10-Q 1 ctxs09-30x201510xq.htm 10-Q 10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
or
o
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 0-27084
 
 
 
CITRIX SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
    
Delaware
  
75-2275152
(State or other jurisdiction of
incorporation or organization)
  
(IRS Employer
Identification No.)
 
 
 
851 West Cypress Creek Road
Fort Lauderdale, Florida
  
33309
(Address of principal executive offices)
  
(Zip Code)
Registrant’s Telephone Number, Including Area Code:
(954) 267-3000
 
 
 
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 x   No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).   Yes x   No o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
x  Large accelerated filer
  
o    Accelerated filer
o    Non-accelerated filer
  
o    Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of October 30, 2015 there were 153,824,447 shares of the registrant’s Common Stock, $.001 par value per share, outstanding.

1



CITRIX SYSTEMS, INC.
Form 10-Q
For the Quarterly Period Ended September 30, 2015
CONTENTS

 
 
 
 
 
Page
Number
PART I:
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II:
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

2



PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
September 30, 2015
 
December 31, 2014
 
(Unaudited)
 
(Derived from audited financial statements)
 
(In thousands, except par value)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
527,594

 
$
260,149

Short-term investments, available-for-sale
545,206

 
529,260

Accounts receivable, net of allowances of $6,417 and $5,976 at September 30, 2015 and December 31, 2014, respectively
467,815

 
674,401

Inventories, net
10,863

 
12,617

Prepaid expenses and other current assets
141,742

 
166,005

Current portion of deferred tax assets, net
43,918

 
45,892

Total current assets
1,737,138

 
1,688,324

Long-term investments, available-for-sale
792,262

 
1,073,110

Property and equipment, net
371,101

 
367,779

Goodwill
1,957,436

 
1,796,851

Other intangible assets, net
366,048

 
390,717

Long-term portion of deferred tax assets, net
113,184

 
128,198

Other assets
68,314

 
67,028

Total assets
$
5,405,483

 
$
5,512,007

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
143,299

 
$
79,884

Accrued expenses and other current liabilities
263,840

 
298,079

Income taxes payable
2,575

 
12,053

Current portion of deferred revenues
1,137,828

 
1,200,093

Total current liabilities
1,547,542

 
1,590,109

Long-term portion of deferred revenues
372,052

 
357,771

Convertible notes
1,316,892

 
1,292,953

Other liabilities
84,305

 
97,529

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Preferred stock at $.01 par value: 5,000 shares authorized, none issued and outstanding

 

Common stock at $.001 par value: 1,000,000 shares authorized; 298,112 and 294,674 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively
298

 
295

Additional paid-in capital
4,492,313

 
4,292,706

Retained earnings
3,343,352

 
3,155,264

Accumulated other comprehensive loss
(29,464
)
 
(36,790
)
 
7,806,499

 
7,411,475

Less - common stock in treasury, at cost (140,987 and 133,898 shares at September 30, 2015 and December 31, 2014, respectively)
(5,721,807
)
 
(5,237,830
)
Total stockholders' equity
2,084,692

 
2,173,645

Total liabilities and stockholders' equity
$
5,405,483

 
$
5,512,007

See accompanying notes.

3



CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands, except per share information)
Revenues:
 
 
 
 
 
 
 
Product and licenses
$
206,252

 
$
193,153

 
$
594,507

 
$
632,369

Software as a service
190,757

 
165,253

 
537,705

 
483,164

License updates and maintenance
379,585

 
358,266

 
1,128,043

 
1,049,065

Professional services
36,676

 
42,322

 
110,576

 
126,775

Total net revenues
813,270

 
758,994

 
2,370,831

 
2,291,373

Cost of net revenues:
 
 
 
 
 
 
 
Cost of product and license revenues
34,859

 
24,045

 
83,833

 
88,144

Cost of services and maintenance revenues
91,295

 
87,981

 
270,218

 
254,763

Amortization of product related intangible assets
20,100

 
23,959

 
57,560

 
102,660

Total cost of net revenues
146,254

 
135,985

 
411,611

 
445,567

Gross margin
667,016

 
623,009

 
1,959,220

 
1,845,806

Operating expenses:
 
 
 
 
 
 
 
Research and development
139,128

 
137,877

 
423,972

 
411,870

Sales, marketing and services
293,587

 
318,252

 
896,250

 
956,287

General and administrative
79,799

 
95,203

 
241,697

 
242,606

Amortization and impairment of other intangible assets
76,938

 
9,956

 
97,371

 
32,855

Restructuring
13,766

 
3,124

 
62,251

 
17,285

Total operating expenses
603,218

 
564,412

 
1,721,541

 
1,660,903

Income from operations
63,798

 
58,597

 
237,679

 
184,903

Interest income
3,004

 
2,411

 
8,679

 
6,705

Interest expense
11,075

 
10,551

 
33,196

 
17,601

Other expense, net
(2,369
)
 
(2,235
)
 
(13,480
)
 
(6,002
)
Income before income taxes
53,358

 
48,222

 
199,682

 
168,005

Income tax (benefit) expense
(2,567
)
 
690

 
11,595

 
11,510

Net income
$
55,925

 
$
47,532

 
$
188,087

 
$
156,495

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.35

 
$
0.29

 
$
1.17

 
$
0.91

Diluted
$
0.35

 
$
0.29

 
$
1.16

 
$
0.90

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
160,359

 
164,229

 
160,359

 
172,622

Diluted
161,777

 
165,713

 
161,716

 
174,023


See accompanying notes.

4



CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
 
 
 
 
 
 
 
 
Net income
$
55,925

 
$
47,532

 
$
188,087

 
$
156,495

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Change in foreign currency translation adjustment

 
(12,890
)
 

 
(15,617
)
Available for sale securities:
 
 
 
 
 
 
 
Change in net unrealized gains (losses)
94

 
(911
)
 
1,392


(182
)
Less: reclassification adjustment for net gains included in net income
232

 
(96
)
 
164

 
(961
)
Net change (net of tax effect)
326

 
(1,007
)
 
1,556

 
(1,143
)
Loss on pension liability

 
(45
)
 

 
(45
)
Cash flow hedges:
 
 
 
 
 
 
 
Change in unrealized losses
(2,348
)
 
(6,809
)
 
(5,692
)
 
(4,197
)
Less: reclassification adjustment for net losses (gains) included in net income
1,794

 
(1,500
)
 
11,462

 
(4,448
)
Net change (net of tax effect)
(554
)
 
(8,309
)
 
5,770

 
(8,645
)
Other comprehensive (loss) income
(228
)
 
(22,251
)
 
7,326

 
(25,450
)
Comprehensive income
$
55,697

 
$
25,281

 
$
195,413

 
$
131,045


See accompanying notes.




5



CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended September 30,
 
2015
 
2014
 
(In thousands)
Operating Activities
 
 
 
Net income
$
188,087

 
$
156,495

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization and other
295,810

 
251,320

Stock-based compensation expense
103,674

 
128,440

Excess tax benefit from stock-based compensation
(2,236
)
 
(5,122
)
Deferred income tax benefit
(31,873
)
 
(25,114
)
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies
13,382

 
825

Other non-cash items
11,155

 
9,722

Total adjustments to reconcile net income to net cash provided by operating activities
389,912

 
360,071

Changes in operating assets and liabilities, net of the effects of acquisitions:
 
 
 
Accounts receivable
198,075

 
182,542

Inventories
1,084

 
(4,342
)
Prepaid expenses and other current assets
(7,375
)
 
(5,763
)
Other assets
(1,460
)
 
1,651

Income taxes, net
21,088

 
(87,180
)
Accounts payable
6,658

 
7,526

Accrued expenses and other current liabilities
(674
)
 
53,846

Deferred revenues
(47,982
)
 
(8,183
)
Other liabilities
5,400

 
(1,113
)
Total changes in operating assets and liabilities, net of the effects of acquisitions
174,814

 
138,984

Net cash provided by operating activities
752,813

 
655,550

Investing Activities
 
 
 
Purchases of available-for-sale investments
(1,806,781
)
 
(1,891,045
)
Proceeds from sales of available-for-sale investments
1,552,983

 
1,342,500

Proceeds from maturities of available-for-sale investments
518,755

 
282,711

Purchases of property and equipment
(119,591
)
 
(115,442
)
(Purchases) proceeds from cost method investments, net
(3,400
)
 
1,084

Cash paid for acquisitions, net of cash acquired
(250,986
)
 
(43,342
)
Cash paid for licensing agreements and product related intangible assets
(10,666
)
 
(12,712
)
Net cash used in investing activities
(119,686
)
 
(436,246
)
Financing Activities
 
 
 
Proceeds from issuance of common stock under stock-based compensation plans
79,338

 
38,674

Proceeds from issuance of convertible notes, net of issuance costs

 
1,415,717

Purchase of convertible note hedges

 
(184,288
)
Proceeds from issuance of warrants

 
101,775

Proceeds from credit facility
95,000

 

Repayment of credit facility
(95,000
)
 

Repayment of acquired debt
(7,569
)
 
(3,766
)
Excess tax benefit from stock-based compensation
2,236

 
5,122

Stock repurchases, net
(398,070
)
 
(1,600,986
)
Cash paid for tax withholding on vested stock awards
(32,351
)
 
(27,777
)
Net cash used in financing activities
(356,416
)
 
(255,529
)
Effect of exchange rate changes on cash and cash equivalents
(9,266
)
 
(1,728
)
Change in cash and cash equivalents
267,445

 
(37,953
)
Cash and cash equivalents at beginning of period
260,149

 
280,740

Cash and cash equivalents at end of period
$
527,594

 
$
242,787

See accompanying notes.

