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 June 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x   No o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 July 27, 2018, there were 135,658,446 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 June 30, 2018
CONTENTS

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

2



PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
June 30, 2018
 
December 31, 2017
 
(Unaudited)
 
(Derived from audited financial statements)
 
(In thousands, except par value)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,021,708

 
$
1,115,130

Short-term investments, available-for-sale
487,367

 
632,516

Accounts receivable, net of allowances of $3,737 and $4,645 at June 30, 2018 and December 31, 2017, respectively
528,386

 
712,535

Inventories, net
20,282

 
13,912

Prepaid expenses and other current assets
208,648

 
147,330

Total current assets
2,266,391

 
2,621,423

Long-term investments, available-for-sale
825,444

 
984,328

Property and equipment, net
246,025

 
252,932

Goodwill
1,662,438

 
1,614,494

Other intangible assets, net
141,989

 
141,952

Deferred tax assets, net
119,760

 
152,362

Other assets
104,015

 
52,685

Total assets
$
5,366,062

 
$
5,820,176

Liabilities, Temporary Equity and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
86,533

 
$
66,893

Accrued expenses and other current liabilities
277,275

 
277,679

Income taxes payable
1,261

 
34,033

Current portion of convertible notes
1,406,157

 

Current portion of deferred revenues
1,243,032

 
1,308,474

Total current liabilities
3,014,258

 
1,687,079

Long-term portion of deferred revenues
480,942

 
555,769

Long-term debt
741,277

 
2,127,474

Long-term income taxes payable
321,651

 
335,457

Other liabilities
143,677

 
121,936

Commitments and contingencies

 

Temporary equity from convertible notes
28,081

 

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; 307,662 and 305,751 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
308

 
306

Additional paid-in capital
5,116,339

 
4,883,670

Retained earnings
3,893,354

 
3,509,484

Accumulated other comprehensive loss
(18,718
)
 
(10,806
)
 
8,991,283

 
8,382,654

Less - common stock in treasury, at cost (172,244 and 162,044 shares at June 30, 2018 and December 31, 2017, respectively)
(8,355,107
)
 
(7,390,193
)
Total stockholders' equity
636,176

 
992,461

Total liabilities, temporary equity and stockholders' equity
$
5,366,062

 
$
5,820,176

See accompanying notes.

3



CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except per share information)
Revenues:
 
 
 
 
 
 
 
Subscription
$
110,796

 
$
74,596

 
$
213,954

 
$
143,686

Product and license
192,058

 
190,376

 
352,755

 
361,275

Support and services
439,511

 
428,255

 
872,848

 
850,943

Total net revenues
742,365

 
693,227

 
1,439,557

 
1,355,904

Cost of net revenues:
 
 
 
 
 
 
 
Cost of subscription, support and services
67,523

 
64,167

 
130,908

 
123,826

Cost of product and license revenues
29,707

 
32,735

 
63,579

 
62,446

Amortization of product related intangible assets
11,519

 
12,410

 
22,548

 
25,498

Total cost of net revenues
108,749

 
109,312

 
217,035

 
211,770

Gross margin
633,616

 
583,915

 
1,222,522

 
1,144,134

Operating expenses:
 
 
 
 
 
 
 
Research and development
112,943

 
106,696

 
211,493

 
209,365

Sales, marketing and services
286,730

 
268,300

 
537,943

 
515,065

General and administrative
77,340

 
81,146

 
141,067

 
157,655

Amortization of other intangible assets
4,019

 
3,692

 
7,685

 
7,338

Restructuring
7,437

 
2,140

 
13,624

 
10,126

Total operating expenses
488,469

 
461,974

 
911,812

 
899,549

Income from operations
145,147

 
121,941

 
310,710

 
244,585

Interest income
9,402

 
5,560

 
18,133

 
11,172

Interest expense
(20,542
)
 
(12,007
)
 
(40,878
)
 
(23,560
)
Other (expense) income, net
(2,537
)
 
(1,141
)
 
(5,549
)
 
