0001048695-20-000012.txt : 20200205 0001048695-20-000012.hdr.sgml : 20200205 20200205163048 ACCESSION NUMBER: 0001048695-20-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 77 CONFORMED PERIOD OF REPORT: 20191231 FILED AS OF DATE: 20200205 DATE AS OF CHANGE: 20200205 FILER: COMPANY DATA: COMPANY CONFORMED NAME: F5 NETWORKS, INC. CENTRAL INDEX KEY: 0001048695 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 911714307 STATE OF INCORPORATION: WA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26041 FILM NUMBER: 20579188 BUSINESS ADDRESS: STREET 1: 401 ELLIOTT AVENUE WEST CITY: SEATTLE STATE: WA ZIP: 98119 BUSINESS PHONE: 2062725555 MAIL ADDRESS: STREET 1: 401 ELLIOTT AVENUE WEST CITY: SEATTLE STATE: WA ZIP: 98119 FORMER COMPANY: FORMER CONFORMED NAME: F5 NETWORKS INC DATE OF NAME CHANGE: 19990308 FORMER COMPANY: FORMER CONFORMED NAME: F5 LABS INC DATE OF NAME CHANGE: 19990305 10-Q 1 ffiv10q12312019.htm 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 000-26041
 
F5 NETWORKS, INC.
(Exact name of registrant as specified in its charter)
 
Washington
 
91-1714307
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
801 5th Avenue
Seattle, Washington 98104
(Address of principal executive offices and zip code)
(206) 272-5555
(Registrant’s telephone number, including area code)

 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, no par value
FFIV
NASDAQ Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
 
  
Accelerated Filer
 
Non-accelerated Filer
 
  (Do not check if a smaller reporting company)
  
Smaller Reporting Company
 
 
 
 
 
Emerging Growth Company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
The number of shares outstanding of the registrant’s common stock as of January 31, 2020 was 60,804,090.



F5 NETWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended December 31, 2019
Table of Contents
 
 
Page
 
 



PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements
F5 NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
 
 
 
December 31,
2019
 
September 30,
2019
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
735,457

 
$
599,219

Short-term investments
 
426,761

 
373,063

Accounts receivable, net of allowances of $3,304 and $3,259
 
354,668

 
322,029

Inventories
 
32,381

 
34,401

Other current assets
 
188,204

 
182,874

Total current assets
 
1,737,471

 
1,511,586

Property and equipment, net
 
229,800

 
223,426

Operating lease right-of-use assets
 
303,435

 

Long-term investments
 
312,044

 
358,402

Deferred tax assets
 
29,380

 
27,701

Goodwill
 
1,065,379

 
1,065,379

Other assets, net
 
197,851

 
203,781

Total assets
 
$
3,875,360

 
$
3,390,275

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
52,407

 
$
62,627

Accrued liabilities
 
250,350

 
235,869

Deferred revenue
 
847,750

 
807,030

Total current liabilities
 
1,150,507

 
1,105,526

Deferred tax liabilities
 
258

 
313

Operating lease liabilities, long-term
 
342,303

 

Deferred revenue, long-term
 
390,223

 
391,086

Other long-term liabilities
 
62,611

 
131,853

Total long-term liabilities
 
795,395

 
523,252

Commitments and contingencies (Note 8)
 

 

Shareholders’ equity
 
 
 
 
Preferred stock, no par value; 10,000 shares authorized, no shares outstanding
 

 

Common stock, no par value; 200,000 shares authorized, 60,803 and 60,367 shares issued and outstanding
 
211,217

 
142,597

Accumulated other comprehensive loss
 
(18,376
)
 
(19,190
)
Retained earnings
 
1,736,617

 
1,638,090

Total shareholders’ equity
 
1,929,458

 
1,761,497

Total liabilities and shareholders’ equity
 
$
3,875,360

 
$
3,390,275

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


3


F5 NETWORKS, INC.
CONSOLIDATED INCOME STATEMENTS
(unaudited, in thousands, except per share data)
 
 
 
Three months ended
December 31,
 
 
2019
 
2018
Net revenues
 
 
 