6



CITRIX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Citrix Systems, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. All adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown, are of a normal recurring nature and have been reflected in the condensed consolidated financial statements and accompanying notes. The results of operations for the periods presented are not necessarily indicative of the results expected for the full year or for any future period partially because of the seasonality of the Company’s business. Historically, the Company’s revenue for the fourth quarter of any year is typically higher than the revenue for the first quarter of the subsequent year. The information included in these condensed consolidated financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report and the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
The condensed consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries in the Americas, Europe, the Middle East and Africa (“EMEA”), and Asia-Pacific. All significant transactions and balances between the Company and its subsidiaries have been eliminated in consolidation.
The Company’s revenues are derived from its Enterprise and Service Provider products, which primarily include its Workspace Services products, Delivery Networking products and related license updates and maintenance and professional services and from its Mobility Apps products, which primarily include Communications Cloud and Workflow Cloud products. Enterprise and Service Provider and Mobility Apps business units constitute the Company's two reportable segments. See Note 9 for more information on the Company's segments.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant estimates made by management include the provision for doubtful accounts receivable, the provision to reduce obsolete or excess inventory to market, the provision for estimated returns, as well as sales allowances, the assumptions used in the valuation of stock-based awards, the assumptions used in the discounted cash flows to mark certain of its investments to market, the valuation of the Company’s goodwill, net realizable value of product related and other intangible assets, the fair value of convertible senior notes, the provision for income taxes and the amortization and depreciation periods for intangible and long-lived assets. While the Company believes that such estimates are fair when considered in conjunction with the condensed consolidated financial position and results of operations taken as a whole, the actual amounts of such items, when known, will vary from these estimates.
Available-for-sale Investments
Short-term and long-term available-for-sale investments as of September 30, 2015 and December 31, 2014 primarily consist of agency securities, corporate securities, municipal securities and government securities. Investments classified as available-for-sale are stated at fair value with unrealized gains and losses, net of taxes, reported in Accumulated other comprehensive loss. The Company classifies its available-for-sale investments as current and non-current based on their actual remaining time to maturity. The Company does not recognize changes in the fair value of its available-for-sale investments in income unless a decline in value is considered other-than-temporary in accordance with the authoritative guidance.
The Company’s investment policy is designed to limit exposure to any one issuer depending on credit quality. The Company uses information provided by third parties to adjust the carrying value of certain of its investments to fair value at the end of each period. Fair values are based on a variety of inputs and may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. See Note 5 for investment information.


7




Revenue Recognition
Net revenues include the following categories: Product and licenses, SaaS, License updates and maintenance and Professional services. Product and licenses revenues primarily represent fees related to the licensing of the Company’s software and hardware appliances. These revenues are reflected net of sales allowances, cooperative advertising agreements, partner incentive programs and provisions for returns. SaaS revenues consist primarily of fees related to online service agreements, which are recognized ratably over the contract term, which is typically 12 months. In addition, SaaS revenues may also include set-up fees, which are recognized ratably over the contract term or the expected customer life, whichever is longer. License updates and maintenance revenues consist of fees related to the Subscription Advantage program and maintenance fees, which include technical support and hardware and software maintenance. Subscription Advantage is a renewable program that provides subscribers with immediate access to software upgrades, enhancements and maintenance releases when and if they become available during the term of the contract. Subscription Advantage and maintenance fees are recognized ratably over the term of the contract, which is typically 12 to 24 months. The Company capitalizes certain third-party commissions related to Subscription Advantage, maintenance and support renewals. The capitalized commissions are amortized to Sales, marketing and services expense at the time the related deferred revenue is recognized as revenue. Hardware and software maintenance and support contracts are typically sold separately. Hardware maintenance includes technical support, the latest software upgrades and replacement of malfunctioning appliances. Dedicated account management is available as an add-on to the program for a higher level of service. Software maintenance includes unlimited technical support, immediate access to software upgrades, enhancements and maintenance releases when and if they become available during the term of the contract. Professional services revenues are comprised of fees from consulting services related to the implementation of the Company’s products and fees from product training and certification, which are recognized as the services are provided.
The Company recognizes revenue when it is earned and when all of the following criteria are met: persuasive evidence of the arrangement exists; delivery has occurred or the service has been provided and the Company has no remaining obligations; the fee is fixed or determinable; and collectability is probable.
The majority of the Company’s product and license revenue consists of revenue from the sale of software products. Software sales generally include a perpetual license to the Company’s software and is subject to the industry specific software revenue recognition guidance. In accordance with this guidance, the Company allocates revenue to license updates related to its stand-alone software and any other undelivered elements of the arrangement based on vendor specific objective evidence (“VSOE”) of fair value of each element and such amounts are deferred until the applicable delivery criteria and other revenue recognition criteria described above have been met. The balance of the revenues, net of any discounts inherent in the arrangement, is recognized at the outset of the arrangement using the residual method as the product licenses are delivered. If management cannot objectively determine the fair value of each undelivered element based on VSOE of fair value, revenue recognition is deferred until all elements are delivered, all services have been performed, or until fair value can be objectively determined.
For hardware appliance and software transactions, the arrangement consideration is allocated to stand-alone software deliverables as a group and the non-software deliverables based on the relative selling prices using the selling price hierarchy in the revenue recognition guidance. The selling price hierarchy for a deliverable is based on its VSOE if available, third-party evidence of selling price ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available. The Company then recognizes revenue on each deliverable in accordance with its policies for product and service revenue recognition. VSOE of selling price is based on the price charged when the element is sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices fall within a reasonable range based on historical discounting trends for specific products and services. TPE of selling price is established by evaluating competitor products or services in stand-alone sales to similarly situated customers. However, as the Company’s products contain a significant element of proprietary technology and its solutions offer substantially different features and functionality, the comparable pricing of products with similar functionality typically cannot be obtained. Additionally, as the Company is unable to reliably determine what competitors products’ selling prices are on a stand-alone basis, the Company is not typically able to determine TPE. The estimate of selling price is established considering multiple factors including, but not limited to, pricing practices in different geographies and through different sales channels and competitor pricing strategies.
Our Citrix Service Provider ("CSP") program provides subscription-based services in which the CSP partners host software services to their end users. The fees from the CSP program are recognized based on usage and as the CSP services are provided to their end users.
For the Company’s non-software transactions, it allocates the arrangement consideration based on the relative selling price of the deliverables. For the Company’s hardware appliances, it uses ESP as its selling price. For the Company’s support and services, it generally uses VSOE as its selling price. When the Company is unable to establish selling price using VSOE for its support and services, the Company uses ESP in its allocation of arrangement consideration.

8



The Company’s Mobility Apps products are considered hosted service arrangements per the authoritative guidance, or SaaS. Generally, the Company’s Mobility Apps products are sold separately and not bundled with the Enterprise and Service Provider business unit’s products and services.
In the normal course of business, the Company is not obligated to accept product returns from its distributors under any conditions, unless the product item is defective in manufacture. The Company establishes provisions for estimated returns, as well as other sales allowances, concurrently with the recognition of revenue. The provisions are established based upon consideration of a variety of factors, including, among other things, recent and historical return rates for both specific products and distributors and the impact of any new product releases and projected economic conditions. Product returns are provided for in the condensed consolidated financial statements and have historically been within management’s expectations. Allowances for estimated product returns amounted to approximately $1.1 million and $2.2 million at September 30, 2015 and December 31, 2014, respectively. The Company also records estimated reductions to revenue for customer programs and incentive offerings, including volume-based incentives. The Company could take actions to increase its customer incentive offerings, which could result in an incremental reduction to revenue at the time the incentive is offered.
Foreign Currency
The functional currency for all of the Company’s wholly-owned foreign subsidiaries is the U.S. dollar. Monetary assets and liabilities of such subsidiaries are remeasured into U.S. dollars at exchange rates in effect at the balance sheet date, and revenues and expenses are remeasured at average rates prevailing during the year. Effective January 1, 2015, the functional currency of the Company’s wholly-owned foreign subsidiaries of its Mobility Apps business unit became the U.S. dollar as a result of a reorganization in the foreign subsidiaries' operations. Prior to January 1, 2015, the functional currency of the Company’s wholly-owned foreign subsidiaries of its Mobility Apps business unit was the currency of the country in which each subsidiary is located. The Company translated assets and liabilities of these foreign subsidiaries at exchange rates in effect at the balance sheet date and included accumulated net translation adjustments in equity as a component of Accumulated other comprehensive loss. The change in functional currency is applied on a prospective basis, therefore any gains and losses that were previously recorded in Accumulated other comprehensive loss remain unchanged from January 1, 2015. Foreign currency transaction gains and losses are the result of exchange rate changes on transactions denominated in currencies other than the functional currency, including U.S. dollars. The remeasurement of those foreign currency transactions is included in determining net income or loss for the period of exchange. See Note 9 for information on the Company's Enterprise and Service Provider and Mobility Apps business units.
Accounting for Stock-Based Compensation Plans
The Company has various stock-based compensation plans for its employees and outside directors and accounts for stock-based compensation arrangements in accordance with the authoritative guidance, which requires the Company to measure and record compensation expense in its condensed consolidated financial statements using a fair value method. See Note 7 for further information regarding the Company’s stock-based compensation plans.
3. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted-average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise or settlement of stock awards (calculated using the treasury stock method) during the period they were outstanding.

9




The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share information):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Net income
$
55,925

 
$
47,532

 
$
188,087

 
$
156,495

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share - weighted-average shares outstanding
160,359

 
164,229

 
160,359

 
172,622

Effect of dilutive employee stock awards
1,418

 
1,484

 
1,357

 
1,401

Denominator for diluted earnings per share - weighted-average shares outstanding
161,777

 
165,713

 
161,716

 
174,023

Basic earnings per share
$
0.35

 
$
0.29

 
$
1.17

 
$
0.91

Diluted earnings per share
$
0.35

 
$
0.29

 
$
1.16

 
$
0.90

Anti-dilutive weighted-average shares from stock awards
1,572

 
2,807

 
2,416

 
3,287


The weighted-average number of shares outstanding used in the computation of basic and diluted earnings per share does not include the effect of the potential outstanding common stock from the Company's convertible senior notes and warrants. The effects of these potentially outstanding shares were not included in the calculation of diluted earnings per share because the effect would have been anti-dilutive.

The Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on its Convertible Senior Notes (the "Convertible Notes") on diluted earnings per share, if applicable, as upon conversion, the Company will pay cash up to the aggregate principal amount of the Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, in respect of the remainder, if any, of the Company’s conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted. The conversion spread will have a dilutive impact on diluted earnings per share when the average market price of the Company’s common shares for a given period exceeds the conversion price of $90.00 per share. For the three and nine months ended September 30, 2015, the Convertible Notes have been excluded from the computation of diluted earnings per share as the effect would be anti-dilutive since the conversion price of the Convertible Notes exceeded the average market price of the Company’s common stock. In addition, the Company uses the treasury stock method for calculating any potential dilutive effect related to the warrants. See Note 10 to the Company's condensed consolidated financial statements for detailed information on the Convertible Notes offering.
4. ACQUISITIONS
2015 Acquisitions
Sanbolic
On January 8, 2015, the Company acquired all of the issued and outstanding securities of Sanbolic, Inc. (“Sanbolic”). Sanbolic is an innovator and leader in workload-oriented storage virtualization technologies. The Sanbolic technology, combined with XenDesktop, XenApp, and XenMobile products will enable the Company to develop a range of differentiated solutions that will reduce the complexity of Microsoft Windows application delivery and desktop virtualization deployments. Sanbolic became part of the Company's Enterprise and Service Provider segment. The total cash consideration for this transaction was approximately $89.4 million, net of $0.2 million cash acquired. Transaction costs associated with the acquisition were $0.5 million. No transaction costs were recorded during the three months ended September 30, 2015 and the Company expensed $0.2 million during the nine months ended September 30, 2015, which is included in General and administrative expense in the accompanying condensed consolidated statements of income. In addition, in connection with the acquisition, the Company assumed non-vested stock units which were converted into the right to receive, in the aggregate, up to 37,057 shares of the Company's common stock, for which the vesting period began on the closing of the transaction.