2,185

Income from continuing operations before income taxes
131,470

 
114,353

 
282,416

 
234,382

Income tax expense
24,637

 
5,524

 
31,324

 
55,228

Income from continuing operations
106,833

 
108,829

 
251,092

 
179,154

(Loss) from discontinued operations, net of income taxes



 

 
(42,704
)
Net income
$
106,833

 
$
108,829

 
$
251,092

 
$
136,450

Basic earnings (loss) per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.79

 
$
0.72

 
$
1.82

 
$
1.18

(Loss) from discontinued operations

 

 

 
(0.28
)
Basic net earnings per share
$
0.79

 
$
0.72

 
$
1.82

 
$
0.90

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.73

 
$
0.70

 
$
1.72

 
$
1.14

(Loss) from discontinued operations

 

 

 
(0.27
)
Diluted net earnings per share:
$
0.73

 
$
0.70

 
$
1.72

 
$
0.87

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
135,993

 
151,212

 
137,614

 
152,247

Diluted
145,447

 
156,036

 
145,709


157,239


See accompanying notes.

4



CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Net income
$
106,833

 
$
108,829

 
$
251,092

 
$
136,450

Other comprehensive income:
 
 
 
 


 


Available for sale securities:
 
 
 
 


 


Change in net unrealized gains (losses)
332

 
350

 
(4,210
)
 
1,440

Less: reclassification adjustment for net losses (gains) included in net income
243

 
(85
)
 
1,244

 
(460
)
Net change (net of tax effect)
575

 
265

 
(2,966
)
 
980

Loss on pension liability

 

 

 
(9
)
Cash flow hedges:
 
 
 
 
 
 
 
Change in unrealized (losses) gains
(3,422
)
 
1,884

 
(2,730
)
 
3,876

Less: reclassification adjustment for net (gains) losses included in net income
(997
)
 
6

 
(2,216
)
 
1,678

Net change (net of tax effect)
(4,419
)
 
1,890

 
(4,946
)
 
5,554

Other comprehensive (loss) income
(3,844
)
 
2,155

 
(7,912
)
 
6,525

Comprehensive income
$
102,989

 
$
110,984

 
$
243,180

 
$
142,975


See accompanying notes.




5



CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended June 30,
 
2018
 
2017
 
(In thousands)
Operating Activities
 
 
 
Net income
$
251,092

 
$
136,450

Loss from discontinued operations

 
42,704

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization and other
106,266

 
97,403

Stock-based compensation expense
91,567

 
75,487

Deferred income tax expense
5,756

 
56,584

Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies
6,021

 
(6,049
)
Other non-cash items
5,166

 
7,812

Total adjustments to reconcile net income to net cash provided by operating activities
214,776

 
231,237

Changes in operating assets and liabilities, net of the effects of acquisitions:
 
 
 
Accounts receivable
182,469

 
140,471

Inventories
(6,645
)
 
(1,398
)
Prepaid expenses and other current assets
(38,080
)
 
(5,957
)
Other assets
1,795

 
(9,597
)
Income taxes, net
(72,405
)
 
(73,567
)
Accounts payable
19,851

 
(9,272
)
Accrued expenses and other current liabilities
10,435

 
(20,536
)
Deferred revenues
(41,100
)
 
26,084

Other liabilities
5,850

 
(790
)
Total changes in operating assets and liabilities, net of the effects of acquisitions
62,170

 
45,438

Net cash provided by operating activities of continuing operations
528,038

 
455,829

Net cash used in operating activities of discontinued operations

 
(56,070
)
Net cash provided by operating activities
528,038

 
399,759

Investing Activities
 
 
 
Purchases of available-for-sale investments
(332,136
)
 
(590,004
)
Proceeds from sales of available-for-sale investments
434,901

 
562,098

Proceeds from maturities of available-for-sale investments
196,791

 
179,330

Purchases of property and equipment
(32,929
)
 
(38,650
)
Cash paid for acquisitions, net of cash acquired
(65,983
)
 
(60,449
)
Cash paid for licensing agreements and technology
(1,217
)
 
