Company's 2027 Notes.
Convertible Note Hedge and Warrant Transactions
To minimize the impact of potential dilution upon conversion of the Convertible Notes, the Company entered into convertible note hedge transactions relating to approximately 16.0 million shares of common stock (the "Bond Hedges") and also entered into separate warrant transactions (the "Warrant Transactions") with each of the Option Counterparties relating to approximately 16.0 million shares of common stock to offset any payments in cash or shares of common stock at the Company’s election. As a result of the spin-off of its GoTo Business, the number of shares of the Company's common stock covered by the Bond Hedges and Warrant Transactions was adjusted to approximately 20.0 million shares.
As noted above, the Bond Hedges reduced the dilution upon conversion of the Convertible Notes, as the market price per share of common stock, as measured under the terms of the Bond Hedges, was greater than the strike price of the Bond Hedges, which initially corresponded to the conversion price of the Convertible Notes and was subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Convertible Notes. The Warrant Transactions will separately have a dilutive effect to the extent that the market value per share of common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants issued pursuant to the Warrant Transactions (the “Warrants”). The strike price of the Warrants was adjusted to $94.27 per share and the number of shares of the Company's common stock covered by the Warrant Transactions was adjusted to approximately 20.2 million shares as a result of the cash dividend paid in June 2019. The Warrants will expire in ratable portions on a series of expiration dates commencing on July 15, 2019. The Warrants are not marked to market as the value of the Warrants were initially recorded in stockholders' equity and continue to be classified within stockholders' equity.
Aside from the initial payment of a premium to the Option Counterparties under the Bond Hedges, which amount was partially offset by the receipt of a premium under the Warrant Transactions, the Company was not required to make any cash payments to the Option Counterparties under the Bond Hedges and will not receive any proceeds if the Warrants are exercised.
13.12. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives Designated as Hedging Instruments
As of SeptemberJune 30, 2017,2019, the Company’s derivative assets and liabilities primarily resulted from cash flow hedges related to its forecasted operating expenses transacted in local currencies. A substantial portion of the Company’s overseas expenses are and will continue to be transacted in local currencies. To protect against fluctuations in operating expenses and the volatility of future cash flows caused by changes in currency exchange rates, the Company has established a program that uses foreign exchange forward contracts to hedge its exposure to these potential changes. The terms of these instruments, and the hedged transactions to which they relate, generally do not exceed 12 months.
Generally, when the dollar is weak, foreign currency denominated expenses will be higher, and these higher expenses will be partially offset by the gains realized from the Company’s hedging contracts. Conversely, if the dollar is strong, foreign currency denominated expenses will be lower. These lower expenses will in turn be partially offset by the losses incurred from the Company’s hedging contracts. Derivative instruments are recognized as either assets or liabilities and are measured at fair value. The changeaccounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Gains and losses on derivatives that are designated as cash flow hedges are initially reported as a component inof Accumulated other comprehensive loss includes unrealized gains orand are subsequently recognized in income when the hedged exposure is recognized in income. Gains and losses that arose from changes in market value of the effective portionfair values of derivatives that were held during the period, and gains or losses that were previously unrealized but have beenare not designated as hedges are recognized in the same line item as the forecasted transaction in current periodOther (expense) income, net income due to termination or maturities of derivative contracts. This reclassification has no effect on total comprehensive income or equity..
The total cumulative unrealized gain on cash flow derivative instruments was $2.10.3 million at SeptemberJune 30, 2017,2019 and is included in Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. The total cumulative unrealized loss on cash flow derivative instruments was $3.1$1.0 million at December 31, 2016,2018, and is included in Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. See Note 1413 for more information related to comprehensive income. The net unrealized gain as of SeptemberJune 30, 20172019 is expected to be recognized in income over the next 12 months at the same time the hedged items are recognized in income.
Derivatives not Designated as Hedging Instruments
A substantial portion of the Company’s overseas assets and liabilities are and will continue to be denominated in local currencies. To protect against fluctuations in earnings caused by changes in currency exchange rates when remeasuring the Company’s balance sheet, it utilizes foreign exchange forward contracts to hedge its exposure to this potential volatility.
These contracts are not designated for hedge accounting treatment under the authoritative guidance. Accordingly, changes in the fair value of these contracts are recorded in Other (expense) income, (expense), net.net.
Fair Values of Derivative Instruments |
| | | | | | | | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives |
| | (In thousands) |
| | June 30, 2019 | | December 31, 2018 | | June 30, 2019 | | December 31, 2018 |
Derivatives Designated as Hedging Instruments | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
| Foreign currency forward contracts | Prepaid expenses and other current assets | | $1,222 | | Prepaid expenses and other current assets | | $708 | | Accrued expenses and other current liabilities | | $835 | | Accrued expenses and other current liabilities | | $1,811 |
| | | | | | | | | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives |
| | (In thousands) |
| | June 30, 2019 | | December 31, 2018 | | June 30, 2019 | | December 31, 2018 |
Derivatives Not Designated as Hedging Instruments | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
| Foreign currency forward contracts | Prepaid expenses and other current assets | | $133 | | Prepaid
expenses
and other
current
assets | | $56 | | Accrued expenses and other current liabilities | | $404 | | Accrued expenses and other current liabilities | | $732 |
|
| | | | | | | | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives |
| | (In thousands) |
| | September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 |
Derivatives Designated as Hedging Instruments | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
| Foreign currency forward contracts | Prepaid expenses and other current assets | | $2,569 | | Prepaid expenses and other current assets | | $460 | | Accrued expenses and other current liabilities | | $293 | | Accrued expenses and other current liabilities | | $3,816 |
| | | | | | | | | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives |
| | (In thousands) |
| | September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 |
Derivatives Not Designated as Hedging Instruments | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
| Foreign currency forward contracts | Prepaid expenses and other current assets | | $1,962 | | Prepaid expenses and other current assets | | $2,046 | | Accrued expenses and other current liabilities | | $329 | | Accrued expenses and other current liabilities | | $619 |
The Effect of Derivative Instruments on Financial Performance
|
| | | | | | | | | | | | | | | | | |
| | For the Three Months Ended June 30, |
| | (In thousands) |
Derivatives in Cash Flow Hedging Relationships | Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) | | Location of (Loss) Gain Reclassified
from Accumulated Other
Comprehensive Loss into
Income | | Amount of (Loss) Gain Reclassified from Accumulated Other Comprehensive Loss |
| | 2019 | | 2018 | | | | 2019 | | 2018 |
| Foreign currency forward contracts | $ | 285 |
| | $ | (4,419 | ) | | Operating expenses | | $ | (97 | ) | | $ | 997 |
|
|
| | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, 2017 |
| | (In thousands) |
Derivatives in Cash Flow Hedging Relationships | Amount of (Loss) Gain Recognized in Other Comprehensive Income (Effective Portion) | | Location of Gain (Loss) Reclassified
from Accumulated Other
Comprehensive Loss into
Income
(Effective Portion) | | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss (Effective Portion) |
| | 2017 | | 2016 | | | | 2017 | | 2016 |
| Foreign currency forward contracts | $ | (340 | ) | | $ | 1,023 |
| | Operating expenses | | $ | 1,116 |
| | $ | (641 | ) |
| | | | | | | | | | |
| | For the Nine Months Ended September 30, 2017 |
| | (In thousands) |
Derivatives in Cash Flow Hedging Relationships | Amount of Gain Recognized in Other Comprehensive Income (Effective Portion)
| | Location of Loss Reclassified
from Accumulated Other
Comprehensive Loss into
Income
(Effective Portion) | | Amount of Loss Reclassified from Accumulated Other Comprehensive Loss (Effective Portion) |
| | 2017 | | 2016 | | | | 2017 | | 2016 |
| Foreign currency forward contracts | $ | 5,214 |
| | $ | 2,049 |
| | Operating expenses | | $ | (551 | ) | | $ | (1,663 | ) |
There was no material ineffectiveness in the Company’s foreign currency hedging program in the periods presented.
|
| | | | | | | | | | | | | | | | | |
| | For the Six Months Ended June 30, |
| | (In thousands) |
Derivatives in Cash Flow Hedging Relationships | Amount of Gain (Loss) Recognized in Other Comprehensive Income | | Location of (Loss) Gain Reclassified
from Accumulated Other
Comprehensive Loss into
Income | | Amount of (Loss) Gain Reclassified from Accumulated Other Comprehensive Loss |
| | 2019 | | 2018 | | | | 2019 | | 2018 |
| Foreign currency forward contracts | $ | 1,326 |
| | $ | (4,946 | ) | | Operating expenses | | $ | (991 | ) | | $ | 2,216 |
|
|
| | | | | | | | | |
| | For the Three Months Ended June 30, |
| | (In thousands) |
| Derivatives Not Designated as Hedging Instruments | Location of (Loss) Gain Recognized in Income on Derivative | | Amount of (Loss) Gain Recognized in Income on Derivative |
| | | | 2019 | | 2018 |
| Foreign currency forward contracts | Other (expense) income, net | | $ | (584 | ) | | $ | 7,161 |
|
| | | | For the Three Months Ended September 30, 2017 | For the Six Months Ended June 30, |
| | (In thousands) | (In thousands) |
| Derivatives Not Designated as Hedging Instruments | Location of Loss Recognized in Income on Derivative | | Amount of Loss Recognized in Income on Derivative | Location of (Loss) Gain Recognized in Income on Derivative | | Amount of (Loss) Gain Recognized in Income on Derivative |
| | | | 2017 | | 2016 | | | 2019 | | 2018 |
| Foreign currency forward contracts | Other income (expense), net | | $ | (1,148 | ) | | $ | (1,693 | ) | Other (expense) income, net | | $ | (1,980 | ) | | $ | 3,602 |
|
| | | | | | |
| | For the Nine Months Ended September 30, 2017 | |
| | (In thousands) | |
| Derivatives Not Designated as Hedging Instruments | Location of Loss Recognized in Income on Derivative | | Amount of Loss Recognized in Income on Derivative | |
| | | | 2017 | | 2016 | |
| Foreign currency forward contracts | Other income (expense), net | | $ | (6,298 | ) | | $ | (5,658 | ) | |
Outstanding Foreign Currency Forward Contracts
As of SeptemberJune 30, 20172019, the Company had the following net notional foreign currency forward contracts outstanding (in thousands):
|
| |
| Foreign Currency | Currency Denomination |
| Australian Dollar | AUD 20,77032,000 |
| Brazilian Real | BRL 11,8707,000 |
| Pounds Sterling | GBP 5,70020,000 |
| Canadian Dollar | CAD 2,6402,850 |
| Chinese Yuan Renminbi | CNY 53,27953,840 |
| Danish Krone | DKK 8,59667,385 |
| Euro | EUR 11,3009,336 |
| Hong Kong Dollar | HKD 26,00033,000 |
| Indian Rupee | INR 238,7452,847,000 |
| Japanese Yen | JPY 2,012,3171,757,501 |
| Korean Won | KRW 1,079,000 |
| Singapore Dollar | SGD 10,40020,400 |
| Swiss Franc | CHF 2,03027,280 |
| Czech Koruna | CZK 98,000 |
| Swedish Krona | SEK 10,000 |
13. COMPREHENSIVE INCOME
The changes in Accumulated other comprehensive loss by component, net of tax, are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Foreign currency | | Unrealized loss on available-for-sale securities | | Unrealized (loss) gain on derivative instruments | | Other comprehensive loss on pension liability | | Total |
| | (In thousands) |
| Balance at December 31, 2018 | $ | (2,946 | ) | | $ | (2,440 | ) | | $ | (985 | ) | | $ | (1,783 | ) | | $ | (8,154 | ) |
| Other comprehensive income before reclassifications | — |
| | 2,802 |
| | 335 |
| | — |
| | 3,137 |
|
| Amounts reclassified from accumulated other comprehensive loss | — |
| | (584 | ) | | 991 |
| | — |
| | 407 |
|
| Net current period other comprehensive income | — |
| | 2,218 |
| | 1,326 |
| | — |
| | 3,544 |
|
| Balance at June 30, 2019 | $ | (2,946 | ) | | $ | (222 | ) | | $ | 341 |
| | $ | (1,783 | ) | | $ | (4,610 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Foreign currency | | Unrealized loss on available-for-sale securities | | Unrealized (loss) gain on derivative instruments | | Other comprehensive loss on pension liability | | Total |
| | (In thousands) |
| Balance at December 31, 2016 | $ | (16,346 | ) | | $ | (3,108 | ) | | $ | (3,130 | ) | | $ | (6,120 | ) | | $ | (28,704 | ) |
| Other comprehensive income before reclassifications | — |
| | 1,500 |
| | 4,663 |
| | — |
| | 6,163 |
|
| Amounts reclassified from accumulated other comprehensive loss | — |
| | (340 | ) | | 551 |
| | 263 |
| | 474 |
|
| Net current period other comprehensive income | — |
| | 1,160 |
| | 5,214 |
| | 263 |
| | 6,637 |
|
| Distribution of the GoTo Business | $ | 13,400 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 13,400 |
|
| Balance at September 30, 2017 | $ | (2,946 | ) | | $ | (1,948 | ) | | $ | 2,084 |
| | $ | (5,857 | ) | | $ | (8,667 | ) |
Income tax expense or benefit allocated to each component of other comprehensive income (loss)loss is not material.
Reclassifications out of Accumulated other comprehensive loss are as follows:
| | | | | For the Three Months Ended September 30, 2017 | |
| | | (In thousands) | |
| Details about accumulated other comprehensive loss components | | Amount reclassified from accumulated other comprehensive loss, net of tax | | Affected line item in the Condensed Consolidated Statements of Income | |
| Unrealized net losses on available-for-sale securities | | $ | 120 |
| | Other income (expense), net | |
| Unrealized net gains on cash flow hedges | | (1,116 | ) | | Operating expenses * | |
| | | $ | (996 | ) | | |
| | | | | |
| | | | | | | | |
| | | For the Nine Months Ended September 30, 2017 | | For the Three Months Ended June 30, 2019 |
| | | (In thousands) | | (In thousands) |
| Details about accumulated other comprehensive loss components | | Amount reclassified from accumulated other comprehensive loss, net of tax | | Affected line item in the Condensed Consolidated Statements of Income | | Amount reclassified from accumulated other comprehensive loss, net of tax | | Affected line item in the Condensed Consolidated Statements of Income |
| Unrealized net gains on available-for-sale securities | | $ | (340 | ) | | Other income (expense), net | | $ | (26 | ) | | Other (expense) income, net |
| Unrealized net losses on cash flow hedges | | 551 |
| | Operating expenses * | | 97 |
| | Operating expenses * |
| | | $ | 211 |
| | | $ | 71 |
| |
|
| | | | | | |
| | | For the Six Months Ended June 30, 2019 |
| | | (In thousands) |
| Details about accumulated other comprehensive loss components | | Amount reclassified from accumulated other comprehensive loss, net of tax | | Affected line item in the Condensed Consolidated Statements of Income |
| Unrealized net gains on available-for-sale securities | | $ | (584 | ) | | Other (expense) income, net |
| Unrealized net losses on cash flow hedges | | 991 |
| | Operating expenses * |
| | | $ | 407 |
| | |
* Operating expenses amounts allocated to Research and development, Sales, marketing and services, and General and administrative are not individually significant.
15.14. INCOME TAXES
The Company is required to estimate its income taxes in each of the jurisdictions in which it operates as part of the process of preparing its condensed consolidated financial statements. The Company maintains certain strategic management and operational activities in overseas subsidiaries and its foreign earnings are taxed at rates that are generally lower than in the United States. The Company does not expect to remit earnings from its foreign subsidiaries.
In March 2016, the Financial Accounting Standards Board issued an accounting standard update on the accounting of stock-based compensation to provide guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance requires, among other things, the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid-in capital pools. The Company adopted this standard in the first quarter of 2017. There was no material impact upon adoption of this guidance since the recognition of income tax effects of awards was not materially different from amounts previously recorded in the Company's financial statements.
The Company’s continuingeffective tax rate generally differs from the U.S. federal statutory rate primarily due to lower tax rates on earnings generated by the Company’s foreign operations that are taxed primarily in Switzerland.
The Company’s effective tax rate was 5.3%12.8% and 8.5%18.7% for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The decrease in the effective tax rate when comparing the three months ended SeptemberJune 30, 20172019 to the three months ended SeptemberJune 30, 20162018 was generallyprimarily due to tax items unique to the recognition of a $7.9 millionperiod ended June 30, 2018, as well as additional tax benefit from stock-based compensation deductions in the release of uncertain tax positions due to the expiration of statute of limitations in certain jurisdictions. period ended June 30, 2019.
The Company’s effective tax rate for continuing operations was 16.9%9.6% and 13.2%11.1% for the ninesix months ended SeptemberJune 30, 20172019 and September 30, 2016,2018, respectively. The increasedecrease in the effective tax rate when comparing the ninesix months ended SeptemberJune 30, 20172019 to the ninesix months ended SeptemberJune 30, 20162018 was primarily due to certain transactions executed during the nine months ended September 30, 2017. These amounts include a $46.1 million income tax charge to establish a valuation allowance due to a change in expectation of realizability of state R&D credits arising from the separation of the GoTo Business. This charge was partially offset by a $20.9 million benefit dueitems unique to the adoption of the accounting standard update requiring recognition of incomeperiod ended June 30, 2018, as well as additional tax effects related tobenefit from stock-based compensation whendeductions in the awards vest or settle. This charge was also partially offset by a $9.8 million net tax benefit related to an international statutory tax transaction and a $7.9 million benefit from the release of uncertain tax positions due to the expiration of statute of limitations in certain jurisdictions.period ended June 30, 2019.
The Company’s net unrecognized tax benefits totaled $69.2$101.6 million and $69.8$89.9 million as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively. All amountsAt June 30, 2019, $74.8 million included in the balance at September 30, 2017 for tax positions would affect the annual effective tax rate if recognized. The Company recognizes interest accrued related to uncertain tax positions and penalties in income tax expense. As of June 30, 2019, the Company has $2.4accrued $6.0 million accrued for the payment of interest and penalties as of September 30, 2017.
interest.
The Company and one or more of its subsidiaries are subject to U.S. federal income taxes in the United States, as well as income taxes of multiple state and foreign jurisdictions. The Company is not currently no longer subject to U.S. federal income tax examination.under examination by the United States Internal Revenue Service. With few exceptions, the Company is generally not undersubject to examination for state and local income tax, or in non-U.S. jurisdictions, by tax authorities for years prior to 2013.2015.
