10-Q 1 ctxs09-30x201810xq.htm 10-Q Document


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, 2018
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
x  Large accelerated filer
  
o    Accelerated filer
o    Non-accelerated filer
  
o    Smaller reporting company
 
 
o    Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 26, 2018, there were 134,761,787 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, 2018
CONTENTS

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

2



PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
September 30, 2018
 
December 31, 2017
 
(Unaudited)
 
(Derived from audited financial statements)
 
(In thousands, except par value)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,205,182

 
$
1,115,130

Short-term investments, available-for-sale
628,696

 
632,516

Accounts receivable, net of allowances of $5,106 and $4,645 at September 30, 2018 and December 31, 2017, respectively
413,509

 
712,535

Inventories, net
21,386

 
13,912

Prepaid expenses and other current assets
229,188

 
147,330

Total current assets
2,497,961

 
2,621,423

Long-term investments, available-for-sale
657,727

 
984,328

Property and equipment, net
247,544

 
252,932

Goodwill
1,661,264

 
1,614,494

Other intangible assets, net
128,297

 
141,952

Deferred tax assets, net
127,703

 
152,362

Other assets
116,031

 
52,685

Total assets
$
5,436,527

 
$
5,820,176

Liabilities, Temporary Equity and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
71,110

 
$
66,893

Accrued expenses and other current liabilities
293,883

 
277,679

Income taxes payable
29,918

 
34,033

Current portion of convertible notes
1,415,970

 

Current portion of deferred revenues
1,212,280

 
1,308,474

Total current liabilities
3,023,161

 
1,687,079

Long-term portion of deferred revenues
467,722

 
555,769

Long-term debt
741,551

 
2,127,474

Long-term income taxes payable
286,695

 
335,457

Other liabilities
144,892

 
121,936

Commitments and contingencies

 

Temporary equity from convertible notes
19,286

 

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; 307,981 and 305,751 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
308

 
306

Additional paid-in capital
5,193,928

 
4,883,670

Retained earnings
4,052,211

 
3,509,484

Accumulated other comprehensive loss
(18,291
)
 
(10,806
)
 
9,228,156

 
8,382,654

Less - common stock in treasury, at cost (173,322 and 162,044 shares at September 30, 2018 and December 31, 2017, respectively)
(8,474,936
)
 
(7,390,193
)
Total stockholders' equity
753,220

 
992,461

Total liabilities, temporary equity and stockholders' equity
$
5,436,527

 
$
5,820,176

See accompanying notes.

3



CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except per share information)
Revenues:
 
 
 
 
 
 
 
Subscription
$
111,539

 
$
81,373

 
$
325,493

 
$
225,060

Product and license
170,952

 
168,716

 
523,707

 
529,990

Support and services
449,985

 
440,836

 
1,322,833

 
1,291,779

Total net revenues
732,476

 
690,925

 
2,172,033

 
2,046,829

Cost of net revenues:
 
 
 
 
 
 
 
Cost of subscription, support and services
64,717

 
61,096

 
195,625

 
184,922

Cost of product and license revenues
27,571

 
27,277

 
91,150

 
89,723

Amortization of product related intangible assets
11,629

 
17,564

 
34,177

 
43,062

Total cost of net revenues
103,917

 
105,937

 
320,952

 
317,707

Gross margin
628,559

 
584,988

 
1,851,081

 
1,729,122

Operating expenses:
 
 
 
 
 
 
 
Research and development
111,557

 
107,113

 
323,050

 
316,478

Sales, marketing and services
262,562

 
249,499

 
800,505

 
764,564

General and administrative
86,084

 
79,378

 
227,151

 
237,033

Amortization of other intangible assets
4,063

 
3,733

 
11,748

 
11,071

Restructuring
(486
)
 
8,552

 
13,138

 
18,678

Total operating expenses
463,780

 
448,275

 
1,375,592

 
1,347,824

Income from operations
164,779

 
136,713

 
475,489

 
381,298

Interest income
10,896

 
7,873

 
29,029

 
19,045

Interest expense
(19,962
)
 
(11,726
)
 
(60,840
)
 
(35,286
)
Other income (expense), net
3,702

 
981

 
(1,847
)
 
3,166

Income from continuing operations before income taxes
159,415

 
133,841

 
441,831

 
368,223

Income tax expense
558

 
7,121

 
31,882

 
62,349

Income from continuing operations
158,857

 
126,720

 
409,949

 
305,874

(Loss) from discontinued operations, net of income taxes



 

 
(42,704
)
Net income
$
158,857

 
$
126,720

 
$
409,949

 
$
263,170

Basic earnings (loss) per share:
 
 
 
 
 
 
 
Income from continuing operations
$
1.18

 
$
0.84

 
$
3.00

 
$
2.01

(Loss) from discontinued operations

 

 

 
(0.28
)
Basic net earnings per share
$
1.18

 
$
0.84

 
$
3.00

 
$
1.73

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Income from continuing operations
$
1.08

 
$
0.82

 
$
2.80

 
$
1.96

(Loss) from discontinued operations

 

 

 
(0.28
)
Diluted net earnings per share:
$
1.08

 
$
0.82

 
$
2.80

 
$
1.68

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
135,055

 
151,156

 
136,752

 
151,896

Diluted
147,568

 
154,627

 
146,554


156,384


See accompanying notes.

4



CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Net income
$
158,857

 
$
126,720

 
$
409,949

 
$
263,170

Other comprehensive income:
 
 
 
 


 


Available for sale securities:
 
 
 
 


 


Change in net unrealized gains (losses)
816

 
60

 
(3,394
)
 
1,500

Less: reclassification adjustment for net losses (gains) included in net income
62

 
120

 
1,307

 
(340
)
Net change (net of tax effect)
878

 
180

 
(2,087
)
 
1,160

Loss on pension liability

 
272

 

 
263

Cash flow hedges:
 
 
 
 
 
 
 
Change in unrealized (losses) gains
(1,636
)
 
776

 
(4,367
)
 
4,663

Less: reclassification adjustment for net losses (gains) included in net income
1,185

 
(1,116
)
 
(1,031
)
 
551

Net change (net of tax effect)
(451
)
 
(340
)
 
(5,398
)
 
5,214

Other comprehensive (loss) income
427

 
112

 
(7,485
)
 
6,637

Comprehensive income
$
159,284

 
$
126,832

 
$
402,464

 
$
269,807


See accompanying notes.




5



CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
 
(In thousands)
Operating Activities
 
 
 
Net income
$
409,949

 
$
263,170

Loss from discontinued operations

 
42,704

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization and other
161,582

 
149,813

Stock-based compensation expense
144,306

 
127,219

Deferred income tax expense
2,508

 
32,367

Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies
7,226

 
(8,063
)
Other non-cash items
5,558

 
9,608

Total adjustments to reconcile net income to net cash provided by operating activities
321,180

 
310,944

Changes in operating assets and liabilities, net of the effects of acquisitions:
 
 
 
Accounts receivable
296,286

 
216,139

Inventories
(7,549
)
 
(3,350
)
Prepaid expenses and other current assets
(51,726
)
 
(15,836
)
Other assets
(17,540
)
 
(2,393
)
Income taxes, net
(83,273
)
 
(58,278
)
Accounts payable
2,945

 
(17,039
)
Accrued expenses and other current liabilities
40,503

 
(17,372
)
Deferred revenues
(85,072
)
 
(10,746
)
Other liabilities
3,233

 
2,645

Total changes in operating assets and liabilities, net of the effects of acquisitions
97,807