(5,155
)
Other
3,002

 
987

Net cash provided by investing activities of continuing operations
202,429

 
48,157

Net cash used in investing activities of discontinued operations

 
(3,891
)
Net cash provided by investing activities
202,429

 
44,266

Financing Activities
 
 
 
Proceeds from issuance of common stock under stock-based compensation plans
113

 
1,490

Proceeds from credit facility

 
125,000

Repayment of credit facility

 
(95,000
)
Repayment of acquired debt
(5,674
)
 
(4,000
)
Stock repurchases, net
(764,978
)
 
(500,000
)
Cash paid for tax withholding on vested stock awards
(49,936
)
 
(60,547
)
Transfer of cash to GoTo Business resulting from the separation

 
(28,523
)
Net cash used in financing activities
(820,475
)
 
(561,580
)
Effect of exchange rate changes on cash and cash equivalents
(3,414
)
 
5,370

Change in cash and cash equivalents
(93,422
)
 
(112,185
)
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
$
1,021,708

 
$
844,771

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 six months ended June 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.
The impact of adoption of ASC 606 to the Company’s condensed consolidated statements of income and balance sheets are as follows:

7



 
 
Three Months Ended June 30, 2018
 
 
As Reported
 
Balances without adoption of ASC 606
 
Effect of Change
Higher/(Lower)
 
 
(in thousands, except per share amounts)
Total net revenues
 
$
742,365

 
$
741,920

 
$
445

Total cost of net revenues
 
108,749

 
107,807

 
942

Gross profit
 
633,616

 
634,113

 
(497
)
Total operating expenses
 
488,469

 
499,047

 
(10,578
)
Income from operations
 
145,147

 
135,066

 
10,081

Net income
 
$
106,833

 
$
99,295

 
$
7,538

 
 
 
 
 
 
 
Basic earnings per share
 
$
0.79

 
$
0.73

 
$
0.06

Diluted earnings per share
 
$
0.73

 
$
0.68

 
$
0.05

 
 
Six Months Ended June 30, 2018
 
 
As Reported
 
Balances without adoption of ASC 606
 
Effect of Change
Higher/(Lower)
 
 
(in thousands, except per share amounts)
Total net revenues
 
$
1,439,557

 
$
1,449,244

 
$
(9,687
)
Total cost of net revenues
 
217,035

 
215,933

 
1,102

Gross profit
 
1,222,522

 
1,233,311

 
(10,789
)
Total operating expenses
 
911,812

 
925,731

 
(13,919
)
Income from operations
 
310,710

 
307,580

 
3,130

Net income
 
$
251,092

 
$
250,197

 
$
895

 
 
 
 
 
 
 
Basic earnings per share
 
$
1.82

 
$
1.82

 
$

Diluted earnings per share
 
$
1.72

 
$
1.72

 
$

 
 
As of June 30, 2018
 
 
As Reported
 
Balances without adoption of ASC 606
 
Effect of Change
Higher/(Lower)
 
 
(in thousands)
Prepaid and other current assets (1)
 
$
208,648

 
$
186,538

 
$
22,110

Other assets (2)
 
104,015

 
42,323

 
61,692

Deferred tax assets, net
 
119,760

 
150,444

 
(30,684
)
Total assets
 
$
5,366,062

 
$
5,312,944

 
$
53,118

 
 
 
 
 
 
 
Other liabilities (3)
 
143,677

 
130,617

 
13,060

Current portion of deferred revenues
 
1,243,032

 
1,290,041

 
(47,009
)
Long-term portion of deferred revenues
 
480,942

 
525,160

 
(44,218
)
Total liabilities
 
$
4,701,805

 
$
4,779,972

 
$
(78,167
)
 
 
 
 
 
 
 
Stockholders' Equity:
 
 
 
 
 

Retained earnings
 
$
3,893,354

 
$
3,762,069

 
$
131,285

(1) As reported primarily includes contract acquisition costs of $35.0 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 $59.5 million.
(3) As reported includes deferred tax liabilities of $62.8 million. The balance without ASC 606 includes deferred tax liabilities
of $49.7 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 standards 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. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. The Company has concluded an assessment of its systems, data and processes related to the implementation of this accounting standard. Additionally, the Company 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.