In the ordinary course of global business, thereThe Company's U.S. liquidity needs are transactions for which the ultimate tax outcome is uncertain; thus, judgment is required in determining the worldwide provision for income taxes.currently satisfied using cash flows generated from its U.S. operations, borrowings, or both. The Company provides for income taxes on transactions based onalso utilizes a variety of tax planning strategies in an effort to ensure that its estimate of the probable liability.worldwide cash is available in locations in which it is needed. The Company adjustsexpects to repatriate a substantial portion of its provision as appropriate for changes that impact its underlying judgments. Changes that impact provision estimates include such items as jurisdictional interpretations on tax filing positions based on the results of tax audits and general tax authority rulings. Dueforeign earnings over time, to the evolving nature of tax rules combined with the large number of jurisdictions in which the Company operates, it is possibleextent that the Company’s estimates of its tax liability and the realizability of its deferred tax assets could change in the future, which mayforeign earnings are not restricted by local laws or result in additional tax liabilities and adversely affectsignificant incremental costs associated with repatriating the Company’s results of operations, financial condition or cash flows.foreign earnings.
At SeptemberJune 30, 20172019, the Company had $194.5$114.6 million in net deferred tax assets from continuing operations.assets. The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company reviews deferred tax assets periodically for recoverability and makes estimates and judgments regarding the expected geographic sources of taxable income and gains from investments, as well as tax planning strategies in assessing the need for a valuation allowance. If the estimates and assumptions used in the Company's determination change in the future, the Company could be required to revise its estimates of the valuation allowances against its deferred tax assets and adjust its provisions for additional income taxes.
The Company’s effective tax rate generally differs fromOn July 24, 2018, the U.S. federal statutory rateNinth Circuit Court of 35% due primarilyAppeals overturned the U.S. Tax Court’s unanimous decision in Altera v. Commissioner, where the Tax Court held the Treasury regulation requiring participants in a qualified cost sharing arrangement to lower tax ratesshare stock-based compensation costs to be invalid. On August 7, 2018, the U.S. Ninth Circuit Court of Appeals, on earnings generated byits own motion, withdrew its July 24, 2018 opinion to allow time for a reconstituted panel to confer. Given the Company’s foreign operations that are taxed primarily in Switzerland. The Company has not provided for U.S. taxes for those earnings becauseincreased uncertainty as to the Ninth Circuit panel's eventual ruling and the impact it planswill have on the Internal Revenue Service’s ability to reinvest allchallenge the technical merits of those earnings indefinitely outside the United States. From time to time, there may be other items that impact the Company's effectiveposition, the Company accrued amounts for this uncertain tax rate, suchposition as of the items specificyear ended December 31, 2018.
On June 7, 2019, a reconstituted panel issued a new opinion which again reversed the Tax Court's holding in Altera v. Commissioner and upheld a 2003 regulation that requires participants in a cost-sharing arrangement to share stock-based compensation costs. The Ninth Circuit panel concluded that the 2003 regulations were valid under the Administrative Procedure Act. Since the Company previously accrued amounts for this uncertain tax position, there were no changes to the Company's position or treatment of its cost-sharing arrangements in the current period discussed above.period. On July 22, 2019, Altera Corp. filed an appeal with the Ninth Circuit to rehear this case, which is ongoing. Therefore, the case's final disposition may result in a benefit for the Company in the future if the case is reversed.
16.15. TREASURY STOCK
Stock Repurchase Program
The Company’s Board of Directors authorized an ongoing stock repurchase program, with a total repurchase authority granted to the Company of $6.8 billion, of which $500.0$750.0 million was approved in January 2017.October 2018. The Company may use the approved dollar authority to repurchase stock at any time until the approved amount is exhausted. The objective of the Company’s stock repurchase program is to improve stockholders’ returns. At SeptemberJune 30, 2017, $329.02019, approximately $517.9 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock. A portion of the funds used to repurchase stock over the course of the program was provided by net proceeds from the Convertible Notes offering,and 2027 Notes offerings, as well as proceeds from employee stock option exercisesawards and the related tax benefit. The Company is authorized to make open market purchases of its common stock using general corporate funds through open market purchases, pursuant to a Rule 10b5-1 plan or in privately negotiated transactions.
In February 2018, the Company entered into an ASR transaction with a counterparty to pay an aggregate of $750.0 million in exchange for the delivery of approximately 6.5 million shares of its common stock based on current market prices. The purchase price per share under the ASR was based on the volume-weighted average price of the Company's common stock
during the term of the ASR, less a discount. The ASR was entered into pursuant to the Company's existing share repurchase program. Final settlement of the ASR agreement was completed in April 2018 and the Company received delivery of an additional 1.6 million additional shares of its common stock.
During the three months ended SeptemberJune 30, 2017,2019, the Company had expended $75.0approximately $156.2 million on open market purchases under the stock repurchase program, repurchasing 984,8691,599,822 shares of commonscommon stock at an average price of $76.11.$97.63. During the ninesix months ended SeptemberJune 30, 2017,2019, the Company expended $575.0approximately $250.0 million on open market purchases under the stock repurchase program, repurchasing 7,384,3682,510,882 shares of outstanding common stock at an average price of $77.86.$99.57.
During the three and six months ended SeptemberJune 30, 2016, the Company had no open market purchases. During the nine months ended September 30, 2016,2018, the Company expended $28.7approximately $15.0 million on open market purchases under the stock repurchase program, repurchasing 426,3000.1 million shares of outstanding common stock at an average price of $67.30.
$106.83.
Shares for Tax Withholding
During the three and six months ended SeptemberJune 30, 2017,2019, the Company withheld 135,003104,129 shares and 698,117 shares, respectively, from equity awards that vested, totaling $10.6$10.4 million and $70.6 million, respectively, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. During the ninethree and six months ended SeptemberJune 30, 2017,2018, the Company withheld 870,65630,502 shares from stock units that vested, totaling $71.2 million, to satisfy minimum tax withholding obligations that arose on the vesting of stock units. During the three months ended September 30, 2016, the Company withheld 134,782and 537,776 shares, respectively, from equity awards that vested, totaling $12.0$3.0 million and $49.9 million, respectively, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. During the nine months ended September 30, 2016, the Company withheld 698,391 shares from stock units that vested, totaling $55.0 million, to satisfy minimum tax withholding obligations that arose on the vesting of stock units. These shares are reflected as treasury stock in the Company’s condensed consolidated balance sheets and the related cash outlays do not reduce the Company’s total stock repurchase authority.
17.16. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain office space and equipment under various operating leases. In addition to rent, the leases require the Company to pay for taxes, insurance, maintenance and other operating expenses. Certain of these leases contain stated escalation clauses while others contain renewal options. The Company recognizes rent expense on a straight-line basis over the term of the lease, excluding renewal periods, unless renewal of the lease is reasonably assured.
Legal Matters
The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the Company's views on the probable outcomes of any pending claims, suits, assessments, regulatory investigations, or other legal proceedings change, changes in the Company's accrued liabilities would be recorded in the period in which such determination is made. For the matters referenced below, the amount of liability is not probable or the amount cannot be reasonably estimated; and, therefore, accruals have not been made. In addition, in accordance with the relevant authoritative guidance, for matters in which the likelihood of material loss is at least reasonably possible, the Company provides disclosure of the possible loss or range of loss. If a reasonable estimate cannot be made, however, the Company will provide disclosure to that effect.
Due to the nature of the Company's business, the Company is subject to patent infringement claims, including current litigation alleging infringement by various Company productssolutions and services. The Company believes that it has meritorious defenses to the allegations made in its pending caseslitigation and intends to vigorously defend these lawsuits;itself; however, it is unable currently to determine the ultimate outcome of these or similar matters or the potential exposure to loss, if any. In addition, the Company is a defendant insubject to various litigation mattersother legal proceedings, including suits, assessments, regulatory actions and investigations generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcomes of these cases,matters, the Company believes that it is not reasonably possibleoutcomes that the ultimate outcomes will materially and adversely affect its business, financial position, results of operations or cash flows are reasonably possible but not estimable at this time.
The Company was the victim of a previously disclosed cyber attack during which international cyber criminals gained intermittent access to Citrix’s internal network. The Company has conducted an investigation into this incident. The Company’s investigation confirmed that between October 13, 2018 and March 8, 2019, international cyber criminals gained intermittent access to Citrix’s internal network through “password spraying”, and over a limited number of days stole business documents and files from a shared network drive and a drive associated with a web-based tool used in the Company's consulting practice. The shared drive from which documents and files were stolen was used to store current and historical business documents and files, such as human resources and employee records, some of which contained sensitive and personal identification information of the Company's current and former employees and, in some cases, their beneficiaries, dependents and others; customer engagement documents, including consulting services project materials, statements of work and proofs of concept, some of which were also stored on the drive associated with a web-based tool used in the Company's consulting practice; marketing materials; sales and finance documents; contracts and other legal records; and a wide assortment of other company records. The cyber criminals also may have accessed the individual virtual drives of a very limited number of compromised users, accessed the company email accounts of the same very limited number of compromised users, and launched without further exploitation a limited number of internal applications. The Company is reviewing documents and files that may have been accessed or were stolen in this incident, which include files stolen from the shared network drive and the drive associated with the web-based tool used in the Company's consulting practice, and the accessed documents and files on the individual virtual drives and the Company email accounts of the very limited number of compromised users. The
Company’s investigation found no indication that the cyber criminals discovered and exploited any vulnerabilities in the Company’s products or customer cloud services to gain entry, and no indication that the security of any Citrix product or customer cloud service was compromised. The Company found no impact to its financial reporting systems from this cyberattack. Additionally, the Company has taken steps to enhance its internal controls over financial reporting and disclosure controls and procedures related to cyberattacks.
Further, the Company has a program of network-security (or cyber risk) insurance policies that, with standard exclusions, insure against the costs of detecting and mitigating cyber breaches, the cost of credit monitoring, and reasonable expenses for defending and settling privacy and network security lawsuits. These policies are subject to a $500,000 self-insured retention and a total insurance limit of $200.0 million. There can be no assurance, however, that this insurance coverage is sufficient to cover this or any other cyberattack. In addition to these insurance policies, the Company maintains customary business coverage under its crime, commercial general liability, and director and officer insurance policies.
Although it is difficult to predict the ultimate outcomes of this cyberattack, to date, three putative class action lawsuits have been filed against the Company in the United States District Court for the Southern District of Florida. These matters, Howard v. Citrix, Jackson and Sargent v. Citrix, and Ramus, Young and Charles v. Citrix, were filed on May 24, 2019, May 30, 2019, and June 23, 2019, respectively, and have been consolidated. The plaintiffs, who purport to represent various classes of current and former employees (and their dependents) of the Company, generally claim to have been harmed by the Company’s alleged actions and/or omissions in connection with this incident and their personal data. They assert a variety of common law and statutory claims seeking monetary damages or other related relief.
The Company is unable to currently determine the ultimate outcome of these legal proceedings or the potential exposure or loss, if any, because the legal proceedings remain in the early stages, there is uncertainty as to the likelihood of a class or classes being certified or the ultimate size of any class if certified, and there are significant factual and legal issues to be resolved.
Beyond the matters described above, the Company believes that it is reasonably possible that outcomes from potential unasserted claims related to this cyberattack could materially and adversely affect its business, financial position, results of operations or cash flows. However, it is not possible to estimate the amount or a range of potential loss, if any, at this time, and the Company will continue to evaluate information as it becomes known, and will record an accrual for estimated losses at the time or times it is determined that a loss is both probable and reasonably estimable.
On July 25, 2019, a class action lawsuit was filed against Citrix, LogMeIn, Inc. (“LogMeIn”) and certain of their directors and officers in the Circuit Court of the 15th Judicial Circuit, Palm Beach County, Florida. The complaint alleges that the defendants violated federal securities laws by making alleged misstatements and omissions in LogMeIn’s Registration Statement and Prospectus filed in connection with the 2017 spin-off of Citrix’s GoTo family of service offerings and subsequent merger of that business with LogMeIn. The complaint seeks among other things the recovery of monetary damages. The Company believes that Citrix and its directors have meritorious defenses to these allegations, however, the Company is unable to currently determine the ultimate outcome of this matter or the potential exposure or loss, if any.
Guarantees
The authoritative guidance requires certain guarantees to be recorded at fair value and requires a guarantor to make disclosures, even when the likelihood of making any payments under the guarantee is remote. For those guarantees and indemnifications that do not fall within the initial recognition and measurement requirements of the authoritative guidance, the Company must continue to monitor the conditions that are subject to the guarantees and indemnifications, as required under existing generally accepted accounting principles, to identify if a loss has been incurred. If the Company determines that it is probable that a loss has been incurred, any such estimable loss would be recognized. The initial recognition and measurement requirements do not apply to the provisions contained in the majority of the Company’s software license agreements that indemnify licensees of the Company’s software from damages and costs resulting from claims alleging that the Company’s software infringes the intellectual property rights of a third party. The Company has not made material payments pursuant to these provisions. The Company has not identified any losses that are probable under these provisions and, accordingly, the Company has not recorded a liability related to these indemnification provisions.
18.Other Purchase Commitments
In June 2019, the Company entered into an amended agreement with a third-party provider, in the ordinary course of business, for the Company's use of certain cloud services through June 2021. Under the amended agreement, the Company is committed to a purchase of $25.0 million in fiscal year 2019 and $25.0 million in fiscal year 2020.
17. RESTRUCTURING
The Company has implemented multiple restructuring plans to reduce its cost structure, align resources with its product strategy and improve efficiency, which has resulted in workforce reductions and the consolidation of certain leased facilities.
For the three and ninesix months ended SeptemberJune 30, 20172019 and September 30, 2016,2018, restructuring charges were comprised of the following (in thousands): |
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 |
| 2018 | | 2019 | | 2018 |
| Employee severance and related costs | $ | 4,311 |
| | $ | 1,278 |
| | $ | 7,143 |
| | $ | 2,319 |
|
| Consolidation of leased facilities | — |
| | 6,159 |
| | — |
| | 11,305 |
|
| Total Restructuring charges | $ | 4,311 |
| | $ | 7,437 |
| | $ | 7,143 |
| | $ | 13,624 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Employee severance and related costs | $ | 1,895 |
| | $ | 3,933 |
| | $ | 10,448 |
| | $ | 42,342 |
|
| Consolidation of leased facilities | 6,657 |
| | 8,243 |
| | 8,408 |
| | 19,147 |
|
| Reversal of previous charges | — |
| | — |
| | (178 | ) | | (177 | ) |
| Total Restructuring charges | $ | 8,552 |
| | $ | 12,176 |
| | $ | 18,678 |
| | $ | 61,312 |
|
DuringFor the three and nine months ended SeptemberJune 30, 2017,2019 and 2018, the Company incurred costs of $1.7$4.3 million and $9.2$1.3 million, respectively, and for the six months June 30, 2019 and 2018, the Company incurred costs of $7.1 million and $2.3 million, respectively, related to operational initiatives designed to improve infrastructure scalability and cost saving efficiencies. The charges primarily related to employee severance. The majority of the activities related to this program were substantially completed as of the end of the third quarter of 2017. As of September 30, 2017, total charges incurred since inception were $9.2 million.
All remaining costs for the three and nine months ended September 30, 2017 and 2016 relate to other restructuring plans, wherein the majority of the activities related to these previous programs are substantially complete.
Restructuring accruals
The activity in the Company’s restructuring accruals for the nine months ended September 30, 2017 is summarized as follows (in thousands):
|
| | | |
| | Total |
| Balance at January 1, 2017 | $ | 38,059 |
|
| Restructuring charges | 18,678 |
|
| Payments | (15,770 | ) |
| Balance at September 30, 2017 | $ | 40,967 |
|
As of September 30, 2017, the $41.0 million in outstanding restructuring accruals primarily relate to future payments for leased facilities.
Subsequent Event
On October 4, 2017, the Company announced a restructuring program to support its initiatives intended to accelerate the transformation to a cloud-based subscription business, increase strategic focus, and improve operational efficiency.
In connection with the Company's restructuring initiatives, the Company had previously vacated or consolidated properties and subsequently reassessed its obligations on non-cancelable leases. The program will include, among other things,fair value estimate of these non-cancelable leases was based on the elimination of full-time positionscontractual lease costs over the remaining term, partially offset by estimated future sublease rental income. No costs were incurred during the three and facilities consolidation. The Company currently expects to record in the aggregate approximately $60.0 million to $100.0 million in pre-tax restructuring charges associated with this program. Included in these pre-tax charges are approximately $55.0 million to $70.0 million related to employee severance arrangements and approximately $5.0 million to $30.0 millionsix months ended June 30, 2019 related to the consolidation of leased facilitiesfacilities. During the three and other charges associated withsix months ended June 30, 2018, the program. Substantially allCompany incurred costs of these charges will$6.2 million and $11.3 million, respectively, related to the consolidation of leased facilities.
Restructuring accruals
The activity in the Company’s restructuring accruals for the six months ended June 30, 2019 is summarized as follows (in thousands):
|
| | | |
| | Total |
| Balance at January 1, 2019 | $ | 45,095 |
|
| Adjustment for ASC 842 | (42,248 | ) |
| Restructuring charges | 7,143 |
|
| Payments | (6,209 | ) |
| Balance at June 30, 2019 | $ | 3,781 |
|
As of June 30, 2019, the $3.8 million in outstanding restructuring accruals primarily relate to employee severance and related costs. As a result in future cash expenditures. The Company currently anticipates completing the majority of the activities relatedadoption of the new lease standard, the provision for lease losses was reclassified, resulting in a reduction to this programoperating lease right-of-use assets as of January 1, 2019. Refer to Note 2 for additional information on adoption of the lease standard.