 
93,770

Net cash provided by operating activities of continuing operations
828,936

 
710,588

Net cash used in operating activities of discontinued operations

 
(56,070
)
Net cash provided by operating activities
828,936

 
654,518

Investing Activities
 
 
 
Purchases of available-for-sale investments
(435,876
)
 
(966,067
)
Proceeds from sales of available-for-sale investments
442,360

 
678,533

Proceeds from maturities of available-for-sale investments
320,259

 
377,719

Purchases of property and equipment
(54,289
)
 
(61,670
)
Cash paid for acquisitions, net of cash acquired
(65,983
)
 
(60,449
)
Cash paid for licensing agreements and technology
(2,140
)
 
(5,865
)
Other
1,399

 
490

Net cash provided by investing activities of continuing operations
205,730

 
(37,309
)
Net cash used in investing activities of discontinued operations

 
(3,891
)
Net cash provided by investing activities
205,730

 
(41,200
)
Financing Activities
 
 
 
Proceeds from issuance of common stock under stock-based compensation plans
164

 
2,094

Proceeds from credit facility

 
165,000

Repayment of credit facility

 
(125,000
)
Repayment of acquired debt
(5,674
)
 
(4,000
)
Stock repurchases, net
(881,153
)
 
(574,957
)
Cash paid for tax withholding on vested stock awards
(53,589
)
 
(71,179
)
Transfer of cash to GoTo Business resulting from the separation

 
(28,523
)
Net cash used in financing activities
(940,252
)
 
(636,565
)
Effect of exchange rate changes on cash and cash equivalents
(4,362
)
 
7,160

Change in cash and cash equivalents
90,052

 
(16,087
)
Cash and cash equivalents at beginning of period, including cash of discontinued operations of $0 and $120,861, respectively
1,115,130

 
956,956

Cash and cash equivalents at end of period
$
1,205,182

 
$
940,869

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, 2017.
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 and Japan ("APJ"). All significant transactions and balances between the Company and its subsidiaries have been eliminated in consolidation.
In these condensed consolidated financial statements, unless otherwise indicated, references to Citrix and the Company, refer to Citrix Systems, Inc. and its consolidated subsidiaries after giving effect to the spin-off of its GoTo family of service offerings (the "GoTo Business") in January 2017.
The Company's revenues are derived from sales of its Workspace Services solutions, Networking products, Content Collaboration offerings and related Support and services. The Company operates under one reportable segment. See Note 10 for more information on the Company's segment.
2. SIGNIFICANT ACCOUNTING POLICIES
During the first quarter of 2018, the Company adopted new accounting guidance related to revenue recognition, accounting for business combinations, income taxes and investments, each of which is described below. There have been no other significant changes in the Company’s accounting policies during the three and nine months ended September 30, 2018 as compared to the significant accounting policies described in its Annual Report on Form 10-K for the year ended December 31, 2017.
Recent Accounting Pronouncements
Revenue Recognition
In May 2014, the Financial Accounting Standards Board issued an accounting standard update ("ASC 606") on revenue recognition. The new guidance creates a single, principle-based model for revenue recognition that expands and improves disclosures about revenue. On January 1, 2018, the Company adopted the accounting standard update for revenue from contracts with customers on a modified retrospective basis, applying the practical expedient to all contracts that the Company had not completed as of January 1, 2018. The Company elected the modified retrospective method of adoption; and consequently, results for reporting periods beginning after January 1, 2018 are presented under the new revenue standard, while prior period amounts are not adjusted and continue to be reported under the revenue accounting literature in effect during those periods. The Company recorded a net increase to retained earnings of $130.7 million as of January 1, 2018 as a result of the transition, with the impact primarily related to the cumulative effect of a decrease in deferred revenue from the upfront recognition of term licenses and the general requirement to allocate the transaction price on a relative stand-alone selling price of $99.9 million, and an increase in contract assets of $7.3 million, the cumulative effect of a decrease in commission expense of $66.4 million, partially offset by an increase from the cumulative effect of the impact on deferred income taxes of $42.9 million.



7



The impact of adoption of ASC 606 to the Company’s condensed consolidated statements of income and balance sheets are as follows:
 
 
Three Months Ended September 30, 2018
 
 
As Reported
 
Balances without adoption of ASC 606
 
Effect of Change
Higher/(Lower)
 
 
(in thousands, except per share amounts)
Total net revenues
 
$
732,476

 
$
736,055

 
$
(3,579
)
Total cost of net revenues
 
103,917

 
103,739

 
178

Gross profit
 
628,559

 
632,316

 
(3,757
)
Total operating expenses
 
463,780

 
472,715

 
(8,935
)
Income from operations
 
164,779

 
159,601

 
5,178

Net income
 
$
158,857

 
$
154,513

 
$
4,344

 
 
 
 
 
 
 
Basic earnings per share
 
$
1.18

 
$
1.14

 
$
0.04

Diluted earnings per share
 
$
1.08

 
$
1.05

 
$
0.03

 
 
Nine Months Ended September 30, 2018
 
 
As Reported
 
Balances without adoption of ASC 606
 
Effect of Change
Higher/(Lower)
 
 
(in thousands, except per share amounts)
Total net revenues
 
$
2,172,033

 
$
2,185,299

 
$
(13,266
)
Total cost of net revenues
 
320,952

 
319,673

 
1,279

Gross profit
 
1,851,081

 
1,865,626

 
(14,545
)
Total operating expenses
 
1,375,592

 
1,398,446

 
(22,854
)
Income from operations
 
475,489

 
467,180

 
8,309

Net income
 
$
409,949

 
$
404,710

 
$
5,239

 
 
 
 
 
 
 
Basic earnings per share
 
$
3.00

 
$
2.96

 
$
0.04

Diluted earnings per share
 
$
2.80

 
$
2.76

 
$
0.04

 
 
As of September 30, 2018
 
 
As Reported
 
Balances without adoption of ASC 606
 
Effect of Change
Higher/(Lower)
 
 
(in thousands)
Prepaid and other current assets (1)
 
$
229,188

 
$
202,998

 
$
26,190

Other assets (2)
 
116,031

 
48,648

 
67,383

Deferred tax assets, net
 
127,703

 
159,181

 
(31,478
)
Total assets
 
$
5,436,527

 
$
5,374,432

 
$
62,095

 
 
 
 
 
 
 
Other liabilities (3)
 
144,892

 
131,807

 
13,085

Current portion of deferred revenues
 
1,212,280

 
1,260,727

 
(48,447
)
Long-term portion of deferred revenues
 
467,722

 
507,648

 
(39,926
)
Total liabilities
 
$
4,664,021

 
$
4,739,309

 
$
(75,288
)
 
 
 
 
 
 
 
Stockholders' Equity:
 
 
 
 
 

Retained earnings
 
$
4,052,211

 
$
3,914,828

 
$
137,383

(1) As reported primarily includes contract acquisition costs of $38.6 million. The balance without adoption of ASC 606 includes contract acquisition costs of $14.2 million.
(2) As reported primarily includes contract acquisition costs of $64.9 million.
(3) As reported and without ASC 606 includes deferred tax liabilities of $53.2 million.