 
Products
 
$
234,536

 
$
233,877

Services
 
334,769

 
309,893

Total
 
569,305

 
543,770

Cost of net revenues
 
 
 
 
Products
 
42,118

 
42,410

Services
 
46,524

 
44,304

Total
 
88,642

 
86,714

Gross profit
 
480,663

 
457,056

Operating expenses
 
 
 
 
Sales and marketing
 
195,519

 
164,259

Research and development
 
96,005

 
92,038

General and administrative
 
59,004

 
42,543

Restructuring charges
 
7,800

 

Total
 
358,328

 
298,840

Income from operations
 
122,335

 
158,216

Other income, net
 
5,220

 
7,095

Income before income taxes
 
127,555

 
165,311

Provision for income taxes
 
29,028

 
34,406

Net income
 
$
98,527

 
$
130,905

Net income per share — basic
 
$
1.62

 
$
2.17

Weighted average shares — basic
 
60,649

 
60,216

Net income per share — diluted
 
$
1.62

 
$
2.16

Weighted average shares — diluted
 
60,815

 
60,645

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


4


F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
 
 
 
Three months ended
December 31,
 
 
2019
 
2018
Net income
 
$
98,527

 
$
130,905

Other comprehensive income:
 
 
 
 
Foreign currency translation adjustment
 
634

 
141

Available-for-sale securities:
 
 
 
 
Unrealized gains on securities, net of taxes of $28 and $65 for the three months ended December 31, 2019 and 2018, respectively
 
189

 
44

Reclassification adjustment for realized gains included in net income, net of taxes of $2 and $0 for the three months ended December 31, 2019 and 2018, respectively
 
(9
)
 

Net change in unrealized gains on available-for-sale securities, net of tax
 
180

 
44

Total other comprehensive income
 
814

 
185

Comprehensive income
 
$
99,341

 
$
131,090

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


5


F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(unaudited, in thousands)

 
 
Common Stock
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
Shareholders’
Equity
 
 
Shares
 
Amount
 
 
 
(In thousands)
 
 
Three months ended December 31, 2018
Balances, September 30, 2018
 
60,215

 
$
20,427

 
$
(22,178
)
 
$
1,287,243

 
$
1,285,492

Cumulative effect adjustment from adoption of ASC 606
 

 

 

 
36,048

 
36,048

Issuance of stock under employee stock purchase plan
 
135

 
18,900

 

 

 
18,900

Issuance of restricted stock
 
277

 

 

 

 

Repurchase of common stock
 
(569
)
 
(64,739
)
 

 
(36,292
)
 
(101,031
)
Stock-based compensation
 

 
38,689

 

 

 
38,689

Net income
 

 

 

 
130,905

 
130,905

Other comprehensive income
 

 

 
185

 

 
185

Balances, December 31, 2018
 
60,058

 
$
13,277

 
$
(21,993
)
 
$
1,417,904

 
$
1,409,188

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended December 31, 2019
Balances, September 30, 2019
 
60,367

 
$
142,597

 
$
(19,190
)
 
$
1,638,090

 
$
1,761,497

Exercise of employee stock options
 
11

 
290

 

 

 
290

Issuance of stock under employee stock purchase plan
 
169

 
20,669

 

 

 
20,669

Issuance of restricted stock
 
256

 

 

 

 

Stock-based compensation
 

 
47,661

 

 

 
47,661

Net income
 

 

 

 
98,527

 
98,527

Other comprehensive income
 

 

 
814

 

 
814

Balances, December 31, 2019
 
60,803

 
$
211,217

 
$
(18,376
)
 
$
1,736,617

 
$
1,929,458

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


6


F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
 
 
Three months ended
December 31,
 
 
2019
 
2018
Operating activities
 
 
 
 
Net income
 
$
98,527

 
$
130,905

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Stock-based compensation
 
47,661

 
38,689

Depreciation and amortization
 
18,979

 
14,001

Non-cash operating lease costs
 
8,703

 

Other
 
(31
)
 
251

Deferred income taxes
 
(1,714
)
 