10




Grasshopper
On May 18, 2015, the Company acquired all of the membership interests of Grasshopper Group, LLC (“Grasshopper”), a leading provider of cloud-based phone solutions for small businesses. With the acquisition, the Company will expand its breadth of communication and collaboration solutions for small businesses, including GoToMeeting, GoToTraining, GoToWebinar, OpenVoice and ShareFile. Grasshopper became part of the Mobility Apps segment. Total cash consideration for this transaction was approximately $161.5 million, net of $3.6 million cash acquired. Transaction costs associated with the acquisition were $0.3 million. No transaction costs were recorded during the three months ended September 30, 2015 and the Company expensed $0.3 million during the nine months ended September 30, 2015, which is included in General and administrative expense in the accompanying condensed consolidated statements of income. In addition, in connection with the acquisition, the Company assumed non-vested stock units which were converted into the right to receive, in the aggregate, up to 105,765 shares of the Company's common stock, for which the vesting period commenced on the closing of the transaction.
Purchase Accounting for the 2015 Acquisitions
    
The purchase prices for companies acquired during the nine months ended September 30, 2015, which include Sanbolic and Grasshopper (collectively, the "2015 Acquisitions"), were allocated to the acquired net tangible and intangible assets based on estimated fair values as of the date of each acquisition. The allocation of the total purchase prices is summarized below (in thousands):
 
Sanbolic
 
Grasshopper
 
Purchase Price Allocation
 
Asset Life
 
Purchase Price Allocation
 
Asset Life
Current assets
$
581

 
 
 
$
4,818

 
 
Property and equipment

 
 
 
467

 
Various
Intangible assets
45,300

 
Various
 
71,400

 
Various
Goodwill
61,639

 
Indefinite
 
99,686

 
Indefinite
Other assets

 
 
 
80

 
 
Assets acquired
107,520

 
 
 
176,451

 
 
Current liabilities assumed
1,454

 
 
 
11,181

 
 
Long-term liabilities assumed
3,175

 
 
 
158

 
 
Deferred tax liabilities, non-current
13,295

 
 
 

 
 
Net assets acquired
$
89,596

 
 
 
$
165,112

 
 
The company continues to evaluate certain income tax assets and liabilities related to the Sanbolic acquisition. Current assets acquired in connection with the 2015 Acquisitions consisted primarily of cash, accounts receivable, deferred tax assets and other short term assets. Current liabilities assumed in connection with the 2015 Acquisitions consisted primarily of accounts payable, other accrued expenses and short-term debt. Long-term liabilities assumed in connection with the 2015 Acquisitions consisted of long-term debt and other long-term liabilities. Both short-term and long-term debt were paid in full subsequent to the Sanbolic and Grasshopper acquisition dates.
Goodwill from the Sanbolic acquisition was assigned to the Enterprise and Service Provider segment whereas goodwill from the Grasshopper acquisition was assigned to the Mobility Apps segment. The goodwill related to the Sanbolic acquisition is not deductible for tax purposes and the goodwill related to the Grasshopper acquisition is deductible for tax purposes. See Note 9 for segment information. The goodwill amount from the 2015 Acquisitions is comprised primarily of expected synergies from combining operations and other intangible assets that do not qualify for separate recognition.
Revenue from the Sanbolic acquisition is included in the Enterprise and Service Provider segment and revenue from the Grasshopper acquisition is included in the Mobility Apps segment. The Company has included the effect of the 2015 Acquisitions in its results of operations prospectively from the respective dates of acquisitions.

11




Identifiable intangible assets acquired in connection with the 2015 Acquisitions (in thousands) and the weighted-average lives are as follows:
 
Sanbolic
 
Asset Life
 
Grasshopper
 
Asset Life
Core and product technologies
$
43,800

 
5 and 6 years
 
$
25,000

 
7 years
Customer relationships
1,500

 
2 years
 
37,900

 
5 years
Telecommunication carrier relationships

 
 
 
7,900

 
2 years
Trade name

 
 
 
600

 
2 years
Total
$
45,300

 
 
 
$
71,400

 
 
The following unaudited pro-forma information combines the consolidated results of the operations of the Company and the 2015 Acquisitions as if the acquisitions had occurred on January 1, 2014, the first day of the Company's fiscal year 2014 (in thousands, except per share data):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenues
$
813,309

 
$
766,282

 
$
2,384,428

 
$
2,310,979

Income from operations
63,837

 
53,260

 
229,379

 
166,384

Net income
55,949

 
44,005

 
182,685

 
144,398

Per share - basic
0.35

 
0.27

 
1.14

 
0.84

Per share - diluted
0.35

 
0.27

 
1.13

 
0.83

2014 Acquisitions
Framehawk
In January 2014, the Company acquired all of the issued and outstanding securities of Framehawk, Inc. ("Framehawk"). The Framehawk solution, which optimizes the delivery of virtual desktops and applications to mobile devices, was combined with HDX technology in the Citrix XenApp and XenDesktop products to deliver an improved user experience under adverse network conditions. Framehawk became part of the Company's Enterprise and Service Provider segment. The total cash consideration for this transaction was approximately $24.2 million, net of $0.2 million of cash acquired. Transaction costs associated with the acquisition were approximately $0.1 million, all of which the Company expensed during the nine months ended September 30, 2014 and are included in General and administrative expense in the accompanying condensed consolidated statements of income.
RightSignature
In October 2014, the Company acquired all of the membership interests of RightSignature, LLC. ("RightSignature”). The RightSignature technology expands the Workflow Cloud beyond storage and file transfer to supporting e-signature and approval workflows. RightSignature became a part of the Company's Mobility Apps segment. The total cash consideration for this transaction was approximately $37.8 million, net of $1.1 million of cash acquired. Transaction costs associated with the acquisition were approximately $0.2 million, of which the Company expensed $0.1 million during the nine months ended September 30, 2014 and are included in General and administrative expense in the accompanying condensed consolidated statements of income. In addition, in connection with the acquisition, the Company assumed non-vested stock units which were converted into the right to receive, in the aggregate, up to 67,500 of the Company's common stock, for which the vesting period began on the closing of the transaction.
2014 Other Acquisitions
During the second quarter of 2014, the Company acquired all of the issued and outstanding securities of a privately-held company. The total cash consideration for this transaction was approximately $17.2 million, net of $0.8 million of cash acquired. This business became part of the Company's Enterprise and Service Provider segment. Transaction costs associated with the acquisition were approximately $0.1 million, all of which the Company expensed during the nine months ended September 30, 2014 and are included in General and administrative expense in the accompanying condensed consolidated statements of income.

12



In the fourth quarter of 2014, the Company acquired all of the issued and outstanding securities of two privately-held companies for total cash consideration of approximately $19.9 million, net of $0.2 million of cash acquired. The businesses became part of the Company's Enterprise and Service Provider segment. In addition, in connection with one of the acquisitions, the Company assumed non-vested stock units which were converted into the right to receive, in the aggregate, up to 23,430 shares of the Company's common stock, for which the vesting period began on the closing of the transaction. Transaction costs associated with the acquisitions were not significant.
5. INVESTMENTS
Available-for-sale Investments
Investments in available-for-sale securities at fair value were as follows for the periods ended (in thousands):
 
 
September 30, 2015
 
December 31, 2014
Description of the
Securities
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency securities
$
577,539

 
$
1,422

 
$
(80
)
 
$
578,881

 
$
637,474

 
$
1,296

 
$
(457
)
 
$
638,313

Corporate securities
679,887

 
396

 
(928
)
 
679,355

 
795,255

 
232

 
(1,372
)
 
794,115

Municipal securities
15,466

 
28

 
(1
)
 
15,493

 
48,744

 
17

 
(31
)
 
48,730

Government securities
63,596

 
143

 

 
63,739

 
121,431

 
37

 
(256
)
 
121,212

Total
$
1,336,488

 
$
1,989

 
$
(1,009
)
 
$
1,337,468

 
$
1,602,904

 
$
1,582

 
$
(2,116
)
 
$
1,602,370

The change in net unrealized gains (losses) on available-for-sale securities recorded in Other comprehensive (loss) income includes unrealized gains (losses) that arose from changes in market value of specifically identified securities that were held during the period, gains (losses) that were previously unrealized, but have been recognized in current period net income due to sales, as well as prepayments of available-for-sale investments purchased at a premium. This reclassification has no effect on total comprehensive income or equity and was not material for all periods presented. See Note 13 for more information related to comprehensive income.
The average remaining maturities of the Company’s short-term and long-term available-for-sale investments at September 30, 2015 were approximately six months and three years, respectively.
Realized Gains and Losses on Available-for-sale Investments
For the three and nine months ended September 30, 2015, the Company received proceeds from the sales of available-for-sale investments of $718.4 million and $1.55 billion, respectively, and for the three and nine months ended September 30, 2014, it received proceeds from the sales of available-for-sale investments of $469.6 million and $1.34 billion, respectively.
The Company had realized gains on the sales of available-for-sale investments during the three and nine months ended September 30, 2015 of $0.3 million and $0.7 million, respectively, and for the three and nine months ended September 30, 2014, it had realized gains on the sales of available-for-sale investments of $0.2 million and $1.4 million, respectively.
For the three and nine months ended September 30, 2015, the Company had realized losses on available-for-sale investments of $0.6 million and $0.9 million, respectively, and for the three and nine months ended September 30, 2014, it had realized losses on available-for-sale investments of $0.1 million and $0.4 million, respectively, primarily related to prepayments at par of securities purchased at a premium.
All realized gains and losses related to the sales of available-for-sale investments are included in Other expense, net, in the accompanying condensed consolidated statements of income.
Unrealized Losses on Available-for-Sale Investments
The gross unrealized losses on the Company’s available-for-sale investments that are not deemed to be other-than-temporarily impaired as of September 30, 2015 and December 31, 2014 were $1.0 million and $2.1 million, respectively. Because the Company does not intend to sell any of its investments in an unrealized loss position and it is more likely than not that it will not be required to sell the securities before the recovery of its amortized cost basis, which may not occur until maturity, it does not consider the securities to be other-than-temporarily impaired.