8



Adoption of the standard had no impact to cash from or used in operating, financing, or investing activities on the Company’s condensed consolidated cash flows statements.
Accounting for Business Combinations
In January 2017, the Financial Accounting Standards Board issued an accounting standard update on the accounting for business combinations by clarifying the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The Company adopted the standard effective January 1, 2018. The adoption of this standard had no impact on the Company's condensed consolidated financial position, results of operations and cash flows.
Accounting for Income Taxes
In October 2016, the Financial Accounting Standards Board issued an accounting standard update on the accounting for income taxes, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transaction occurs as opposed to deferring tax consequences and amortizing them into future periods. A modified retrospective approach with a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption is required. The Company adopted the standard effective January 1, 2018. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial position, results of operations and cash flows.
Accounting for Investments
In January 2016, the Financial Accounting Standards Board issued an accounting standard update for the recognition and measurement of financial assets and liabilities. Under the standard, equity investments that do not have readily determinable fair values and do not qualify for the net asset value practical expedient are eligible for the measurement alternative. For the Company’s equity investments in private equity securities, which do not have readily determinable fair values, the Company has elected the measurement alternative defined as cost, less impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. For certain of the Company’s equity investments in private equity funds, the Company has elected to use the net asset value practical expedient. The guidance of this accounting standard update was adopted effective January 1, 2018. The impact of adopting the accounting standard update was not material to the condensed consolidated financial statements.
In February 2018, the Financial Accounting Standards Board issued an accounting standard update that clarified and amended some of the updates made in the January 2016 update to the recognition and measurement of financial assets and liabilities. The Company has elected to early adopt this accounting standard update effective January 1, 2018. The impact of adopting the accounting standard update was not material to the condensed consolidated financial statements.
Leases
In February 2016, the Financial Accounting Standards Board issued an accounting standard update on the accounting for leases. The new guidance requires that lessees in a leasing arrangement recognize a right-of-use asset and a lease liability for most leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. The new guidance is effective for annual reporting periods beginning after December 15, 2018. Under the original guidance, the modified retrospective method of adoption was mandatory, and would have required application of the standard at the beginning of the earliest comparative period presented. However, in July 2018, the Financial Accounting Standards Board issued an update which permits entities to adopt the standard using another transition method. Under this optional transition method, the Company would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has elected to adopt this standard using the optional transition method. The Company has concluded an assessment of its systems, data and processes related to the implementation of this accounting standard and has initiated its information technology system design and solution development. The Company is currently evaluating the potential impact of this standard on its financial position and results of operations; however, it is expected to have a material impact on the Company's financial position due to the recognition of the right-of-use assets and lease liabilities for operating leases which are currently not reflected on the balance sheet. The Company does not expect a material impact to its results of operations.

Accounting for Cloud Computing Costs

In August 2018, the Financial Accounting Standards Board issued an accounting standard update on the accounting for implementation costs incurred by customers in cloud computing arrangements that are service contracts. The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new guidance is

9



effective for annual reporting periods beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted. The standard can be adopted either using the prospective or retrospective transition approach. The Company expects to early adopt this standard on January 1, 2019 and does not expect a material impact from adoption on its condensed consolidated financial position and results of operations.
Fair Value Measurements
In August 2018, the Financial Accounting Standards Board issued an accounting standard update on fair value measurements. The new guidance modifies the disclosure requirements on fair value measurements by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty, and adding new disclosure requirements. The new guidance is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's condensed consolidated financial position, results of operations and cash flows.
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 standalone selling price related to revenue recognition, 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 provision for lease losses, the provision for income taxes and the amortization and depreciation periods for contract acquisition costs, 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, 2018 and December 31, 2017 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 6 for additional information regarding the Company’s investments.
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. 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.
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 8 for further information regarding the Company’s stock-based compensation plans.


10



Reclassifications
Certain reclassifications of the prior years' amounts have been made to conform to the current year's presentation.
Beginning in the first quarter of fiscal year 2018, the Company revised its presentation of revenue to align with its transition to a subscription business model as follows: (1) subscription revenue, which includes revenue from the Company's cloud services offerings and on-premise subscriptions as well as revenue from its Citrix Service Provider ("CSP") offerings; (2) product and license revenue from perpetual product and license offerings; and (3) support and services revenue for perpetual product and license offerings.
This change in manner of presentation did not affect the Company's total net revenues, total cost of net revenues or gross margin. Conforming changes have been made for all periods presented, as follows (in thousands):

Three Months Ended September 30, 2017
As Previously Reported
 
Amount Reclassified
 
As Reported
Revenues:
 
 
 
 
Revenues:
 
Software as a service
$
45,810

 
$
35,563

 
Subscription
$
81,373

Product and licenses (1)
192,102

 
(23,386
)
 
Product and license
168,716

License updates and maintenance (2)
420,951

 
19,885

 
Support and services (3)
440,836

Professional services
32,062

 
(32,062
)
 
 
 
Total net revenues
$
690,925

 
$

 
Total net revenues
$
690,925

Nine Months Ended September 30, 2017
As Previously Reported
 
Amount Reclassified
 
As Reported
Revenues:
 
 
 
 
Revenues:
 
Software as a service
$
126,053

 
$
99,007

 
Subscription
$
225,060

Product and licenses (1)
594,708

 
(64,718
)
 
Product and license
529,990

License updates and maintenance (2)
1,232,734

 
59,045

 
Support and services (3)
1,291,779

Professional services
93,334

 
(93,334
)
 
 
 
Total net revenues
$
2,046,829

 
$

 
Total net revenues
$
2,046,829


(1)
Product and licenses as previously reported included revenue from CSPs and on-premise subscriptions that are now included in Subscription. Current period presentation only includes revenues from perpetual offerings and hardware.
(2)
License updates and maintenance as previously reported included revenue from CSPs and on-premise license updates and maintenance that are now included in Subscription.
(3)
Support and services includes revenues from license updates and maintenance from perpetual offerings as well as professional services.
3. REVENUE
The following is a description of the principal activities from which the Company generates revenue.
Subscription
Subscription revenues primarily consist of cloud-hosted offerings which provide customers a right to use, or a right to access, one or more of the Company’s cloud-hosted subscription offerings, with routine customer support, as well as revenues from the CSP program and on-premise subscription software licenses. For the Company’s cloud-hosted performance obligations, revenue is generally recognized on a ratable basis over the contract term beginning on the date that the Company's service is made available to the customer, as the Company continuously provides online access to the web-based software that the customer can use at any time. The CSP program provides subscription-based services in which the CSP partners host software services to their end users.
Product and license
Product and license revenues are primarily derived from perpetual offerings related to the Company’s Workspace Services solutions and Networking products. For performance obligations related to perpetual software license agreements, the

11



Company determined that its licenses are functional intellectual property that are distinct as the user can benefit from the software on its own as defined under the new revenue standard.
Support and services
Support and services includes license updates, maintenance and professional services revenues. License updates and maintenance revenues are primarily comprised of software and hardware maintenance, when and if-available updates and technical support. For performance obligations related to license updates and maintenance, revenue is generally recognized on a straight-line basis over the period of service because the Company transfers control evenly by providing a stand-ready service. That is, the Company is continuously working on improving its products and pushing those updates through to the customer, and stands ready to provide software updates on a when and if-available basis. Services revenues are comprised of fees from consulting services primarily related to the implementation of the Company’s products and fees from product training and certification.
The Company’s typical performance obligations include the following:
Performance Obligation
When Performance Obligation
is Typically Satisfied
Subscription
 
Cloud hosted offerings
Over the contract term, beginning on the date that service is made available to the customer (over time)
CSP
As the usage occurs (over time)
On-premise subscription software licenses
When software activation keys have been made available for download (point in time)
Product and license
 
Software Licenses
When software activation keys have been made available for download (point in time)
Hardware
When control of the product passes to the customer; typically upon shipment (point in time)
Support and services
 