2,714

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(32,683
)
 
(28,921
)
Inventories
 
2,020

 
(991
)
Other current assets
 
(5,494
)
 
(26,777
)
Other assets
 
2,011

 
(157
)
Accounts payable and accrued liabilities
 
(23,606
)
 
2,022

Deferred revenue
 
39,856

 
66,122

Lease liabilities
 
(10,217
)
 

Net cash provided by operating activities
 
144,012

 
197,858

Investing activities
 
 
 
 
Purchases of investments
 
(180,557
)
 
(190,884
)
Maturities of investments
 
150,697

 
151,537

Sales of investments
 
22,764

 

Purchases of property and equipment
 
(22,304
)
 
(21,046
)
Net cash used in investing activities
 
(29,400
)
 
(60,393
)
Financing activities
 
 
 
 
Proceeds from the exercise of stock options and purchases of stock under employee stock purchase plan
 
20,959

 
18,900

Repurchase of common stock
 

 
(101,032
)
Net cash provided by (used in) financing activities
 
20,959

 
(82,132
)
Net increase in cash, cash equivalents and restricted cash
 
135,571

 
55,333

Effect of exchange rate changes on cash, cash equivalents and restricted cash
 
820

 
46

Cash, cash equivalents and restricted cash, beginning of period
 
602,254

 
425,894

Cash, cash equivalents and restricted cash, end of period
 
$
738,645

 
$
481,273

Supplemental disclosures of cash flow information
 
 
 
 
Cash paid for amounts included in the measurement of operating lease liabilities
 
$
12,707

 
$

Supplemental disclosures of non-cash activities
 
 
 
 
Right-of-use assets obtained in exchange for lease obligations
 
$
394,315

 
$

Capitalized leasehold improvements paid directly by landlord
 
$

 
$
15,384

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


7


F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Summary of Significant Accounting Policies
Description of Business
F5 Networks, Inc. (the “Company”) is a leading provider of multi-cloud application services which enable its customers to develop, deploy, operate, secure, and govern applications in any architecture, from on-premises to the public cloud. The Company's cloud, software, and hardware solutions enable its customers to deliver digital experiences to their customers faster, reliably, and at scale. The Company's enterprise-grade application services are available as cloud-based, software-as-a-service, and software-only solutions optimized for multi-cloud environments, with modules that can run independently, or as part of an integrated solution on its high-performance appliances. In connection with its solutions, the Company offers a broad range of professional services, including consulting, training, installation, maintenance, and other technical support services.
Basis of Presentation
The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for their fair statement in conformity with accounting principles generally accepted in the United States of America. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
Certain prior year amounts have been reclassified to conform to the current year presentation in the Consolidated Statements of Cash Flows. The reclassified amounts are considered immaterial and there was no change to total cash from operating, investing or financing activities as a result.
There have been no material changes to the Company's significant accounting policies as of and for the three months ended December 31, 2019, except for the accounting policy for leases that was updated as a result of adopting Accounting Standards Update 2016-02, Leases (Topic 842) (ASU 2016-02) and related standards. For more information, refer to the "Recently Adopted Accounting Standards" section of Note 1 and Note 7 - Leases.
Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02), which requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a corresponding lease liability for all leases with terms greater than twelve months. The Company’s leases consist primarily of operating leases for its offices and lab spaces. The Company does not have finance leases. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases. The Company adopted this standard on October 1, 2019 on a modified retrospective basis by applying the new standard to its lease portfolio as of October 1, 2019, while continuing to apply legacy guidance in the comparative periods. The adoption of this standard had no impact on the consolidated income statements and consolidated statements of cash flows. Refer to Note 7 - Leases for further discussion.
Upon adoption of the standard, the Company elected the package of three expedients for existing and expired contracts to not reassess: the existence of additional leases, lease classification, or the treatment of initial direct costs. The Company also applies the short-term lease exemption for leases with an original expected term of 12 months or less and expenses such leases month-to-month and does not record a right-of-use asset or lease liability. Short-term lease activity under the exception is not significant. Additionally, the Company does not separate lease and non-lease components in the allocation of minimum lease payments for its office space and equipment leases, as such separation is not significant.
The Company includes in minimum lease payments, fixed and variable payments based on a rate or index, but excludes variable payments based on satisfying future benchmarks or actual future costs incurred; such amounts are expensed as incurred. To calculate the net present value, the Company applied an incremental borrowing rate. This incremental borrowing rate is determined using a portfolio approach based on the rate of interest the Company would pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. Renewal options to extend lease terms are excluded from the minimum lease term at lease commencement.

