GOODWILL & INTANGIBLE ASSETS

Goodwill

Through the first quarter of fiscal year 2017, the Company had five reporting units: (1) legacy NetScout, (2) cybersecurity (Arbor Networks), (3) service assurance product lines focused on the service provider market (formerly known as Tektronix Communications), (4) network visibility product lines (formerly known as VSS Monitoring) and (5) service assurance product lines primarily focused on the enterprise market (formerly known as FNET). As part of its continued integration efforts of the Communication Business acquisition, effective July 1, 2016, the Company reorganized its business units. As a result of this change, the Company reduced the number of reporting units from five reporting units to two reporting units. The two reporting units are: (1) Service Assurance and (2) Security. The former cybersecurity reporting unit was aggregated within the Security reporting unit along with portions of the legacy NetScout business while all other former reporting units were aggregated into the Service Assurance reporting unit. Our reporting units are determined based on the components of our operating segment that constitute a business for which financial information is available and for which operating results are regularly reviewed by segment management.

As a result of the reduction in reporting units, the Company completed a quantitative impairment analysis for goodwill as of July 1, 2016. To conduct the impairment test, the Company performed a quantitative step 1 analysis, on a before and after basis, and concluded the estimated fair values of each of the Company’s current and former reporting units exceeded their respective carrying values both immediately prior to and subsequent to the change.

At March 31, 2017, goodwill attributable to our Service Assurance and Security reporting units was $1.2 billion and $548.5 million, respectively. At March 31, 2016, goodwill attributable to our Service Assurance and Security reporting units was $1.2 billion and $547.4 million, respectively. Goodwill is tested for impairment at a reporting unit level at least annually, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value. The Company completed its annual impairment test on January 31, 2017.

The Company determined the fair values of its reporting units by preparing a discounted cash flow analysis using forward looking projections of the reporting units’ future operating results and by comparing the value of the reporting units to the implied market value of selected peers. The significant assumptions used in the discounted cash flow analysis include: revenue and revenue growth, selling margins, other operating expenditures, the discounted rate used to present value future cash flows and terminal growth rates. The discount rate used is a cost of equity method, which is essentially equal to the “market participant” weighted-average cost of capital (WACC). The Service Assurance and Security reporting units' goodwill fair value substantially exceeded its carrying value.

The change in the carrying amount of goodwill for the fiscal year ended March 31, 2017 is due to the acquisition of Avvasi, purchase accounting adjustments and the impact of foreign currency translation adjustments related to asset balances that are recorded in currencies other than the U.S. Dollar.

The changes in the carrying amount of goodwill for the fiscal years ended March 31, 2017 and 2016 are as follows (in thousands):




Balance at March 31, 2015	$	197,445
Goodwill acquired during the quarter ended September 30, 2015	1,504,261
Goodwill acquired during the quarter ended December 31, 2015 from Delayed Close Entities	5,141
Deferred revenue adjustments	(11,392		)
Purchase accounting adjustments	(527		)
Change in assumptions for assumed liabilities	(6,258		)
Adjust deferred tax liability	25,034
Adjust tax effect on equity consideration	(3,271		)
Foreign currency translation impact	(1,064		)
Balance at March 31, 2016	$	1,709,369
Goodwill attributable to the Avvasi acquisition	1,950
Purchase accounting adjustments	3,792
Foreign currency translation impact and other adjustments	3,051
Balance at March 31, 2017	$	1,718,162

Intangible Assets

The net carrying amounts of intangible assets were $931.3 million and $1.1 billion at March 31, 2017 and 2016, respectively. Intangible assets acquired in a business combination are recorded under the acquisition method of accounting at their estimated fair values at the date of acquisition. The Company amortizes intangible assets over their estimated useful lives, except for the acquired trade name which resulted from the Network General acquisition, which has an indefinite life and thus is not amortized. The carrying value of the indefinite lived trade name is evaluated for potential impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.

In fiscal year 2017 and 2016, the Company's annual impairment tests indicated that the acquired trade name was not impaired. In the fourth quarter of fiscal year 2017, the Company completed its annual impairment test of the indefinite lived intangible at January 31, 2017, using the qualitative Step 0 assessment. No impairment indicators were observed at January 31, 2017.

During the years ended March 31, 2017 and 2016, the Company acquired technology licenses for $1.0 million and $3.7 million, respectively. These amounts are included within distributor relationships and are being amortized using the economic benefit method over a useful life of 3 years and 4 years, respectively.

Intangible assets include the indefinite lived trade name with a carrying value of $18.6 million and the following amortizable intangible assets at March 31, 2017 (in thousands):



	Cost		Accumulated Amortization			Net
Developed technology	$	254,005	$	(110,200	)	$	143,805
Customer relationships	831,731		(105,319		)	726,412
Distributor relationships and technology licenses	8,290		(3,068		)	5,222
Definite-lived trademark and trade name	43,817		(12,078		)	31,739
Core technology	7,108		(6,009		)	1,099
Net beneficial leases	336		(336		)	—
Non-compete agreements	278		(278		)	—
Leasehold interest	2,600		(998		)	1,602
Backlog	18,142		(18,133		)	9
Capitalized software	3,047		(594		)	2,453
Other	1,208		(880		)	328
	$	1,170,562	$	(257,893	)	$	912,669

Intangible assets include the indefinite lived trade name with a carrying value of $18.6 million and the following amortizable intangible assets at March 31, 2016 (in thousands):



	Cost		Accumulated Amortization			Net
Developed technology	$	253,249	$	(69,810	)	$	183,439
Customer relationships	834,091		(42,526		)	791,565
Distributor relationships and technology licenses	5,348		(1,633		)	3,715
Definite-lived trademark and trade name	43,964		(5,511		)	38,453
Core technology	7,169		(4,659		)	2,510
Net beneficial leases	336		(336		)	—
Non-compete agreements	288		(288		)	—
Leasehold interest	2,600		(416		)	2,184
Backlog	18,245		(6,750		)	11,495
Capitalized software	1,625		—			1,625
Other	1,191		(737		)	454
	$	1,168,106	$	(132,666	)	$	1,035,440

Amortization included as product revenue consists of amortization of backlog. Amortization included as cost of product revenue consists of amortization of developed technology, distributor relationships, core technology and software. Amortization included as operating expense consists of all other intangible assets. The following table provides a summary of amortization expense during the fiscal years ended March 31, 2017, 2016, and 2015 (in thousands).



	Years Ended March 31,
	2017		2016		2015
Amortization of intangible assets included as:
Product revenue	$	11,438	$	6,747	$	—
Cost of product revenue	44,326		45,127		3,639
Operating expense	70,325		32,547		3,503
	$	126,089	$	84,421	$	7,142

The following is the expected future amortization expense at March 31, 2017 for the years ended March 31 (in thousands):



2018	$	111,606
2019	106,148
2020	97,872
2021	85,402
2022	74,109
Thereafter	437,532
Total	$	912,669

The weighted average amortization period of developed technology and core technology is 11.5 years. The weighted average amortization period for customer and distributor relationships is 16.1 years. The weighted average amortization period for trademarks and trade names is 8.5 years. The weighted average amortization period for leasehold interests is 5.6 years. The weighted average amortization period for backlog is 2.0 years. The weighted average amortization period for capitalized software is 4.0 years. The weighted average amortization period for amortizing all intangible assets is 14.6 years.