License updates and maintenance
Ratably over the course of the service term (over time)
Professional services
As the services are provided (over time)
Significant Judgments
At contract inception, the Company assesses the product or services, or bundles of products and services, obligated in the contract with a customer to identify each performance obligation within the contract, and then evaluates whether the performance obligations are capable of being distinct and distinct within the context of the contract. Products and services that are not both capable of being distinct and distinct within the context of the contract are combined and treated as a single performance obligation in determining the allocation and recognition of revenue.
The standalone selling price is the price at which the Company would sell a promised product or service separately to the customer. For the majority of the Company's software licenses and hardware, CSP and on-premise subscription software licenses, the Company uses the observable price in transactions with multiple performance obligations. For the majority of the Company’s support and services, and cloud-hosted subscription offerings, the Company uses the observable price when the Company sells that support and service and cloud-hosted subscription separately to similar customers. If the standalone selling price for a performance obligation is not directly observable, the Company estimates it. The Company estimates standalone selling price by taking into consideration market conditions, economics of the offering and customers’ behavior. The Company maximizes the use of observable inputs and applies estimation methods consistently in similar circumstances. The Company allocates the transaction price to each distinct performance obligation on a relative standalone selling price basis.
Revenues are recognized when control of the promised products or services are transferred to customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those products or services. The Company generates all of its revenues from contracts with customers.

12



Sales tax
The Company records revenue net of sales tax.
Timing of revenue recognition
 
 
Three Months Ended
Nine Months Ended (1)
 
 
September 30, 2018
 
 
(In Thousands)
Products and services transferred at a point in time
 
$
186,039

$
583,888

Products and services transferred over time
 
546,437

1,588,145

Total net revenues
 
$
732,476

$
2,172,033

(1) Includes a net reclassification from Products and services transferred at a point in time to Products and services transferred over time of $10.0 million. For the three months ended March 31, 2018, the Company reclassified $11.6 million from Product and services transferred over time to Product and services transferred at a point in time. For the three months ended June 30, 2018, the Company reclassified $21.6 million from Product and services transferred at a point in time to Product and services transferred over time. The change in presentation does not impact total net revenues and it does not affect the Company's condensed consolidated financial position, results of operations or cash flows.
Contract balances
The Company's short-term and long-term contract assets were not significant for the periods presented. The Current portion of deferred revenues and the Long-term portion of deferred revenues were $1.25 billion and $512.8 million, respectively, as of January 1, 2018 and $1.21 billion and $467.7 million, respectively, as of September 30, 2018. The difference in the opening and closing balances of the Company’s contract assets and liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment. During the three and nine months ended September 30, 2018, the Company recognized $493.1 million and $1.07 billion, respectively, of revenue that was included in the deferred revenue balance as of June 30, 2018 and December 31, 2017, respectively.
The Company performs its obligations under a contract with a customer by transferring products and services in exchange for consideration from the customer. Accounts receivable are recorded when the right to consideration becomes unconditional. The timing of the Company’s performance often differs from the timing of the customer’s payment, which results in the recognition of a contract asset or a contract liability. The Company recognizes a contract asset when the Company transfers products or services to a customer and the right to consideration is conditional on something other than the passage of time. The Company recognizes a contract liability when it has received consideration or an amount of consideration is due from the customer and the Company has a future obligation to transfer products or services. The Company had no asset impairment charges related to contract assets for the three and nine months ended September 30, 2018
For the Company’s software and hardware products, the timing of payment is typically upfront for its perpetual offerings and the Company’s on-premise subscriptions. Therefore, deferred revenue is created when a contract includes performance obligations such as license updates and maintenance or certain professional services that are satisfied over time. For subscription contracts, the timing of payment is typically in advance of services, and deferred revenue is created as these services are provided over time.
A significant portion of the Company’s contracts have an original duration of one year or less; therefore, the Company applies a practical expedient to determine whether a significant financing component exists and does not consider the effects of the time value of money. For multi-year contracts, the Company bills annually.
Transaction price allocated to the remaining performance obligations
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period (in thousands):
 
 
<1-3 years
 
3-5 years
 
5 years or more
 
Total
Subscriptions
 
$
317,356

 
$
30,371

 
$
526

 
$
348,253

Support and services
 
1,518,794

 
55,880

 
280

 
1,574,954

Total net revenues
 
$
1,836,150

 
$
86,251

 
$
806

 
$
1,923,207


13



Contract acquisition costs
In conjunction with the adoption of the new standard, the Company is required to capitalize certain contract acquisition costs consisting primarily of commissions paid and related payroll taxes when contracts are signed. The asset recognized from capitalized incremental and recoverable acquisition costs is amortized on a basis consistent with the pattern of transfer of the products or services to which the asset relates.
The Company’s typical contracts include performance obligations related to product and licenses and support. In these contracts, incremental costs of obtaining a contract are allocated to the performance obligations based on the relative estimated standalone selling prices and then recognized on a basis that is consistent with the transfer of the goods or services to which the asset relates. The commissions paid on annual renewals of support for product and licenses are not commensurate with the initial commission. The costs allocated to product and licenses are expensed at the time of sale, when revenue for the product and functional software licenses is recognized. The costs allocated to customer support for product and licenses are amortized ratably over a period of the greater of the contract term or the average customer life, the expected period of benefit of the asset capitalized. The Company currently estimates an average customer life of three to five years, which it believes is appropriate based on consideration of the historical average customer life and the estimated useful life of the underlying product and license sold as part of the transaction. Amortization of contract acquisition costs related to support are limited to the contractual period of the arrangement as the Company intends to pay a commensurate commission upon renewal of the related support. For contracts that contain multi-year services or subscriptions, the amortization period of the capitalized costs is the expected period of benefit, which is the greater of the contractual term or the expected customer life.
The Company elects to apply a practical expedient to expense contract acquisition costs as incurred where the expected period of benefit is one year or less.
For the three and nine months ended September 30, 2018, the Company recorded amortization of capitalized contract acquisition costs of $9.5 million and $25.7 million, respectively, which is recorded in Sales, marketing and services expense in the accompanying condensed consolidated statement of income. There was no impairment loss in relation to costs capitalized during the three and nine months ended September 30, 2018.
4. 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 and shares issuable under the employee stock purchase plan (calculated using the treasury stock method) during the period they were outstanding and potential dilutive common shares from the conversion spread on the Company’s Convertible Notes and the Company's warrants.


14



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,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
158,857

 
$
126,720

 
$
409,949

 
$
305,874

Loss from discontinued operations, net of income taxes

 

 

 
(42,704
)
Net income
$
158,857

 
$
126,720

 
$
409,949

 
$
263,170

Denominator:
 
 
 
 
 
 
 
Denominator for basic net earnings per share - weighted-average shares outstanding
135,055

 
151,156

 
136,752

 
151,896

Effect of dilutive employee stock awards
2,731

 
1,987

 
2,594

 
2,538

Effect of dilutive Convertible Notes
6,999

 
1,484

 
5,892

 
1,950

Effect of dilutive warrants
2,783



 
1,316

 

Denominator for diluted net earnings per share - weighted-average shares outstanding
147,568

 
154,627

 
146,554

 
156,384

 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Income from continuing operations
$
1.18

 
$
0.84

 
$
3.00

 
$
2.01

Loss from discontinued operations

 

 

 
(0.28
)
Basic net earnings per share
$
1.18

 
$
0.84

 
$
3.00

 
$
1.73

Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Income from continuing operations
$
1.08

 
$
0.82

 
$
2.80

 
$
1.96

Loss from discontinued operations

 

 

 
(0.28
)
Diluted net earnings per share:
$
1.08

 
$
0.82

 
$
2.80

 
$
1.68

For the three and nine months ended September 30, 2018, the weighted-average number of shares outstanding used in the computation of diluted earnings per share includes the dilutive effect of the Company's warrants, as the average stock price during the quarter was above the weighted-average warrant strike price of $95.25 per share. For the three and nine months ended September 30, 2017, the weighted-average number of shares outstanding used in the computation of basic and diluted earnings per share does not include common stock issuable upon the exercise of the Company's warrants. The effects of these potentially issuable shares were not included in the calculation of diluted earnings per share because the effect would have been anti-dilutive. Anti-dilutive stock-based awards excluded from the calculations of diluted earnings per share were immaterial during the periods presented.
The Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on its 0.500% Convertible Notes due 2019 (the “Convertible Notes”) on diluted earnings per share, if applicable, because 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 stock for a given period exceeds the conversion price of $71.91 per share of common stock. For the three and nine months ended September 30, 2018 and 2017, the average market price of the Company's common stock exceeded the conversion price; therefore, the dilutive effect of the Convertible Notes was included in the denominator of diluted earnings per share. See Note 11 for detailed information on the Convertible Notes offering.