8


Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) (ASU 2018-15), which 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, and hosting arrangements that include an internal use software license. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements.
2. Revenue from Contracts with Customers
Capitalized Contract Acquisition Costs
The table below shows significant movements in capitalized contract acquisition costs (current and noncurrent) for the three months ended December 31, 2019 (in thousands):
Balance, September 30, 2019
 
$
59,446

Additional capitalized contract acquisition costs deferred
 
7,412

Amortization of capitalized contract acquisition costs
 
(8,705
)
Balance, December 31, 2019
 
$
58,153


Amortization of capitalized contract acquisition costs was $8.7 million and $7.3 million for the three months ended December 31, 2019 and 2018, respectively, and is recorded in Sales and Marketing expense in the accompanying consolidated income statements. There was no impairment of any capitalized contract acquisition costs during any period presented.
Contract Balances
Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to our contracts with customers. The Company records assets for amounts related to performance obligations that are satisfied but not yet billed and/or collected, in addition to contracts that have started, but not yet been fully billed. These assets are recorded as contract assets rather than receivables when receipt of the consideration is conditional on something other than the passage of time. Liabilities are recorded for amounts that are collected in advance of the satisfaction of performance obligations. These liabilities are classified as current and non-current deferred revenue.
The table below shows significant movements in contract assets (current and noncurrent) for the three months ended December 31, 2019 (in thousands):
Balance, September 30, 2019
 
$
132,492

Revenue recognized during period but not yet billed
 
3,407

Contract asset net additions
 
12,930

Contract assets reclassified to accounts receivable
 
(13,584
)
Balance, December 31, 2019
 
$
135,245


As of December 31, 2019, contract assets that are expected to be reclassified to receivables within the next 12 months are included in other current assets, with those expected to be transferred to receivables in more than 12 months included in other assets. There were no impairments of contract assets during the three months ended December 31, 2019 and 2018.
The table below shows significant movements in the deferred revenue balances (current and noncurrent) for the three months ended December 31, 2019 (in thousands):

9


Balance, September 30, 2019
 
$
1,198,116

Amounts billed but not recognized as revenues
 
346,132

Revenues recognized related to the opening balance of deferred revenue
 
(306,275
)
Balance, December 31, 2019
 
$
1,237,973


Our contract assets and liabilities are reported in a net position on a contract by contract basis at the end of each reporting period.
Remaining Performance Obligations
Remaining performance obligations represent the amount of the transaction price under contracts with customers that are attributable to performance obligations that are unsatisfied or partially satisfied at the reporting date. As of December 31, 2019, the total non-cancelable remaining performance obligations under the Company's contracts with customers was approximately $1.2 billion and the Company expects to recognize revenues on approximately 68.5% of these remaining performance obligations over the next 12 months, 18.7% in year two, and the remaining balance thereafter.
See Note 11, Segment Information, for disaggregated revenue by significant customer and geographic region.
3. Business Combinations
Fiscal Year 2019 Acquisition of Nginx, Inc.
On March 9, 2019, the Company entered into a Merger Agreement (the “Merger Agreement”) with Nginx, Inc. ("NGINX"), a provider of open source web server software and application delivery solutions. The transaction closed on May 8, 2019 with NGINX becoming a wholly-owned subsidiary of F5.
Pursuant to the Merger Agreement, at the effective time of the Merger, the capital stock of NGINX and the vested outstanding and unexercised stock options in NGINX were cancelled and converted to the right to receive approximately $643.2 million in cash, subject to certain adjustments and conditions set forth in the Merger Agreement, and the unvested stock options and restricted stock units in NGINX held by continuing employees of NGINX were assumed by F5, on the terms and conditions set forth in the Merger Agreement. Included in cash consideration was $19.0 million of transaction costs paid by F5 on behalf of NGINX. In addition, the Company incurred an additional $1.0 million of transaction costs associated with the acquisition which was included in General and Administrative expenses for fiscal 2019.
NGINX is an open source leader in application delivery. The combined company will enable multi-cloud application services across all environments, providing the ease-of-use and flexibility developers require while also delivering the scale, security, reliability and enterprise readiness network operations teams demand. As a result of the acquisition, the Company acquired all the assets and assumed all the liabilities of NGINX. The goodwill related to the NGINX acquisition is comprised primarily of expected synergies from combining operations and the acquired intangible assets that do not qualify for separate recognition. The results of operations of NGINX have been included in the Company’s consolidated financial statements from the date of acquisition.