13



Cost Method Investments
The Company held direct investments in privately-held companies of approximately $17.2 million and $16.6 million as of September 30, 2015 and December 31, 2014, respectively, which are accounted for based on the cost method and are included in Other assets in the accompanying condensed consolidated balance sheets. The Company periodically reviews these investments for impairment. If the Company determines that an other-than-temporary impairment has occurred, it will write-down the investment to its fair value. For the three months ended September 30, 2015, no cost method investments were determined to be impaired. For the nine months ended September 30, 2015, the Company determined that certain cost method investments were impaired and recorded a charge of $3.0 million which was included in Other expense, net in the accompanying condensed consolidated statements of income. For the three and nine months ended September 30, 2014, the Company determined that certain cost method investments were impaired and recorded a charge of $3.2 million and $8.3 million, respectively, which were included in Other expense, net in the accompanying condensed consolidated statements of income.
During the three and nine months ended September 30, 2015, no gains were recorded on cost method investments. During the three and nine months ended September 30, 2014, certain early-stage entities in which the Company held direct investments were acquired by third parties and as a result of such sale transactions, the Company recorded gains of $1.2 million and $2.7 million, respectively, which were included in Other expense, net in the accompanying condensed consolidated statements of income.
6. FAIR VALUE MEASUREMENTS
The authoritative guidance defines fair value as an exit price, representing the amount that would either be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Available-for-sale securities included in Level 2 are valued utilizing inputs obtained from an independent pricing service (the “Service”) which uses quoted market prices for identical or comparable instruments rather than direct observations of quoted prices in active markets. The Service applies a four level hierarchical pricing methodology to all of the Company’s fixed income securities based on the circumstances. The hierarchy starts with the highest priority pricing source, then subsequently uses inputs obtained from other third-party sources and large custodial institutions. The Service’s providers utilize a variety of inputs to determine their quoted prices. These inputs may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. Substantially all of the Company’s available-for-sale investments are valued utilizing inputs obtained from the Service and accordingly are categorized as Level 2 in the table below. The Company periodically independently assesses the pricing obtained from the Service and historically has not adjusted the Service's pricing as a result of this assessment. Available-for-sale securities are included in Level 3 when relevant observable inputs for a security are not available.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and liabilities within the fair value hierarchy. In certain instances, the inputs used to measure fair value may meet the definition of more than one level of the fair value hierarchy. The input with the lowest level priority is used to determine the applicable level in the fair value hierarchy.

14



Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
As of September 30, 2015
 
Quoted
Prices In
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash
$
295,170

 
$
295,170

 
$

 
$

Money market funds
220,004

 
220,004

 

 

Corporate securities
12,420

 

 
12,420

 

Available-for-sale securities:
 
 
 
 
 
 
 
Agency securities
578,881

 

 
578,881

 

Corporate securities
679,355

 

 
673,193

 
6,162

Municipal securities
15,493

 

 
15,493

 

Government securities
63,739

 

 
63,739

 

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
Foreign currency derivatives
1,191

 

 
1,191

 

Total assets
$
1,866,253

 
$
515,174

 
$
1,344,917

 
$
6,162

Accrued expenses and other current liabilities:
 
 
 
 
 
 
 
Foreign currency derivatives
3,783

 

 
3,783

 

Total liabilities
$
3,783

 
$

 
$
3,783

 
$

 
As of December 31, 2014
 
Quoted
Prices In
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash
$
230,370

 
$
230,370

 
$

 
$

Money market funds
29,512

 
29,512

 

 

Corporate securities
267

 

 
267

 

Available-for-sale securities:
 
 
 
 
 
 
 
Agency securities
638,313

 

 
638,313

 

Corporate securities
794,115

 

 
788,042

 
6,073

Municipal securities
48,730

 

 
48,730

 

Government securities
121,212

 

 
121,212

 

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
Foreign currency derivatives
1,206

 

 
1,206

 

Total assets
$
1,863,725

 
$
259,882

 
$
1,597,770

 
$
6,073

Accrued expenses and other current liabilities:
 
 
 
 
 
 
 
Foreign currency derivatives
9,692

 

 
9,692

 

Total liabilities
$
9,692

 
$

 
$
9,692

 
$

The Company’s fixed income available-for-sale security portfolio generally consists of investment grade securities from diverse issuers with a minimum credit rating of A-/A3 and a weighted-average credit rating of AA-/Aa3. The Company values these securities based on pricing from the Service, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value, and accordingly, the Company classifies all of its fixed income available-for-sale securities as Level 2.
The Company measures its cash flow hedges, which are classified as Prepaid expenses and other current assets and Accrued expenses and other current liabilities, at fair value based on indicative prices in active markets (Level 2 inputs).

15




Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The Company has invested in convertible debt securities of certain early-stage entities that are classified as available-for-sale investments. As quoted prices in active markets or other observable inputs were not available for these investments, in order to measure them at fair value, the Company utilized a discounted cash flow model using a discount rate reflecting the market risk inherent in holding securities of an early-stage enterprise, adjusted by the probability-weighted exit possibilities associated with the convertible debt securities. This methodology required the Company to make assumptions that were not directly or indirectly observable regarding the fair value of the convertible debt securities; accordingly they are a Level 3 valuation and are included in the table below.
 
Corporate Securities
 
(In thousands)
Balance at December 31, 2014
$
6,073

Purchases of Level 3 securities
1,475

Proceeds received on Level 3 securities
(101
)
Total net realized losses included in earnings
(838
)
Transfers out of Level 3
(447
)
Balance at September 30, 2015
$
6,162


Transfers out of Level 3 relate to certain of the Company's investments in convertible debt securities of early-stage entities that were reclassified from available-for-sale investments to cost method investments upon conversion to equity ownership. These amounts are included in Other assets in the accompanying consolidated balance sheets. Realized losses included in earnings for the period are reported in Other expense, net in the accompanying consolidated statements of income.
Assets Measured at Fair Value on a Non-recurring Basis Using Significant Unobservable Inputs (Level 3)
During the nine months ended September 30, 2015, certain cost method investments with a combined carrying value of $3.0 million were determined to be impaired and written down to zero. The impairment charge is included in Other expense, net in the accompanying condensed consolidated financial statements. For the nine months ended September 30, 2014, the Company determined that certain cost method investments were impaired and recorded a charge of $8.3 million which was included in Other expense, net in the accompanying condensed consolidated financial statements. In determining the fair value of cost method investments, the Company considers many factors including but not limited to operating performance of the investee, the amount of cash that the investee has on-hand, the ability to obtain additional financing and the overall market conditions in which the investee operates. The fair value of the cost method investments represent a Level 3 valuation as the assumptions used in valuing these investments were not directly or indirectly observable.
For certain intangible assets where the unamortized balances exceeded the undiscounted future net cash flows, the Company measures the amount of the impairment by calculating the amount by which the carrying values exceed the estimated fair values, which are based on projected discounted future net cash flows. These non-recurring fair value measurements are categorized as Level 3 significant unobservable inputs. See Note 8 to the Company's condensed consolidated financial statements for detailed information related to Goodwill and Other Intangible Assets.
Additional Disclosures Regarding Fair Value Measurements
The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short maturity of these items.
As of September 30, 2015, the fair value of the Convertible Notes, which was determined based on inputs that are observable in the market (Level 2) based on the closing trading price per $100 as of the last day of trading for the quarter ended September 30, 2015, and carrying value of debt instruments (carrying value excludes the equity component of the Company’s Convertible Notes classified in equity) was as follows (in thousands):
 
Fair Value
 
Carrying Value
Convertible Senior Notes
$
1,541,719

 
$
1,316,892


16



7. STOCK-BASED COMPENSATION
The Company’s stock-based compensation program is a long-term retention program that is intended to attract and reward talented employees and align stockholder and employee interests. As of September 30, 2015, the Company had two stock-based compensation plans under which it was granting stock options and non-vested stock units. The Company is currently granting stock-based awards from its 2014 Equity Incentive Plan (the "2014 Plan"). In December 2014, the Company's Board of Directors approved the 2015 Employee Stock Purchase Plan (the “2015 ESPP”), which was approved by stockholders at the Company's Annual Meeting of Stockholders held on May 28, 2015. The 2015 ESPP has replaced the Company's Amended and Restated 2005 Employee Stock Purchase Plan (as amended, the "2005 ESPP"). In connection with certain of the Company’s acquisitions, the Company has assumed certain plans from acquired companies. The Company’s Board of Directors has provided that no new awards will be granted under the Company’s acquired stock plans. Awards previously granted under the Company's superseded and expired stock plans that are still outstanding typically expire between five and ten years from the date of grant and will continue to be subject to all the terms and conditions of such plans, as applicable. The Company’s superseded and expired stock plans include the Amended and Restated 1995 Stock Plan and the Amended and Restated 2005 Equity Incentive Plan and the 2005 ESPP.
Under the terms of the 2014 Plan, the Company is authorized to grant incentive stock options (“ISOs”), non-qualified stock options (“NSOs”), non-vested stock, non-vested stock units, stock appreciation rights (“SARs”), and performance units and to make stock-based awards to full and part-time employees of the Company and its subsidiaries or affiliates, where legally eligible to participate, as well as to consultants and non-employee directors of the Company. SARs and ISOs are not currently being granted. Currently, the 2014 Plan provides for the issuance of 29,000,000 shares of common stock. In addition, shares of common stock underlying any awards granted under the Company’s Amended and Restated 2005 Equity Incentive Plan, as amended, that are forfeited, canceled or otherwise terminated (other than by exercise) are added to its shares of common stock available for issuance under the 2014 Plan. Under the 2014 Plan, NSOs must be granted at exercise prices no less than fair market value on the date of grant. Non-vested stock awards may be granted for such consideration in cash, other property or services, or a combination thereof, as determined by the Company’s Compensation Committee of its Board of Directors. Stock-based awards are generally exercisable or issuable upon vesting. The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. As of September 30, 2015, there were 28,949,258 shares of common stock reserved for issuance pursuant to the Company’s stock-based compensation plans and the Company had authorization under its 2014 Plan to grant stock-based awards covering 21,163,715 shares of common stock.
Under the 2015 ESPP, all full-time and certain part-time employees of the Company are eligible to purchase common stock of the Company twice per year at the end of a six-month payment period (a “Payment Period”). During each Payment Period, eligible employees who so elect may authorize payroll deductions in an amount no less than 1% nor greater than 10% of his or her base pay for each payroll period in the Payment Period. At the end of each Payment Period, the accumulated deductions are used to purchase shares of common stock from the Company up to a maximum of 12,000 shares for any one employee during a Payment Period. Shares are purchased at a price equal to 85% of the fair market value of the Company’s common stock on the last business day of a Payment Period. Employees who, after exercising their rights to purchase shares of common stock in the 2015 ESPP, would own shares representing 5% or more of the voting power of the Company’s common stock, are ineligible to continue to participate under the 2015 ESPP. The 2015 ESPP provides for the issuance of a maximum of 16,000,000 shares of common stock. As of September 30, 2015, 3,872,661 shares had been issued under the 2005 ESPP. As of September 30, 2015, 245,029 shares have been issued under the 2015 ESPP. The Company recorded stock-based compensation costs related to its employee stock purchase plans of $2.3 million and $5.2 million for the three and nine months ended September 30, 2015, respectively, and the Company recorded stock-based compensation costs of $1.3 million and $4.0 million for the three and nine months ended September 30, 2014, respectively. Effective with the Payment Period beginning in July 2015, the purchase price to participating employees will be 85% of the fair market value of the Company's common stock, on either the first business day of the Payment Period or the last business day of the Payment Period, whichever is lower.
The Company used the Black-Scholes model to estimate the fair value of its Employee Stock Purchase Plan awards with the following weighted-average assumptions:
 