15



5. ACQUISITIONS
2018 Business Combination
On February 6, 2018, the Company acquired all of the issued and outstanding securities of Cedexis, Inc. (“Cedexis” or the "2018 Business Combination") whose solution is a real-time data driven service for dynamically optimizing the flow of traffic across public clouds and data centers that provides a dynamic and reliable way to route and manage Internet performance for customers moving towards hybrid and multi-cloud deployments. The total cash consideration for this transaction was $66.0 million, net of $6.0 million cash acquired. Transaction costs associated with the acquisition were not significant.
Purchase Accounting for the 2018 Business Combination
The purchase price for the 2018 Business Combination was allocated to the acquired net tangible and intangible assets based on estimated fair values as of the date of the acquisition. The allocation of the total purchase price is summarized below (in thousands):
 
Cedexis
 
Purchase Price Allocation
 
Asset Life
Current assets
$
8,961

 
 
Intangible assets
27,200

 
1-6 years
Goodwill
46,770

 
Indefinite
Deferred taxes
406

 
 
Other assets
69

 
 
Assets acquired
83,406

 
 
Other current liabilities assumed
5,711

 
 
Assumed debt
5,674

 
 
Net assets acquired
$
72,021

 
 
Current assets acquired in connection with the Cedexis acquisition consisted primarily of cash, accounts receivable and other short term assets. Current liabilities assumed in connection with the acquisition consisted primarily of accounts payable and other accrued expenses. Assumed debt consisted primarily of short-term and long-term debt, which was paid in full subsequent to the acquisition date. The Company continues to evaluate certain income tax assets and liabilities related to the Cedexis acquisition that may be subject to change through the remainder of the measurement period, which will extend not more than twelve months from the acquisition date.
The goodwill related to the Cedexis acquisition is not deductible for tax purposes and is comprised primarily of expected synergies from combining operations and other intangible assets that do not qualify for separate recognition.
The Company has included the effect of the Cedexis acquisition in its results of operations prospectively from the date of acquisition. The effect of the acquisition was not material to the Company's consolidated results for the periods presented; accordingly, pro forma financial disclosures have not been presented.
Identifiable intangible assets acquired in connection with the Cedexis acquisition (in thousands) and the weighted-average lives are as follows:
 
Cedexis
 
Asset Life
Customer relationships
$
2,000

 
1 year
Developed technology
23,800

 
5-6 years
Tradenames
1,400

 
1 year
Total
$
27,200

 
 
2017 Business Combination
On January 3, 2017, the Company acquired all of the issued and outstanding securities of Unidesk Corporation (“Unidesk”). The Company acquired Unidesk to enhance its application management and delivery offerings. The total cash

16



consideration for this transaction was $60.4 million, net of $2.7 million of cash acquired. Transaction costs associated with the acquisition were not significant.
Subsequent Event
On November 1, 2018, the Company entered into a definitive agreement to acquire all of the issued and outstanding securities of a privately held entity intended to advance the Company’s development of the intelligent workspace. The acquired technology enables efficient workstyles by creating a unified and customizable notification experience for business applications. The total preliminary cash consideration for this transaction is approximately $200.0 million, subject to working capital and other adjustments. The acquisition will be accounted for as a business combination and accordingly, total purchase price will be allocated to the tangible and intangible assets acquired and liabilities assumed based on their respective fair values on the acquisition date. The Company has not yet determined the purchase price allocation for the transaction. The transaction is expected to close in the fourth quarter of 2018, subject to customary closing conditions.
6. 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, 2018
 
December 31, 2017
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
$
356,504

 
$
361

 
$
(3,268
)
 
$
353,597

 
$
441,315

 
$
509

 
$
(2,760
)
 
$
439,064

Corporate securities
625,874

 
193

 
(4,277
)
 
621,790

 
810,444

 
268

 
(3,020
)
 
807,692

Municipal securities
2,500

 
5

 

 
2,505

 
3,965

 
2

 
(2
)
 
3,965

Government securities
310,208

 
2

 
(1,679
)
 
308,531

 
367,595

 
44

 
(1,516
)
 
366,123

Total
$
1,295,086

 
$
561

 
$
(9,224
)
 
$
1,286,423

 
$
1,623,319

 
$
823

 
$
(7,298
)
 
$
1,616,844

The change in net unrealized gains (losses) on available-for-sale securities recorded in Other comprehensive 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, 2018 were approximately seven months and two years, respectively.
Realized Gains and Losses on Available-for-sale Investments
For the three and nine months ended September 30, 2018, the Company received proceeds from the sales of available-for-sale investments of $7.5 million and $442.4 million, respectively, and for the three and nine months ended September 30, 2017, the Company received proceeds from the sales of available-for-sale investments of $116.4 million and $678.5 million, respectively.
For the three months ended September 30, 2018, the Company had no realized gains on the sales of available-for-sale investments. For the nine months ended September 30, 2018, the Company had $0.1 million in realized gains on the sales of available-for-sale investments, and during the three and nine months ended September 30, 2017, the Company had no realized gains on the sales of available-for-sale investments, and $0.7 million, respectively, in realized gains on the sales of available-for-sale investments.
For the three and nine months ended September 30, 2018, the Company had realized losses on available-for-sale investments of $0.1 million and $1.5 million, respectively, and for the three and nine months ended September 30, 2017, it had realized losses on available-for-sale investments of $0.2 million and $0.4 million, respectively, primarily related to sales of these investments during these periods.
All realized gains and losses related to the sales of available-for-sale investments are included in Other income (expense), net, in the accompanying condensed consolidated statements of income.

