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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 March 31, 2020
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 May 1, 2020 was 60,896,541.



F5 NETWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 2020
Table of Contents
 
 
Page
 
 



PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements
F5 NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
 
 
 
March 31,
2020
 
September 30,
2019
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
572,888

 
$
599,219

Short-term investments
 
248,257

 
373,063

Accounts receivable, net of allowances of $3,305 and $3,259
 
338,655

 
322,029

Inventories
 
30,942

 
34,401

Other current assets
 
217,989

 
182,874

Total current assets
 
1,408,731

 
1,511,586

Property and equipment, net
 
232,006

 
223,426

Operating lease right-of-use assets
 
327,436

 

Long-term investments
 
204,969

 
358,402

Deferred tax assets
 
47,230

 
27,701

Goodwill
 
1,864,991

 
1,065,379

Other assets, net
 
355,614

 
203,781

Total assets
 
$
4,440,977

 
$
3,390,275

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
56,200

 
$
62,627

Accrued liabilities
 
286,902

 
235,869

Deferred revenue
 
889,629

 
807,030

Current portion of long-term debt
 
19,275

 

Total current liabilities
 
1,252,006

 
1,105,526

Deferred tax liabilities
 
221

 
313

Deferred revenue, long-term
 
391,475

 
391,086

Operating lease liabilities, long-term
 
357,645

 

Long-term debt
 
378,685

 

Other long-term liabilities
 
62,751

 
131,853

Total long-term liabilities
 
1,190,777

 
523,252

Commitments and contingencies (Note 9)
 

 

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

 

Common stock, no par value; 200,000 shares authorized, 60,629 and 60,367 shares issued and outstanding
 
223,101

 
142,597

Accumulated other comprehensive loss
 
(22,903
)
 
(19,190
)
Retained earnings
 
1,797,996

 
1,638,090

Total shareholders' equity
 
1,998,194

 
1,761,497

Total liabilities and shareholders' equity
 
$
4,440,977

 
$
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
March 31,
 
Six months ended
March 31,
 
 
2020
 
2019
 
2020
 
2019
Net revenues
 
 
 
 
 
 
 
 
Products
 
$
259,538

 
$
237,859

 
$
494,074

 
$
471,736

Services
 
323,911

 
307,036

 
658,680

 
616,929

Total
 
583,449

 
544,895

 
1,152,754

 
1,088,665

Cost of net revenues
 
 
 
 
 
 
 
 
Products
 
53,086

 
43,547

 
95,204

 
85,957

Services
 
48,152

 
44,631

 
94,676

 
88,935

Total
 
101,238

 
88,178

 
189,880

 
174,892

Gross profit
 
482,211

 
456,717

 
962,874

 
913,773

Operating expenses
 
 
 
 
 
 
 
 
Sales and marketing
 
215,472

 
170,954

 
410,991

 
335,213

Research and development
 
109,028

 
96,314

 
205,033

 
188,352

General and administrative
 
74,013

 
46,656

 
133,017

 
89,199

Restructuring charges
 

 

 
7,800

 

Total
 
398,513

 
313,924

 
756,841

 
612,764

Income from operations
 
83,698

 
142,793

 
206,033

 
301,009

Other (loss) income, net
 
(141
)
 
7,434

 
5,079

 
14,529

Income before income taxes
 
83,557

 
150,227

 
211,112

 
315,538

Provision for income taxes
 
22,178

 
34,140

 
51,206

 
68,546

Net income
 
$
61,379

 
$
116,087

 
$
159,906

 
$
246,992

Net income per share — basic
 
$
1.01

 
$
1.94

 
$
2.63

 
$
4.12

Weighted average shares — basic
 
60,869

 
59,686

 
60,758

 
59,954

Net income per share — diluted
 
$
1.00

 
$
1.93

 
$
2.62

 
$
4.09

Weighted average shares — diluted
 
61,084

 
60,029

 
61,017

 
60,374

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
March 31,
 
Six months ended
March 31,
 
 
2020
 
2019
 
2020
 
2019
Net income
 
$
61,379

 
$
116,087

 
$
159,906

 
$
246,992

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(1,586
)
 
