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Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2020

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For certain of the Company’s financial instruments, including certain cash equivalents, accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their fair values due to the relatively short maturity of these balances.

The Company measures and reports certain cash equivalents, marketable securities, derivative foreign currency forward contracts and commitments associated with prior business combinations at fair value in accordance with the provisions of the authoritative accounting guidance that addresses fair value measurements. This guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1-Valuations based on quoted prices in active markets for identical assets or liabilities.

Level 2-Valuations based on other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3-Valuations based on inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

The Company's Level 1 assets include a highly liquid money market funds, which are valued using unadjusted quoted prices that are available in an active market for an identical asset. Level 2 assets include fixed-income U.S. government agency securities, commercial paper, corporate bonds, asset-backed securities and derivative financial instruments consisting of foreign currency forward contracts. The securities, bonds and commercial paper are valued using prices from independent pricing services based on quoted prices in active markets for similar instruments or on industry models using data inputs such as interest rates and prices that can be directly observed or corroborated in active markets. The foreign currency forward contracts are valued using observable inputs, such as quotations on forward foreign exchange points and foreign interest rates. During the fiscal year ended December 31, 2019 and 2018, the Company made investments of $0.6 million in a convertible security and $2.5 million in preferred stock, respectively, issued by a privately-held company. The estimated fair value of the investments was determined based on Level 3 inputs. As of March 31, 2020 and December 31, 2019, management estimated that the fair value of the investments equaled their carrying value.

The Company's cash and cash equivalents, and marketable securities consist of the following:



	March 31, 2020
	Amortized Cost		Unrealized Gains		Unrealized (Losses)			Fair Value
	(in thousands)
Cash and cash equivalents:
Cash	$	94,365	$	—	$	—		$	94,365
Money market funds	35,033		—		—			35,033
U.S. government agencies	15,439		10		—			15,449
Commercial paper	1,200		—		—			1,200
Corporate bonds	1,517		1		—			1,518
Total	147,554		11		—			147,565
Short-term marketable securities:
Commercial paper	1,000		—		—			1,000
Corporate bonds	23,975		17		(84		)	23,908
Asset-backed securities	3,017		9		—			3,026
U.S. government agencies	155,316		1,137		—			156,453
Total	183,308		1,163		(84		)	184,387
Long-term marketable securities:
Asset-backed securities	39,983		79		(72		)	39,990
U.S. government agencies	16,409		544		(10		)	16,943
Corporate bonds	46,065		169		(390		)	45,844
Total	102,457		792		(472		)	102,777
Total	$	433,319	$	1,966	$	(556	)	$	434,729



	December 31, 2019
	Amortized Cost		Unrealized Gains		Unrealized (Losses)			Fair Value
	(in thousands)
Cash and cash equivalents:
Cash	$	84,102	$	—	$	—		$	84,102
Money market funds	58		—		—			58
Commercial paper	3,399		—		—			3,399
Total	87,559		—		—			87,559
Short-term marketable securities:
Commercial paper	2,239		—		—			2,239
Corporate bonds	33,048		51		(1		)	33,098
Asset-backed securities	2,438		11		—			2,449
U.S. government agencies	173,364		184		(3		)	173,545
Total	211,089		246		(4		)	211,331
Long-term marketable securities:
Asset-backed securities	40,001		193		(1		)	40,193
U.S. government agencies	46,447		370		—			46,817
Corporate bonds	32,236		262		—			32,498
Total	118,684		825		(1		)	119,508
Total	$	417,332	$	1,071	$	(5	)	$	418,398

There were no marketable securities that had been in a continuous unrealized loss position for 12 months or longer. As of March 31, 2020, the Company had the ability and intent to hold all marketable securities that were in an unrealized loss position until maturity or recovery. The Company considered the extent to which fair value was less than amortized cost basis and conditions related to security’s industry and geography and changes to the ratings, if any, and concluded the decline in fair value compared to carrying value was not related to credit loss.

The following table sets forth by level within the fair value hierarchy the fair value of the Company's cash equivalents and marketable securities measured on a recurring basis:



	March 31, 2020
	Level 1		Level 2		Fair Value
	(in thousands)
Money market funds	$	35,033	$	—	$	35,033
Commercial paper	—		2,200		2,200
U.S. government agencies	—		188,844		188,844
Corporate bonds	—		71,271		71,271
Asset-backed securities	—		43,016		43,016
Total	$	35,033	$	305,331	$	340,364



	December 31, 2019
	Level 1		Level 2		Fair Value
	(in thousands)
Money market funds	$	58	$	—	$	58
Commercial paper	—		5,638		5,638
U.S. government agencies	—		220,362		220,362
Corporate bonds	—		65,596		65,596
Asset-backed securities	—		42,642		42,642
Total	$	58	$	334,238	$	334,296

There were no transfers between Level 1 and Level 2 of the fair value hierarchy, as determined at the end of each reporting period.