17



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, 2018 and December 31, 2017 were $9.2 million and $7.3 million, respectively. Because the Company does not currently 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.
Equity Securities without Readily Determinable Fair Values
The Company held direct investments in privately-held companies of $8.4 million as of September 30, 2018, which are accounted for at cost, less impairment plus or minus adjustments resulting from observable price changes in orderly transactions for an identical or a similar investment of the same issuer. These investments are included in Other assets in the accompanying condensed consolidated balance sheets. The Company periodically reviews these investments for impairment and observable price changes on a quarterly basis, and adjusts the carrying value accordingly. For the three and nine months ended September 30, 2018, there were no adjustments resulting from observable price changes to the Company’s investments in privately-held companies without a readily determinable fair value. The fair value of these investments represents a Level 3 valuation as the assumptions used in valuing these investments are not directly or indirectly observable. See Note 7 for detailed information on fair value measurements.
Equity Securities Accounted for at Net Asset Value
The Company held equity interests in certain private equity funds of $11.2 million as of September 30, 2018 which are accounted for under the net asset value practical expedient. These investments are included in Other assets in the accompanying condensed consolidated balance sheets. The net asset value of these investments is determined using quarterly capital statements from the funds which are based on the Company’s contributions to the funds, allocation of profit and loss and changes in fair value of the underlying fund investments.
For 2017, the Company’s investments in privately-held companies and private equity funds were previously classified as cost method investments and were $18.6 million as of December 31, 2017. Due to the Company's adoption of the accounting standard update for the recognition and measurement of financial assets and liabilities, effective January 1, 2018, these investments are now accounted for under the new basis of accounting referenced above. See Note 2 for detailed information regarding the Company's recent accounting pronouncements.
7. 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

18



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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
As of September 30, 2018
 
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
$
433,449

 
$
433,449

 
$

 
$

Money market funds
756,455

 
756,455

 

 

Corporate securities
3,118

 

 
3,118

 

Government securities
12,160

 

 
12,160

 

Available-for-sale securities:
 
 
 
 
 
 
 
Agency securities
353,597

 

 
353,597

 

Corporate securities
621,790

 

 
621,077

 
713

Municipal securities
2,505

 

 
2,505

 

Government securities
308,531

 

 
308,531

 

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
Foreign currency derivatives
627

 

 
627

 

Total assets
$
2,492,232

 
$
1,189,904

 
$
1,301,615

 
$
713

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

 

 
3,783

 

Total liabilities
$
3,783

 
$

 
$
3,783

 
$

 
As of December 31, 2017
 
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
$
556,520

 
$
556,520

 
$

 
$

Money market funds
555,826

 
555,826

 

 

Corporate securities
2,784

 

 
2,784

 

Available-for-sale securities:
 
 
 
 
 
 
 
Agency securities
439,064

 

 
439,064

 

Corporate securities
807,692

 

 
807,299

 
393

Municipal securities
3,965

 

 
3,965

 

Government securities
366,123

 

 
366,123

 

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
Foreign currency derivatives
2,498

 

 
2,498

 

Total assets
$
2,734,472

 
$
1,112,346

 
$
1,621,733

 
$
393

Accrued expenses and other current liabilities:
 
 
 
 
 
 
 
Foreign currency derivatives
814

 

 
814

 

Total liabilities
$
814

 
$

 
$
814

 
$

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

19



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).
Assets Measured at Fair Value on a Non-recurring Basis Using Significant Unobservable Inputs (Level 3)
During the three months ended September 30, 2018, no direct investments in privately held companies were determined to be impaired. During the nine months ended September 30, 2018, certain direct investments in privately-held companies with a combined carrying value of $2.8 million were determined to be impaired and written down to their estimated fair values of $1.9 million. Accordingly, the Company recorded $0.9 million of impairment charges during the nine months ended September 30, 2018, which are included in Other income (expense), net in the accompanying condensed consolidated statements of income. For the three months ended September 30, 2017, no cost method investments were determined to be impaired. For the nine months ended September 30, 2017, the Company determined that certain direct investments in privately-held companies were impaired and recorded charges of $1.4 million, which were included in Other income (expense), net in the accompanying condensed consolidated statements of income. In determining the fair value of the 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.
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.
On November 15, 2017, the Company issued $750.0 million of unsecured senior notes due December 1, 2027 (the "2027 Notes"). As of September 30, 2018, the fair value of the 2027 Notes and 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, 2018, 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
2027 Notes
$
722,858

 
$
741,551

Convertible Notes
$
2,210,935

 
$
1,415,970

See Note 11 for more information on the 2027 Notes and the Convertible Notes.
8. 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, 2018, the Company had one stock-based compensation plan under which it was granting equity awards. The Company is currently granting stock-based awards from its Amended and Restated 2014 Equity Incentive Plan (the "2014 Plan"), which was approved at the Company's Annual Meeting of Stockholders on June 22, 2017. 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 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 stock plans with outstanding awards include the Amended and Restated 2005 Equity Incentive Plan ("2005 Plan").
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. ISOs, NSOs, and SARs are not currently being granted. Currently, the 2014 Plan provides for the issuance of 46,000,000 shares of common stock. In addition, shares of common stock underlying any awards granted under the Company’s 2014 Plan or the 2005 Plan that are forfeited, canceled or otherwise terminated (other than by exercise) are added to the 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

20



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, 2018, there were 22,603,277 shares of common stock reserved for issuance pursuant to the Company’s stock-based compensation plans including authorization under its 2014 Plan to grant stock-based awards covering 16,927,000 shares of common stock.

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. 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 either the first business day of the Payment Period or the last business day of the Payment Period, whichever is lower. 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, 2018, 1,721,924 shares have been issued under the 2015 ESPP. The Company recorded stock-based compensation costs related to the 2015 ESPP of $1.8 million and $4.4 million for the three months ended September 30, 2018 and 2017, respectively, and $7.3 million and $7.9 million for the nine months ended September 30, 2018 and 2017, respectively.
The Company used the Black-Scholes model to estimate the fair value of 2015 ESPP awards with the following weighted-average assumptions:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Expected volatility factor
0.26 - 0.29
 
0.27 - 0.29

 
0.26 - 0.29
 
0.27 - 0.29

Risk free interest rate
1.63% - 2.19%
 
0.60% - 1.12%

 
1.12% - 2.19%
 
0.60% - 1.12%

Expected dividend yield
0% - 1.27%
 
0
%
 
0% - 1.27%
 
0
%
Expected life (in years)
0.5
 
0.5

 
0.5
 
0.5

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 historical dividend yield input was zero in prior periods as it has not historically paid cash dividends on its common stock. The current dividend yield has been updated for expected dividend yield payout given the Company's previously announced intent to pay a recurring quarterly dividend beginning in December 2018. 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
 
Nine Months Ended
Income Statement Classifications
September 30, 2018

September 30, 2017
 
September 30, 2018
 
September 30, 2017
Cost of subscription, support and services
$
2,106

 
$
1,132

 
$
5,827

 
$
2,539

Research and development
17,009

 
14,365

 
45,517

 
35,691

Sales, marketing and services
18,910

 
16,063

 
52,095

 
42,388

General and administrative
14,714

 
20,172

 
40,867

 
46,601

Total
$
52,739

 
$
51,732

 
$
144,306

 
$
127,219


21



Non-vested Stock Units
Market Performance and Service Condition Stock Units
In March 2017, the Company granted senior level employees non-vested stock unit awards representing, in the aggregate, 275,148 non-vested stock units that vest based on certain target performance and service conditions. The number of non-vested stock units underlying the award will be determined within sixty days of the three-year performance period ending December 31, 2019. The attainment level under the award will be based on the Company's relative total return to stockholders over the performance period compared to a pre-established custom index group. If the Company’s relative total return to stockholders is between the 41st percentile and the 80th percentile when compared to the index companies, the number of non-vested stock units earned will be based on interpolation. The maximum number of non-vested stock units that may vest pursuant to the awards is capped at 200% of the target number of non-vested stock units set forth in the award agreement and is earned if the Company's relative total return to stockholders when compared to the index companies is at or greater than the 80th percentile. If the Company’s total return to stockholders is negative, the number of non-vested stock units earned will be no more than 100% regardless of the Company’s relative total return to stockholders compared to the index companies. 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 2017 Grant
Expected volatility factor
0.27-0.32