Three Months Ended
 
September 30, 2015
Expected volatility factor
0.35

Risk free interest rate
0.25
%
Expected dividend yield
0
%
Expected life (in years)
0.5


17



The Company determined the expected volatility factor by considering the implied volatility in six-month market-traded options of the Company's common stock based on third party volatility quotes. The Company's decision to use implied volatility was based upon the availability of actively traded options on the Company's common stock and its assessment that implied volatility is more representative of future stock price trends than historical volatility. The risk-free interest rate was based on a U.S. Treasury instrument whose term is consistent with the expected term of the stock options. The Company's expected dividend yield input was zero as it has not historically paid, nor expects in the future to pay, cash dividends on its common stock. The expected term is based on the term of the purchase period for grants made under the ESPP.
Stock-Based Compensation
The detail of the total stock-based compensation recognized by income statement classification is as follows (in thousands):
 
Three Months Ended
 
Three Months Ended
 
Nine Months Ended
 
Nine Months Ended
Income Statement Classifications
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Cost of services and maintenance revenues
$
803

 
$
673

 
$
2,095

 
$
1,854

Research and development
9,118

 
13,989

 
31,454

 
42,102

Sales, marketing and services
16,922

 
15,073

 
38,083

 
46,885

General and administrative
11,828

 
12,714

 
32,042

 
37,599

Total
$
38,671

 
$
42,449

 
$
103,674

 
$
128,440

Non-vested Stock Units
Market Performance and Service Condition Stock Units
In March 2015 and 2014, the Company granted senior level employees non-vested stock unit awards representing, in the aggregate, 393,464 and 378,022 non-vested stock units, respectively, that vest based on certain target market performance and service conditions. The number of non-vested stock units underlying each award will be determined within sixty days of the calendar year following the end of a three-year performance period ending December 31, 2017 for the March 2015 awards and December 31, 2016 for the March 2014 awards. The attainment level under the award will be based on the Company's total return to stockholders over the performance period compared to the return on the Nasdaq Composite Total Return Index (the "XCMP"). If the Company's return is positive and meets or exceeds the indexed return, the number of non-vested stock units issued will be based on interpolation, with the maximum number of non-vested stock units issuable pursuant to the award capped at 200% of the target number of non-vested stock units set forth in the award agreement if the Company's return exceeds the indexed return by 40% or more. If the Company's return over the performance period is positive but underperforms the index, a number of non-vested stock units will be issued, below the target award, based on interpolation; however, no non-vested stock units will be issued if the Company's return underperforms the index by more than 20% over the performance period. In the event the Company's return to stockholders is negative but still meets or exceeds the indexed return, only 75% of the target award shall be issued. If the awardee is not employed by the Company at the end of the performance period; the extent to which the awardee will vest in the award, if at all, is dependent upon the timing and character of the termination as provided in the award agreement. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company's common stock.
The market condition requirements are reflected in the grant date fair value of the award, and the compensation expense for the award will be recognized assuming that the requisite service is rendered regardless of whether the market conditions are achieved. The grant date fair value of the non-vested performance stock unit awards was determined through the use of a Monte Carlo simulation model, which utilized multiple input variables that determined the probability of satisfying the market condition requirements applicable to each award as follows:
 
March 2015 Grant
March 2014 Grant
Expected volatility factor
0.14 - 0.29

0.19 - 0.38

Risk free interest rate
0.85
%
0.81
%
Expected dividend yield
0
%
0
%
The range of expected volatilities utilized was based on the historical volatilities of the Company's common stock and the XCMP. The Company chose to use historical volatility to value these awards because historical stock prices were used to develop the correlation coefficients between the Company and the XCMP in order to model the stock price movements. The

18



volatilities used were calculated over a 2.76 year period, which was the remaining term of the performance period at the date of grant. The risk free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues with remaining terms equivalent to the remaining performance period. The Company does not intend to pay dividends on its common stock in the foreseeable future. Accordingly, the Company used a dividend yield of zero in its model. The estimated fair value of each award as of the date of grant was $61.01 for the March 2015 grant and $56.94 for the March 2014 grant.
Service Based Stock Units
The Company also awards senior level, certain other employees and new non-employee directors non-vested stock units granted under the 2014 Plan that vest based on service. These non-vested stock unit awards generally vest 33.33% on each anniversary subsequent to the date of the award. The Company also assumes non-vested stock units in connection with certain of its acquisitions. The assumed awards have the same three year vesting schedule. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. In addition, the Company awards non-vested stock units to all of its continuing non-employee directors. These awards vest monthly in 12 equal installments based on service and, upon vesting, each stock unit represents the right to receive one share of the Company's common stock.
Unrecognized Compensation Related to Stock Units
As of September 30, 2015, the number of all non-vested stock units outstanding, including market performance and service condition awards and service-based awards, including service-based awards assumed in connection with acquisitions, were 5,633,512. As of September 30, 2015, there was $264.2 million of total unrecognized compensation cost related to non-vested stock units. The unrecognized cost is expected to be recognized over a weighted-average period of 1.93 years. See Note 4 for more information regarding the Company's acquisitions.
Stock Options
Stock options granted under the 2014 Plan typically have a five-year life and vest over three years, with 33.3% of the shares underlying the option vesting on the first anniversary of the date of grant and the remainder of the underlying shares vesting in equal monthly installments at a rate of 2.78% thereafter (the "Standard Vesting Rate"). The Company may assume stock options from certain of its acquisitions for which the vesting period is typically reset to vest over three years at the Standard Vesting Rate. The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. There were no stock options granted or assumed during the three and nine months ended September 30, 2015 and 2014.
The total intrinsic value of options exercised during the three and nine months ended September 30, 2015 was $4.4 million and $18.2 million, respectively and the total intrinsic value of options exercised during the three and nine months ended September 30, 2014 was $11.3 million and $31.3 million. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the shares. As of September 30, 2015, there was $0.4 million of total unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of 0.36 years.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The Company accounts for goodwill in accordance with the authoritative guidance, which requires that goodwill and certain intangible assets are not amortized, but are subject to an annual impairment test. There was no impairment of goodwill or indefinite lived intangible assets as a result of the annual impairment test analysis completed during the fourth quarter of 2014. There were no indicators of impairment during the nine months ended September 30, 2015. In-process R&D acquired in connection with the Company's acquisitions was not significant. See Note 4 for more information regarding the Company's acquisitions and Note 9 for more information regarding the Company's segments.
The following table presents the change in goodwill allocated to the Company’s reportable segments during the nine months ended September 30, 2015 (in thousands):
 
Balance at January 1, 2015
 
Additions
 
 
Other
 
 
Balance at September 30, 2015
Enterprise and Service Provider
$
1,434,369

 
$
61,639

 
 
$
(740
)
(2)
 
$
1,495,268

Mobility Apps
362,482

 
99,686

  
 

 
 
462,168

Consolidated
$
1,796,851

 
$
161,325

(1)
 
$
(740
)
 
 
$
1,957,436

 
 
(1)
Amounts relate to 2015 acquisitions. See Note 4 for more information regarding the Company’s acquisitions.
(2)
Amount relates to adjustments to the preliminary purchase price allocation associated with 2014 acquisitions.

19



Intangible Assets
The Company has intangible assets which were primarily acquired in conjunction with business combinations and technology purchases. Intangible assets with finite lives are recorded at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally three to seven years, except for patents, which are amortized over the lesser of their remaining life or ten years. In-process R&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When in-process R&D projects are completed, the corresponding amount is reclassified as an amortizable intangible asset and is amortized over the asset's estimated useful life.
Intangible assets consist of the following (in thousands):
 
September 30, 2015
 
December 31, 2014
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Product related intangible assets
$
683,695

 
$
500,282

 
$
618,336

 
$
454,830

Other
455,862

 
273,227

 
492,960

 
265,749

Total
$
1,139,557

 
$
773,509

 
$
1,111,296

 
$
720,579

Amortization of product related intangible assets, which consists primarily of product-related technologies and patents, was $20.1 million and $24.0 million for the three months ended September 30, 2015 and 2014, respectively, and $57.6 million and $102.7 million for the nine months ended September 30, 2015 and 2014, respectively, and is classified as a component of Cost of net revenues in the accompanying condensed consolidated statements of income. Amortization and impairment of other intangible assets, which consist primarily of customer relationships, trade names and covenants not to compete was $76.9 million and $10.0 million for the three months ended September 30, 2015 and 2014, respectively, and $97.4 million and $32.9 million for the nine months ended September 30, 2015 and 2014, respectively, and is classified as a component of Operating expenses in the accompanying condensed consolidated statements of income.
The Company monitors its intangible assets for indicators of impairment. If the Company determines that an impairment has occurred, it will write-down the intangible asset to its fair value. For certain intangible assets where the unamortized balances exceeded the undiscounted future net cash flows, the Company measures the amount of the impairment by calculating the amount by which the carrying values exceed the estimated fair values, which are based on projected discounted future net cash flows. During the nine months ended September 30, 2015, due to disruptions in the business as a result of the announced plan to explore strategic alternatives, the Company identified certain definite-lived intangible assets, primarily customer relationships from the acquisition of ByteMobile, that were impaired within our Enterprise and Service Provider business unit and recorded non-cash impairment charges of $65.4 million to write down the intangible assets to their estimated fair value of $27.6 million. Of the impairment charge, $64.4 million is included in Amortization and impairment of other intangible assets and $1.0 million is included in Amortization of product related intangible assets in the accompanying condensed consolidated statements of income. This non-recurring fair value measurement was categorized as Level 3, as significant unobservable inputs were used in the valuation analysis. Key assumptions used in the valuation include forecasts of revenue and expenses over an extended period of time, customer retention rates, tax rates, and estimated costs of debt and equity capital to discount the projected cash flows. Certain of these assumptions involve significant judgment, are based on management’s estimate of current and forecasted market conditions and are sensitive and susceptible to change, therefore, further disruptions in the business could result in additional amounts becoming impaired.
Estimated future amortization expense of intangible assets with finite lives as of September 30, 2015 is as follows (in thousands): 
Year ending December 31,
Amount