18. STATEMENT OF CHANGES IN EQUITY
The following tables presents the changes in total stockholders' equity during the fourth quarterthree and six months ended June 30, 2019 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Common Stock in Treasury | | | Total Equity |
| | Shares | | Amount | | Shares | | Amount | | |
| Balance at March 31, 2019 | 311,732 |
| | $ | 312 |
| | $ | 5,495,935 |
| | $ | 4,232,181 |
| | $ | (5,483 | ) | | (179,832 | ) | | $ | (9,168,067 | ) | | | $ | 554,878 |
|
| Shares issued under stock-based compensation plans | 287 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | | — |
|
| Stock-based compensation expense | — |
| | — |
| | 70,080 |
| | — |
| | — |
| | — |
| | — |
| | | 70,080 |
|
| Temporary equity reclassification | — |
| | — |
| | 1,163 |
| | — |
| | — |
| | — |
| | — |
| | | 1,163 |
|
| Stock repurchases, net | — |
| | — |
| | — |
| | — |
| | — |
| | (1,600 | ) | | (156,195 | ) | | | (156,195 | ) |
| Restricted shares turned in for tax withholding | — |
| | — |
| | — |
| | — |
| | — |
| | (104 | ) | | (10,445 | ) | | | (10,445 | ) |
| Cash dividends declared | — |
| | — |
| | — |
| | (45,827 | ) | | — |
| | — |
| | — |
| | | (45,827 | ) |
| Settlement of convertible notes and hedges | 4,950 |
| | 5 |
| | 509,519 |
| | — |
| | — |
| | (4,950 | ) | | (509,524 | ) | | | — |
|
| Other | — |
| | — |
| | 2,263 |
| | (2,263 | ) | | — |
| | — |
| | — |
| | | — |
|
| Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | 873 |
| | — |
| | — |
| | | 873 |
|
| Net income | — |
| | — |
| | — |
| | 93,495 |
| | — |
| | — |
| | — |
| | | 93,495 |
|
| Balance at June 30, 2019 | 316,969 |
| | $ | 317 |
| | $ | 6,078,960 |
| | $ | 4,277,586 |
| | $ | (4,610 | ) | | (186,486 | ) | | $ | (9,844,231 | ) | | | $ | 508,022 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid In Capital | | Retained Earnings | | Accumulated Other Comprehensive loss | | Common Stock in Treasury | | | Total Equity |
| | Shares | | Amount | | Shares | | Amount | | |
| Balance at December 31, 2018 | 309,761 |
| | $ | 310 |
| | $ | 5,404,500 |
| | $ | 4,169,019 |
| | $ | (8,154 | ) | | (178,327 | ) | | $ | (9,014,156 | ) | | | $ | 551,519 |
|
| Shares issued under stock-based compensation plans | 2,042 |
| | 2 |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
| | | — |
|
| Stock-based compensation expense | — |
| | — |
| | 133,554 |
| | — |
| | — |
| | — |
| | — |
| | | 133,554 |
|
| Temporary equity reclassification | — |
| | — |
| | 8,110 |
| | — |
| | — |
| | — |
| | — |
| | | 8,110 |
|
| Common stock issued under employee stock purchase plan | 216 |
| | — |
| | 19,016 |
| | — |
| | — |
| | — |
| | — |
| | | 19,016 |
|
| Stock repurchases, net | — |
| | — |
| | — |
| | — |
| | — |
| | (2,511 | ) | | (250,000 | ) | | | (250,000 | ) |
| Restricted shares turned in for tax withholding | — |
| | — |
| | — |
| | — |
| | — |
| | (698 | ) | | (70,551 | ) | | | (70,551 | ) |
| Cash dividends declared | — |
| | — |
| | — |
| | (91,851 | ) | | — |
| | — |
| | — |
| | | (91,851 | ) |
| Settlement of convertible notes and hedges | 4,950 |
| | 5 |
| | 509,519 |
| | — |
| | — |
| | (4,950 | ) | | (509,524 | ) | | | — |
|
| Cumulative-effect adjustment from adoption of accounting standards | — |
| | — |
| | — |
| | 838 |
| | — |
| | — |
| | — |
| | | 838 |
|
| Other | — |
| | — |
| | 4,263 |
| | (4,263 | ) | | — |
| | — |
| | — |
| | | — |
|
| Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | 3,544 |
| | — |
| | — |
| | | 3,544 |
|
| Net income | — |
| | — |
| | — |
| | 203,843 |
| | — |
| | — |
| | — |
| | | 203,843 |
|
| Balance at June 30, 2019 | 316,969 |
| | $ | 317 |
| | $ | 6,078,960 |
| | $ | 4,277,586 |
| | $ | (4,610 | ) | | (186,486 | ) | | $ | (9,844,231 | ) | | | $ | 508,022 |
|
The following tables presents the changes in total stockholders' equity during the three and six months ended June 30, 2018 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid In Capital | | Retained Earnings | | Accumulated Other Comprehensive loss | | Common Stock in Treasury | | | Total Equity |
| | Shares | | Amount | | Shares | | Amount | | |
| Balance at March 31, 2018 | 307,575 |
| | $ | 308 |
| | $ | 4,938,533 |
| | $ | 3,786,521 |
| | $ | (14,874 | ) | | (170,431 | ) | | $ | (8,187,110 | ) | | | $ | 523,378 |
|
| Shares issued under stock-based compensation plans | 87 |
| | — |
| | 43 |
| | — |
| | — |
| | — |
| | — |
| | | 43 |
|
| Stock-based compensation expense | — |
| | — |
| | 55,844 |
| | — |
| | — |
| | — |
| | — |
| | | 55,844 |
|
| Temporary equity reclassification | — |
| | — |
| | (28,081 | ) | | — |
| | — |
| | — |
| | — |
| | | (28,081 | ) |
| Stock repurchases, net | — |
| | — |
| | — |
| | — |
| | — |
| | (1,783 | ) | | (164,978 | ) | | | (164,978 | ) |
| Accelerated stock repurchase program | — |
| | — |
| | 150,000 |
| | — |
| | — |
| | — |
| | — |
| | | 150,000 |
|
| Restricted shares turned in for tax withholding | — |
| | — |
| | — |
| | — |
| | — |
| | (30 | ) | | (3,019 | ) | | | (3,019 | ) |
| Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | (3,844 | ) | | — |
| | — |
| | | (3,844 | ) |
| Net income | — |
| | — |
| | — |
| | 106,833 |
| | — |
| | — |
| | — |
| | | 106,833 |
|
| Balance at June 30, 2018 | 307,662 |
| | $ | 308 |
| | $ | 5,116,339 |
| | $ | 3,893,354 |
| | $ | (18,718 | ) | | (172,244 | ) | | $ | (8,355,107 | ) | | | $ | 636,176 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid In Capital | | Retained Earnings | | Accumulated Other Comprehensive loss | | Common Stock in Treasury | | | Total Equity |
| | Shares | | Amount | | Shares | | Amount | | |
| Balance at December 31, 2017 | 305,751 |
| | $ | 306 |
| | $ | 4,883,670 |
| | $ | 3,509,484 |
| | $ | (10,806 | ) | | (162,044 | ) | | $ | (7,390,193 | ) | | | $ | 992,461 |
|
| Shares issued under stock-based compensation plans | 1,659 |
| | 2 |
| | 111 |
| | — |
| | — |
| | — |
| | — |
| | | 113 |
|
| Stock-based compensation expense | — |
| | — |
| | 91,567 |
| | — |
| | — |
| | — |
| | — |
| | | 91,567 |
|
| Temporary equity reclassification | — |
| | — |
| | (28,081 | ) | | — |
| | — |
| | — |
| | — |
| | | (28,081 | ) |
| Common stock issued under employee stock purchase plan | 252 |
| | — |
| | 17,457 |
| | — |
| | — |
| | — |
| | — |
| | | 17,457 |
|
| Stock repurchases, net | — |
| | — |
| | — |
| | — |
| | — |
| | (9,663 | ) | | (914,978 | ) | | | (914,978 | ) |
| Accelerated stock repurchase program | — |
| | — |
| | 150,000 |
| | — |
| | — |
| | — |
| | — |
| | | 150,000 |
|
| Restricted shares turned in for tax withholding | — |
| | — |
| | — |
| | — |
| | — |
| | (537 | ) | | (49,936 | ) | | | (49,936 | ) |
| Cumulative-effect adjustment from adoption of accounting standard | — |
| | — |
| | — |
| | 132,778 |
| | — |
| | — |
| | — |
| | | 132,778 |
|
| Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | (7,912 | ) | | — |
| | — |
| | | (7,912 | ) |
| Other | — |
| | — |
| | 1,615 |
| | — |
| | — |
| | — |
| | — |
| | | 1,615 |
|
| Net income | — |
| | — |
| | — |
| | 251,092 |
| | — |
| | — |
| | — |
| | | 251,092 |
|
| Balance at June 30, 2018 | 307,662 |
| | $ | 308 |
| | $ | 5,116,339 |
| | $ | 3,893,354 |
| | $ | (18,718 | ) | | (172,244 | ) | | $ | (8,355,107 | ) | | | $ | 636,176 |
|
Cash Dividend
The following table provides information with respect to quarterly dividends on common stock during the six months ended June 30, 2019.
|
| | | | | | | |
| Declaration Date | Dividends per Share | | Record Date | | Payable Date |
| January 23, 2019 | $ | 0.35 |
| | March 8, 2019 | | March 22, 2019 |
| April 24, 2019 | $ | 0.35 |
| | June 7, 2019 | | June 21, 2019 |
Subsequent Event
On July 24, 2019 the Company announced that its Board of 2017 and during fiscal year 2018.Directors approved a quarterly cash dividend of $0.35 per share which will be paid on September 20, 2019 to all shareholders of record as of the close of business on September 6, 2019.
19. RECENT ACCOUNTING PRONOUNCEMENTSLEASES
In January 2017, the Financial Accounting Standards Board issued an accounting standard update on the accounting for business combinations by clarifying the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new guidance is effective for annual and interim periods beginning after December 15, 2017. The Company is currently evaluatingleases certain office space and equipment under various leases. In addition to rent, the potential impact of this standard on its financial positionleases require the Company to pay for taxes, insurance, maintenance and results of operations.
In October 2016, the Financial Accounting Standards Board issued an accounting standard update on the accounting for income taxes, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transaction occurs as opposed to deferring tax consequences and amortizing them into future periods. This update is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. A modified retrospective approach with a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption is required.operating expenses. The Company does not expect the adoption of this standard to havedetermines if an arrangement is a material impact on its consolidated financial position or results of operations.
In March 2016, the Financial Accounting Standards Board issued an accounting standard update on the accounting for stock-based compensation. The guidance requires the recognition of the income tax effects of awardslease at inception. Operating leases are included in operating lease right-of-use assets, accrued expenses and other current liabilities, and operating lease liabilities in the income statement whenCompany’s condensed consolidated balance sheets. Finance leases are included in property and equipment, net, accrued expenses and other current liabilities and other long term liabilities in the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employerCompany’s condensed consolidated balance sheets. Finance leases were not material to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The Company adopted this standard effective January 1, 2017. The impact of the adoption on the condensed consolidated financial statements was as follows:of June 30, 2019.
•Income tax accounting - The Company adoptedROU assets represent the guidance relatedCompany’s right to use an underlying asset for the recognition of excess tax benefitslease term and deficiencies as income tax expense or benefit inlease liabilities represent its obligation to make lease payments arising from the Company's condensed consolidated statements of income on a prospective basis. The Company adopted on a modified retrospective basislease. Operating lease ROU assets and liabilities are recognized at the recognition of previously unrecognized excess tax benefits and recorded the cumulative effectlater of the change as a $0.4 million increase to Retained earnings with a corresponding adjustment to Deferred tax assets, net as of January 1, 2017.
•Forfeitures - The Company elected to account for forfeitures as they occur on a modified retrospective basis, rather than estimate expected forfeitures and recorded the cumulative effectadoption date of the change as a $5.7 million decrease to Retained earnings asnew standard or the commencement date. The lease liability is based on the present value of January 1, 2017 with a corresponding adjustment to Additional paid-in capital.
•Cash flow presentation - The Company elected to adoptlease payments over the guidance related to the presentation of excess tax benefits in the condensed consolidated statements of cash flows on a prospective basis. The presentation requirementslease term (or remaining term for cash flows related to employee taxes paid for withheld shares had no impact to anyexisting leases). As most of the periods presentedCompany’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the Company's condensed consolidated statements of cash flows since such cash flows have historically been presented as a financing activity.
In February 2016, the Financial Accounting Standards Board issued an accounting standard update on the accounting of leases. The new guidance requires that lesseesinformation available at commencement date in a leasing arrangement recognize a right-of-use asset and a lease liability for most leases (other than leases that meet the definition of a short-term lease). The liability will be equal todetermining the present value of lease payments. The Company uses the implicit rate when readily determinable. The operating lease ROU asset will beis based on the liability, subject to adjustment, such as for initial direct costs.costs, and excludes lease incentives. The new guidance is effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application ofCompany’s lease terms may include options to extend or terminate the new guidance at the beginning of the earliest comparative period presented. The Company is currently evaluating the potential impact of this standard on its financial position and results of operations; however,lease when it is expected to have a material impact due to the recognition of the right-of-use assets and lease liabilities forreasonably certain that it will exercise that option. For most operating leases, whichexpense for lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are currently not reflectedrecorded on the balance sheet.sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.
In July 2015, the Financial Accounting Standards Board issued an accounting standard update modifying the accounting for inventory. Under the new guidance, the measurement principle for inventory will change from lower of cost or market value to lower of cost and net realizable value. The standard defines net realizable value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The standard is applicable to inventory that is accounted for under the first-in, first-out method and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. The Company adopted this standard effective January 1, 2017. The adoption of this guidance did not have a significant impact on the Company’s financial position or results of operations.
In May 2014, the Financial Accounting Standards Board issued an accounting standard update on revenue recognition. The new guidance creates a single, principle-based model for revenue recognition and expands and improves disclosures about revenue. In July 2015, the Financial Accounting Standards Board issued an accounting standard update that defers the effective date of the new revenue recognition standard by one year. The new guidance is effective for annual reporting periods beginning on or after December 15, 2017, and must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. The Company has completed its assessmentlease agreements with lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) and non-lease components (e.g., common-area maintenance costs), which are generally accounted for as a single lease component, such as for real estate leases. For certain equipment leases, such as colocation facilities, the Company accounts for the lease and non-lease components separately.
The components of itslease expense were as follows (in thousands):
|
| | | | | | | | | |
| | | | Three Months Ended | | Six Months Ended |
| | | | June 30, 2019 |
| | Classification | | | | |
| Operating lease cost | Operating expenses | | $ | 12,377 |
| | $ | 24,777 |
|
| Variable lease cost | Operating expenses | | 2,249 |
| | 4,818 |
|
| Sublease income | Other (expense) income, net | | (233 | ) | | (431 | ) |
| Net lease cost | | | $ | 14,393 |
| | $ | 29,164 |
|
Supplemental cash flow information technology systems, data and processes related to the implementationleases was as follows (in thousands):
|
| | | | |
| | | Six Months Ended |
| | | June 30, |
| | | 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | |
| Operating cash flows from operating leases | | $ | 27,129 |
|
| Right-of-use assets obtained in exchange for lease obligations: | | |
| Operating leases | | $ | 11,658 |
|
Lease Term and Discount Rate |
| | | |
| | June 30, 2019 |
| Weighted-average remaining lease term (years) | | |
| Operating leases | | 6.4 |
|
| Weighted-average discount rate | | |
| Operating leases | | 4.58 | % |
Maturities of this accounting standard. Additionally, the Company has substantially completed itslease liabilities as of June 30, 2019 were as follows (in thousands):
|
| | | | |
| Year ending December 31, | | Operating Leases |
| 2019 (remaining six months) | | $ | 27,615 |
|
| 2020 | | 54,801 |
|
| 2021 | | 44,184 |
|
| 2022 | | 36,506 |
|
| 2023 | | 32,876 |
|
| After 2023 | | 89,746 |
|
| Total lease payments | | $ | 285,728 |
|
| Less: imputed interest | | (39,171 | ) |
| Present value of lease liabilities | | $ | 246,557 |
|
Supplemental balance sheet information technology system design and solution development, and commenced implementation of the solution in the first quarter of fiscal year 2017. The Company is currently evaluating and developing
internal controls during implementation to ensure its portfolio of contracts are adequately evaluated, and it expects that the adoption of the standard will have a significant impact to its internal control environment. The Company's internal controls will be modified and augmented, as necessary, upon adoption of the Company’s new revenue recognition policy effective January 1, 2018. The Company expects to adopt the accounting standard update on a modified retrospective basis in the first quarter of fiscal year 2018, and is currently evaluating the potential impact of this standard on its financial position and results of operations. Under the new standard the Company expects to capitalize and amortize certain commissions over the expected customer life rather than expensing them as incurred. Additionally, under the new standard, the Company would be required to recognize term license revenues upfront at time of delivery rather than ratably over the related contract period. The Company expects revenue recognition related to perpetual software, hardware, cloud offerings and professional services to remain substantially unchanged.leases was as follows (in thousands):
|
| | | | |
| Operating Leases | | June 30, 2019 |
| Operating lease right-of-use assets | | $ | 191,010 |
|
| | | |
| Accrued expenses and other current liabilities | | $ | 46,473 |
|
| Operating lease liabilities | | 200,084 |
|
| Total operating lease liabilities | | $ | 246,557 |
|
| |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Our operating results and financial condition have varied in the past and could in the future vary significantly depending on a number of factors. From time to time, information provided by us or statements made by our employees contain “forward-looking” information that involves risks and uncertainties. In particular, statements contained in this Quarterly Report on Form 10-Q, and in the documents incorporated by reference into this Quarterly Report on Form 10-Q, that are not historical facts, including, but not limited to, statements concerning new products, researchour strategy and development, offerings of productsoperational and services, market positioning and opportunities, customer demand, distribution and sales channels,growth initiatives, our transition to a subscription-based business model, financial information and results of operations for future periods, strategy, operational and growth initiatives,revenue trends, seasonal factors, restructuring activities, headcount,stock-based compensation, licensing and subscription renewal programs, international operations, investment transactions and valuations of investments and derivative instruments, restructuring charges, reinvestment or repatriation of foreign earnings, fluctuations in foreign exchange rates, tax estimates and other tax matters, liquidity, stock repurchases and rates, the expected benefits of acquisitions,dividends, our debt, changes in accounting rules or guidance, changes in domestic and foreign economic conditions, acquisitions, litigation matters, the security of our network, products and credit markets, liquidity and debt obligations, share repurchase activity, litigation and intellectual property matters,services, and the evolutionimpact of the cybersecurity incident on our business towards a subscription-based model,and results of operations constitute forward-looking statements and are made under the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are neither promises nor guarantees. Our actual results of operations and financial condition have varied and could in the future vary materially from those stated in any forward-looking statements. The factors described in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2016,2018, as may be updated inby Part II, Item 1A in this Quarterly Report on Form 10-Q, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q, in the documents incorporated by reference into this Quarterly Report on Form 10-Q or presented elsewhere by our management from time to time. Such factors, among others, could have a material adverse effect upon our business, results of operations and financial condition. We caution readers not to place undue reliance on any forward-looking statements, which only speak as of the date made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.
Overview
Management’s discussion and analysis of financial condition and results of operations is intended to help the reader understand our financial condition and results of operations. This section is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the three and ninesix months ended SeptemberJune 30, 2017.2019. The results of operations for the periods presented in this report are not necessarily indicative of the results expected for the full year or for any future period, due in part to the seasonality of our business. Historically, our revenue for the fourth quarter of any year is typically higher than our revenue for the first quarter of the subsequent year.
Citrix aimsis powering a better way to powerwork with unified workspace, networking, and analytics solutions that help organizations unlock innovation, engage customers, and boost productivity, without sacrificing security. With Citrix, users get a world where people, organizationsseamless work experience and things are securely connectedIT has a unified platform to secure, manage, and accessible to make the extraordinary possible. We help customers reimagine the future of work by providing the most comprehensive secure digital workspace that unifies the apps, data and services people need to be productive, and simplifies IT’s ability to adopt and managemonitor diverse technologies in complex cloud environments.
We market and license our products directly to customers,solutions through multiple channels worldwide, including selling through resellers and direct over the Web, and throughWeb. Our partner community comprises thousands of value-added resellers, or VARs, known as Citrix Solution Advisors, value-added distributors, or VADs, systems integrators, or SIs, in addition to indirectly through value-added resellers,independent software vendors, or VARs, value-added distributors, or VADs,ISVs, original equipment manufacturers, or OEMs, and service providers,Citrix Service Providers, or CSPs.