10


The purchase price allocation is as follows (in thousands):
Assets acquired
 
Cash and cash equivalents
$
29,911

Fair value of tangible assets:
 
Accounts receivable
7,306

Other current assets
4,214

Property and equipment, net
1,822

Deferred tax assets
10,357

Intangible assets
89,300

Goodwill
509,414

Total assets acquired
$
652,324

Liabilities assumed
 
Accounts payable
$
(1,081
)
Deferred revenue
(4,000
)
Other liabilities
(4,035
)
Total liabilities assumed
$
(9,116
)
Net assets acquired
$
643,208


The allocation of the purchase price and the estimated useful lives associated with certain assets is as follows (in thousands):
 
 
 
Estimated
 
Amount
 
Useful Life
Net tangible assets
$
44,494

 
Identifiable intangible assets:
 
 
 
Developed technologies
62,500

 
7 years
Customer relationships
12,000

 
15 years
Trade name
14,500

 
7 years
Non-competition agreements
300

 
2 years
Goodwill
509,414

 
Total purchase price
$
643,208

 
 

The developed technology intangible asset will be amortized on a straight-line basis over its estimated useful life of seven years and included in cost of net product revenues. The trade names and customer relationships intangible assets will be amortized on a straight-line basis over their estimated useful lives of seven years and fifteen years, respectively, and included in sales and marketing expenses. The weighted average life of the amortizable intangible assets recognized from the NGINX merger was 8.1 years. The estimated useful lives for the acquired intangible assets were based on the expected future cash flows associated with the respective asset. Tax deductible goodwill based on the Company's preliminary calculation is $450.7 million.
Since the NGINX acquisition was completed on May 8, 2019, the F5 and NGINX teams have been rapidly executing a plan to integrate ongoing operations.
4. Fair Value Measurements
In accordance with the authoritative guidance on fair value measurements and disclosure under GAAP, the Company determines fair value using a fair value hierarchy that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity, and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances and expands disclosure about fair value measurements.

11


Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date, essentially the exit price.
The levels of fair value hierarchy are:
Level 1: Quoted prices in active markets for identical assets and liabilities at the measurement date that the Company has the ability to access.
Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Unobservable inputs for which there is little or no market data available. These inputs reflect management’s assumptions of what market participants would use in pricing the asset or liability.
Level 1 investments are valued based on quoted market prices in active markets and include the Company’s cash equivalent investments. Level 2 investments, which include investments that are valued based on quoted prices in markets that are not active, broker or dealer quotations, actual trade data, benchmark yields or alternative pricing sources with reasonable levels of price transparency, include the Company’s certificates of deposit, corporate bonds and notes, municipal bonds and notes, U.S. government securities, U.S. government agency securities and international government securities. Fair values for the Company’s level 2 investments are based on similar assets without applying significant judgments. In addition, all of the Company’s level 2 investments have a sufficient level of trading volume to demonstrate that the fair values used are appropriate for these investments.
A financial instrument’s level within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. The Company considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.
The Company’s financial assets measured at fair value on a recurring basis subject to the disclosure requirements at December 31, 2019, were as follows (in thousands):
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
 