2015 (remaining three months)
$
27,251

2016
98,586

2017
74,536

2018
62,561

2019
43,012

Thereafter
60,102

     Total
$
366,048


20



9. SEGMENT INFORMATION
The Enterprise and Service Provider and the Mobility Apps business units constitute the Company’s two reportable segments. The Company does not engage in intercompany revenue transfers between segments. The Company’s chief operating decision maker (“CODM”) evaluates the Company’s performance based primarily on profitability from its Enterprise and Service Provider and Mobility Apps products. Segment profit for each segment includes certain research and development, sales, marketing and services and general and administrative expenses directly attributable to the segment as well as other corporate costs allocated to the segment and excludes certain expenses that are managed outside of the reportable segments. Costs excluded from segment profit primarily consist of certain restructuring charges, stock-based compensation costs, charges or benefits related to significant litigation that are not anticipated to be ongoing costs, amortization of product related intangible assets, amortization and impairment of other intangible assets, net interest and other expense, net. Accounting policies of the Company’s segments are the same as its consolidated accounting policies.
Net revenues and segment profit, classified by the Company’s two reportable segments were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net revenues:
 
 
 
 
 
 
 
Enterprise and Service Provider
$
622,513

 
$
593,741

 
$
1,833,126

 
$
1,808,209

Mobility Apps
190,757

 
165,253

 
537,705

 
483,164

Consolidated
$
813,270

 
$
758,994

 
$
2,370,831

 
$
2,291,373

Segment profit(1):
 
 
 
 
 
 
 
Enterprise and Service Provider
$
190,372

 
$
131,409

 
$
497,351

 
$
394,536

Mobility Apps
22,901

 
27,402

 
60,202

 
92,333

Unallocated expenses(2):
 
 
 
 
 
 
 
Amortization and impairment
of intangible assets
(97,038
)
 
(33,915
)
 
(154,931
)
 
(135,515
)
Patent litigation charge

 
(20,727
)
 

 
(20,727
)
Other

 

 
982

 

Restructuring
(13,766
)
 
(3,124
)
 
(62,251
)
 
(17,285
)
Net interest and other expense, net
(10,440
)
 
(10,374
)
 
(37,997
)
 
(16,897
)
Stock-based compensation
(38,671
)
 
(42,449
)
 
(103,674
)
 
(128,440
)
Consolidated income before income taxes
$
53,358

 
$
48,222

 
$
199,682

 
$
168,005

 
 
(1)
The Company revised its methodology for allocating certain corporate costs within General and administrative expenses to more closely align these costs to the employees directly utilizing the related services within each of its reporting segments, thereby impacting Segment profit for the nine months ended September 30, 2015. Accordingly, the adjusted Segment profit for the Enterprise and Service Provider and Mobility Apps segments is $132.1 million and $15.0 million, respectively for the three months ended March 31, 2015 and $174.9 million and $22.3 million, respectively for the three months ended June 30, 2015. This change in presentation does not affect the Company's consolidated financial position, results from operations or cash flows.
(2)
Represents expenses presented to management on a consolidated basis only and not allocated to the operating segments.

21



Revenues by Product Grouping
Revenues by product grouping for the Company’s Enterprise and Service Provider and Mobility Apps business units were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net revenues:
 
 
 
 
 
 
 
Enterprise and Service Provider
 
 
 
 
 
 
 
Workspace Services revenues(1)
$
396,167

 
$
392,875

 
$
1,193,178

 
$
1,170,103

Delivery Networking revenues(2)
187,447

 
155,388

 
521,488

 
501,231

Professional services(3)
36,676

 
42,322

 
110,576

 
126,775

Other
2,223

 
3,156

 
7,884

 
10,100

Total Enterprise and Service Provider revenues
622,513

 
593,741

 
1,833,126

 
1,808,209

Mobility Apps revenues
190,757

 
165,253

 
537,705

 
483,164

Total net revenues
$
813,270

 
$
758,994

 
$
2,370,831

 
$
2,291,373

 
 
(1)
Workspace Services revenues are primarily comprised of sales from the Company’s windows app delivery products, which include XenDesktop and XenApp, and the Company's mobile app delivery products, which include XenMobile and related license updates and maintenance and support.
(2)
Delivery Networking revenues primarily include NetScaler, ByteMobile Smart Capacity and CloudBridge products and related license updates and maintenance and support.
(3)
Professional services revenues are primarily comprised of revenues from consulting services and product training and certification services.
Revenues by Geographic Location
The following table presents revenues by segment and geographic location, for the following periods (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net revenues:
 
 
 
 
 
 
 
Enterprise and Service Provider
 
 
 
 
 
 
 
Americas
$
345,417

 
$
318,180

 
$
1,005,967

 
$
977,166

EMEA
206,377

 
202,557

 
616,558

 
610,254

Asia-Pacific
70,719

 
73,004

 
210,601

 
220,789

Total Enterprise and Service Provider revenues
622,513

 
593,741

 
1,833,126

 
1,808,209

Mobility Apps
 
 
 
 
 
 
 
Americas
160,079

 
137,031

 
452,672

 
400,580

EMEA
24,480

 
22,407

 
67,843

 
65,780

Asia-Pacific
6,198

 
5,815

 
17,190

 
16,804

Total Mobility Apps revenues
190,757

 
165,253

 
537,705

 
483,164

Total net revenues
$
813,270

 
$
758,994

 
$
2,370,831

 
$
2,291,373

10. CONVERTIBLE SENIOR NOTES
Convertible Notes Offering
During 2014, the Company completed a private placement of approximately $1.44 billion principal amount of 0.500% Convertible Notes due 2019. The net proceeds from this offering were approximately $1.42 billion, after deducting the initial purchasers’ discounts and commissions and the estimated offering expenses payable by the Company. The Company used approximately $82.6 million of the net proceeds to pay the cost of the Bond Hedges described below (after such cost was partially offset by the proceeds to the Company from the Warrant Transactions described below). The Company used the

22



remainder of the net proceeds from the offering and a portion of its existing cash and investments to purchase an aggregate of approximately $1.5 billion of its common stock, as authorized under its share repurchase program. The Company used approximately $101.0 million to purchase shares of common stock from certain purchasers of the Convertible Notes in privately negotiated transactions concurrently with the closing of the offering, and the remaining $1.4 billion to purchase additional shares of common stock through an Accelerated Share Repurchase ("ASR") which the Company entered into with Citibank, N.A. (the “ASR Counterparty”) on April 25, 2014 (the “ASR Agreement”).
The Convertible Notes are governed by the terms of an indenture, dated as of April 30, 2014 (the “Indenture”), between the Company and Wilmington Trust, National Association, as trustee (the “Trustee”). The Convertible Notes are the senior unsecured obligations of the Company and bear interest at a rate of 0.500% per annum, payable semi-annually in arrears on April 15 and October 15 of each year. The Convertible Notes will mature on April 15, 2019, unless earlier repurchased or converted. Upon conversion, the Company will pay cash up to the aggregate principal amount of the Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, in respect of the remainder, if any, of the Company’s conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted. As of September 30, 2015, none of the conditions allowing holders of the Notes to convert had been met.
The conversion rate for the Convertible Notes is 11.1111 shares of common stock per $1,000 principal amount of Convertible Notes, which corresponds to a conversion price of approximately $90.00 per share of common stock. The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of certain stock dividends on common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, the payment of cash dividends and certain issuer tender or exchange offers.
The Company may not redeem the Convertible Notes prior to the maturity date and no “sinking fund” is provided for the Convertible Notes, which means that the Company is not required to periodically redeem or retire the Convertible Notes. Upon the occurrence of certain fundamental changes involving the Company, holders of the Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes in principal amounts of $1,000 or an integral multiple thereof at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
In accounting for the issuance of the Convertible Notes, the Company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Convertible Notes as a whole. The excess of the principal amount of the liability component over its carrying amount ("debt discount") is amortized to interest expense over the term of the Convertible Notes using the effective interest method with an effective interest rate of 3.0 percent per annum. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the Convertible Note issuance, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Issuance costs attributable to the $1.3 billion liability component are being amortized to expense over the term of the Convertible Notes, and issuance costs attributable to the $162.9 million equity component are included along with the equity component in stockholders' equity. Additionally, a deferred tax liability of $8.2 million related to a portion of the equity component transaction costs which are deductible for tax purposes is included in Other liabilities in the accompanying condensed consolidated balance sheets.
The Convertible Notes consist of the following (in thousands):
 
September 30, 2015
Liability component
 
     Principal
$
1,437,500

     Less: note discount
(120,608
)
Net carrying amount
1,316,892

 
 
Equity component *
$
162,869

* Recorded in the condensed consolidated balance sheet within additional paid-in capital.