(197
)
 
(952
)
 
(56
)
Available-for-sale securities:
 
 
 
 
 
 
 
 
Unrealized (losses) gains on securities, net of taxes of $(368) and $679 for the three months ended March 31, 2020 and 2019, respectively, and $(344) and $743 for the six months ended March 31, 2020 and 2019, respectively
 
(2,999
)
 
2,849

 
(2,831
)
 
2,893

Reclassification adjustment for realized losses included in net income, net of taxes of $(17) and $0 for the three months ended March 31, 2020 and 2019, respectively, and $(18) and $0 for the six months ended March 31, 2020 and 2019, respectively
 
58

 

 
70

 

Net change in unrealized (losses) gains on available-for-sale securities, net of tax
 
(2,941
)
 
2,849

 
(2,761
)
 
2,893

Total other comprehensive (loss) income
 
(4,527
)
 
2,652

 
(3,713
)
 
2,837

Comprehensive income
 
$
56,852

 
$
118,739

 
$
156,193

 
$
249,829

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 March 31, 2019
Balances, December 31, 2018
 
60,058

 
$
13,277

 
$
(21,993
)
 
$
1,417,904

 
$
1,409,188

Issuance of restricted stock
 
254

 

 

 

 

Repurchase of common stock
 
(617
)
 
(23,370
)
 

 
(76,643
)
 
(100,013
)
Stock-based compensation
 

 
39,494

 

 

 
39,494

Net income
 

 

 

 
116,087

 
116,087

Other comprehensive income
 

 

 
2,652

 

 
2,652

Balances, March 31, 2019
 
59,695

 
$
29,401

 
$
(19,341
)
 
$
1,457,348

 
$
1,467,408

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2020
Balances, December 31, 2019
 
60,803

 
$
211,217

 
$
(18,376
)
 
$
1,736,617

 
$
1,929,458

Exercise of employee stock options
 
20

 
498

 

 

 
498

Issuance of restricted stock
 
248

 

 

 

 

Repurchase of common stock
 
(442
)
 
(50,009
)
 

 

 
(50,009
)
Stock-based compensation
 

 
61,395

 

 

 
61,395

Net income
 

 

 

 
61,379

 
61,379

Other comprehensive loss
 

 

 
(4,527
)
 

 
(4,527
)
Balances, March 31, 2020
 
60,629

 
$
223,101

 
$
(22,903
)
 
$
1,797,996

 
$
1,998,194

 
 
 
 
 
Six months ended March 31, 2019
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

 
18,901

 

 

 
18,901

Issuance of restricted stock
 
531

 

 

 

 

Repurchase of common stock
 
(1,186
)
 
(88,110
)
 

 
(112,935
)
 
(201,045
)
Stock-based compensation
 

 
78,183

 

 

 
78,183

Net income
 

 

 

 
246,992

 
246,992

Other comprehensive income
 

 

 
2,837

 

 
2,837

Balances, March 31, 2019
 
59,695

 
$
29,401

 
$
(19,341
)
 
$
1,457,348

 
$
1,467,408

 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended March 31, 2020
Balances, September 30, 2019
 
60,367

 
$
142,597

 
$
(19,190
)
 
$
1,638,090

 
$
1,761,497

Exercise of employee stock options
 
31

 
789

 

 

 
789

Issuance of stock under employee stock purchase plan
 
169

 
20,670

 

 

 
20,670

Issuance of restricted stock
 
504

 

 

 

 

Repurchase of common stock
 
(442
)
 
(50,009
)
 

 

 
(50,009
)
Stock-based compensation
 

 
109,054

 

 

 
109,054

Net income
 

 

 

 
159,906

 
159,906

Other comprehensive loss
 

 

 
(3,713
)
 

 
(3,713
)
Balances, March 31, 2020
 
60,629

 
$
223,101

 
$
(22,903
)
 
$
1,797,996

 
$
1,998,194

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


6


F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
 
 
Six months ended
March 31,
 
 
2020
 
2019
Operating activities
 
 
 
 
Net income
 
$
159,906

 
$
246,992

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Stock-based compensation
 
98,447

 
78,183

Depreciation and amortization
 
43,112

 
28,246

Non-cash operating lease costs
 
18,970

 