We are a Delaware corporation incorporated on April 17, 1989.
Executive Summary
During the three months ended June 30, 2019, our results reflect an acceleration in subscription bookings compared to the year-ago period, demonstrating execution of our strategy to transition more of our business to subscription. We believe that this dynamic is best captured in our Subscription and SaaS Annualized Recurring Revenue, or ARR. This operating metric represents the contracted recurring value of all termed subscriptions normalized to a one-year period. It is calculated at the end of a reporting period by taking each contract’s recurring total contract value and dividing by the length of the contract. ARR includes only active contractually committed, fixed subscription fees. All contracts are annualized, including 30 day offerings where we take monthly recurring revenue multiplied by 12 to annualize. ARR may be influenced by seasonality within the year. ARR should be viewed independently of U.S. GAAP revenue, deferred revenue and unbilled revenue and is not intended to be combined with or to replace those items. ARR is not a forecast of future revenue. As we continue through this business model transition, we believe ARR is a key indicator of the overall health and trajectory of our business.
On March 6, 2019, the FBI informed us that international cyber criminals had gained access to Citrix’s internal network through a “password spraying” attack, a technique that exploits weak passwords. Immediately, we engaged outside forensics and security experts, took actions to expel the cyber criminals from our internal systems, and adopted additional security measures. Additionally, we launched a comprehensive forensic investigation led by a leading, independent cybersecurity firm. From our investigation, we learned that the cyberattack commenced on October 13, 2018, and encompassed a cyber incident that we became aware of in late 2018 and took certain steps to remediate based on our assessment at the time. Further, we received a notification from the Department of Homeland Security in late February 2019 concerning a network compromise that may have been part of this same cyberattack. While waiting for clarification from the Department of Homeland Security, we were contacted by the FBI on March 6, 2019.
We conducted an investigation, which confirmed that between October 13, 2018 and March 8, 2019, cyber criminals intermittently accessed Citrix's internal network and over a limited number of days stole business documents and files from a shared network drive and a drive associated with a web-based tool used in our consulting practice. The shared drive, from which documents and files were stolen, was used to store current and historical business documents and files, such as human resources and employee records, some of which contained sensitive and personal identification information of our current and former employees and, in some cases, their beneficiaries, dependents and others; customer engagement documents, including consulting services project materials, statements of work and proofs of concept, some of which were also stored on the drive associated with a web-based tool used in our consulting practice; marketing materials; sales and finance documents; contracts and other legal records; and a wide assortment of other company records. The cyber criminals also may have accessed the individual virtual drives of a very limited number of compromised users, accessed the company email accounts of the same very limited number of compromised users, and launched without further exploitation a limited number of internal applications. We are reviewing documents and files that may have been accessed or were stolen in this incident, which include files stolen from the shared network drive and the drive associated with the web-based tool used in our consulting practice, and the accessed documents and files on the individual virtual drives and the Company email accounts of the very limited number of compromised users. Our productsinvestigation found no indication that the cyber criminals discovered and services mobilize desktops, apps, data, and people to help our customers drive value. We continue driving innovationexploited any vulnerabilities in the datacenter with our products or customer cloud services to gain entry, and services across both physicalno indication that the security of any Citrix product or customer cloud service was compromised. We found no impact to our financial reporting systems from this cyberattack. Additionally, we have taken steps to enhance our internal controls over financial reporting and software defined networking platforms while powering somedisclosure controls and procedures related to cyberattacks.
Further, we have a program of network-security (or cyber risk) insurance policies that, with standard exclusions, insure against the world’s largest cloudscosts of detecting and giving enterprisesmitigating cyber breaches, the capabilitiescost of credit monitoring, and reasonable expenses for defending and settling privacy and network security lawsuits. These policies are subject to combine best-in-class application networking services on a single, consolidated footprint.$500,000 self-insured retention and a total insurance limit of $200.0 million. There can be no assurance, however, that this insurance coverage is sufficient to cover this or any other cyberattack. In addition to these insurance policies, we maintain customary business coverage under our crime, commercial general liability, and director and officer insurance policies. The costs associated with this incident, to the extent not covered by insurance, are not material to the quarter ended June 30, 2019.
On July 7, 2017, the Citrix24, 2019, we announced that our Board of Directors appointed David J. Henshall as President and Chief Executive Officer of Citrix, effective as of July 10, 2017. Mr. Henshall succeeds Kirill Tatarinov who stepped down from his roles as President and Chief Executive Officer and director of Citrix on July 7, 2017. Mr. Henshall also was electeddeclared a $0.35 per share dividend payable September 20, 2019 to the Citrix Board of Directors, effective as of July 10, 2017.
In connection with Mr. Henshall’s appointment, Mark M. Coyle, Senior Vice President, Finance, was appointed interim Chief Financial Officer. The Board also formed an Operations and Capital Committee that will work with Citrix’s management team and advise the Citrix Board of Directors on a comprehensive review of opportunities to drive margin expansion and return capital to shareholders.
On October 4, 2017, we announced a restructuring program to support our initiatives intended to accelerate the transformation to a cloud-based subscription business, increase strategic focus, and improve operational efficiency. The program will include, among other things, the elimination of full-time positions and facilities consolidation. We currently expect to record in the aggregate approximately $60.0 million to $100.0 million in pre-tax restructuring charges associated with this program. Included in these pre-tax charges are approximately $55.0 million to $70.0 million related to employee severance arrangements and approximately $5.0 million to $30.0 million related to the consolidation of leased facilities and other charges associated with the program. Substantially all of these charges will result in future cash expenditures. We currently anticipate completing the majority of the activities related to this program during the fourth quarter of 2017 and during fiscal year 2018.
Through the first three quarters of 2017, we accelerated innovation in the cloud, with the introduction of new services, features and capabilities in Citrix Cloud to build out a comprehensive secure digital workspace. We are seeing an increasing shift in the way customers are purchasing our products, evolving towards a more subscription-based business model.
We expect our transition to a subscription-based business model to provide financial and operational benefits to Citrix, including by increasing customer life-time-value, expanding our customer use-cases and innovation opportunities, and extending the use of Citrix services to securely deliver a broader array of applications, including SaaS and Web apps, and services.
For the balance of fiscal year 2017, we will continue to report our revenues in four groupings: (1) product and license; (2) license updates and maintenance; (3) professional services; and (4) software as a service. Beginning in the first quarter of fiscal year 2018, we plan to improve transparency of our subscription business model transition by reporting revenue as follows: (1) product and license revenue from perpetual product offerings; (2) support and services revenue for perpetual product and license offerings; and (3) subscription revenue, which will include revenue from our ratable cloud services offerings and on-premise subscriptions as well as revenue from our CSP offerings.
On January 31, 2017, we completed the spin-off of our GoTo Business and subsequent merger of that business with LogMeIn, Inc. pursuant to the terms of (1) an Agreement and Plan of Merger, dated as of July 26, 2016, by and among Citrix, GetGo, Inc., a wholly-owned subsidiary of Citrix, LogMeIn, and a wholly-owned subsidiary of LogMeIn (“Merger Sub”), and (2) a Separation and Distribution Agreement, dated as of July 26, 2016, by and among Citrix, LogMeIn and GetGo. As a result of the Spin-off, we distributed approximately 26.9 million shares of GetGo common stock to our stockholdersshareholders of record as of the close of business on January 20, 2017. We delivered theSeptember 6, 2019. Our Board of Directors will continue to review our capital allocation strategy for potential modifications and will determine whether to repurchase shares of GetGoour common stock toand/or declare future dividends based on our transfer agent, who held such shares for the benefit of our stockholders. Immediately thereafter, Merger Sub was merged withfinancial performance, business outlook and into GetGo, with GetGo continuing as a wholly owned subsidiary of LogMeIn. As a result of the Merger, each share of GetGo common stock was converted into the right to receive one share of LogMeIn common stock. As a result of these transactions, our stockholders received approximately 26.9 million shares of LogMeIn common stock in the aggregate, or 0.171844291 of a share of LogMeIn common stock for each share of Citrix common stock held of record by our stockholders as of the close of business on January 20, 2017. No fractional shares of LogMeIn were issued, and our stockholders instead received cash in lieu of any fractional shares. The distribution of the shares of GetGo common stock to our stockholders also resulted in an adjustment to the conversion rate for our 0.500% Convertible Notes due 2019 under the terms of the related indenture. As a result of this adjustment, the conversion rate for the Convertible Notes in effect as of the opening of business on February 1, 2017 was 13.9061 shares of Citrix common stock per $1,000 principal amount of Convertible Notes, which corresponds to a conversion price of $71.91 per share of common stock.
As a result of the Spin-off, the GoTo Business is accounted for as a discontinued operation for all periods presented.other considerations.
Summary of Results
For the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 2016,2018, a summary of our results from continuing operations included:
Subscription revenue increased 40.6% to $155.8 million;
SaaS revenue increased 40.7% to $91.2 million and accounted for 58.5% of total subscription revenue;
Product and licenseslicense revenue decreased 6.8%26.8% to $192.1$140.7 million;
Software as a service revenue increased 32.1% to $45.8 million;
License updatesSupport and maintenance revenue increased 5.7% to $421.0 million;
Professional services revenue increased 7.4%2.9% to $32.1$452.2 million;
Gross margin as a percentage of revenue remained consistent at 84.7%decreased 0.2% to 85.2%;
Operating income from continuing operations increased 6.3%decreased 19.3% to $136.7$117.1 million; and
Diluted net income per share decreased 4.1% to $0.70;
Unbilled revenue increased $267.5 million to $484.2 million;
Subscription ARR increased $152.0 million to $614.4 million; and
SaaS ARR increased $136.0 million to $418.0 million.
Our Subscription revenue increased primarily due to increased customer adoption of our cloud-based solutions from continuing operations increased 15.5% to $0.82.
our Digital Workspace offerings delivered via the cloud. Our Product and licenseslicense revenue decreased primarily due to lower sales of our perpetual Networking products, partially offset by an increase in sales of our Workspace Services products. Our Software as a service revenue increased primarily due to increased sales of our Data offerings and Workspace Services offerings delivered via the cloud. The increase in License updatesSupport and maintenanceservices revenue was primarily due to increased sales of maintenance services across our Digital Workspace Servicesperpetual offerings and Networking products, partially offset by a decrease in our Subscription Advantage product and technical support. The increase in Professional services revenue was primarily due to increased product training and certification and implementation servicessales of hardware maintenance related to our Workspace Services solutions.perpetual Networking products. We currently expect total revenue to increasedecrease when comparing the fourththird quarter of 20172019 to the fourththird quarter of 2016 and when comparing the 2017 fiscal year2018 due to the 2016 fiscal year.acceleration of our transition to a subscription-based model. The increasedecrease in operating income from continuing operations was primarily due to a higher gross margin driven by an increase in sales.operating expenses, as we have realigned the organization to better support our subscription model transition and have made more intentional investments in product and engineering as well as customer facing resources. The increasedecrease in diluted net income per share from continuing operations was primarily due to a net tax benefit from the release of tax reserves related to the expiration of statute of limitations for the 2013 tax year, as well asdecrease in operating margin, partially offset by a decrease in the number of weighted average shares outstanding due to share repurchases. Both Subscription and SaaS ARR increased due to the acceleration of subscription bookings.
20172018 Business CombinationCombinations
Sapho, Inc.
On January 3, 2017,November 13, 2018, we acquired all of the issued and outstanding securities of Unidesk CorporationSapho, Inc. (“Unidesk”Sapho”). We, whose technology is intended to advance our development of the intelligent workspace. The acquired Unidesk to enhance our application managementtechnology enables efficient workstyles by creating a unified and delivery offerings.customizable notification experience for business applications. The total cash consideration for this transaction was $60.4$182.7 million, net of $2.7$3.7 million cash acquired. Transaction costs associated with the acquisition were $0.4 million. No transaction costs were incurred during the three months ended September 30, 2017. We expensed $0.1 million of transaction costs during the nine months ended September 30, 2017, which were included in General and administrative expense in the accompanying condensed consolidated statements of income.not significant.
2016 Business Combination
Cedexis, Inc.
On September 7, 2016,February 6, 2018, we acquired all of the issued and outstanding securities of Cedexis, Inc. (“Cedexis”), whose solution is a privately held company. The acquisitionreal-time data driven service for dynamically optimizing the flow of traffic across public clouds and data centers that provides a software solution that cuts the cost of desktopdynamic and application virtualizationreliable way to route and delivers workspacemanage Internet performance by accelerating desktop logonfor customers moving towards hybrid and application response times for any Microsoft Windows-based environment.multi-cloud deployments. The total cash consideration for this transaction was $11.5$66.0 million, net of $0.8$6.0 million cash acquired. Transaction costs were $0.4 million, none of which were incurred during the three and nine months ended September 30, 2017. We expensed $0.3 million and $0.4 million of transaction costs during the three and nine months ended September 30, 2016, respectively. The assets related to this acquisition relate primarily to $8.2 million of product technology identifiable intangible assets with a 4 year life and goodwill of $4.7 million.
2016 Asset Acquisition
On January 8, 2016, we acquired certain monitoring technology assets from a privately-held company for total cash consideration of $23.6 million. The acquisition provides a monitoring solution for our products as it relates to Microsoft Windows applications and desktop delivery. The identifiable intangible assets acquired related primarily to product technologies.
2016 Divestiture
On February 29, 2016, we sold our CloudPlatform and CloudPortal Business Manager products to Persistent Telecom Solutions, Inc. The agreement included contingent consideration in the form of an earnout provision based on revenue for a period of five years following the closing date. Any income associated with the contingent consideration will be recognized if the earnout provisions are met. No earnout provisionsacquisition were met during the three and nine months ended September 30, 2017. Therefore, no income was recognized during the three and nine months ended September 30, 2017.not significant.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base these estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted.
For more information regarding our critical accounting policies and estimates please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” contained in our Annual Report on Form 10-K for the year ended December 31, 2016,2018, or the Annual Report, and Note 2 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. There have been no material changes to the critical accounting policies disclosed in the Annual Report.
Results of Operations
The following table sets forth our unaudited condensed consolidated statements of income data and presentation of that data as a percentage of change from period-to-period (in thousands):
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended |
| Three Months Ended |
| Six Months Ended |
| | September 30, | | September 30, | | September 30, 2017 | | September 30, 2017 | June 30, | | June 30, |
| June 30, 2019 |
| June 30, 2019 |
| | 2017 | | 2016 | | 2017 | | 2016 | | vs. September 30, 2016 | | vs. September 30, 2016 | 2019 | | 2018 | | 2019 |
| 2018 |
| vs. June 30, 2018 |
| vs. June 30, 2018 |
| Revenues: | | | | | | | | | | | | | | | | | | | | | | |
| Product and licenses | $ | 192,102 |
| | $ | 206,041 |
| | $ | 594,708 |
| | $ | 627,581 |
| | (6.8 | )% | | (5.2 | )% | |
| Software as a service | 45,810 |
| | 34,673 |
| | 126,053 |
| | 98,552 |
| | 32.1 |
| | 27.9 |
| |
| License updates and maintenance | 420,951 |
| | 398,171 |
| | 1,232,734 |
| | 1,178,053 |
| | 5.7 |
| | 4.6 |
| |
| Professional services | 32,062 |
| | 29,851 |
| | 93,334 |
| | 97,310 |
| | 7.4 |
| | (4.1 | ) | |
| Subscription | | $ | 155,833 |
| | $ | 110,796 |
| | $ | 297,439 |
| | $ | 213,954 |
| | 40.6 | % | | 39.0 | % |
| Product and license | | 140,654 |
| | 192,058 |
| | 275,676 |
| | 352,755 |
| | (26.8 | ) | | (21.9 | ) |
| Support and services | | 452,210 |
| | 439,511 |
| | 894,725 |
| | 872,848 |
| | 2.9 |
| | 2.5 |
|
| Total net revenues | 690,925 |
| | 668,736 |
| | 2,046,829 |
| | 2,001,496 |
| | 3.3 |
| | 2.3 |
| 748,697 |
| | 742,365 |
| | 1,467,840 |
| | 1,439,557 |
| | 0.9 |
| | 2.0 |
|
| Cost of net revenues: | | | | | | | | | | | | | | | | | | | | | | |
| Cost of subscription, support and services | | 78,817 |
| | 67,523 |
| | 150,245 |
| | 130,908 |
| | 16.7 |
| | 14.8 |
|
| Cost of product and license revenues | 27,277 |
| | 28,059 |
| | 89,723 |
| | 93,077 |
| | (2.8 | ) | | (3.6 | ) | 21,878 |
| | 29,707 |
| | 47,622 |
| | 63,579 |
| | (26.4 | ) | | (25.1 | ) |
| Cost of services and maintenance revenues | 61,096 |
| | 55,337 |
| | 184,922 |
| | 168,874 |
| | 10.4 |
| | 9.5 |
| |
| Amortization of product related intangible assets | 17,564 |
| | 14,775 |
| | 43,062 |
| | 43,222 |
| | 18.9 |
| | (0.4 | ) | 9,784 |
| | 11,519 |
| | 20,085 |
| | 22,548 |
| | (15.1 | ) | | (10.9 | ) |
| Total cost of net revenues | 105,937 |
| | 98,171 |
| | 317,707 |
| | 305,173 |
| | 7.9 |
| | 4.1 |
| 110,479 |
| | 108,749 |
| | 217,952 |
| | 217,035 |
| | 1.6 |
| | 0.4 |
|
| Gross margin | 584,988 |
| | 570,565 |
| | 1,729,122 |
| | 1,696,323 |
| | 2.5 |
| | 1.9 |
| 638,218 |
| | 633,616 |
| | 1,249,888 |
| | 1,222,522 |
| | 0.7 |
| | 2.2 |
|
| Operating expenses: |
| |
| |
| |
| | | | |
| |
| | | | | | | | |
| Research and development | 107,113 |
| | 101,741 |
| | 316,478 |
| | 304,624 |
| | 5.3 |
| | 3.9 |
| 134,029 |
| | 112,943 |
| | 264,292 |
| | 211,493 |
| | 18.7 |
| | 25.0 |
|
| Sales, marketing and services | 249,499 |
| | 244,495 |
| | 764,564 |
| | 724,343 |
| | 2.0 |
| | 5.6 |
| 298,429 |
| | 286,730 |
| | 573,084 |
| | 537,943 |
| | 4.1 |
| | 6.5 |
|
| General and administrative | 79,378 |
| | 79,617 |
| | 237,033 |
| | 236,775 |
| | (0.3 | ) | | 0.1 |
| 81,162 |
| | 77,340 |
| | 158,709 |
| | 141,067 |
| | 4.9 |
| | 12.5 |
|
| Amortization of other intangible assets | 3,733 |
| | 3,907 |
| | 11,071 |
| | 11,449 |
| | (4.5 | ) | | (3.3 | ) | 3,205 |
| | 4,019 |
| | 6,734 |
| | 7,685 |
| | (20.3 | ) | | (12.4 | ) |
| Restructuring | 8,552 |
| | 12,176 |
| | 18,678 |
| | 61,312 |
| | (29.8 | ) | | (69.5 | ) | 4,311 |
| | 7,437 |
| | 7,143 |
| | 13,624 |
| | (42.0 | ) | | (47.6 | ) |
| Total operating expenses | 448,275 |
| | 441,936 |
| | 1,347,824 |
| | 1,338,503 |
| | 1.4 |
| | 0.7 |
| 521,136 |
| | 488,469 |
| | 1,009,962 |
| | 911,812 |
| | 6.7 |
| | 10.8 |
|
| Income from operations | 136,713 |
| | 128,629 |
| | 381,298 |
| | 357,820 |
| | 6.3 |
| | 6.6 |
| 117,082 |
| | 145,147 |
| | 239,926 |
| | 310,710 |
| | (19.3 | ) | | (22.8 | ) |
| Interest income | 7,873 |
| | 4,193 |
| | 19,045 |
| | 12,108 |
| | 87.8 |
| | 57.3 |
| 3,870 |
| | 9,402 |
| | 13,544 |
| | 18,133 |
| | (58.8 | ) | | (25.3 | ) |
| Interest expense | (11,726 | ) | | (11,254 | ) | | (35,286 | ) | | (33,605 | ) | | 4.2 |
| | 5.0 |
| (10,289 | ) | | (20,542 | ) | | (28,322 | ) | | (40,878 | ) | | (49.9 | ) | | (30.7 | ) |
| Other income (expense), net | 981 |
| | 494 |
| | 3,166 |
| | (781 | ) | | 98.6 |
| | (505.4 | ) | |
Income from continuing operations before income taxes
| 133,841 |
| | 122,062 |
| | 368,223 |
| | 335,542 |
| | 9.7 |
| | 9.7 |
| |
| Other (expense) income, net | | (3,420 | ) | | (2,537 | ) | | 279 |
| | (5,549 | ) | | 34.8 |
| | (105.0 | ) |
| Income before income taxes | | 107,243 |
| | 131,470 |
| | 225,427 |
| | 282,416 |
| | (18.4 | ) | | (20.2 | ) |
| Income tax expense | 7,121 |
| | 10,325 |
| | 62,349 |
| | 44,262 |
| | (31.0 | ) | | 40.9 |
| 13,748 |
| | 24,637 |
| | 21,584 |
| | 31,324 |
| | (44.2 | ) | | (31.1 | ) |
| Income from continuing operations | 126,720 |
| | 111,737 |
| | 305,874 |
| | 291,280 |
| | 13.4 |
| | 5.0 |
| |
| Income (loss) from discontinued operations, net of income taxes | — |
| | 20,164 |
| | (42,704 | ) | | 44,982 |
| | (100.0 | ) | | (194.9 | ) | |
| Net income | $ | 126,720 |
| | $ | 131,901 |
| | $ | 263,170 |
| | $ | 336,262 |
| | (3.9 | ) | | (21.7 | ) | $ | 93,495 |
| | $ | 106,833 |
| | $ | 203,843 |
| | $ | 251,092 |
| | (12.5 | )% | | (18.8 | )% |
Revenues
Net revenues include Product and licenses, License updates and maintenance, Professional services and SaaS revenues related to our Data offerings. Product and licenses primarily represent fees related to the licensing of the following major products:
Workspace Services is primarily comprised of our Application Virtualization products which include XenDesktop and XenApp, our Enterprise Mobility Management products which include XenMobile products and Workspace Suite; and
Networking primarily includes NetScaler ADC and NetScaler SD-WAN.