Quoted Prices in
Active Markets for
Identical Securities
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value at December 31,
2019
Cash equivalents
 
$
249,178

 
$
42,387

 
$

 
$
291,565

Short-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — certificates of deposits
 

 
991

 

 
991

Available-for-sale securities — corporate bonds and notes
 

 
264,425

 

 
264,425

Available-for-sale securities — municipal bonds and notes
 

 
9,190

 

 
9,190

Available-for-sale securities — U.S. government securities
 

 
131,808

 

 
131,808

Available-for-sale securities — U.S. government agency securities
 

 
20,347

 

 
20,347

Long-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — corporate bonds and notes
 

 
274,477

 

 
274,477

Available-for-sale securities — U.S. government securities
 

 
7,559

 

 
7,559

Available-for-sale securities — U.S. government agency securities
 

 
30,008

 

 
30,008

Total
 
$
249,178

 
$
781,192

 
$

 
$
1,030,370



12


The Company’s financial assets measured at fair value on a recurring basis subject to the disclosure requirements at September 30, 2019, were as follows (in thousands):
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
 
Quoted Prices in
Active Markets for
Identical Securities
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value at
September 30,
2019
Cash equivalents
 
$
140,238

 
$
153,404

 
$

 
$
293,642

Short-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — certificates of deposits
 

 
249

 

 
249

Available-for-sale securities — corporate bonds and notes
 

 
259,547

 

 
259,547

Available-for-sale securities — municipal bonds and notes
 

 
12,129

 

 
12,129

Available-for-sale securities — U.S. government securities
 

 
78,992

 

 
78,992

Available-for-sale securities — U.S. government agency securities
 

 
22,146

 

 
22,146

Long-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — corporate bonds and notes
 

 
298,916

 

 
298,916

Available-for-sale securities — municipal bonds and notes
 

 
2,524

 

 
2,524

Available-for-sale securities — U.S. government securities
 

 
5,515

 

 
5,515

Available-for-sale securities — U.S. government agency securities
 

 
51,447

 

 
51,447

Total
 
$
140,238

 
$
884,869

 
$

 
$
1,025,107


The Company uses the fair value hierarchy for financial assets and liabilities. The carrying amounts of other current financial assets and other current financial liabilities approximate fair value due to their short-term nature.
The Company’s non-financial assets and liabilities, which include goodwill, intangible assets, and long-lived assets, are not required to be carried at fair value on a recurring basis. These non-financial assets and liabilities are measured at fair value on a non-recurring basis when there is an indicator of impairment, and they are recorded at fair value only when impairment is recognized. The Company reviews goodwill and intangible assets for impairment annually, during the second quarter of each fiscal year, or as circumstances indicate the possibility of impairment. The Company monitors the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate its carrying amount may not be recoverable. During the three months ended December 31, 2019 and 2018, the Company did not recognize any impairment charges related to goodwill, intangible assets, or long-lived assets.
5. Short-Term and Long-Term Investments
Short-term investments consist of the following (in thousands):
 
December 31, 2019
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Certificates of deposits
 
$
991

 
$

 
$

 
$
991

Corporate bonds and notes
 
264,006

 
463

 
(44
)
 
264,425

Municipal bonds and notes
 
9,188

 
5

 
(3
)
 
9,190

U.S. government securities
 
131,784

 
42

 
(18
)
 
131,808

U.S. government agency securities
 
20,335

 
12

 

 
20,347

 
 
$
426,304

 
$
522

 
$
(65
)
 
$
426,761

 

13


September 30, 2019
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Certificates of deposits
 
$
249

 
$

 
$

 
$
249

Corporate bonds and notes
 
259,242

 
402

 
(97
)
 
259,547

Municipal bonds and notes
 
12,128

 
6

 
(5
)
 
12,129

U.S. government securities
 
78,988

 
18

 
(14
)
 
78,992

U.S. government agency securities
 
22,138

 
9

 
(1
)
 
22,146

 
 
$
372,745

 
$
435

 
$
(117
)
 
$
373,063


Long-term investments consist of the following (in thousands):
 
December 31, 2019
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Corporate bonds and notes
 