Other
 
54

 
(43
)
Deferred income taxes
 
5,353

 
3,606

Changes in operating assets and liabilities (excluding effects of the acquisition of businesses):
 
 
 
 
Accounts receivable
 
4,317

 
(24,419
)
Inventories
 
3,459

 
(2,895
)
Other current assets
 
(19,603
)
 
(35,735
)
Other assets
 
(4,298
)
 
2,683

Accounts payable and accrued liabilities
 
(1,936
)
 
16,746

Deferred revenue
 
43,987

 
78,046

Lease liabilities
 
(25,948
)
 

Net cash provided by operating activities
 
325,820

 
391,410

Investing activities
 
 
 
 
Purchases of investments
 
(195,123
)
 
(211,087
)
Maturities of investments
 
237,892

 
351,600

Sales of investments
 
232,255

 
2,499

Acquisition of businesses, net of cash acquired
 
(955,574
)
 

Purchases of property and equipment
 
(35,463
)
 
(50,056
)
Net cash (used in) provided by investing activities
 
(716,013
)
 
92,956

Financing activities
 
 
 
 
Proceeds from the exercise of stock options and purchases of stock under employee stock purchase plan
 
21,443

 
18,900

Repurchase of common stock
 
(50,009
)
 
(201,045
)
Proceeds from term debt agreement
 
400,000

 

Payments for debt issuance costs
 
(3,040
)
 

Net cash provided by (used in) financing activities
 
368,394

 
(182,145
)
Net (decrease) increase in cash, cash equivalents and restricted cash
 
(21,799
)
 
302,221

Effect of exchange rate changes on cash, cash equivalents and restricted cash
 
(1,090
)
 
(265
)
Cash, cash equivalents and restricted cash, beginning of period
 
602,254

 
425,894

Cash, cash equivalents and restricted cash, end of period
 
$
579,365

 
$
727,850

Supplemental disclosures of cash flow information
 
 
 
 
Cash paid for amounts included in the measurement of operating lease liabilities
 
$
30,067

 
$

Cash paid for interest on long-term debt
 
$
2,089

 
$

Supplemental disclosures of non-cash activities
 
 
 
 
Right-of-use assets obtained in exchange for lease obligations
 
$
399,203

 
$

Capitalized leasehold improvements paid directly by landlord
 
$

 
$
28,814

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. On January 24, 2020, the Company completed the acquisition of Shape Security, Inc. ("Shape"), a leader in online fraud and abuse prevention, adding protection from automated attacks, botnets, and targeted fraud to F5's world-class portfolio of application 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 ("GAAP"). 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 ("SEC"). 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 and six months ended March 31, 2020, 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 8 - Leases.
In December 2019, a novel strain of coronavirus (“COVID-19“) was first identified, and in March 2020, the World Health Organization categorized COVID-19 as a pandemic. The Company assessed the impact that COVID-19 had on its results of operations, including, but not limited to an assessment of its allowance for doubtful accounts, the carrying value of short-term and long-term investments, the carrying value of goodwill and other long-lived assets, and the impact to revenue recognition and cost of revenues. For the quarter ended March 31, 2020, the Company’s analysis shows COVID-19 had a net-neutral impact on its results of operations. The Company is actively monitoring the impact to the results of its business operations, and may make decisions required by federal, state or local authorities, or that are determined to be in the best interests of its employees, customers, partners, suppliers and stockholders. As of the filing date, the extent to which the COVID-19 pandemic may impact the Company’s financial condition or results of operations remains uncertain.
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board ("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 8 - Leases for further discussion.

8


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.
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 six months ended March 31, 2020 (in thousands):
Balance, September 30, 2019
 
$
59,446

Additional capitalized contract acquisition costs deferred
 
21,836

Amortization of capitalized contract acquisition costs
 
(16,972
)
Balance, March 31, 2020
 
$
64,310


Amortization of capitalized contract acquisition costs was $8.3 million and $7.2 million for the three months ended March 31, 2020 and 2019, respectively, and $17.0 million and $14.4 million for the six months ended March 31, 2020 and 2019, 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 the Company's 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.