We offer incentive programs to our VADs and VARs to stimulate demand for our products.Subscription, Product and license revenues associated with these programsand Support and services revenues.
Subscription revenue relates to fees which are partially offset by these incentives togenerally recognized ratably over the contractual term. Our subscription revenue includes SaaS, which primarily consists of subscriptions delivered via a cloud service whereby the customer does not take possession of the software and hybrid subscription offerings; and non-SaaS, which consists primarily of on-premise licensing, hybrid subscription offerings, CSP services and the related support. Our hybrid subscription offerings are allocated between SaaS and non-SaaS, which are generally recognized at a point in time. For our VADson-premise and VARs.hybrid subscription offerings, a portion of the revenue is recognized at a point in time. In addition, our CSP program provides subscription-based services in which the CSP partners host software services to their end users. The fees from the CSP program are recognized based on usage and as the CSP services are provided to their end users.
License updatesProduct and maintenancelicense revenue primarily represents fees related to the perpetual licensing of the following major solutions:
Digital Workspace is primarily comprised of our Application Virtualization solutions which include Citrix Virtual Apps and Desktops, our unified endpoint management solutions, which include Citrix Endpoint Management, Citrix Content Collaboration, and Citrix Workspace; and
Networking products, which primarily include Citrix ADC and Citrix SD-WAN.
We offer incentive programs to our VADs and VARs to stimulate demand for our solutions. Product and license revenues associated with these programs are partially offset by these incentives to our VADs and VARs.
Support and services revenue consists of maintenance and support fees related to the following offerings:
Customer Success Services, which gives customers a choice of tiered support offerings that combine the elements of product version upgrades, guidance, enablement, support and proactive monitoring to help our customers and our partners fully realize their business goals. Fees associated with this offering are recognized ratably over the term of the contract; and
Hardware Maintenance fees for our perpetual Networking products, which include technical support and hardware and software maintenance, and which are recognized ratably over the contract term; and
Subscription Advantage program, which has been retired and reached end of sale and end of renewal for existing customers. Fees associated with these offerings are being recognized ratably over the remaining term of existing contracts, which was typically 12 to 24 months.
Professional services are comprised of:
Fees from consulting services related to the implementation of our products,solutions, which are recognized as the services are provided; and
Fees from product training and certification, which are recognized as the services are provided.
Our SaaS revenues, which are recognized ratably over the contractual term, primarily consist of fees related to our Data offerings, primarily ShareFile, as well as fees related to our Workspace Services and Networking offerings delivered via the cloud.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, 2017 | | September 30, 2017 |
| | 2017 | | 2016 | | 2017 | | 2016 | | vs. September 30, 2016 | | vs. September 30, 2016 |
| | (in thousands) |
| Product and licenses | $ | 192,102 |
| | $ | 206,041 |
| | $ | 594,708 |
| | $ | 627,581 |
| | $ | (13,939 | ) | | $ | (32,873 | ) |
| Software as a service | 45,810 |
| | 34,673 |
| | 126,053 |
| | 98,552 |
| | 11,137 |
| | 27,501 |
|
| License updates and maintenance | 420,951 |
| | 398,171 |
| | 1,232,734 |
| | 1,178,053 |
| | 22,780 |
| | 54,681 |
|
| Professional services | 32,062 |
| | 29,851 |
| | 93,334 |
| | 97,310 |
| | 2,211 |
| | (3,976 | ) |
| Total net revenues | $ | 690,925 |
| | $ | 668,736 |
| | $ | 2,046,829 |
| | $ | 2,001,496 |
| | $ | 22,189 |
| | $ | 45,333 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| Three Months Ended |
| Six Months Ended |
| | June 30, | | June 30, |
| June 30, 2019 |
| June 30, 2019 |
| | 2019 | | 2018 | | 2019 |
| 2018 |
| vs. June 30, 2018 |
| vs. June 30, 2018 |
| | (in thousands) | | |
| Subscription | $ | 155,833 |
| | $ | 110,796 |
| | $ | 297,439 |
| | $ | 213,954 |
| | $ | 45,037 |
| | $ | 83,485 |
|
| Product and license | 140,654 |
| | 192,058 |
| | 275,676 |
| | 352,755 |
| | (51,404 | ) | | (77,079 | ) |
| Support and services | 452,210 |
| | 439,511 |
| | 894,725 |
| | 872,848 |
| | 12,699 |
| | 21,877 |
|
| Total net revenues | $ | 748,697 |
| | $ | 742,365 |
| | $ | 1,467,840 |
| | $ | 1,439,557 |
| | $ | 6,332 |
| | $ | 28,283 |
|
Product and LicensesSubscription
Product and licensesSubscription revenue decreasedincreased for the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 20162018 and for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily due to increased customer adoption of our cloud-based solutions from our Digital Workspace offerings. We currently expect our Subscription revenue to increase when comparing the third quarter of 2019 to the third quarter of 2018 as customers continue to shift to our cloud-based solutions.
Product and license
Product and license revenue decreased when comparing the three months ended June 30, 2019 to the three months ended June 30, 2018 and when comparing the six months ended June 30, 2019 to the six months ended June 30, 2018 primarily due to lower sales of our perpetual Networking products, of $17.2 million, partially offset by an increase in sales of our Workspace Services products of $3.0 million. Product and licenses revenue decreased for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 primarily due to lower sales ofcyclical ordering patterns at large hyperscale providers and our Networking products.customers continuing to shift to the cloud. We currently expect Product and licenseslicense revenue to increasedecrease when comparing the fourththird quarter of 20172019 to the fourththird quarter of 2016.2018 as customers continue to shift to our cloud-based solutions and away from our Networking hardware products.
Support and services
Software as a Service
Software as a serviceSupport and services revenue increased for the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 2016 primarily due to increased sales of our Data offerings of $5.6 million and Workspace Services offerings delivered via the cloud of $5.2 million. Software as a service revenue increased for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 primarily due to increased sales of our Data offerings of $17.8 million and our Workspace Services offerings delivered via the cloud of $9.1 million. We currently expect Software as a service revenue to increase when comparing the fourth quarter of 2017 to the fourth quarter of 2016.
License Updates and Maintenance
In October 2016, we announced the launch of Customer Success Services, which replaced Software Maintenance and provides a higher standard of service that empowers customer success whether in the cloud, on-premises or in a hybrid environment through additional services providing expert guidance, proactive monitoring and enablement. In connection with this launch, beginning in 2017, our customers began migrating from the Subscription Advantage and Software Maintenance programs to this new offering.
License updates and maintenance revenue increased for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 primarily due to an increase in software and hardware maintenance revenues of $101.0 million,2018 primarily driven by increased sales of maintenance revenuesservices across our Digital Workspace Services products, partially offset by a decrease in our Subscription Advantage productperpetual offerings of $71.7$8.4 million and technical supporthigher sales of $7.8hardware maintenance related to our perpetual Networking products of $2.7 million. License updatesSupport and maintenanceservices revenue increased for the ninesix months ended SeptemberJune 30, 20172019 compared to the ninesix months ended SeptemberJune 30, 2016 primarily due to an increase in software and hardware maintenance revenues of $245.3 million,2018 primarily driven by increased sales of maintenance revenuesservices across our Digital Workspace Services products, partially offset by a decrease in our Subscription Advantage product of $168.8 million and our technical support of $22.1 million. These results are due to our new Customer Success Services offering discussed above.perpetual offerings. We currently expect License updatesSupport and maintenance revenue to increase when comparing the fourth quarter of 2017 to the fourth quarter of 2016.
Professional Services
The increase in Professional services revenue when comparing the three months ended September 30, 2017 to the three months ended September 30, 2016 were primarily due to increased product training and certification and implementation services related to our Workspace Services solutions. The decrease in Professional services revenue when comparing the nine months ended September 30, 2017 to the nine months ended September 30, 2016 was primarily due to decreased product training and certification and implementation services related to our Workspace Services solutions. We currently expect Professional services revenue to remain relatively consistent when comparing the fourththird quarter of 20172019 to the fourththird quarter of 2016.2018.
Deferred Revenue, Unbilled Revenue and Backlog
Deferred revenues are primarily comprised of License updatesSupport and maintenanceservices revenue from maintenance fees, which include software and hardware maintenance, technical support related to our Subscription Advantage productperpetual offerings and technical support.services revenue related to our consulting contracts. Deferred revenues also include SaaSSubscription revenue from our Content Collaboration and cloud-based subscription offerings.
Deferred revenue primarily fromconsists of billings or payments received in advance of revenue recognition and is recognized in our Data offeringscondensed consolidated balance sheets and Professional servicesstatements of income as the revenue recognition criteria are met. Unbilled revenue primarily represents future billings under our subscription agreements that have not been invoiced and, accordingly, are not recorded in accounts receivable or deferred revenue within our condensed consolidated financial statements. Deferred revenue and unbilled revenue are influenced by several factors, including new business seasonality within the year, the specific timing, size and duration of customer subscription agreements, annual billing cycles of subscription agreements, and invoice timing. Fluctuations in unbilled revenue may not be a reliable indicator of future performance and the related to our consulting contracts.revenue associated with these contractual commitments.
The following table presents the amounts of deferred revenue and unbilled revenue (in thousands):
|
| | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 | | 2019 compared to 2018 |
| Deferred revenue | $ | 1,744,714 |
| | $ | 1,834,572 |
| | $ | (89,858 | ) |
| Unbilled revenue | 484,213 |
| | 338,463 |
| | 145,750 |
|
Deferred revenuesrevenue decreased $5.3$89.9 million as of SeptemberJune 30, 20172019 compared to December 31, 20162018 primarily due to a decrease in salesmaintenance and support of our Subscription Advantage product of $244.3$136.3 million, primarily due to seasonality, partially offset by an increase in salessubscription of $54.9 million. Unbilled revenue as of June 30, 2019 increased $145.8 million from December 31, 2018 primarily due to an increase in multi-year subscription agreements as a result of an increase in customer adoption of our software maintenance offeringscloud-based subscription offerings.
While it is generally our practice to promptly ship our products upon receipt of $239.6properly finalized orders, at any given time, we have confirmed product license orders that have not shipped and are unfulfilled. We refer to those unfulfilled product license orders at the end of a given period as “product and license backlog.” As of June 30, 2019, the amount of product and license backlog was not material. As of June 30, 2018, we had product and license backlog of $37.8 million. We currently expect deferred revenue to increase throughout the remainderdo not believe that backlog, as of 2017.any particular date, is a reliable indicator of future performance.
International Revenues
International revenues (sales outside the United States) accounted for 45.9%47.0% and 48.0% of our net revenues for the three and six months ended June 30, 2019, respectively, and 46.4% and 45.7% of our net revenues for the three and ninesix months ended SeptemberJune 30, 2017, respectively, and 43.8% and 45.4% of our net revenues for the three and nine months ended September 30, 2016.2018, respectively. The increase in our international revenues as a percentage of our net revenues for the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 20162018 was mostly due toprimarily driven by an increase in revenue in theour EMEA region, consisting primarily due to higher sales of our Workspace Services solutionsincreases in Subscription of $9.8$13.0 million and Networking productsSupport and services of $2.2$5.9 million, partially offset by a decrease in Product and license of $12.6 million. The increase in our international revenues as a percentage of our net revenues for ninethe six months ended SeptemberJune 30, 20172019 compared to the ninesix months ended SeptemberJune 30, 2016 is not significant.2018 was primarily driven by an increase in revenue in our EMEA region of $28.5 million, consisting primarily of increases in Subscription of $24.3 million and Support and services of $15.5 million, partially offset by a decrease in Product and license of $11.3 million, and an increase in revenue in our APJ region of $10.5 million, consisting primarily of increases in Product and license of $6.0 million and Subscription of $4.9 million. See Note 10 to our condensed consolidated financial statements for detailed information on net revenues by geography.
Cost of Net Revenues
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | September 30, | | September 30, | | September 30, 2017 | | September 30, 2017 | June 30, | | June 30, | | June 30, 2019 | | June 30, 2019 |
| | 2017 | | 2016 | | 2017 | | 2016 | | vs. September 30, 2016 | | vs. September 30, 2016 | 2019 | | 2018 | | 2019 | | 2018 | | vs. June 30, 2018 | | vs. June 30, 2018 |
| | (In thousands) | (In thousands) |
| Cost of subscription, support and services revenues | | $ | 78,817 |
| | $ | 67,523 |
| | $ | 150,245 |
| | $ | 130,908 |
| | $ | 11,294 |
| | $ | 19,337 |
|
| Cost of product and license revenues | $ | 27,277 |
| | $ | 28,059 |
| | $ | 89,723 |
| | $ | 93,077 |
| | $ | (782 | ) | | $ | (3,354 | ) | 21,878 |
| | 29,707 |
| | 47,622 |
| | 63,579 |
| | (7,829 | ) | | (15,957 | ) |
| Cost of services and maintenance revenues | 61,096 |
| | 55,337 |
| | 184,922 |
| | 168,874 |
| | 5,759 |
| | 16,048 |
| |
| Amortization of product related intangible assets | 17,564 |
| | 14,775 |
| | 43,062 |
| | 43,222 |
| | 2,789 |
| | (160 | ) | 9,784 |
| | 11,519 |
| | 20,085 |
| | 22,548 |
| | (1,735 | ) | | (2,463 | ) |
| Total cost of net revenues | $ | 105,937 |
| | $ | 98,171 |
| | $ | 317,707 |
| | $ | 305,173 |
| | $ | 7,766 |
| | $ | 12,534 |
| $ | 110,479 |
| | $ | 108,749 |
| | $ | 217,952 |
| | $ | 217,035 |
| | $ | 1,730 |
| | $ | 917 |
|
Cost of subscription, support and services revenues consists primarily of compensation and other personnel-related costs of providing technical support, consulting and cloud capacity costs, as well as the costs related to providing our offerings
delivered via the cloud. Cost of product and license revenues consists primarily of hardware, shipping expense, royalties, product media and duplication, manuals and packaging materials. Cost of services and maintenance revenues consists primarily of compensation and other personnel-related costs of providing technical support, consulting, cloud capacity costs, as well as the costs related to providing our SaaS offerings. Also included in Cost of net revenues is amortization of product related intangible assets.
Cost of subscription, support and services revenues increased for the three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018 primarily due to an increase in costs related to providing our subscription offerings. We currently expect Cost of subscription, support and services revenues to increase when comparing the third quarter of 2019 to the third quarter of 2018, consistent with the expected increases in Subscription revenue as discussed above.
Cost of product and license revenues decreased for the three and ninesix months ended SeptemberJune 30, 20172019 compared to the three and ninesix months ended SeptemberJune 30, 20162018 primarily due to lower overall sales of our perpetual Networking products, which containscontain hardware components that have a higher cost than our software products. We currently expect an increase in Cost of product and license revenues to decrease when comparing the fourththird quarter of 20172019 to the fourththird quarter of 2016,2018, consistent with the expected increasedecrease in Product and licenseslicense revenue.