23




The following table includes total interest expense recognized related to the Convertible Notes (in thousands):
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2015
2014
2015
2014
Contractual interest expense
$
1,797

$
1,797

$
5,391

$
2,995

Amortization of debt issuance costs
997

922

2,971

1,533

Amortization of debt discount
8,039

7,802

23,939

12,971

 
$
10,833

$
10,521

$
32,301

$
17,499

See Note 6 to the Company's condensed consolidated financial statements for fair value disclosures related to the Company's Convertible Notes.
Convertible Note Hedge and Warrant Transactions
In connection with the pricing of the Convertible Notes, the Company entered into convertible note hedge transactions relating to approximately 16.0 million shares of common stock (the "Bond Hedges"), with JPMorgan Chase Bank, National Association, London Branch; Goldman, Sachs & Co.; Bank of America, N.A.; and Royal Bank of Canada (the “Option Counterparties”) and also entered into separate warrant transactions (the "Initial Warrant Transactions") with each of the Option Counterparties relating to approximately 16.0 million shares of common stock. 
The Bond Hedges are generally expected to reduce the potential dilution upon conversion of the Convertible Notes and/or offset any payments in cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, that the Company is required to make in excess of the principal amount of the Convertible Notes upon conversion of any Convertible Notes, as the case may be, in the event that the market price per share of common stock, as measured under the terms of the Bond Hedges, is greater than the strike price of the Bond Hedges, which initially corresponds to the conversion price of the Convertible Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Convertible Notes. The Warrant Transactions will separately have a dilutive effect to the extent that the market value per share of common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants issued pursuant to the Warrant Transactions (the “Warrants”). The initial strike price of the Warrants is $120.00 per share. The Warrants will expire in ratable portions on a series of expiration dates commencing after the maturity of the Convertible Notes. The Bond Hedges and Warrants are not marked to market. The value of the Bond Hedges and Warrants were initially recorded in stockholders' equity and continue to be classified within stockholders' equity.
Aside from the initial payment of a premium to the Option Counterparties under the Bond Hedges, which amount is partially offset by the receipt of a premium under the Warrant Transactions, the Company is not required to make any cash payments to the Option Counterparties under the Bond Hedges and will not receive any proceeds if the Warrants are exercised.
11. CREDIT FACILITY
Effective January 7, 2015, the Company entered into a Credit Facility with a group of financial institutions (the “Lenders”). The Credit Facility provides for a five year revolving line of credit in the aggregate amount of $250.0 million, subject to continued covenant compliance. The Company may elect to increase the revolving credit facility by up to $250.0 million if existing or new lenders provide additional revolving commitments in accordance with the terms of the Credit Agreement. A portion of the revolving line of credit (i) in the aggregate amount of $25.0 million may be available for issuances of letters of credit and (ii) in the aggregate amount of $10.0 million may be available for swing line loans, as part of, not in addition to, the aggregate revolving commitments. The Credit Facility bears interest at the LIBOR plus 1.10% and adjusts in the range of 1.00% to 1.30% above LIBOR based on the ratio of the Company’s total debt to its adjusted earnings before interest, taxes, depreciation, amortization and certain other items (“EBITDA”) as defined in the agreement. In addition, the Company is required to pay a quarterly facility fee ranging from 0.125% to 0.20% of the aggregate revolving commitments under the Credit Facility and based on the ratio of the Company’s total debt to the Company’s consolidated EBITDA. The weighted average interest rate for the period that amounts were outstanding under the Credit Facility was 1.82%. As of September 30, 2015, there were no amounts outstanding under the Credit Facility.
The Credit Agreement contains certain financial covenants that require the Company to maintain a consolidated leverage ratio of not more than 3.5:1.0 and a consolidated interest coverage ratio of not less than 3.0:1.0. In addition, the Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the ability of the Company to grant liens, merge, dissolve or consolidate, dispose of all or substantially all of its assets, pay dividends during the

24



existence of a default under the Credit Agreement, change its business and incur subsidiary indebtedness, in each case subject to customary exceptions for a credit facility of this size and type. The Company was in compliance with these covenants as of September 30, 2015.
12. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives Designated as Hedging Instruments
As of September 30, 2015, the Company’s derivative assets and liabilities primarily resulted from cash flow hedges related to its forecasted operating expenses transacted in local currencies. A substantial portion of the Company’s overseas expenses are and will continue to be transacted in local currencies. To protect against fluctuations in operating expenses and the volatility of future cash flows caused by changes in currency exchange rates, the Company has established a program that uses foreign exchange forward contracts to hedge its exposure to these potential changes. The terms of these instruments, and the hedged transactions to which they relate, generally do not exceed 12 months.
Generally, when the dollar is weak, foreign currency denominated expenses will be higher, and these higher expenses will be partially offset by the gains realized from the Company’s hedging contracts. Conversely, if the dollar is strong, foreign currency denominated expenses will be lower. These lower expenses will in turn be partially offset by the losses incurred from the Company’s hedging contracts. The change in the derivative component in Accumulated other comprehensive loss includes unrealized gains or losses that arose from changes in market value of the effective portion of derivatives that were held during the period, and gains or losses that were previously unrealized but have been recognized in the same line item as the forecasted transaction in current period net income due to termination or maturities of derivative contracts. This reclassification has no effect on total comprehensive income or equity.
The total cumulative unrealized loss on cash flow derivative instruments was $2.6 million at September 30, 2015 and the total cumulative unrealized loss on cash flow derivative instruments was $8.3 million at December 31, 2014, and is included in Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. See Note 13 for more information related to comprehensive income. The net unrealized loss as of September 30, 2015 is expected to be recognized in income over the next 12 months at the same time the hedged items are recognized in income.
Derivatives not Designated as Hedging Instruments
A substantial portion of the Company’s overseas assets and liabilities are and will continue to be denominated in local currencies. To protect against fluctuations in earnings caused by changes in currency exchange rates when remeasuring the Company’s balance sheet, it utilizes foreign exchange forward contracts to hedge its exposure to this potential volatility.
These contracts are not designated for hedge accounting treatment under the authoritative guidance. Accordingly, changes in the fair value of these contracts are recorded in Other expense, net.

25



Fair Values of Derivative Instruments
 
Asset Derivatives
 
Liability Derivatives
 
(In thousands)
 
September 30, 2015
 
December 31, 2014
 
September 30, 2015
 
December 31, 2014
Derivatives Designated as
Hedging Instruments
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Foreign currency forward contracts
Prepaid
expenses
and other
current
assets
 
$462
 
Prepaid
expenses
and other
current
assets
 
$435
 
Accrued
expenses
and other
current
liabilities
 
$3,297
 
Accrued
expenses
and other
current
liabilities
 
$9,364
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset Derivatives
 
Liability Derivatives
 
(In thousands)
 
September 30, 2015
 
December 31, 2014
 
September 30, 2015
 
December 31, 2014
Derivatives Not Designated as
Hedging Instruments
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Foreign currency forward contracts
Prepaid
expenses
and other
current
assets
 
$729
 
Prepaid
expenses
and other
current
assets
 
$771
 
Accrued
expenses
and other
current
liabilities
 
$486
 
Accrued
expenses
and other
current
liabilities
 
$328

The Effect of Derivative Instruments on Financial Performance
 
For the Three Months Ended September 30,
 
(In thousands)
Derivatives in Cash Flow
Hedging Relationships
Amount of Loss Recognized in Other
Comprehensive (Loss)
Income
(Effective Portion)
 
Location of (Loss)/Gain Reclassified
from Accumulated Other
Comprehensive Loss into
Income
(Effective Portion)
 
Amount of (Loss)/Gain Reclassified from
Accumulated Other 
Comprehensive Loss
(Effective Portion)
 
2015
 
2014
 
 
 
2015
 
2014
Foreign currency forward contracts
$
(554
)
 
$
(8,309
)
 
Operating expenses
 
$
(1,794
)
 
$
1,500

 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30,
 
(In thousands)
Derivatives in Cash Flow
Hedging Relationships
Amount of Gain/(Loss) Recognized in Other
Comprehensive (Loss)
Income
(Effective Portion)
 
Location of (Loss)/Gain Reclassified
from Accumulated Other
Comprehensive Loss into
Income
(Effective Portion)
 
Amount of (Loss)/Gain Reclassified from
Accumulated Other 
Comprehensive Loss
(Effective Portion)
 
2015
 
2014
 
 
 
2015
 
2014
Foreign currency forward contracts
$
5,770

 
$
(8,645
)
 
Operating expenses
 
$
(11,462
)
 
$
4,448

There was no material ineffectiveness in the Company’s foreign currency hedging program in the periods presented.
 

26



 
For the Three Months Ended September 30,
 
(In thousands)
Derivatives Not Designated as Hedging Instruments
Location of Gain Recognized in Income on
Derivative
 
Amount of Gain Recognized in Income on Derivative
 
 
 
2015
 
2014
Foreign currency forward contracts
Other expense, net
 
$
1,238

 
$
2,626

 
 
 
 
 
 
 
For the Nine Months Ended September 30,
 
(In thousands)
Derivatives Not Designated as Hedging Instruments
Location of Gain Recognized in Income on
Derivative
 
Amount of Gain Recognized in Income on Derivative
 
 
 
2015
 
2014
Foreign currency forward contracts
Other expense, net
 
$
1,727

 
$
1,064

Outstanding Foreign Currency Forward Contracts
As of September 30, 2015, the Company had the following net notional foreign currency forward contracts outstanding (in thousands):
Foreign Currency
Currency
Denomination
Australian Dollar
AUD 10,332
Brazilian Real
BRL 5,100
Pounds Sterling
GBP 8,550
Canadian Dollar
CAD 2,600
Chinese Yuan Renminbi
CNY 12,217
Danish Krone
DKK 21,300
Euro
EUR 6,300
Hong Kong Dollar
HKD 51,268
Indian Rupee
INR 615,751
Japanese Yen
JPY 731,342
Singapore Dollar
SGD 11,615
Swiss Franc
CHF 22,700
13. COMPREHENSIVE INCOME
The changes in Accumulated other comprehensive loss by component, net of tax, are as follows:
 
Foreign currency
 
Unrealized gain (loss) on available-for-sale securities
 
Unrealized (loss) gain on derivative instruments
 
Other comprehensive loss on pension liability
 
Total
 
(In thousands)
Balance at December 31, 2014
$
(16,346
)
 
$
(990
)
 
$
(8,345
)
 
$
(11,109
)
 
$
(36,790
)
Other comprehensive income before reclassifications

 
1,392

 
(5,692
)
 

 
(4,300
)
Amounts reclassified from accumulated other comprehensive loss

 
164

 
11,462

 

 
11,626

Net current period other comprehensive income

 
1,556

 
5,770

 

 
7,326

Balance at September 30, 2015
$
(16,346
)
 
$
566

 
$
(2,575
)
 
$
(11,109
)
 
$
(29,464
)
Income tax expense or benefit allocated to each component of other comprehensive (loss) income is not material.