9


The table below shows significant movements in contract assets (current and noncurrent) for the six months ended March 31, 2020 (in thousands):
Balance, September 30, 2019
 
$
132,492

Revenue recognized during period but not yet billed
 
13,998

Contract asset additions
 
38,060

Contract assets acquired through the purchase of Shape
 
6,045

Contract assets reclassified to accounts receivable
 
(33,211
)
Balance, March 31, 2020
 
$
157,384


As of March 31, 2020, 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 six months ended March 31, 2020 and 2019.
The table below shows significant movements in the deferred revenue balances (current and noncurrent) for the six months ended March 31, 2020 (in thousands):
Balance, September 30, 2019
 
$
1,198,116

Amounts billed but not recognized as revenues
 
587,983

Amounts acquired through the purchase of Shape
 
39,000

Revenues recognized related to the opening balance of deferred revenue
 
(543,995
)
Balance, March 31, 2020
 
$
1,281,104


The Company's 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 March 31, 2020, the total non-cancelable remaining performance obligations under the Company's contracts with customers was approximately $1.3 billion and the Company expects to recognize revenues on approximately 69.4% of these remaining performance obligations over the next 12 months, 18.6% in year two, and the remaining balance thereafter.
See Note 12, Segment Information, for disaggregated revenue by significant customer and geographic region.
3. 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.
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.

10


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 March 31, 2020, 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
March 31,
2020
Cash equivalents
 
$
100,355

 
$

 
$

 
$
100,355

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

 
493

 

 
493

Available-for-sale securities — corporate bonds and notes
 

 
201,811

 

 
201,811

Available-for-sale securities — municipal bonds and notes
 

 
8,057

 

 
8,057

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

 
27,232

 

 
27,232

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

 
10,664

 

 
10,664

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

 
180,625

 

 
180,625

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

 
24,344

 

 
24,344

Total
 
$
100,355

 
$
453,226

 
$

 
$
553,581



11


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 fair value of the Company's borrowings under its Term Loan Facility approximate the carrying value based on the borrowing rates currently available to the Company for loans with similar terms using Level 2 inputs. 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. Included in the Company’s impairment considerations for non-financial assets and liabilities in the current quarter were the potential impacts of the COVID-19 pandemic. During the three and six months ended March 31, 2020 and 2019, the Company did not recognize any impairment charges related to goodwill, intangible assets, or long-lived assets.
4. Short-Term and Long-Term Investments
Short-term investments consist of the following (in thousands):
 
March 31, 2020
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Certificates of deposits
 
$
493

 
$

 
$

 
$
493

Corporate bonds and notes
 
202,270

 
259

 
(718
)
 
201,811

Municipal bonds and notes
 
8,056

 
10

 
(9
)
 
8,057

U.S. government securities
 
27,007

 
225

 

 
27,232

U.S. government agency securities
 
10,627

 
37

 

 
10,664

 
 
$
248,453

 
$
531

 
$
(727
)
 
$
248,257

 

12


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):
 
March 31, 2020
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Corporate bonds and notes
 
$
183,265

 
$
259

 
$
(2,899
)
 
$
180,625

U.S. government agency securities
 
24,276

 
71

 
(3
)
 
24,344

 
 
$
207,541

 
$
330

 
$
(2,902
)
 
$
204,969

 
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 $3.3 million and $7.5 million for the three months ended March 31, 2020 and 2019, respectively, and $8.9 million and $14.4 million for the six months ended March 31, 2020 and 2019, 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 March 31, 2020 (in thousands):
 
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
March 31, 2020
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Corporate bonds and notes
 
$
254,910

 
$
(3,477
)
 
$
11,732

 
$
(140
)
 
$
266,642

 
$
(3,617
)
Municipal bonds and notes
 
2,911

 
(9
)
 

 

 
2,911

 
(9
)
U.S. government agency securities
 
1,498

 
(3
)
 

 

 
1,498

 
(3
)
Total
 
$
259,319

 
$
(3,489
)
 
$
11,732

 
$
(140
)
 
$
271,051

 
$
(3,629
)


13


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