Risk free interest rate
1.48
%
Expected dividend yield
0
%
For the March 2017 grant, the range of expected volatilities utilized was based on the historical volatilities of the Company's common stock and the average of its peer group. 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 its peer group in order to model the stock price movements. The volatilities used were calculated over the most recent 2.75 year period, which is commensurate with the awards' performance period at the grant date. 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 performance period. In addition, 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 $104.05.
Service-Based Stock Units
The Company also awards senior level employees, certain other employees and new non-employee directors, non-vested stock units granted under the 2014 Plan that vest based on service. The majority of 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.
Company Performance Stock Units
In March 2018, the Company awarded senior level employees non-vested performance stock unit awards granted under the 2014 Plan. The number of non-vested stock units underlying the award will be determined within sixty days following completion of the performance period ending December 31, 2020 and will be based on the achievement of specific corporate financial performance goals related to subscription bookings as a percentage of total product bookings measured during the period from January 1, 2020 to December 31, 2020. As defined in the applicable award agreements, total product bookings includes subscription bookings. The number of non-vested stock units issued will be based on a graduated slope, 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. The Company is required to estimate the attainment expected to be achieved related to the defined performance goals and the number of non-vested stock units that will ultimately be awarded in order to

22



recognize compensation expense over the vesting period. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. Compensation expense will be recorded through the end of the performance period on December 31, 2020 if it is deemed probable that the performance goals will be met. If the performance goals are not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed.
On August 1, 2017, the Company awarded certain senior level employees non-vested performance stock units granted under the 2014 Plan. The number of non-vested stock units underlying each award will be determined within sixty days following completion of the performance period ending December 31, 2019 and will be based on achievement of specific corporate financial performance goals related to non-GAAP net operating margin and subscription bookings as a percent of total product bookings measured during the period from January 1, 2019 to December 31, 2019. As defined in the applicable award agreements, total product bookings includes subscription bookings. The number of non-vested stock units issued will be based on a graduated slope, 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. The Company is required to estimate the attainment expected to be achieved related to the defined performance goals and the number of non-vested stock units that will ultimately be awarded in order to recognize compensation expense over the vesting period. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. The non-GAAP net operating margin and subscription bookings as a percent of total product bookings targets were set in the first quarter of 2018. As a result, such awards were not outstanding under U.S. GAAP until the first quarter of 2018 when the performance goals were determined and subsequently communicated to employees who received the awards. Compensation expense will be recorded through the end of the performance period on December 31, 2019 if it is deemed probable that the performance goals will be met. If the performance goals are not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed.
Unrecognized Compensation Related to Stock Units
As of September 30, 2018, the total number of non-vested stock units outstanding, including company performance awards, market performance and service condition awards and service-based awards, including service-based awards assumed in connection with acquisitions, was 5,628,216. As of September 30, 2018, there was $349.0 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 1.77 years.
9. 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. The Company performed a qualitative assessment in connection with its annual goodwill impairment test in the fourth quarter of 2017. As a result of the qualitative analysis, a quantitative impairment test was not deemed necessary. 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 2017.
During the three months ended September 30, 2018, the Company initiated an effort to streamline and simplify its product branding and packaging, which included naming updates to the portfolio to provide clarity on the Company's offerings and unify its sales motions. The change resulted in the Company consolidating its Content Collaboration product group with Workspace Services and renaming the new product group Digital Workspace. As a result, the Company's two reporting units (Enterprise and Service Provider and Content Collaboration) were combined into one, consistent with how management reviews the operating results of the business. Additionally, the Company expects to rename its revenue product groups and report revenue from Content Collaboration in the new Digital Workspace product group in future periods. In connection with this change, the Company performed a qualitative goodwill assessment of the reporting units and determined there were no indicators of impairment during the three months ended September 30, 2018. The change in reporting units did not result in a reallocation of goodwill or a change in reportable segments. See Note 5 for more information regarding the Company's acquisitions.
The following table presents the change in goodwill during the nine months ended September 30, 2018 (in thousands):
 
Balance at January 1, 2018
 
Additions
 
 
Other
 
 
Balance at September 30, 2018
Goodwill
$
1,614,494

 
$
46,770

(1)
 
$

 
 
$
1,661,264


(1)
Amount relates to preliminary purchase price allocation of goodwill associated with the 2018 Business Combination. See Note 5 for more information regarding the Company's acquisitions.

23



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, 2018
 
December 31, 2017
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Product related intangible assets
$
691,874

 
$
589,111

 
$
663,004

 
$
554,934

Other
226,323

 
200,789

 
222,923

 
189,041

Total
$
918,197

 
$
789,900

 
$
885,927

 
$
743,975

Amortization of product-related intangible assets, which consists primarily of product-related technologies and patents, was $11.6 million and $17.6 million for the three months ended September 30, 2018 and 2017, respectively, and $34.2 million and $43.1 million for the nine months ended September 30, 2018 and 2017, respectively, and is classified as a component of Cost of net revenues in the accompanying condensed consolidated statements of income. Amortization of other intangible assets, which consist primarily of customer relationships, trade names and covenants not to compete was $4.1 million and $3.7 million for the three months ended September 30, 2018 and 2017, respectively, and $11.7 million and $11.1 million for the nine months ended September 30, 2018 and 2017, 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 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.
Estimated future amortization expense of intangible assets with finite lives as of September 30, 2018 is as follows (in thousands): 
Year ending December 31,
Amount

2018 (remaining three months)
$
15,484

2019
40,046

2020
27,548

2021
13,559

2022
11,708

Thereafter
19,952

     Total
$
128,297

10. SEGMENT INFORMATION
Citrix has one reportable segment. The Company's chief operating decision maker (“CODM”) reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company's CEO is the CODM.

24



Revenues by Product Grouping
Revenues by product grouping were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018

2017 (5)
 
2018
 
2017 (5)
Net revenues:
 
 
 
 
 
 
 
Workspace Services revenues(1)
$
462,101

 
$
431,592

 
$
1,329,584

 
$
1,255,728

Networking revenues(2)
195,421

 
185,539

 
611,386

 
575,827

Content Collaboration revenues(3)
46,605

 
41,632

 
137,503

 
121,566

Professional services(4)
28,349

 
32,162

 
93,560

 
93,708

Total net revenues
$
732,476

 
$
690,925

 
$
2,172,033

 
$
2,046,829


(1)
Workspace Services revenues are primarily comprised of sales from the Company’s application virtualization solutions, which include XenDesktop and XenApp, the Company's enterprise mobility management solutions, which include XenMobile, and Citrix Workspace, and related license updates, maintenance and subscription offerings.
(2)
Networking revenues primarily include NetScaler ADC and NetScaler SD-WAN and related license updates, maintenance and subscription offerings.
(3)
Content Collaboration revenues primarily include ShareFile, Podio and related subscriptions.
(4)
Professional services revenues are primarily comprised of revenues from consulting services and product training and certification services.
(5)
Prior period amounts have not been adjusted under the modified retrospective method of adoption of the revenue recognition standard. See Note 2 for further information regarding the Company’s adoption of the revenue recognition standard.

Revenues by Geographic Location
The following table presents revenues by geographic location, for the following periods (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018

2017 (1)
 
2018
 
2017 (1)
Net revenues:
 
 
 
 
 
 
 
Americas
$
432,689

 
$
406,322

 
$
1,276,873

 
$
1,200,740

EMEA
228,236

 
213,954

 
676,942

 
633,119

APJ
71,551

 
70,649

 
218,218

 
212,970

Total net revenues
$
732,476

 
$
690,925

 
$
2,172,033

 
$
2,046,829

(1)
As noted above, prior period amounts have not been adjusted under the modified retrospective method of adoption of the revenue recognition standard. See Note 2 for further information regarding the Company’s adoption of the revenue recognition standard.