$
274,383

 
$
267

 
$
(173
)
 
$
274,477

U.S. government securities
 
7,558

 
5

 
(4
)
 
7,559

U.S. government agency securities
 
30,035

 

 
(27
)
 
30,008

 
 
$
311,976

 
$
272

 
$
(204
)
 
$
312,044

 
September 30, 2019
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Corporate bonds and notes
 
$
298,888

 
$
469

 
$
(441
)
 
$
298,916

Municipal bonds and notes
 
2,528

 
2

 
(6
)
 
2,524

U.S. government securities
 
5,515

 
3

 
(3
)
 
5,515

U.S. government agency securities
 
51,463

 
5

 
(21
)
 
51,447

 
 
$
358,394

 
$
479

 
$
(471
)
 
$
358,402


Interest income from investments was $5.6 million and $7.0 million for the three months ended December 31, 2019 and 2018, respectively. Interest income is included in other income, net on the Company's consolidated income statements.
The following table summarizes investments that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for more than 12 months as of December 31, 2019 (in thousands):
 
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
December 31, 2019
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Corporate bonds and notes
 
$
171,910

 
$
(180
)
 
$
62,543

 
$
(37
)
 
$
234,453

 
$
(217
)
Municipal bonds and notes
 
1,421

 

 
2,530

 
(3
)
 
3,951

 
(3
)
U.S. government securities
 
79,687

 
(22
)
 

 

 
79,687

 
(22
)
U.S. government agency securities
 
31,119

 
(27
)
 

 

 
31,119

 
(27
)
Total
 
$
284,137

 
$
(229
)
 
$
65,073

 
$
(40
)
 
$
349,210

 
$
(269
)


14


The following table summarizes investments that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for more than 12 months as of September 30, 2019 (in thousands):
 
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
September 30, 2019
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Corporate bonds and notes
 
$
237,747

 
$
(434
)
 
$
109,613

 
$
(104
)
 
$
347,360

 
$
(538
)
Municipal bonds and notes
 
864

 

 
7,800

 
(11
)
 
8,664

 
(11
)
U.S. government securities
 
27,095

 
(12
)
 
9,991

 
(5
)
 
37,086

 
(17
)
U.S. government agency securities
 
30,946

 
(22
)
 

 

 
30,946

 
(22
)
Total
 
$
296,652

 
$
(468
)
 
$
127,404

 
$
(120
)
 
$
424,056

 
$
(588
)

The Company invests in securities that are rated investment grade. The Company reviews the individual securities in its portfolio to determine whether a decline in a security's fair value below the amortized cost basis is other-than-temporary. The Company determined that as of December 31, 2019, there were no investments in its portfolio that were other-than-temporarily impaired.
6. Balance Sheet Details
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of the Company’s cash and cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total cash, cash equivalents and restricted cash shown in the Company’s consolidated statements of cash flows for the periods presented (in thousands):
 
 
December 31,
2019
 
September 30,
2019
Cash and cash equivalents
 
$
735,457

 
$
599,219

Restricted cash included in other assets, net
 
3,188

 
3,035

Total cash, cash equivalents and restricted cash
 
$
738,645

 
$
602,254


Inventories
Inventories consist of the following (in thousands):
 
 
December 31,
2019
 
September 30,
2019
Finished goods
 
$
21,463

 
$
22,441

Raw materials
 
10,918

 
11,960

 
 
$
32,381

 
$
34,401


Other Current Assets
Other current assets consist of the following (in thousands):
 
 
December 31,
2019
 
September 30,
2019
Contract assets
 
$
85,118

 
$
79,407

Prepaid expenses
 
55,170

 
49,051

Capitalized contract acquisition costs
 
27,752

 
28,228

Other
 
20,164

 
26,188

 
 
$
188,204

 
$
182,874



15


Other Assets
Other assets, net consist of the following (in thousands):
 
 
December 31,
2019
 
September 30,
2019
Intangible assets
 
$
104,315

 
$
108,903

Contract assets
 
50,128

 
53,085

Capitalized contract acquisition costs
 
30,401

 
31,218

Other
 
13,007

 
10,575

 
 
