10. Derivative Financial Instruments

The following tables provide information about the fair values of our derivative financial instruments as of the respective balance sheet dates:

June 30, 2017

Asset Derivatives

Liability Derivatives

(In thousands)

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivatives qualifying as cash flow hedges:

Foreign exchange contracts

Prepaid expenses and

other current assets

2,054

Accrued expenses

Derivatives not subject to hedge accounting:

1.25% Call Option

Other assets

32,046

N/A

1.25% Embedded cash conversion option

N/A

Other liabilities

32,931

Total derivatives

34,100

32,931

December 31, 2016

Asset Derivatives

Liability Derivatives

(In thousands)

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivatives qualifying as cash flow hedges:

Foreign exchange contracts

Prepaid expenses and

other current assets

1,021

Accrued expenses

Derivatives not subject to hedge accounting:

1.25% Call Option

Other assets

17,080

N/A

1.25% Embedded cash conversion option

N/A

Other liabilities

17,659

Total derivatives

18,101

17,659

N/A – We define “N/A” as disclosure not being applicable

Foreign Exchange Contracts

We have entered into non-deliverable forward foreign currency exchange contracts with reputable banking counterparties in order to hedge a portion of our forecasted future Indian Rupee-denominated (“INR”) expenses against foreign currency fluctuations between the United States dollar and the INR. These forward contracts cover a decreasing percentage of forecasted monthly INR expenses over time. As of June 30, 2017, there were 15 forward contracts outstanding that were staggered to mature monthly starting in July 2017 and ending in June 2018. In the future, we may enter into additional forward contracts to increase the amount of hedged monthly INR expenses or initiate hedges for monthly periods beyond June 2018. As of June 30, 2017, the notional amounts of outstanding forward contracts ranged from 25 million to 120 million INR, or the equivalent of $0.4 million to $1.9 million, based on the exchange rate between the United States dollar and the INR in effect as of June 30, 2017. These amounts also approximate the ranges of forecasted future INR expenses we target to hedge in any one month in the future.

The critical terms of the forward contracts and the related hedged forecasted future expenses matched and allowed us to designate the forward contracts as highly effective cash flow hedges. The effective portion of the change in fair value is initially recorded in accumulated other comprehensive loss (“AOCI”) and subsequently reclassified to income in the period in which the cash flows from the associated hedged transactions affect income. Any ineffective portion of the change in fair value of the cash flow hedges is recognized in current period income. During the three and six months ended June 30, 2017, no amount was excluded from the effectiveness assessment and no gains or losses were reclassified from AOCI into income as a result of forecasted transactions that failed to occur. As of June 30, 2017, we estimate that $2.1 million of net unrealized derivative gains included in AOCI will be reclassified into income within the next twelve months.

The following tables show the impact of derivative instruments designated as cash flow hedges on the consolidated statements of operations and the consolidated statements of comprehensive loss:

	Amount of Gain (Loss) Recognized in OCI (Effective Portion)					Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
(In thousands)	Three Months Ended June 30, 2017		Six Months Ended June 30, 2017		Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Three Months Ended June 30, 2017		Six Months Ended June 30, 2017
Foreign exchange contracts	$	434	$	2,307	Cost of Revenue	$	255	$	433
					Selling, general and administrative expenses		194		331
					Research and development	$	300	$	510

	Amount of Gain (Loss) Recognized in OCI (Effective Portion)						Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
(In thousands)	Three Months Ended June 30, 2016			Six Months Ended June 30, 2016		Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Three Months Ended June 30, 2016		Six Months Ended June 30, 2016
Foreign exchange contracts	$	(141	)	$	201	Cost of Revenue	$	27	$	(4	)
						Selling, general and administrative expenses		22		(3	)
						Research and development	$	37	$	(6	)

1.25% Call Option

In June 2013, concurrent with the issuance of the 1.25% Notes, we entered into privately negotiated hedge transactions with certain of the initial purchasers of the 1.25% Notes (collectively, the “1.25% Call Option”). Assuming full performance by the counterparties, the 1.25% Call Option is intended to offset cash payments in excess of the principal amount due upon any conversion of the 1.25% Notes.

The 1.25% Call Option, which is indexed to our common stock, is a derivative asset that requires mark-to-market accounting treatment (due to the cash settlement features) until the 1.25% Call Option settles or expires. The 1.25% Call Option is measured and reported at fair value on a recurring basis, within Level 3 of the fair value hierarchy. For further discussion of the inputs used to determine the fair value of the 1.25% Call Option, refer to Note 3, “Fair Value Measurements and Long-term Investments.”

The 1.25% Call Option does not qualify for hedge accounting treatment. Therefore, the change in fair value of these instruments is recognized immediately in our consolidated statements of operations in Other income, net. Because the terms of the 1.25% Call Option are substantially similar to those of the 1.25% Notes embedded cash conversion option, discussed below, we expect the net effect of those two derivative instruments on our earnings to be minimal.

1.25% Notes Embedded Cash Conversion Option

The embedded cash conversion option within the 1.25% Notes is required to be separated from the 1.25% Notes and accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of operations in Other income, net until the cash conversion option settles or expires. The initial fair value liability of the embedded cash conversion option was $82.8 million, which simultaneously reduced the carrying value of the 1.25% Notes (effectively an original issuance discount). The embedded cash conversion option is measured and reported at fair value on a recurring basis, within Level 3 of the fair value hierarchy. For further discussion of the inputs used to determine the fair value of the embedded cash conversion option, refer to Note 3, “Fair Value Measurements and Long-term Investments.”

The following table shows the net impact of the changes in fair values of the 1.25% Call Option and the 1.25% Notes’ embedded cash conversion option in the consolidated statements of operations:

	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2017			2016			2017			2016
1.25% Call Option	$	(2,639	)	$	(10,507	)	$	14,966		$	(41,710	)
1.25% Embedded cash conversion option		2,631			10,577			(15,272	)		41,970
Net (loss) gain included in other income, net	$	(8	)	$	70		$	(306	)	$	260