CostAmortization of services and maintenance revenues increasedproduct related intangible assets decreased for the three and six months ended SeptemberJune 30, 20172019 compared to the three and six months ended SeptemberJune 30, 20162018 primarily due to an increase in saleslower amortization of our software maintenance from our new Customer Success Services offering. Cost of services and maintenance revenues increased for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 primarily due to an increase in sales of our software maintenance of $10.5 million from our new Customer Success Services offering, an increase in sales of our Data offerings of $3.6 million and an increase in sales of our Workspace Services offerings delivered via the cloud of $3.4 million. These increases are partially offset by a decrease of $2.5 million driven by lower sales of our professional services. We currently expect Cost of services and maintenance revenues to increase when comparing the fourth quarter of 2017 to the fourth quarter of 2016, consistent with the expected increases in SaaS revenue and License updates and maintenance revenue as discussed above.certain intangible assets becoming fully amortized.
Gross Margin
Gross margin as a percentage of revenue was 84.7%85.2% and 84.5%85.2% for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, and 85.3%85.4% and 84.8%84.9% for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively. The change in gross margin when comparing the three and ninesix months ended SeptemberJune 30, 20172019 to SeptemberJune 30, 20162018 was not significant.
Operating Expenses
Foreign Currency Impact on Operating Expenses
The functional currency for all of our wholly-owned foreign subsidiaries is the U.S. dollar. A substantial majority of our overseas operating expenses and capital purchasing activities are transacted in local currencies and are therefore subject to fluctuations in foreign currency exchange rates. In order to minimize the impact on our operating results, we generally initiate our hedging of currency exchange risks up to 12 months in advance of anticipated foreign currency expenses. WhenGenerally, when the dollar is weak, the resulting increase to foreign currency denominated expenses will be higher, and these higher expenses will be partially offset by the gain ingains realized from our hedging contracts. WhenConversely, if the dollar is strong, the resulting decrease to foreign currency denominated expenses will be lower. These lower expenses will in turn be partially offset by the loss inlosses incurred from our hedging contracts. There is a risk that there will be fluctuations in foreign currency exchange rates beyond the timeframe for which we hedge our risk.
Research and Development Expenses
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, 2017 | | September 30, 2017 |
| | 2017 | | 2016 | | 2017 | | 2016 | | vs. September 30, 2016 | | vs. September 30, 2016 |
| | (In thousands) |
| Research and development | $ | 107,113 |
| | $ | 101,741 |
| | $ | 316,478 |
| | $ | 304,624 |
| | $ | 5,372 |
| | $ | 11,854 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, | | June 30, 2019 | | June 30, 2018 |
| | 2019 | | 2018 | | 2019 | | 2018 | | vs. June 30, 2018 | | vs. June 30, 2018 |
| | (In thousands) | | |
| Research and development | $ | 134,029 |
| | $ | 112,943 |
| | $ | 264,292 |
| | $ | 211,493 |
| | $ | 21,086 |
| | $ | 52,799 |
|
Research and development expenses consistedconsist primarily of personnel related costs and facility and equipment costs and cloud capacity costs directly related to our research and development activities. We expensed substantially all development costs included in the research and development of our products.
Research and development expenses increased during the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 2016 primarily due to an increase in stock-based compensation of $3.9 million and an increase in compensation and other employee-related costs of $3.7 million primarily related to a net increase in headcount. These increases are partially offset by a decrease in facility and equipment costs of $1.1 million and a decrease in cloud capacity costs of $0.5 million.
Research and development expenses increased during the nine months ended September 30, 2017 compared to the nine months ended September 30, 20162018 primarily due to an increase in compensation and other employee-related costs of $11.9$9.3 million primarily related to a net increase in headcount and an increase in stock-based compensation of $7.8$7.7 million. These increases are partially offset by a decreaseResearch and development expenses increased during the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily due to an increase in facilitystock-based compensation of $24.7 million and equipmentan increase in compensation and other employee-related costs of $6.5$19.6 million and consulting fees of $2.2 million.related to a net increase in headcount.
Sales, Marketing and Services Expenses
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, 2017 | | September 30, 2017 |
| | 2017 | | 2016 | | 2017 | | 2016 | | vs. September 30, 2016 | | vs. September 30, 2016 |
| | (In thousands) |
| Sales, marketing and services | $ | 249,499 |
| | $ | 244,495 |
| | $ | 764,564 |
| | $ | 724,343 |
| | $ | 5,004 |
| | $ | 40,221 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, | | June 30, 2019 | | June 30, 2019 |
| | 2019 | | 2018 | | 2019 | | 2018 | | vs. June 30, 2018 | | vs. June 30, 2018 |
| | (In thousands) | | |
| Sales, marketing and services | $ | 298,429 |
| | $ | 286,730 |
| | $ | 573,084 |
| | $ | 537,943 |
| | $ | 11,699 |
| | $ | 35,141 |
|
Sales, marketing and services expenses consistedconsist primarily of personnel related costs, including sales commissions, pre-sales support, the costs of marketing programs aimed at increasing revenue, such as brand development, advertising, trade shows, public relations and other market development programs and costs related to our facilities, equipment, information systems and pre-sale demonstration related cloud capacity costs that are directly related to our sales, marketing and services activities.
Sales, marketing and services expenses increased during the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 20162018 primarily due to an increase in stock-based compensation of $4.8 million, an increase in compensation and other employee-related costs including variable compensation of $7.1$3.7 million partially offset bydue to a decreasenet increase in certain facilitysales and depreciation costsservices headcount, and an increase in professional fees of $2.9$2.0 million.
Sales, marketing and services expenses increased during the ninesix months ended SeptemberJune 30, 20172019 compared to the ninesix months ended SeptemberJune 30, 20162018 primarily due to an increase in stock-based compensation of $11.2 million, an increase in compensation and other employee-related costs including variable compensation of $37.4$10.4 million resulting fromdue to a net increase in sales and services headcount, related to go-to market investments to drive growth, an increase in marketing programs of $7.5 million and an increase in cloud capacity costsprofessional fees of $7.4$5.1 million. These increases are partially offset by a decrease in certain facility and depreciation costs of $15.2 million.
General and Administrative Expenses
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, 2017 | | September 30, 2017 |
| | 2017 | | 2016 | | 2017 | | 2016 | | vs. September 30, 2016 | | vs. September 30, 2016 |
| | (In thousands) |
| General and administrative | $ | 79,378 |
| | $ | 79,617 |
| | $ | 237,033 |
| | $ | 236,775 |
| | $ | (239 | ) | | $ | 258 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, | | June 30, 2019 | | June 30, 2019 |
| | 2019 | | 2018 | | 2019 | | 2018 | | vs. June 30, 2018 | | vs. June 30, 2018 |
| | (In thousands) | | |
| General and administrative | $ | 81,162 |
| | $ | 77,340 |
| | $ | 158,709 |
| | $ | 141,067 |
| | $ | 3,822 |
| | $ | 17,642 |
|
General and administrative expenses consistedconsist primarily of personnel related costs and expenses related to outside consultants assisting with information systems, as well as accounting and legal fees.
General and administrative expenses remained consistent forincreased during the three and nine months ended SeptemberJune 30, 20172019 compared to the three and nine months ended SeptemberJune 30, 2016.2018 primarily due to an increase in professional fees. General and administrative expenses increased during the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily due to an increase in professional fees of $9.1 million and an increase in compensation and other employee-related costs of $4.7 million due to a net increase in headcount.
Restructuring Expenses
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, 2017 | | September 30, 2017 |
| | 2017 | | 2016 | | 2017 | | 2016 | | vs. September 30, 2016 | | vs. September 30, 2016 |
| | (In thousands) |
| Restructuring | $ | 8,552 |
| | $ | 12,176 |
| | $ | 18,678 |
| | $ | 61,312 |
| | $ | (3,624 | ) | | $ | (42,634 | ) |
During the three and nine months ended September 30, 2017, we incurred costs of $1.7 million and $9.2 million, respectively, related to operational initiatives designed to improve infrastructure scalability and cost saving efficiencies. The charges primarily related to employee severance. As of September 30, 2017, total charges incurred since inception were $9.2 million.
All remaining costs for the three and nine months ended September 30, 2017 and 2016 relate to other restructuring plans, wherein the majority of the activities related to these previous programs are substantially complete.
Additionally, as mentioned in the Overview section above, on October 4, 2017, we announced a restructuring program to support our initiatives intended to accelerate the transformation to a cloud-based subscription business, increase strategic focus, and improve operational efficiency. We currently expect to record in the aggregate approximately $60.0 million to $100.0 million in pre-tax restructuring charges associated with this program. We currently anticipate completing the majority of the activities related to this program during the fourth quarter of 2017 and during fiscal year 2018.
20172019 Operating Expense Outlook
When comparing the fourththird quarter of 20172019 to the fourththird quarter of 2016,2018, we currently expect an overall decreaseOperating expenses to increase with respect to sales, marketing and services expenses due to our continued investment in Operating expenses. Additionally, wedemand generation, and to better serve customer success. We also expect an increase with respect to research and development expenses as we continue to invest in restructuring costs when comparing the fourth quarter of 2017product and engineering, and remain consistent with respect to the fourth quarter of 2016.general and administrative expenses.
Interest Income
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, 2017 | | September 30, 2017 |
| | 2017 | | 2016 | | 2017 | | 2016 | | vs. September 30, 2016 | | vs. September 30, 2016 |
| | (In thousands) |
| Interest income | $ | 7,873 |
| | $ | 4,193 |
| | $ | 19,045 |
|
| $ | 12,108 |
| | $ | 3,680 |
| | $ | 6,937 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| Three Months Ended |
| Six Months Ended |
| | June 30, | | June 30, |
| June 30, 2019 |
| June 30, 2019 |
| | 2019 | | 2018 | | 2019 |
| 2018 |
| vs. June 30, 2018 |
| vs. June 30, 2018 |
| | (In thousands) | | |
| Interest income | $ | 3,870 |
| | $ | 9,402 |
| | $ | 13,544 |
| | $ | 18,133 |
| | $ | (5,532 | ) | | $ | (4,589 | ) |
Interest income primarily consists of interest earned on our cash, cash equivalents and investment balances. Interest income increaseddecreased for the three and ninesix months ended SeptemberJune 30, 20172019 compared to the three and ninesix months ended SeptemberJune 30, 20162018
primarily due to overalllower cash, cash equivalents and investment balances and higher yieldsas a result of the repayment of the outstanding principal balance of our Convertible Notes on investments.April 15, 2019. See Note 6 to our condensed consolidated financial statements for additional details regarding our investments.
Interest Expense
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, | | June 30, 2019 | | June 30, 2019 |
| | 2019 | | 2018 | | 2019 | | 2018 | | vs. June 30, 2018 | | vs. June 30, 2018 |
| | (In thousands) | | |
| Interest expense | $ | (10,289 | ) | | $ | (20,542 | ) | | $ | (28,322 | ) | | $ | (40,878 | ) | | $ | 10,253 |
| | $ | 12,556 |
|
Interest expense primarily consists of interest paid on our Convertible Notes, 2027 Notes and our credit facility. Interest expense decreased for the Company’s investments.three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018 due to the repayment of the outstanding principal balance of our Convertible Notes on April 15, 2019. See Note 11 to our condensed consolidated financial statements for additional details regarding our debt.
Other (Expense) Income, (Expense), Net
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, 2017 | | September 30, 2017 |
| | 2017 | | 2016 | | 2017 | | 2016 | | vs. September 30, 2016 | | vs. September 30, 2016 |
| | (In thousands) |
| Other income (expense), net | $ | 981 |
| | $ | 494 |
| | $ | 3,166 |
| | $ | (781 | ) | | $ | 487 |
| | $ | 3,947 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, | | June 30, 2019 | | June 30, 2019 |
| | 2019 | | 2018 | | 2019 | | 2018 | | vs. June 30, 2018 | | vs. June 30, 2018 |
| | (In thousands) | | |
| Other (expense) income, net | $ | (3,420 | ) | | $ | (2,537 | ) | | $ | 279 |
| | $ | (5,549 | ) | | $ | (883 | ) | | $ | 5,828 |
|
Other (expense) income, (expense), net is primarily comprised of gains (losses) from remeasurement of foreign currency transaction,transactions, realized losses related to changes in the fair value of our investments that have a decline in fair value considered other-than-temporary and recognized gains (losses) related to our investments, which was not material for all periods presented.
The change in Other (expense) income, (expense), net during the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 20162018 was not significant.
The change in Other (expense) income, (expense), net during the ninesix months ended SeptemberJune 30, 20172019 compared to the ninesix months ended SeptemberJune 30, 2016 is2018 was primarily driven by an increase ingains from fair value adjustments on our investments accounted for using net asset value of $2.3 million, realized gains on remeasurementour available-for-sale investments of $1.9 million and settlementsgains from the remeasurement of foreign currency transactions.transactions of $1.1 million.
Income Taxes
We are required to estimate our income taxes in each of the jurisdictions in which we operate as part of the process of preparing our condensed consolidated financial statements. We maintain certain strategic management and operational activities in overseas subsidiaries and our foreign earnings are taxed at rates that are generally lower than in the United States. We do not expect
Our effective tax rate generally differs from the U.S. federal statutory rate primarily due to remitlower tax rates on earnings fromgenerated by our foreign subsidiaries.
In March 2016, the Financial Accounting Standards Board issued an accounting standard update on the accounting of stock-based compensation to provide guidanceoperations that changes the accounting for certain aspects of share-based payments to employees. The guidance requires, among other things, the recognition of the income tax effects of awardsare taxed primarily in the income statement when the awards vest or are settled, thus eliminating additional paid-in capital pools. We adopted this standard in the first quarter of 2017. There was no material impact upon adoption of this guidance since the recognition of income tax effects of awards was not materially different from amounts previously recorded in our financial statements.Switzerland.
Our continuing operations effective tax rate was 5.3%12.8% and 8.5%18.7% for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The decrease in the effective tax rate when comparing the three months ended SeptemberJune 30, 20172019 to the three months ended SeptemberJune 30, 20162018 was generallyprimarily due to tax items unique to the recognition of a $7.9 millionperiod ended June 30, 2018, as well as additional tax benefit from stock-based compensation deductions in the release of uncertain tax positions due to expiration of statute of limitations in certain jurisdictions during the three monthsperiod ended SeptemberJune 30, 2017. 2019.
Our continuing operations effective tax rate was 16.9%9.6% and 13.2%11.1% for the ninesix months ended SeptemberJune 30, 20172019 and September 30, 2016,2018, respectively. The increasedecrease in the effective tax rate when comparing the ninesix months ended SeptemberJune 30, 20172019 to the ninesix months ended SeptemberJune 30, 20162018 was primarily due to certain transactions executed during the nine months ended September 30, 2017. These amounts include a $46.1 million income tax charge to establish a valuation allowance due to a change in expectation of realizability of state R&D credits arising from the separation of the GoTo Business. This charge was partially offset by a $20.9 million benefit dueitems unique to the adoption of the accounting standard update requiring recognition of incomeperiod ended June 30, 2018, as well as additional tax effects related tobenefit from stock-based compensation whendeductions in the awards vest or settle. This charge was also partially offset by a $9.8 million net tax benefit primarily related to an international statutory tax transaction and a $7.9 million benefit from the release of uncertain tax positions due to the expiration of statute of limitations in certain jurisdictions.period ended June 30, 2019.
Our net unrecognized tax benefits totaled $69.2$101.6 million and $69.8$89.9 million as of SeptemberJune 30, 20172019 and December 31, 20162018, respectively. All amountsAt June 30, 2019, $74.8 million included in the balance at September 30, 2017 for tax positions would affect the annual effective tax rate if recognized. We have $2.4$6.0 million accrued for the payment of interest and penalties as of SeptemberJune 30, 2017.2019.
On July 24, 2018, the U.S. Ninth Circuit Court of Appeals overturned the U.S. Tax Court’s unanimous decision in Altera v. Commissioner, where the Tax Court held the Treasury regulation requiring participants in a qualified cost sharing arrangement to share stock-based compensation costs to be invalid. On August 7, 2018, the U.S. Ninth Circuit Court of Appeals, on its own motion, withdrew its July 24, 2018 opinion to allow time for a reconstituted panel to confer. Given the increased uncertainty as to the Ninth Circuit panel's eventual ruling and the impact it will have on the Internal Revenue Service’s ability to challenge the technical merits of our position, we accrued amounts for this uncertain tax position as of the year ended December 31, 2018.
On June 7, 2019, a reconstituted panel issued a new opinion which again reversed the Tax Court's holding in Altera v. Commissioner and upheld a 2003 regulation that requires participants in a cost-sharing arrangement to share stock-based compensation costs. The Ninth Circuit panel concluded that the 2003 regulations were valid under the Administrative Procedure Act. Since we previously accrued amounts for this uncertain tax position, there were no changes to our position or treatment of our cost-sharing arrangements in the current period. On July 22, 2019, Altera Corp. filed an appeal with the Ninth Circuit to rehear this case, which is ongoing. Therefore, the case's final disposition may result in a benefit for us in the future if the case is reversed.
We and one or more of our subsidiaries are subject to U.S. federal income taxes in the United States, as well as income taxes of multiple state and foreign jurisdictions. We are not currently not subject to a U.S. federal income tax examination.under examination by the United States Internal Revenue Service. With few exceptions, we are generally not undersubject to examination for state and local income tax, or in non-U.S. jurisdictions, by tax authorities for years prior to 2013.2015.
In the ordinary course of global business, thereOur U.S. liquidity needs are transactions for which the ultimate tax outcome is uncertain; thus, judgment is required in determining the worldwide provision for income taxes.currently satisfied using cash flows generated from our U.S. operations, borrowings, or both. We provide for income taxes on transactions based on our estimate of the probable liability. We adjust our provision as appropriate for changes that impact our underlying judgments. Changes that impact provision estimates include such items as jurisdictional interpretations on tax filing positions based on the resultsalso utilize a variety of tax audits and general tax authority rulings. Dueplanning strategies in an effort to ensure that its worldwide cash is available in locations in which it is needed. We expect to repatriate a substantial portion of our foreign earnings over time, to the evolving nature of tax rules combined withextent that the large number of jurisdictions in which we operate, it is possible that our estimates of our tax liability and the realizability of our deferred tax assets could change in the future, which mayforeign earnings are not restricted by local laws or result in additional tax liabilities and adversely affect our results of operations, financial condition or cash flows.significant incremental costs associated with repatriating the foreign earnings.
At SeptemberJune 30, 2017,2019, we had $194.5$114.6 million in net deferred tax assets from continuing operations.assets. The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We review deferred tax assets periodically for recoverability and makemakes estimates and judgments regarding the expected geographic sources of taxable income and gains from investments, as well as tax planning strategies in assessing the need for a valuation allowance. If the estimates and assumptions used in our determination change in the future, we could be required to revise our estimates of the valuation allowances against our deferred tax assets and adjust our provisions for additional income taxes.
Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due primarily to lower tax rates on earnings generated by our foreign operations that are taxed primarily in Switzerland. We have not provided for U.S. taxes for those earnings because we plan to reinvest all of those earnings indefinitely outside the United States. From time to time, there may be other items that impact our effective tax rate, such as the items specific to the current period discussed above.