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Reclassifications out of Accumulated other comprehensive loss are as follows:
 
 
For the Three Months Ended September 30, 2015
 
 
(In thousands)
Details about accumulated other comprehensive loss components
 
Amount reclassified from accumulated other comprehensive loss, net of tax
 
Affected line item in the Condensed Consolidated Statements of Income
Unrealized net losses on available-for-sale securities
 
$
232

 
Other expense, net
Unrealized net losses on cash flow hedges
 
1,794

 
Operating expenses *
 
 
$
2,026

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2015
 
 
(In thousands)
Details about accumulated other comprehensive loss components
 
Amount reclassified from accumulated other comprehensive loss, net of tax
 
Affected line item in the Condensed Consolidated Statements of Income
Unrealized net losses on available-for-sale securities
 
$
164

 
Other expense, net
Unrealized net losses on cash flow hedges
 
11,462

 
Operating expenses *
 
 
$
11,626

 
 
* Operating expenses amounts allocated to Research and development, Sales, marketing and services, and General and administrative are not individually significant.
14. INCOME TAXES
The Company’s net unrecognized tax benefits totaled approximately $48.3 million and $66.9 million as of September 30, 2015 and December 31, 2014, respectively. All amounts included in the balance at September 30, 2015 for tax positions would affect the annual effective tax rate if recognized. The Company has $0.5 million accrued for the payment of interest and penalties as of September 30, 2015.
The Company and one or more of its subsidiaries are subject to federal income taxes in the United States, as well as income taxes of multiple state and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years prior to 2013. With few exceptions, the Company is no longer subject to state and local tax or non-U.S. income tax examinations by tax authorities for years prior to 2011.
During the quarter ended June 30, 2015, the Internal Revenue Service (“IRS”) concluded its field examination of the Company’s 2011 and 2012 tax years and issued proposed adjustments primarily related to transfer pricing and the research and development tax credit. In June 2015, the Company finalized its tax deficiency calculations and formally closed the audit with the IRS for the 2011 and 2012 tax years. As a result, the Company recognized a net tax benefit of $20.3 million during the second quarter of 2015 related to the settlement.
In the ordinary course of global business, there are transactions for which the ultimate tax outcome is uncertain; thus, judgment is required in determining the worldwide provision for income taxes. The Company provides for income taxes on transactions based on its estimate of the probable liability. The Company adjusts its provision as appropriate for changes that impact its underlying judgments. Changes that impact provision estimates include such items as jurisdictional interpretations on tax filing positions based on the results of tax audits and general tax authority rulings. Due to the evolving nature of tax rules combined with the large number of jurisdictions in which the Company operates, it is possible that the Company’s estimates of its tax liability and the realizability of its deferred tax assets could change in the future, which may result in additional tax liabilities and adversely affect the Company’s results of operations, financial condition and cash flows.
At September 30, 2015, the Company had approximately $152.0 million in net deferred tax assets. The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company reviews deferred tax assets periodically for recoverability and makes estimates and judgments regarding the expected geographic sources of taxable income and gains from investments, as well as tax planning strategies in assessing the need for a valuation allowance. During the quarter ended September 30, 2015, the Company did not record a change in the Company's valuation allowance.

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The Company is required to estimate its income taxes in each of the jurisdictions in which it operates as part of the process of preparing its condensed consolidated financial statements. The Company maintains certain strategic management and operational activities in overseas subsidiaries and its foreign earnings are taxed at rates that are generally lower than in the United States. The Company does not expect to remit earnings from its foreign subsidiaries. The Company’s effective tax rate was approximately (4.8)% and 1.4% for the three months ended September 30, 2015 and 2014, respectively and 5.8% and 6.9% for the nine months ended September 30, 2015 and 2014, respectively. The decrease in the effective tax rate when comparing the three months ended September 30, 2015 to the three months ended September 30, 2014 was primarily due to a change in the mix of income between the Company's U.S. and foreign operations driven by impairment charges of certain domestic intangible assets from the acquisition of ByteMobile recorded in the third quarter of 2015. The decrease in the effective tax rate when comparing the nine months ended September 30, 2015 to the nine months ended September 30, 2014 was due to the impact of settling the IRS examination for the tax years 2011 and 2012 that closed during the three months ended June 30, 2015, and the impact of the intangible asset impairment recorded in the three months ended September 30, 2015.
The Company’s effective tax rate generally differs from the U.S. federal statutory rate of 35% due primarily to lower tax rates on earnings generated by the Company’s foreign operations that are taxed primarily in Switzerland. The Company has not provided for U.S. taxes for those earnings because it plans to reinvest all of those earnings indefinitely outside the United States. From time to time, there may be other items that impact our effective tax rate, such as the items specific to the current period discussed above.
15. TREASURY STOCK
Stock Repurchase Program
The Company’s Board of Directors authorized an ongoing stock repurchase program with a total repurchase authority granted to the Company of $5.9 billion, of which $500.0 million was approved in September 2015. The Company may use the approved dollar authority to repurchase stock at any time until the approved amount is exhausted. The objective of the Company’s stock repurchase program is to improve stockholders’ returns. At September 30, 2015, approximately $336.8 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock. A portion of the funds used to repurchase stock over the course of the program was provided by net proceeds from the Convertible Notes offering, as well as proceeds from employee stock option exercises and the related tax benefit. The Company is authorized to make open market purchases of its common stock using general corporate funds through open market purchases, pursuant to a Rule 10b5-1 plan or in privately negotiated transactions.
During the three months ended September 30, 2015, the Company expended approximately $279.5 million on open market purchases under the stock repurchase program, repurchasing 3,895,283 shares of outstanding common stock at an average price of $71.75. During the nine months ended September 30, 2015, the Company expended approximately $451.6 million on open market purchases under the stock repurchase program, repurchasing 6,588,783 shares of outstanding common stock at an average price of $68.54. Of the amount expended, $53.6 million had not yet settled as of September 30, 2015 and therefore was excluded from the amount reflected in Stock repurchases, net in the Condensed Consolidated Statements of Cash Flows as it is considered a non-cash item. In October 2015, the Company repurchased an additional 3.6 million shares under the stock repurchase program.
During the second quarter of 2014, the Company used a portion of the net proceeds from the Convertible Notes offering and existing cash and investments to repurchase an aggregate of approximately $1.5 billion of its common stock as authorized under the stock repurchase program. Of this $1.5 billion, the Company used approximately $101.0 million to purchase 1.7 million shares from certain purchasers of the Convertible Notes in privately negotiated transactions concurrently with the closing of the offering, and the remaining $1.4 billion to purchase additional shares of common stock under an Accelerated Share Repurchase ("ASR") which the Company entered into with Citibank, N.A. ("Citibank") on April 25, 2014 (the "ASR Agreement"). Under the ASR agreement, the Company paid $1.4 billion to Citibank upon consummation of the ASR and received, in the aggregate, approximately 21.8 million shares of its common stock from Citibank, including approximately 2.6 million shares delivered in October 2014 in final settlement in connection with Citibank's election to accelerate the ASR. The total number of shares of common stock that the Company repurchased under the ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the ASR Agreement, less a discount.
During the three and nine months ended September 30, 2014, the Company expended approximately $99.9 million on open market purchases under the stock repurchase program, repurchasing 1,434,400 shares of outstanding common stock at an average price of $69.71.
Shares for Tax Withholding
During the three months ended September 30, 2015, the Company withheld 55,963 shares from stock units that vested, totaling $4.1 million, to satisfy minimum tax withholding obligations that arose on the vesting of stock units. During the nine

29



months ended September 30, 2015, the Company withheld 501,785 shares from stock units that vested, totaling $32.4 million, to satisfy minimum tax withholding obligations that arose on the vesting of stock units. During the three months ended September 30, 2014, the Company withheld 75,797 shares from stock units that vested, totaling $4.9 million, to satisfy minimum tax withholding obligations that arose on the vesting of stock units. During the nine months ended September 30, 2014, the Company withheld 470,567 shares from stock units that vested, totaling $27.8 million, to satisfy minimum tax withholding obligations that arose on the vesting of stock units. These shares are reflected as treasury stock in the Company’s condensed consolidated balance sheets and the related cash outlays do not reduce the Company’s total stock repurchase authority.
16. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain office space and equipment under various operating leases. In addition to rent, the leases require the Company to pay for taxes, insurance, maintenance and other operating expenses. Certain of these leases contain stated escalation clauses while others contain renewal options. The Company recognizes rent expense on a straight-line basis over the term of the lease, excluding renewal periods, unless renewal of the lease is reasonably assured.
Legal Matters
The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the Company's views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Company's accrued liabilities would be recorded in the period in which such determination is made. For the Other Matters referenced below, the amount of liability is not probable or the amount cannot be reasonably estimated; and, therefore, accruals have not been made. In addition, in accordance with the relevant authoritative guidance, for matters in which the likelihood of material loss is at least reasonably possible, the Company provides disclosure of the possible loss or range of loss. If a reasonable estimate cannot be made, however, the Company will provide disclosure to that effect.
In April 2014, John Calma, ostensibly on behalf of the Company, filed a shareholder derivative complaint against certain of the directors of the Company (and the Company as a nominal defendant) in the Court of Chancery of the State of Delaware. The complaint alleges breach of fiduciary duty, waste of corporate assets and unjust enrichment related to stock awards that the directors received under the Company's director compensation program. The complaint seeks among other things the recovery of monetary damages and other relief for damages allegedly caused to the Company. A reasonable estimate cannot be made at this time. The Company believes that its directors and the Company have meritorious defenses to these allegations and that it is not reasonably possible that the ultimate outcome of this suit will materially and adversely affect the Company's business, financial condition, results of operations or cash flows.
Due to the nature of the Company's business, the Company is subject to patent infringement claims, including current suits against it or one or more of its wholly-owned subsidiaries alleging infringement by various Company products and services (the "Other Matters"). The Company believes that it has meritorious defenses to the allegations made in its pending cases and intends to vigorously defend these lawsuits; however, it is currently unable to determine the ultimate outcome of these or similar matters. In addition, the Company is a defendant in various litigation matters generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcomes of these cases, the Company believes that it is not reasonably possible that the ultimate outcomes will materially and adversely affect its business, financial position, results of operations or cash flows.
Guarantees
The authoritative guidance requires certain guarantees to be recorded at fair value and requires a guarantor to make disclosures, even when the likelihood of making any payments under the guarantee is remote. For those guarantees and indemnifications that do not fall within the initial recognition and measurement requirements of the authoritative guidance, the Company must continue to monitor the conditions that are subject to the guarantees and indemnifications, as required under existing generally accepted accounting principles, to identify if a loss has been incurred. If the Company determines that it is probable that a loss has been incurred, any such estimable loss would be recognized. The initial recognition and measurement requirements do not apply to the provisions contained in the majority of the Company’s software license agreements that indemnify licensees of the Company’s software from damages and costs resulting from claims alleging that the Company’s software infringes the intellectual property rights of a third party. The Company has not made payments pursuant to these provisions. The Company has not identified any losses that are probable under these provisions and, accordingly, the Company has not recorded a liability related to these indemnification provisions.

17. RESTRUCTURING
2015 Restructuring Program
On January 28, 2015, the Company announced the implementation of a restructuring program designed to increase strategic focus and operational efficiency and began to execute against the program in February 2015. As a result, the Company eliminated approximately 700 full-time positions in the first half of 2015. During the three and nine months ended September 30, 2015, the Company incurred $14.0 million and $60.5 million, respectively, primarily related to employee severance arrangements and the consolidation of leased facilities. It is anticipated that the aggregate total pre-tax restructuring charges will be in the range of $66.0 million to $70.0 million. Included in these pre-tax charges are approximately $49.0 million to $51.0 million related to employee severance arrangements and approximately $17.0 million to $19.0 million related to the consolidatio