The following summarizes the fair value of marketable securities by contractual or effective maturity as of March 31, 2020 and December 31, 2019:



	March 31, 2020
	Mature within One Year		Mature after One Year through Two Years		Mature over Two Years		Fair Value
	(in thousands)
Commercial paper	$	2,200	$	—	$	—	$	2,200
U.S. government agencies	171,901		15,712		1,231		188,844
Corporate bonds	25,428		24,156		21,687		71,271
Asset-backed securities	27,041		15,975		—		43,016
Total	$	226,570	$	55,843	$	22,918	$	305,331



	December 31, 2019
	Mature within One Year		Mature after One Year through Two Years		Mature over Two Years		Fair Value
	(in thousands)
Commercial paper	$	5,638	$	—	$	—	$	5,638
U.S. government agencies	173,546		46,816		—		220,362
Corporate bonds	33,098		23,251		9,247		65,596
Asset-backed securities	2,449		15,550		24,643		42,642
Total	$	214,731	$	85,617	$	33,890	$	334,238

Derivative Financial Instruments

Designated cash flow hedges

The Company uses a hedging strategy to reduce its exposure to foreign currency exchange rate fluctuations for forecasted subscription renewals and new orders in British Pound ("GBP") and Euro. The Company uses forward currency contracts accounted for as cash flow hedges against a designated portion of forecasted subscription renewals and new orders. Unrealized foreign exchange gains or losses related to those designated cash flow hedge contracts are recorded in AOCI and will be reclassified into revenue when the respective hedged transactions affect earnings.

In addition, the Company uses a hedging strategy to reduce its exposure associated with costs incurred in Indian Rupee ("INR"). Unrealized foreign exchange gains or losses related to those designated cash flow hedge contracts are recorded in AOCI and will be reclassified into operating expenses when the associated hedged costs are incurred.

At March 31, 2020, the Company had 39 open designated cash flow hedge contracts with notional amounts of €22.3 million, £9.4 million and Rs.1,560 million. At December 31, 2019, the Company had 26 open designated cash flow hedge contracts with notional amounts of €24.2 million and £9.7 million.



	Three Months Ended March 31,
Derivative instruments designated as cash flow hedges:	2020			2019
Net unrealized gains (before tax) recognized in AOCI:	(in thousands)
Foreign currency forward contracts (GBP, Euro and INR)	$	410		$	251

Net unrealized (gains) losses (before tax) reclassified from AOCI into income:
Foreign currency forward contracts (GBP and Euro)	(248		)	13
Net change in AOCI before tax	162			264
Net tax impact on the change in AOCI	(37		)	(51		)
Net change in AOCI after tax	$	125		$	213

As of March 31, 2020, the net amount of unrealized gains and losses on the foreign currency forward contracts for GBP and Euro reported in AOCI that is expected to be reclassified into revenue within the next 12 months is a gain of $1.2 million (before tax). As of March 31, 2020, the net amount of unrealized gains and losses on the foreign currency

forward contracts for INR reported in AOCI that is expected to be reclassified into operating expenses is a loss of $1.0 million (before tax).

Non-designated forward contracts

At March 31, 2020, the Company had 13 outstanding non-designated forward contracts with notional amounts of €13.1 million, £6.2 million and Rs.443.4 million. At December 31, 2019, the Company had 15 outstanding non-designated forward contracts with notional amounts of €20.0 million, £5.6 million and Rs.756.0 million.

The following summarizes derivative financial instruments as of March 31, 2020 and December 31, 2019:



	March 31,			December 31,
	2020			2019
Assets:	(in thousands)
Foreign currency forward contracts designated as cash flow hedge	$	954		$	427
Foreign currency forward contracts not designated as hedging instruments	516			515
Total	$	1,470		$	942
Liabilities:
Foreign currency forward contracts designated as cash flow hedge	$	(1,059	)	$	(524	)
Foreign currency forward contracts not designated as hedging instruments	(280		)	(550		)
Total	$	(1,339	)	$	(1,074	)

All foreign currency forward contracts were valued at fair value using level 2 inputs.

The following summarizes the gains (losses) recognized from forward contracts and other foreign currency transactions in other income (expense), net on the condensed consolidated statement of operations:



	Three Months Ended March 31,
	2020			2019
	(in thousands)
Net gain from non-designated forward contracts	$	804		$	23
Other foreign currency transactions loss	(871		)	(183		)
Total foreign exchange loss, net	(67		)	(160		)
Other expenses	(68		)	(63		)
Other expense, net	$	(135	)	$	(223	)

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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