Acquisitions, Goodwill and Intangible Assets

6 Months Ended

Jul. 31, 2020

Acquisition, Goodwill and Intangible Assets

Acquisitions, Goodwill and Intangible Assets

Fiscal 2020 Acquisitions

SignalFx

On October 1, 2019, we acquired 100% of the voting equity interest of SignalFx, Inc. (“SignalFx”), a privately-held Delaware corporation that develops real-time monitoring solutions for cloud infrastructure, microservices and applications. This acquisition has been accounted for as a business combination. The total fair value of consideration transferred for this acquisition was $961.4 million, which consisted of $619.1 million in cash, $324.5 million for the fair value of 2,771,482 shares of our common stock issued and $17.8 million in fair value of replacement equity awards attributable to pre-acquisition service. The purchase price was allocated as follows: $173.7 million to identified intangible assets, $62.1 million to net assets acquired and $3.3 million to net deferred tax liabilities, with the excess $728.9 million of the purchase price over the fair value of net tangible and intangible assets acquired recorded as goodwill, allocated to our one operating segment. Goodwill is primarily attributable to the value expected from the synergies of the combination, including combined selling opportunities with our products. This goodwill is not deductible for income tax purposes. The results of operations of SignalFx have been included in our condensed consolidated financial statements from the date of purchase.

Per the terms of the merger agreement with SignalFx, certain unvested stock options, restricted stock units and restricted stock awards held by SignalFx employees were canceled and exchanged for replacement equity awards under our 2012 Equity Incentive Plan. Additionally, certain shares of stock issued pursuant to share-based compensation awards held by key employees of SignalFx were canceled and exchanged for replacement equity awards consisting of unregistered restricted shares of our common stock subject to vesting. The portion of the fair value of the replacement equity awards associated with pre-acquisition service of SignalFx’s employees represented a component of the total purchase consideration, as discussed above. The remaining fair value of $104.7 million of these issued awards, which are subject to the recipients’ continued service with us and thus excluded from the purchase price, will be recognized ratably as stock-based compensation expense over the required service period. We are still finalizing the allocation of the purchase price, which may be subject to change as additional information becomes available to us.

The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition:


(In thousands, except useful life)	Fair Value		Useful Life (in months)
Developed technology	$	108,800	84
Customer relationships	60,900		60
Other acquired intangible assets	4,000		36
Total intangible assets acquired	$	173,700

We applied significant judgment in determining the fair value of the intangible assets acquired, which involved the use of significant estimates and assumptions with respect to revenue growth rates, royalty rate and technology migration curve.

Omnition

On September 13, 2019, we acquired 100% of the voting equity interest of Cloud Native Labs, Inc. (“Omnition”), a privately-held Delaware corporation that develops a platform for distributed tracing and application monitoring. This acquisition has been accounted for as a business combination. The total fair value of consideration transferred for this acquisition was $52.5 million, which consisted of $31.6 million in cash, $20.2 million for the fair value of 176,989 shares of our common stock issued and $0.7 million in fair value of replacement equity awards attributable to pre-acquisition service. The purchase price was allocated to $8.0 million of identified intangible assets, with the excess $44.5 million of the purchase price over the fair value of net tangible and intangible assets acquired recorded as goodwill, allocated to our one operating segment. Goodwill is primarily attributable to the value expected from the synergies of the combination, including combined selling opportunities with our products. This goodwill is not deductible for income tax purposes. The results of operations of Omnition which are not material, have been included in our condensed consolidated financial statements from the date of purchase.

Per the terms of the merger agreement with Omnition, certain unvested stock options held by Omnition employees were canceled and exchanged for replacement stock options under our 2012 Equity Incentive Plan. Additionally, certain shares of stock issued pursuant to share-based compensation awards held by key employees of Omnition were canceled and exchanged for replacement equity awards subject to vesting. The portion of the fair value of the replacement equity awards associated with pre-acquisition service of Omnition’s employees represented a component of the total purchase consideration, as discussed above. The remaining fair value of $36.6 million of these issued awards, which are subject to the recipients’ continued service with us and thus excluded from the purchase price, will be recognized ratably as stock-based compensation expense over the required service period. We are still finalizing the allocation of the purchase price, which may be subject to change as additional information becomes available to us.