Liquidity and Capital Resources
During the ninesix months ended SeptemberJune 30, 2017,2019, we generated continuing operating cash flows of $710.6$429.9 million. These continuing operating cash flows related primarily to net income from continuing operations of $305.9$203.8 million, adjusted for, among other things, non-cash charges, stock-based compensation expense of $127.2$133.6 million, depreciation and amortization expenses of $121.3$109.1 million, and deferred income tax expense of $32.4$18.9 million. Partially offsetting these cash inflows was a change in operating assets and liabilities of $50.3 million, net of effect of our acquisitions. The change in our net operating assets and liabilities was primarily a result of an outflow in deferred revenue of $89.9 million, an outflow in income taxes, net of $67.3 million due to decreases in income taxes payable, and an outflow in accrued expenses and other current liabilities of $62.8 million, primarily due to decreases in employee-related accruals of $39.7 million and payments on lease liabilities of $27.1 million. These outflows are partially offset by an inflow in accounts receivable of $155.2 million driven by an increase in collections and an inflow from prepaid expenses and other current assets of $22.7 million, primarily due to decreases from prepaid cloud commitment agreements. Our investing activities provided $1.03 billion of cash consisting primarily of cash received from the net proceeds from the sale of investments of $1.07 billion, partially offset by cash paid for the purchase of property and equipment of $38.1 million. Our financing activities used cash of $1.58 billion primarily due to the cash repayment of the outstanding principal balance of our Convertible Notes of $1.16 billion, stock repurchases of $250.0 million, cash dividends on our common stock of $91.9 million and cash paid for tax withholding on vested stock awards of $70.6 million.
During the six months ended June 30, 2018, we generated operating cash flows of $528.0 million. These operating cash flows related primarily to net income of $251.1 million, adjusted for, among other things, non-cash charges, stock-based compensation expense of $91.6 million, depreciation and amortization expenses of $86.3 million, the effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies of $6.0 million and deferred income tax expense of $5.8 million. Also contributing to these cash inflows was a change in operating assets and liabilities of $93.8$62.2 million, net of effect of our acquisitions. The change in our net operating assets and liabilities was primarily a result of an inflow in accounts receivable of $216.1$182.5 million driven by an increase in collections from higher prior period bookings. This inflow is partially offset by changesan outflow in income taxes, net of $58.3$72.4 million mostly due to a decreasedecreases in income taxes payable and an increase in prepaid taxes, changes in accrued expenses and other liabilities of $17.4 million primarily due to a decrease in employee-related accruals, changes in accounts payable of $17.0 million due to the timing of payments, changes in prepaid expenses and other current assets of $15.8 million mostly due to an increase in prepaid licensing agreements andas well as changes in deferred revenue of $10.7 million.$41.1 million primarily due to the upfront recognition of term licenses per the new revenue standard as well as seasonality. Our continuing investing activities used $37.3provided $202.4 million of cash consisting primarily of cash received from the net proceeds from the sale of investments of $302.6 million, partially offset by cash paid for acquisitions of $66.0 million and cash paid for the purchase of property and equipment of $61.7 million and cash paid for acquisitions of $60.4 million, partially offset by the net proceeds from the sale of investments of $90.7$32.9 million. Our financing activities used cash of $636.6$820.5 million primarily due to cash paid for stock repurchases of $575.0$765.0 million repayments on our credit facility of $125.0 million,and cash paid for tax withholding on vested stock awards of $71.2 million, and the transfer of cash to the GoTo Business resulting from the separation of $28.5 million, partially offset by proceeds from the credit facility of $165.0$49.9 million.
During the nine months ended September 30, 2016,Senior Notes
On November 15, 2017, we generated continuing operating cash flows of $739.6 million. These continuing operating cash flows related primarily to net income from continuing operations of $291.3 million, adjusted for, among other things, non-cash charges, depreciation and amortization expenses of $138.7 million and stock-based compensation expense of $115.3 million. Also contributing to these cash inflows was a change in operating assets and liabilities of $200.1 million, net of effect of our acquisitions. The change in our net operating assets and liabilities was primarily a result of changes in accounts receivable of $190.7 million driven by an increase in collections from higher bookings and changes in income taxes, net of $70.8 million mostly due to decreases in prepaid taxes and increase in income taxes payable. These inflows are partially offset by decreases in deferred revenue of $51.1 million and outflows in accounts payable of $19.3 million due to timing of payments. Our continuing investing activities provided $153.1issued $750.0 million of cash consisting primarilythe 2027 Notes. The 2027 Notes accrue interest at a rate of 4.5% per annum. Interest on the 2027 Notes is due semi-annually on June 1 and December 1 of each year, beginning on June 1, 2018. The net proceeds from this offering were approximately $741.0 million, after deducting the sale of investments of $256.3 million, partially offsetunderwriting discount and estimated offering expenses payable by cash paid for the purchase of property and equipment of $66.3 million, cash paid for licensing agreements and technology of $25.8 million, and cash paid for acquisitions of $11.5 million. Our financing activities used cash of $32.3 million primarily due to cash paid for tax withholding on vested stock awards of $55.4 million and cash paid for stock repurchases of $28.7 million, partially offset byus. Net proceeds from the issuancethis offering were used to repurchase shares of our common stock through an ASR transaction which we entered into with the ASR Counterparty on November 13, 2017. The 2027 Notes will mature on December 1, 2027, unless earlier redeemed or repurchased in accordance with their terms prior to such date. We may redeem the 2027 Notes at our option at any time in whole or from time to time in part prior to September 1, 2027 at a redemption price equal to the greater of (a) 100% of the aggregate principal amount of the 2027 Notes to be redeemed and (b) the sum of the present values of the remaining scheduled payments under such 2027 Notes, plus in each case, accrued and unpaid interest to, but excluding, the redemption date. Among other terms, under certain circumstances, holders of the 2027 Notes may require us to repurchase their 2027 Notes upon the occurrence of a change of control prior to maturity for cash at a repurchase price equal to 101% of the principal amount of the 2027 Notes to be repurchased plus accrued and unpaid interest to, but excluding, the repurchase date. See Note 11 to our employee stock-based compensation plans of $39.4 million.
condensed consolidated financial statements for additional details on the 2027 Notes.
Credit Facility
On January 7, 2015, we entered into a credit agreement or Credit Agreement, with Bank of America, N.A., as Administrative Agent, and the other lenders party thereto from time to time collectively, the Lenders. The Credit Agreement provides for a $250.0 million unsecured revolving credit facility for a term of five years. During the nine months ended September 30, 2017, we drew $165.0 million, of which we repaid $125.0 million as of as of September 30, 2017. We may elect to increase the revolving credit facility by up to $250.0 million if existing or new lenders provide additional revolving commitments in accordance with the terms of the Credit Agreement. The proceeds of borrowings under the Credit Agreement may be used for working capital and general corporate purposes, including acquisitions. Borrowings under the Credit Agreement will bear interest at a rate equal to either (a) a customary London interbank offered rate formula or (b) a customary base rate formula, plus the applicable margin with respect thereto, in each case as set forth in the Credit Agreement. The weighted average interest rate for the period that amounts were outstanding under the Credit Facility was 1.57%. As of SeptemberJune 30, 2017,2019, there was $40.0 millionno amount outstanding under the credit facility.
The Credit Agreement requirescontains certain financial covenants that require us to maintain a consolidated leverage ratio of not more than 3.5:1.0 and a consolidated interest coverage ratio of not less than 3.0:1.0. The Credit Agreement includes customary events of default, with corresponding grace periods in certain circumstances, including, without limitation, payment defaults, cross-defaults, the occurrence of a change of control and bankruptcy-related defaults. The Lenders are entitled to accelerate repayment of the loans under the Credit Agreement upon the occurrence of any of the events of default. In addition, the Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to grant liens, merge or consolidate, dispose of all or substantially all of our assets, change our business and incur subsidiary indebtedness, in each case subject to customary exceptions for a credit facility of this size and type. We were in compliance with these covenants as of SeptemberJune 30, 2017.2019. In addition, the Credit Agreement contains customary representations and warranties. Please see Note 1211 to our condensed consolidated financial statements for additional details on our Credit Agreement.
Convertible Senior Notes
In AprilDuring 2014, we completed a private placement of approximately $1.44 billion principal amount of 0.500% Convertible Senior Notes due 2019, or2019. As of October 15, 2018, we had received conversion notices from noteholders with respect to $273.0 million in aggregate principal amount of Convertible Notes requesting conversion as a result of the sales price condition having been
met during the second and third quarter of 2018. In accordance with the terms of the Convertible Notes, in the fourth quarter of 2018, we made cash payments of this aggregate principal amount and delivered 1.3 million newly issued shares of our common stock in respect of the remainder of our conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted, in full satisfaction of such converted notes. We received shares of our common stock under the Bond Hedges that offset the issuance of shares of common stock upon conversion of the Convertible Notes. The net proceeds from this offering were approximately $1.42 billion (includingIn addition, on or after October 15, 2018 until the proceeds fromclose of business on the Over-Allotment Option), after deductingsecond scheduled trading day immediately preceding the initial purchasers’ discounts and commissions and the offering expenses payable by us. We used approximately $82.6 millionApril 15, 2019 maturity date, holders of the net proceedsConvertible Notes had the right to payconvert their notes at any time, regardless of whether the cost of certain bond hedges entered into in connectionsales price condition was met. All Convertible Notes were converted by their beneficial owners prior to their maturity on April 15, 2019. In accordance with the offering (afterterms of the indenture governing the Convertible Notes, on April 15, 2019 we paid $1.16 billion in the outstanding aggregate principal amount of the Convertible Notes and delivered 4.9 million newly issued shares of our common stock in respect of the remainder of our conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted, in full satisfaction of such cost was partiallyconverted notes. We received shares of our common stock under the Bond Hedges that offset by the proceeds to us from certain warrant transactions).issuance of shares of common stock upon conversion of the Convertible Notes. Please see Note 11 to our condensed consolidated financial statements for additional details on theour Convertible Notes offering and the related bond hedges and warrant transactions.
We used the remainder of the net proceeds from the offering and a portion of our existing cash and investments to purchase an aggregate of approximately $1.5 billion of our common stock under our share repurchase program. We used approximately $101.0 million to purchase shares of our common stock from certain purchasers of the Convertible Notes in privately negotiated transactions concurrently with the closing of the offering, and the remaining $1.4 billion to purchase additional shares of our common stock through an accelerated share repurchase transaction, or the ASR, which we entered into with Citibank, N.A., or Citibank, on April 25, 2014.
As a result of the structure of the Reverse Morris Trust (RMT) transaction with LogMeIn, Inc., and the notification on October 10, 2016 to noteholders in accordance with the Indenture, the Convertible Notes became convertible until the earlier of (1) the close of business on the business day immediately preceding the ex-dividend date for the distribution of the outstanding shares of GetGo common stock to our stockholders by way of a pro rata dividend, and (2) our announcement that such distribution will not take place, even though the Convertible Notes were not otherwise convertible at December 31, 2016.
The conversion period for the Convertible Notes that commenced on October 10, 2016 in connection with the distribution terminated as of the close of business on January 31, 2017. As a result, the Convertible Notes were reclassified to Other liabilities from Current liabilities and the amount previously recorded as Temporary equity was reclassified to Stockholders' equity as of September 30, 2017. The distribution also resulted in an adjustment to the conversion rate for the Convertible Notes under the terms of the Indenture. As a result of this adjustment, the conversion rate for the Convertible Notes was re-set as of the opening of business on February 1, 2017 to 13.9061 shares of our common stock per $1,000 principal amount of Convertible Notes, which corresponds to a conversion price of $71.91 per share of common stock. Similar adjustments were made to the conversion rates for the convertible note hedge and warrant transactions as of the opening of business on February 1, 2017.Bond Hedges.
Historically, significant portions of our cash inflows were generated by our operations. We currently expect this trend to continue throughout 2017.2019. We believe that our existing cash and investments together with cash flows expected from continuing operations will be sufficient to meet expected operating and capital expenditure requirements and service our debt obligations for the next 12
months. We continue to search for suitable acquisition candidates and could acquire or make investments in companies we believe are related to our strategic objectives. We could from time to time continue to seek to raise additional funds through the issuance of debt or equity securities for larger acquisitions potential redemption of our Convertible Notes and for general corporate purposes.
Cash, Cash Equivalents and Investments
|
| | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | | 2017 Compared to 2016 |
| | (In thousands) |
| Cash, cash equivalents and investments | $ | 2,558,714 |
| | $ | 2,543,160 |
| | $ | 15,554 |
|
|
| | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 | | 2019 Compared to 2018 |
| | (In thousands) |
| Cash, cash equivalents and investments | $ | 593,629 |
| | $ | 1,776,700 |
| | $ | (1,183,071 | ) |
The increasedecrease in Cash, cash equivalents and investments when comparing SeptemberJune 30, 20172019 to December 31, 2016,2018, is primarily due to the cash provided byrepayment of the outstanding principal amount of our continuing operating activitiesConvertible Notes of $710.6 million and proceeds from our credit facility of $165.0 million, partially offset by$1.16 billion, cash paid for stock repurchases of $575.0$250.0 million, repaymentscash dividends on our credit facilitycommon stock of $125.0$91.9 million, cash paid for tax withholding on vested stock awards of $71.2$70.6 million, and cash paid for property and equipment of $61.7$38.1 million, partially offset by cash provided by operating activities of $429.9 million.
As of SeptemberJune 30, 20172019, $2.47 billion$346.1 million of the $2.56 billion$593.6 million of Cash, cash equivalents and investments was held by our foreign subsidiaries. IfAs a result of the Tax Cuts and Jobs Act, which became effective January 1, 2018, the cash, cash equivalents and investments held by our foreign subsidiaries can be repatriated without incurring any additional U.S. federal tax. Upon repatriation of these funds, we could be subject to foreign and U.S. state income taxes. The amount of taxes due is dependent on the amount and manner of the repatriation, as well as the locations from which the funds are needed for our operations in the United States, we would be required to accruerepatriated and pay U.S. taxes to repatriate these funds. Our current plans are not expected to require repatriation of cash and investments to fund our U.S. operations and, as a result, we intend to permanently reinvest our foreign earnings.received. We generally invest our cash and cash equivalents in investment grade, highly liquid securities to allow for flexibility in the event of immediate cash needs. Our short-term and long-term investments primarily consist of interest-bearing securities.
Accounts Receivable, Net
|
| | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | | 2017 Compared to 2016 |
| | (In thousands) |
| Accounts receivable | $ | 468,309 |
| | $ | 687,089 |
| | $ | (218,780 | ) |
| Allowance for returns | (778 | ) | | (1,994 | ) | | 1,216 |
|
| Allowance for doubtful accounts | (2,730 | ) | | (3,889 | ) | | 1,159 |
|
| Accounts receivable, net | $ | 464,801 |
| | $ | 681,206 |
| | $ | (216,405 | ) |
The decrease in Accounts receivable, net, when comparing September 30, 2017 to December 31, 2016 was primarily due to an increase in collections from prior period bookings. The activity in our Allowance for returns was comprised primarily of $2.9 million in credits issued for returns during the nine months ended September 30, 2017, partially offset by $1.7 million of provisions for returns recorded during the nine months ended September 30, 2017. The activity in our Allowance for doubtful accounts was comprised primarily of $5.4 million of uncollectible accounts written off, net of recoveries during the nine months ended September 30, 2017, partially offset by $4.2 million in provisions for doubtful accounts. From time to time, we could maintain individually significant accounts receivable balances from our distributors or customers, which are comprised of large business enterprises, governments and small and medium-sized businesses. If the financial condition of our distributors or customers deteriorates, our operating results could be adversely affected.
Stock Repurchase Programs
Our Board of Directors authorized an ongoing stock repurchase program, with a total repurchase authority granted to us of $6.8 billion, of which $500.0$750.0 million was approved in January 2017.October 2018. We may use the approved dollar authority to repurchase stock at any time until the approved amount is exhausted. The objective of ourthe stock repurchase program is to improve stockholders’ returns. At SeptemberJune 30, 2017, $329.02019, $517.9 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock. A portion of the funds used to repurchase stock over the course of the program was provided by net proceeds from the Convertible Notes and 2027 Notes offerings, as well as proceeds from employee stock option exercisesawards and the related tax benefit.
We are authorized to make open market purchases of our common stock using general corporate funds through open market purchases, or pursuant to a Rule 10b5-1 plan or in privately negotiated transactions.
In February 2018, we entered into an ASR transaction with a counterparty to pay an aggregate of $750.0 million in exchange for the delivery of approximately 6.5 million shares of our common stock based on current market prices. The purchase price per share under the ASR was based on the volume-weighted average price of our common stock during the term of the ASR, less a discount. The ASR was entered into pursuant to our existing share repurchase program. Final settlement of the ASR agreement was completed in April 2018 and we received delivery of an additional 1.6 million shares of our common stock.
During the three months ended SeptemberJune 30, 2017,2019, we expended $75.0 million on open market purchases under the stock purchase program, repurchasing 984,869 shares of outstanding common stock at an average price of $76.11. During the nine months ended September 30, 2017, we expended $575.0approximately $156.2 million on open market purchases under the stock repurchase program, repurchasing 7,384,3681,599,822 shares of outstanding common stock at an average price of $77.86.
$97.63. During the threesix months ended SeptemberJune 30, 2016, we had no open market purchases. During the nine months ended September 30, 2016,2019, we expended $28.7approximately $250.0 million on open market purchases under the stock repurchase program, repurchasing 426,3002,510,882 shares of outstanding common stock at an average price of $67.30.$99.57.
During the three and six months ended June 30, 2018, we expended approximately $15.0 million on open market purchases under the stock repurchase program, repurchasing 0.1 million shares of common stock at an average price of $106.83.
Shares for Tax Withholding
During the three and six months ended SeptemberJune 30, 2017,2019, we withheld 135,003104,129 shares and 698,117 shares, respectively, from equity awards that vested, totaling $10.6$10.4 million and $70.6 million, respectively, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. During the ninethree and six months ended SeptemberJune 30, 2017,2018, we withheld 870,65630,502 shares and 537,776 shares, respectively, from stock unitsequity awards that vested, totaling $71.2$3.0 million to satisfy minimum tax withholding obligations that arose on the vesting of stock units. During the three months ended September 30, 2016, we withheld 134,782 shares from stock units that vested, totaling $12.0and $49.9 million, respectively, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. During the nine months ended September 30, 2016, we withheld 698,391 shares from stock units that vested, totaling $55.0 million, to satisfy minimum tax withholding obligations that arose on the vesting of stock units. These shares are reflected as treasury stock in our condensed consolidated balance sheets and the related cash outlays do not reduce our total stock repurchase authority.
Contractual Obligations
Other Purchase Commitments
In June 2019, we entered into an amended agreement, in the ordinary course of business, with a third-party provider for our use of certain cloud services through June 2021. Under the amended agreement, we are committed to a purchase of $25.0 million in fiscal year 2019 and $25.0 million in fiscal year 2020.