$
197,851

 
$
203,781


Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
 
 
December 31,
2019
 
September 30,
2019
Payroll and benefits
 
$
110,446

 
$
138,453

Operating lease liabilities, current
 
42,519

 

Income and other tax accruals
 
39,503

 
31,801

Other
 
57,882

 
65,615

 
 
$
250,350

 
$
235,869


Other Long-term Liabilities
Other long-term liabilities consist of the following (in thousands):
 
 
December 31,
2019
 
September 30,
2019
Income taxes payable
 
$
44,520

 
$
42,324

Deferred rent
 

 
66,103

Other
 
18,091

 
23,426

 
 
$
62,611

 
$
131,853


7. Leases
During the first quarter of fiscal 2020, the Company adopted ASU 2016-02, Leases (Topic 842) (the “Leasing Standard”) using the transition method provided in ASU 2018-11, Leases (Topic 842): Targeted Improvements. The impact of adopting the Leasing Standard resulted in the recognition of right-of-use assets and lease liabilities of $304.8 million and $386.4 million, respectively.
The majority of the Company’s operating lease payments relate to its corporate headquarters in Seattle, Washington, which includes approximately 515,000 square feet of office space. The lease commenced in April 2019 and expires in 2033 with an option for renewal. The Company has not yet determined whether the renewal option is likely to be exercised. The Company also leases additional office and lab space for product development and sales and support personnel in the United States and internationally. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The components of the Company's operating lease expenses for the three months ended December 31, 2019 were as follows (in thousands):
 
 
Three months ended
December 31, 2019
Operating lease expense
 
$
11,318

Short-term lease expense
 
814

Variable lease expense
 
5,839

Total lease expense
 
$
17,971



16


Variable lease expense primarily consists of common area maintenance and parking expenses. The Company executed two sublease contracts that commenced during the first quarter of fiscal year 2020. Lease income payments are not due until the second fiscal quarter.
Supplemental balance sheet information related to the Company's operating leases was as follows (in thousands, except lease term and discount rate):
 
 
December 31, 2019
Operating lease right-of-use assets, net
 
$
303,435

 
 
 
Operating lease liabilities, current1
 
42,519

Operating lease liabilities, long-term
 
342,303

Total operating lease liabilities
 
$
384,822

 
 
 
Weighted average remaining lease term (in years)
 
11.1

Weighted average discount rate
 
2.65
%
(1)
Current portion of operating lease liabilities is included in accrued liabilities on the Company's consolidated balance sheet.
Maturities of lease liabilities as of December 31, 2019 were as follows (in thousands):
Fiscal Years Ending September 30:
 
Operating Lease
Payments
2020 (remainder)
 
$
39,193

2021
 
51,202

2022
 
48,737

2023
 
36,259

2024
 
32,938

2025
 
28,436

Thereafter
 
215,966

Total lease payments
 
452,731

Less: imputed interest
 
(67,909
)
Total lease liabilities
 
$
384,822


Operating lease liabilities above do not include sublease income. As of December 31, 2019, the Company expects to receive sublease income of approximately $5.6 million, which consists of $1.2 million to be received for the remainder of fiscal 2020 and $4.4 million to be received over the three fiscal years thereafter.
As of December 31, 2019, the Company had no significant operating leases that were executed but not yet commenced.
ASC 840 - Leases
As a result of adopting the Leasing Standard, reporting periods beginning in the first quarter of fiscal 2020 are presented under the new standard while prior period amounts are not adjusted and continue to be reported in accordance with ASC 840 - Leases.

17


Prior to the adoption of the Leasing Standard, future minimum operating lease payments, net of sublease income, were as follows as of September 30, 2019 (in thousands):
 
Fiscal Year
 
Gross Lease
Payments
 
Sublease
Income
 
Net Lease
Payments
2020
 
$
54,046

 
$
683

 
$
53,363

2021
 
50,712

 
1,051

 
49,661

2022
 
47,550

 
1,082

 
46,468

2023
 
36,514

 
368

 
36,146