As of September 30, 2018, no individual customer accounted for 10% or more of the Company's total gross accounts receivable.
11. DEBT
Senior Notes

On November 15, 2017, the Company issued $750.0 million of unsecured senior notes due December 1, 2027. The 2027 Notes accrue interest at a rate of 4.5% per annum. Interest on the 2027 Notes is due semi-annually on June 1 and December 1 of each year, beginning on June 1, 2018. The net proceeds from this offering were approximately $741.0 million, after deducting the underwriting discount and estimated offering expenses payable by the Company. Net proceeds from this offering were used to repurchase shares of the Company's common stock through an Accelerated Share Repurchase ("ASR") transaction which the Company entered into with Citibank, N.A. (the "ASR Counterparty") on November 13, 2017. The 2027 Notes will mature on December 1, 2027, unless earlier redeemed in accordance with their terms prior to such date. The Company may

25



redeem the 2027 Notes at its option at any time in whole or from time to time in part prior to September 1, 2027 at a redemption price equal to the greater of (i) 100% of the aggregate principal amount of the 2027 Notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments under such 2027 Notes, plus in each case, accrued and unpaid interest to, but excluding, the redemption date. Among other terms, under certain circumstances, holders of the 2027 Notes may require the Company to repurchase their 2027 Notes upon the occurrence of a change of control prior to maturity for cash at a repurchase price equal to 101% of the principal amount of the 2027 Notes to be repurchased plus accrued and unpaid interest to, but excluding, the repurchase date.
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 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. As of September 30, 2018, 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 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, 2018.
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 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 ASR which the Company entered into with 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.
The conversion rate for the Convertible Notes is 13.9061 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which corresponds to a conversion price of $71.91 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.

26



The last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on September 30, 2018 was greater than or equal to $93.48 (130% of the conversion price) on each applicable trading day. As a result, each holder of the Company’s Convertible Notes has the right to convert any portion of its Convertible Notes (in minimum denominations of $1,000 in principal amount or an integral multiple thereof). On or after October 15, 2018 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the Convertible Notes may convert their notes at any time, regardless of whether the sales price condition is met. Accordingly, as of September 30, 2018, the Company reclassified the outstanding balance, net of discount, of $1.42 billion of the Convertible Notes from other liabilities to current liabilities and the difference between the face value and carrying value of $19.3 million was reclassified from stockholders’ equity to temporary equity in the accompanying condensed consolidated balance sheets. As required by the Indenture, the Company gave notice of this sales price trigger to the trustee and the conversion agent on October 1, 2018. The sales price condition was also met for the quarter ended June 30, 2018. As of September 30, 2018, the Company received conversion notices from noteholders with respect to $224.8 million in aggregate principal amount of Convertible Notes requesting conversion as a result of the sales price condition having been met for the prior quarter. Accordingly, in accordance with the terms of the Convertible Notes, in the fourth quarter of 2018 the Company will make cash payments of this aggregate principal amount and has elected to deliver newly issued shares of its common stock in respect of the remainder of the Company's conversion obligation in excess of the aggregate principal amount of the Convertible Notes being redeemed, in full satisfaction of such converted notes. The numbers of shares to be issued will be determined at the end of the settlement period, which will be December 7, 2018 for the conversion notices that the Company has received through September 30, 2018. Additionally, through October 15, 2018, the Company had received conversion notices from noteholders with respect to $48.2 million in aggregate principal amount of Convertible Notes, which will settle during the fourth quarter of 2018. Any conversions with respect to conversion notices received by the Company on or after October 15, 2018 will settle on the maturity date. The Company will receive shares of its common stock under the Bond Hedges (as defined below) which are expected to offset the issuance of shares of common stock upon conversion of the Convertible Notes. See the discussion under “Convertible Note Hedge and Warrant Transaction” in this Note 11 for detailed information on the Bond Hedges.
In accounting for the settlement of the Convertible Notes, the Company will allocate the fair value of the settlement consideration remitted to the noteholders between the liability and equity components. The portion of the settlement consideration allocated to the extinguishment of the liability component will be based on the fair value of that component immediately before extinguishment. A gain or loss will be recognized in the condensed consolidated statements of income for any difference between the consideration allocated to the liability component and the sum of the carrying amount of the liability component and any unamortized debt issuance costs. Additionally, upon settlement of the converted principal, the Company will also derecognize the related unamortized discount and issuance costs. The Company will allocate the remaining settlement consideration to the reacquisition of the equity component and recognize this amount as a reduction of Stockholders' equity.
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 $1.4 billion liability component are being amortized to expense over the term of the Convertible Notes, and issuance costs attributable to the 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.


27



The Convertible Notes consist of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Liability component
 
 
 
     Principal
$
1,437,483

 
$
1,437,483

     Less: note discount and issuance costs
(21,513
)
 
(51,159
)
Net carrying amount
$
1,415,970

 
$
1,386,324

 
 
 
 
Equity component
 
 
 
Temporary equity
$
19,286

 
$

Additional paid-in capital
143,583

 
162,869

Total (including temporary equity)
$
162,869

 
$
162,869

The following table includes total interest expense recognized related to the Convertible Notes and the 2027 Notes (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018

2017
 
2018
 
2017
Contractual interest expense
$
9,721

 
$
1,797

 
$
30,283

 
$
5,391

Amortization of debt issuance costs
1,199

 
1,045

 
3,578

 
3,117

Amortization of debt discount
8,836

 
8,536

 
26,312

 
25,418

 
$
19,756

 
$
11,378

 
$
60,173

 
$
33,926

See Note 7 to the Company's condensed consolidated financial statements for fair value disclosures related to the Company's Convertible Notes and 2027 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") and also entered into separate warrant transactions (the "Warrant Transactions") with each of the Option Counterparties relating to approximately 16.0 million shares of common stock. As a result of the spin-off of its GoTo Business, the number of shares of the Company's common stock covered by the Bond Hedges and Warrant Transactions was adjusted to approximately 20.0 million shares.
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 $95.25 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 as the value of the Bond Hedges and Warrants were initially recorded in stockholders' equity and continue to be classified within stockholders' equity. As of September 30, 2018, no warrants have been exercised.
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.

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12. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives Designated as Hedging Instruments
As of September 30, 2018, 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. Derivative instruments are recognized as either assets or liabilities and are measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Gains and losses on derivatives that are designated as cash flow hedges are initially reported as a component of Accumulated other comprehensive loss and are subsequently recognized in income when the hedged exposure is recognized in income. Gains and losses from changes in fair values of derivatives that are not designated as hedges are recognized in Other income (expense), net.
The total cumulative unrealized loss on cash flow derivative instruments was $3.2 million at September 30, 2018, and is included in Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. The total cumulative unrealized gain on cash flow derivative instruments was $2.2 million at December 31, 2017, 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, 2018 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 income (expense), net.
Fair Values of Derivative Instruments
 
Asset Derivatives
 
Liability Derivatives
 
(In thousands)
 
September 30, 2018
 
December 31, 2017
 
September 30, 2018
 
December 31, 2017
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
 
$44
 
Prepaid
expenses
and other
current
assets
 
$2,481
 
Accrued
expenses
and other
current
liabilities
 
$3,549
 
Accrued
expenses
and other
current
liabilities
 
$110
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset Derivatives
 
Liability Derivatives
 
(In thousands)
 
September 30, 2018
 
December 31, 2017
 
September 30, 2018
 
December 31, 2017
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