The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition:


(In thousands, except useful life)	Fair Value		Useful Life (in months)
Developed technology	$	8,000	60
Total intangible assets acquired	$	8,000

Streamlio

On November 1, 2019, we acquired 100% of the voting equity interest of Streamlio, Inc. (“Streamlio”), a privately-held Delaware corporation that specializes in designing and operating streaming data solutions. This acquisition has been accounted for as a business combination. The total fair value of consideration transferred for this acquisition was $19.8 million, which consisted of $18.7 million in cash and $1.1 million in fair value of replacement equity awards attributable to pre-acquisition service. The purchase price was allocated as follows: $3.6 million to identified intangible assets and $0.1 million to net assets acquired, with the excess $16.1 million of the purchase price over the fair value of net tangible and intangible assets acquired recorded as goodwill, allocated to our one operating segment. Goodwill is primarily attributable to the value expected from the synergies of the combination, including combined selling opportunities with our products. This goodwill is not deductible for income tax purposes. The results of operations of Streamlio have been included in our condensed consolidated financial statements from the date of purchase.

Per the terms of the merger agreement with Streamlio, certain unvested stock options held by Streamlio employees were canceled and exchanged for replacement stock options under our 2012 Equity Incentive Plan. Additionally, certain shares of stock issued pursuant to share-based compensation awards held by key employees of Streamlio were canceled and exchanged for replacement equity awards consisting of restricted shares of our common stock subject to vesting. The portion of the fair value of the replacement equity awards associated with pre-acquisition service of Streamlio’s employees represented a component of the total purchase consideration, as discussed above. The remaining fair value of $4.2 million of these issued awards, which are subject to the recipients’ continued service with us and thus excluded from the purchase price, will be recognized ratably as stock-based compensation expense over the required service period. We are still finalizing the allocation of the purchase price, which may be subject to change as additional information becomes available to us.

The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition:


(In thousands, except useful life)	Fair Value		Useful Life (in months)
Developed technology	$	3,600	36
Total intangible assets acquired	$	3,600

Goodwill

There were no impairments to goodwill during the six months ended July 31, 2020 or during prior periods.

Intangible Assets

Intangible assets subject to amortization realized from acquisitions as of July 31, 2020 are as follows:


(In thousands, except useful life)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted-Average Remaining Useful Life (in months)
Developed technology	$	252,530	$	(107,712)	$	144,818	65
Customer relationships	81,810		(20,403)		61,407		47
Other acquired intangible assets	7,270		(4,371)		2,899		26
Total intangible assets subject to amortization	$	341,610	$	(132,486)	$	209,124

Intangible assets subject to amortization realized from acquisitions as of January 31, 2020 are as follows:


(In thousands, except useful life)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted-Average Remaining Useful Life (in months)
Developed technology	$	252,530	$	(87,112)	$	165,418	68
Customer relationships	81,810		(12,403)		69,407		53
Other acquired intangible assets	7,270		(3,680)		3,590		32
Total intangible assets subject to amortization	$	341,610	$	(103,195)	$	238,415

Amortization expense from acquired intangible assets was $14.6 million and $7.1 million for the three months ended July 31, 2020 and 2019, respectively, and $29.3 million and $14.2 million for the six months ended July 31, 2020 and 2019, respectively.

The expected future amortization expense for acquired intangible assets as of July 31, 2020 is as follows:


Fiscal Period (In thousands)	Expected Amortization Expense
Remaining fiscal 2021	$	26,415
Fiscal 2022	45,567
Fiscal 2023	41,525
Fiscal 2024	37,015
Fiscal 2025	31,182
Thereafter	27,420
Total amortization expense	$	209,124