Off-Balance Sheet Arrangements
We do not have any special purpose entities or off-balance sheet financing arrangements.
| |
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There were no material changes during the quarter ended SeptemberJune 30, 20172019 with respect to the information appearing in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year ended December 31, 2016.2018.
| |
| ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of SeptemberJune 30, 2017,2019, our management, with the participation of our principal executive and principal financial officers, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our principal executive officer and our principal financial officer concluded that, as of SeptemberJune 30, 20172019, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated by and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the quarterthree months ended SeptemberJune 30, 2017,2019, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
DueWe are subject to various legal proceedings, including suits, assessments, regulatory actions and investigations. We believe that we have meritorious defenses in these matters; however, we are unable currently to determine the ultimate outcome of these or similar matters or the potential exposure to loss, if any. In addition, due to the nature of our business, we are subject to various litigation matters, including patent infringement claims alleging infringement by various Citrix products and services. We believe that we have meritorious defenses to the allegations made in our pending cases and intend to vigorously defend these lawsuits; however, we are unable currently to determine the ultimate outcome of these or similar matters or the potential exposure to loss, if any. In addition, we are a defendant in various litigation matters generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcomes of these cases, we believe that it is not reasonably possibleoutcomes that the ultimate outcomes will materially and adversely affect our business, financial position, results of operations or cash flows are reasonably possible, but not estimable at this time.
We were the victim of a cyberattack, in which international cyber criminals gained intermittent access to our internal network through “password spraying”, and over a limited number of days stole business documents and files from a shared network drive and a drive associated with a web-based tool used in our consulting practice. We recently conducted an investigation, and we are reviewing documents and files that may have been accessed or were stolen in this incident. Please also see Management’s Discussion and Analysis - Executive Summary.
Although it is difficult to predict the ultimate outcomes of this cyberattack, to date, three putative class action lawsuits have been filed against us in the United States District Court for the Southern District of Florida. These matters, Howard v. Citrix, Jackson and Sargent v. Citrix, and Ramus, Young and Charles v. Citrix, were filed on May 24, 2019, May 30, 2019, and June 23, 2019, respectively, and have been consolidated. The plaintiffs, who purport to represent various classes of our current and former employees (and their dependents), generally claim to have been harmed by our alleged actions and/or omissions in connection with this incident and their personal data. They assert a variety of common law and statutory claims seeking monetary damages or other related relief.
We are unable to currently determine the ultimate outcome of these proceedings or the potential exposure or loss, if any, because the legal proceedings remain in the early stages, there is uncertainty as to the likelihood of a class or classes being certified or the ultimate size of any class if certified, and there are significant factual and legal issues to be resolved.
Beyond the matters described above, we believe that it is reasonably possible that outcomes from potential unasserted claims related to this cyberattack could materially and adversely affect our business, financial position, results of operations or cash flows. However, it is not possible to estimate the amount or a range of potential loss, if any, at this time, and we will continue to evaluate information as it becomes known and will record an accrual for estimated losses at the time or times it is determined that a loss is both probable and reasonably estimable.
Further, we have a program of network-security (or cyber risk) insurance policies that, with standard exclusions, insure against the costs of detecting and mitigating cyber breaches, the cost of credit monitoring, and reasonable expenses for defending and settling privacy and network security lawsuits. These policies are subject to a $500,000 self-insured retention and a total insurance limit of $200.0 million. There can be no assurance, however, that this insurance coverage is sufficient to cover this or any other cyberattack. In addition to these insurance policies, we maintain customary business coverage under our crime, commercial general liability, and director and officer insurance policies.
On July 25, 2019, a class action lawsuit was filed against Citrix, LogMeIn and certain of their directors and officers in the Circuit Court of the 15th Judicial Circuit, Palm Beach County, Florida. The complaint alleges that the defendants violated federal securities laws by making alleged misstatements and omissions in LogMeIn’s Registration Statement and Prospectus filed in connection with the 2017 spin-off of Citrix’s GoTo family of service offerings and subsequent merger of that business with LogMeIn. The complaint seeks among other things the recovery of monetary damages. We believe that Citrix and our directors have meritorious defenses to these allegations; however, we are unable to currently determine the ultimate outcome of this matter or the potential exposure or loss, if any.
The following information updates, and should be read in conjunction with, the information disclosed in Part 1, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2018, which was filed with the Securities and Exchange Commission on February 16, 2017.15, 2019.
Our transition from a perpetual to a subscription-based business model is subject to numerous risks and uncertainties.
The focus of our business model is shifting away from sales of perpetual software licenses for on premises deployment to sales of subscriptions to our cloud-delivered solutions. Perpetual software licenses for on premises deployment of our solutions will continue to be available to our customers, including through “hybrid” licenses permitting customers to transition from an on premises to a cloud-based deployment during the term of the license. This cloud-subscription strategy may give rise to a number of risks, including the following:
our cloud-subscription strategy may raise concerns among our customer base, including concerns regarding changes to pricing over time, service availability, and security of a cloud-delivered solution;
weWe may not be able to implement effective go-to-market strategies and trainforecast the rate at which our sales team and channel partners in ordercustomers’ purchases trend away from perpetual licenses to effectively market our subscription offerings;
we may be unsuccessful in maintaining our target pricing, adoption and projected renewal rates;
we may select solution prices that are not optimal and could negatively affect our sales or earnings;
we may incur costs at a higher than forecasted rate as we expand our cloud-delivered solutions;
our cloud-delivered solutions are primarily operated through third party data centers, which we do not control andsubscriptions, which may be vulnerable to damage, interruptionimpact our forecasted and cyber-related risks;actual revenue and operating results.
our cloud-subscription strategy creates certain risks related to the timing of revenue recognition and potential reductions in cash flows in the near term.
Our cloud-subscription strategy may also requireWe are undergoing a considerable investment of technical, financial, legal and sales resources, and a scalable organization. Market acceptance of such offerings is affected by a variety of factors, including but not limited to: security, reliability, scalability, customization, performance, current license terms, customer preference, customer concerns with entrusting a third party to store and manage their data, public concerns regarding privacy and the enactment of restrictive laws or regulations. Whether our business model transition will prove successful and will accomplishas our business and financial objectives, includingcustomers’ purchases trend away from perpetual licenses to subscriptions, our fiscal year 2020 targets for revenue growth rate, operating margin, revenue from subscriptionssubscription bookings as a percentage of total product bookings increases. We forecast our future revenue Citrix Cloudand operating results and provide financial projections based on a number of assumptions, including a forecasted rate at which our subscription bookings as a percentage of newtotal product bookings and capital return, is subject to numerous uncertainties, including but not limited to: customer demand, the pacewill increase throughout our business model transition. If any of our assumptions about our business model transition renewal rates, channel acceptance,or the estimated rate at which our ability to further developsubscription bookings as a percentage of total product bookings will increase and scale infrastructure,in which periods are incorrect, our ability to include functionalityforecasted revenue and usabilityoperating results may be impacted and could vary materially from those we provide as guidance or from those anticipated by investors and analysts. For example, in such solutionsthe second quarter of fiscal year 2019, our subscription bookings as a percentage of total product bookings was higher than anticipated, which impacted our operating results for that address customer requirements, tax and accounting implications, pricingperiod and our costs. In addition,guidance for the metricsthird quarter and full fiscal year 2019.
The cyberattack involving our internal network that we use to gauge the status ofannounced on March 8, 2019 could have a material adverse impact on our business, may evolve over the course of the transition as significant trends emerge.
If we are unable to successfully establish our cloud-subscription strategy and navigate our business model transition in light of the foregoing risks and uncertainties, our results of operations could be negatively impacted.and financial condition.
In orderOn March 6, 2019, the FBI informed us that international cyber criminals had gained access to be successful,Citrix’s internal network through a “password spraying” attack, a technique that exploits weak passwords. Immediately, we must attract, engage, retainengaged outside forensics and integrate key employeessecurity experts, took actions to expel the cyber criminals from our internal systems, and have adequate succession plansadopted additional security measures. Additionally, we launched a comprehensive forensic investigation led by a leading, independent cybersecurity firm. From our investigation, we confirmed that the cyberattack commenced on October 13, 2018, and encompassed a cyber incident that we became aware of in place,late 2018 and failuretook certain steps to do so could have an adverse effectremediate based on our ability to manage our business.assessment at the time. Further, we received a notification from the Department of Homeland Security in late February 2019 concerning a network compromise that may have been part of this same cyberattack. While waiting for clarification from the Department of Homeland Security, we were contacted by the FBI on March 6, 2019.
Our success depends, in large part, on our ability to attract, engage, retain,We conducted an investigation, which confirmed that between October 13, 2018 and integrate qualified executivesMarch 8, 2019, cyber criminals intermittently accessed Citrix's internal network and other key employees throughout all areas of our business. Identifying, developing internally or hiring externally, training and retaining highly-skilled managerial, technical, sales and services, finance and marketing personnel are critical to our future, and
competition for experienced employees can be intense. In order to attract and retain executives and other key employees inover a competitive marketplace, we must provide a competitive compensation package, including cash- and equity-based compensation. If we do not obtain the stockholder approval needed to continue granting equity compensation in a competitive manner, our ability to attract, retain, and motivate executives and key employees could be weakened. Failure to successfully hire executives and key employees or the loss of any executives and key employees could have a significant impact on our operations. Competition for qualified personnel in our industry is intense because of the limited number of people availabledays stole business documents and files from a shared network drive and a drive associated with the necessary technical skills and understanding of productsa web-based tool used in our industry.consulting practice. The lossshared drive from which documents and files were stolen was used to store current and historical business documents and files, such as human resources and employee records, some of which contained sensitive and personal identification information of our current and former employees and, in some cases, their beneficiaries, dependents, and others; customer engagement documents, including consulting services project materials, statements of work and proofs of concept, some of which were also stored on the drive associated with a web-based tool used in our consulting practice; marketing materials; sales and finance documents; contracts and other legal records; and a wide assortment of other company records. The cyber criminals also may have accessed the individual virtual drives of a very limited number of compromised users, accessed company email accounts of the same very limited number of compromised users, and launched without further exploitation a limited number of internal applications. We are reviewing documents and files that may have been accessed or were stolen in this incident. Our investigation found no indication that the cyber criminals discovered and exploited any vulnerabilities in our products or customer cloud services to gain entry, and no indication that the security of any key personnel, the inability to retain and attract qualified personnelCitrix product or customer cloud service was compromised.
This cyberattack has resulted in the future or delays in hiring may harm our business and results of operations.
Effective succession planning is also important to our long-term success. We recently experienced significant changes in our senior management team, including the appointment of David J. Henshall as our President and Chief Executive Officer in July 2017 and Mark Ferrer as our Executive Vice President and Chief Revenue Officer in October 2017. Further, as previously announced in connection with Mr. Henshall’s appointment, we are conducting a search process to identify a permanent Chief Financial Officer. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution. Further, changes in our management team may be disruptive to our business, and any failure to successfully integrate key new hires or promoted employees could adversely affect our business and results of operations.
We recently implemented a restructuring program, which we cannot guarantee will achieve its intended result.
In October 2017, we announced the implementation of a restructuring program designed to increase our strategic focus and operational efficiency. It is anticipated that the aggregate total pre-tax restructuring charges for this program, which primarily relate to employee severance arrangements and consolidation of leased facilities, will be in the range of $60.0 million to $100.0 million. We cannot guarantee that we will achieve or sustain the targeted benefits under this restructuring program, or that the benefits, even if achieved, will be adequate to meet our long-term profitability expectations. Risks associated with this restructuring program also include additional unexpected costs, adverse effects on employee morale and the failure to meet operational and growth targets duethree class action complaints related to the loss of personal data of current and former employees, anyand could result in (among other consequences):
lost sales, including from disruption of customer relationships;
disruptions in the operation of our business;
harm to our reputation or brand;
negative publicity;
lost trust from our customers, partners and employees;
regulatory enforcement action under the General Data Protection Regulation or other legal authority, which could result in significant fines and/or penalties or injunctive remedies;
individual and/or class action lawsuits, due to, among other things, the compromise of sensitive employee or customer information, which could result in financial judgments against us or the payment of settlement amounts, which would cause us to incur legal fees and costs;
costs associated with responding to, and mitigating, the incident in excess of insurance policy limits, or that may impairnot be covered by insurance;
disputes with our abilityinsurance carriers concerning coverage for the costs associated with responding to, achieve anticipated results from operations or otherwise harm our business.and mitigating, the incident; and
longer-term remediation and security enhancement expenses.
Consequently, this cyberattack could have a material adverse impact on our business, results of operations and financial condition.
Further, we have a program of network-security (or cyber risk) insurance policies that, with standard exclusions, insure against the costs of detecting and mitigating cyber breaches, the cost of credit monitoring, and reasonable expenses for defending and settling privacy and network security lawsuits. These policies are subject to a $500,000 self-insured retention and a total insurance limit of $200.0 million. There can be no assurance, however, that this insurance coverage is sufficient to cover this or any other cyberattack. In addition to these insurance policies, we maintain customary business coverage under our crime, commercial general liability, and director and officer insurance policies.
| |
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Purchases of Equity Securities by the Issuer
OurThe Company's Board of Directors has authorized an ongoing stock repurchase program, with a total repurchase authority granted to us of $6.8 billion, of which $500.0$750.0 million was approved in January 2017.October 2018. The objective of the stock repurchase program is to improve stockholders’ returns. As of SeptemberJune 30, 2017, $329.02019, $517.9 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock. The following table shows the monthly activity related to our stock repurchase program for the quarter ended SeptemberJune 30, 20172019:
|
| | | | | | | | | | | | | |
| | Total Number of Shares (or Units) Purchased (1) | | Average Price Paid per Share (or Unit) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (In thousands) (2) |
| July 1, 2017 through July 31, 2017 | 52,355 |
| | $ | 80.68 |
| | — |
| | $ | 404,006 |
|
| August 1, 2017 through August 31, 2017 | 836,785 |
| | 76.06 |
| | 789,269 |
| | 344,031 |
|
| September 1, 2017 through September 30, 2017 | 230,732 |
| | 76.79 |
| | 195,600 |
| | 329,049 |
|
| Total | 1,119,872 |
| | | | 984,869 |
| | 329,049 |
|
|
| | | | | | | | | | | | | |
| | Total Number of Shares (or Units) Purchased (1) | | Average Price Paid per Share (or Unit) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (In thousands) (2) |
| April 1, 2019 through April 30, 2019 | 496,647 |
| | $ | 100.78 |
| | 408,985 |
| | $ | 632,889 |
|
| May 1, 2019 through May 31, 2019 | 643,716 |
| | $ | 96.78 |
| | 627,249 |
| | $ | 572,186 |
|
| June 1, 2019 through June 30, 2019 | 563,588 |
| | $ | 96.33 |
| | 563,588 |
| | $ | 517,896 |
|
| Total | 1,703,951 |
| | $ | 97.80 |
| | 1,599,822 |
| | $ | 517,896 |
|
| |
| (1) | Includes 135,003approximately 104,129 shares withheld from restricted stock units and stock awards that vested in the thirdsecond quarter of 20172019 to satisfy minimum tax withholding obligations that arose on the vesting of such restricted stock units and stock awards. We expended approximately $75.0 million during the quarter ended September 30, 2017 for repurchases of our common stock. For more information see Note 16 to our condensed consolidated financial statements. units. |
| |
| (2) | Shares withheld from equity awardsrestricted stock units that vested to satisfy minimum tax withholding obligations that arose on the vesting of awards do not deplete the dollar amount available for purchases under the repurchase program. |
| |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| |
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
On November 1, 2017, the Company entered into a letter agreement with Carlos Sartorius, former Executive Vice President, Worldwide Sales and Services, in connection with his retirement from the Company and in order to effect an orderly transition of leadership of the Worldwide Sales and Services function. Subject to Mr. Sartorius remaining with the Company through March 31, 2018, the letter agreement provides for Mr. Sartorius to receive the payments and benefits that he would have received under his existing Executive Agreement with the Company if his employment had been terminated without cause or terminated following a change in control of the Company. A summary of Mr. Sartorius’s Executive Agreement and the amounts payable thereunder is set forth in the Company’s Current Report on Form 8-K filed with the SEC on January 20, 2017 under the caption “Senior Executive Agreements,” which summary is incorporated herein by reference. The form of Executive Agreement was included as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on January 20, 2017. The payments and benefits described above are subject to the execution of a separation and release agreement containing, among other provisions, a general release of claims in favor of the Company.Not applicable.
|
| | |
| Exhibit No. | | Description |
| | | |
2.1†10.1*† | | Amendment No. 3, dated as of September 29, 2017, to Agreement and Plan of Merger, dated as of July 26, 2016, by and among Citrix Systems, Inc., GetGo, Inc. and LogMeIn, Inc. |
| | |
10.1* | | |
| | |
10.2* | | |
| | |
10.3†* | | |
| | |
10.4* | | |
| | |
10.5†* | | |
| | |
10.6†* | | |
| | |
10.7†* | | |
| | |
10.8†* | | |
| | | |
10.9†*10.2*† | | |
| | | |
10.10†*10.3*† | | |
| | |
| 10.4*† | | |
| | |
| 10.5* | | |
| | | |
| 31.1† | | |
| | | |
| 31.2† | | |
| | | |
| 32.1†† | | |
| | |
101.INS | | XBRL Instance Document |
| | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
| | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| | | |
|
| |
* | Indicates a management contract or a compensatory plan, contract or arrangement. |
† | Filed herewith. |
†† | Furnished herewith. |
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 on this 2nd day of November, 2017.
|
| | |
| | |
| CITRIX SYSTEMS, INC. | |
| | |
| By: | /s/ MARK M. COYLE |
| | Mark M. Coyle |
| | Interim Chief Financial Officer |
| | (Authorized Officer and Principal Financial Officer) |
EXHIBIT INDEX
|
| | |
Exhibit No. | | Description |
| | |
2.1†104 | | Amendment No. 3, datedCover Page Interactive Data File (formatted as of September 29, 2017, to Agreement and Plan of Merger, dated as of July 26, 2016, by and among Citrix Systems, Inc., GetGo, Inc. and LogMeIn, Inc. |
| | |
10.1* | | |
| | |
10.2* | | |
| | |
10.3†* | | |
| | |
10.4* | | |
| | |
10.5†* | | |
| | |
10.6†* | | |
| | |
10.7†* | | |
| | |
10.8†* | | |
| | |
10.9†* | | |
| | |
10.10†* | | |
| | |
31.1† | | |
| | |
31.2† | | |
| | |
32.1†† | | |
| | |
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 |
| | | |
|
| |
| * | Indicates a management contract or a compensatory plan, contract or arrangement. |
| † | Filed herewith. |
| †† | Furnished herewith. |
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 on this 6th day of August, 2019.
|
| | |
| | |
| CITRIX SYSTEMS, INC. | |
| | |
| By: | /s/ JESSICA SOISSON |
| | Jessica Soisson |
| | Interim Chief Financial Officer |
| | (Authorized Officer and Principal Financial Officer) |