9



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 June 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.
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.

10



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 June 30, 2017
As Previously Reported
 
Amount Reclassified
 
As Reported Herein
Revenues:
 
 
 
 
Revenues:
 
Software as a service
$
41,513

 
$
33,083

 
Subscription
$
74,596

Product and licenses (1)
211,009

 
(20,633
)
 
Product and license
190,376

License updates and maintenance (2)
409,028

 
19,227

 
Support and services (3)
428,255

Professional services
31,677

 
(31,677
)
 
 
 
Total net revenues
$
693,227

 
$

 
Total net revenues
$
693,227

Six Months Ended June 30, 2017
As Previously Reported
 
Amount Reclassified
 
As Reported Herein
Revenues:
 
 
 
 
Revenues:
 
Software as a service
$
80,243

 
$
63,443

 
Subscription
$
143,686

Product and licenses (1)
402,606

 
(41,331
)
 
Product and license
361,275

License updates and maintenance (2)
811,783

 
39,160

 
Support and services (3)
850,943

Professional services
61,272

 
(61,272
)
 
 
 
Total net revenues
$
1,355,904

 
$

 
Total net revenues
$
1,355,904


(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 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

11



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 services 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.
Sales tax
The Company records revenue net of sales tax.

12




Timing of revenue recognition
 
 
Three Months Ended
Six Months Ended
 
 
June 30, 2018
 
 
(In Thousands)
Products and services transferred at a point in time
 
$
237,144

$
407,877

Products and services transferred over time
 
505,221

1,031,680

Total net revenues
 
$
742,365

$
1,439,557

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 $1.24 billion and $480.9 million, respectively, as of June 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 six months ended June 30, 2018, the Company recognized $456.6 million and $784.7 million, respectively, of revenue that was included in the deferred revenue balance as of March 31, 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 six months ended June 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.
The majority 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
 
$
275,424

 
$
26,255

 
$
530

 
$
302,209

Support and services
 
1,577,126

 
57,889

 
3,439

 
1,638,454

Total net revenues
 
$
1,852,550

 
$
84,144

 
$
3,969

 
$
1,940,663

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 systematic 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

13



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 systematic 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 six months ended June 30, 2018, the Company recorded amortization of capitalized contract acquisition costs of $8.3 million and $16.2 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 six months ended June 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 (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
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
106,833

 
$
108,829

 
$
251,092

 
$
179,154

Loss from discontinued operations, net of income taxes

 

 

 
(42,704
)
Net income
$
106,833

 
$
108,829

 
$
251,092

 
$
136,450

Denominator:
 
 
 
 
 
 
 
Denominator for basic net earnings per share - weighted-average shares outstanding
135,993

 
151,212

 
137,614

 
152,247

Effect of dilutive employee stock awards
1,940

 
2,180

 
2,360

 
2,815

Effect of dilutive Convertible Notes
6,023

 
2,644

 
5,258

 
2,177

Effect of dilutive warrants
1,491



 
477

 

Denominator for diluted net earnings per share - weighted-average shares outstanding
145,447

 
156,036

 
145,709

 
157,239

 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.79

 
$
0.72

 
$
1.82

 
$
1.18

Loss from discontinued operations

 

 

 
(0.28
)
Basic net earnings per share
$
0.79

 
$
0.72

 
$
1.82

 
$
0.90

Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.73

 
$
0.70

 
$
1.72

 
$
1.14

Loss from discontinued operations

 

 

 
(0.27
)
Diluted net earnings per share:
$
0.73

 
$
0.70

 
$
1.72

 
$
0.87

For the three and six months ended June 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 six months ended June 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 six months ended June 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.
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

15



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
47,944

 
Indefinite
Other assets
69

 
 
Assets acquired
84,174

 
 
Other current liabilities assumed
5,711

 
 
Assumed debt
5,674

 
 
Deferred taxes
768

 
 
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, and 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
23,100

 
6 years
In process research and development
700

 
Indefinite
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 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.

16



6. INVESTMENTS
Available-for-sale Investments
Investments in available-for-sale securities at fair value were as follows for the periods ended (in thousands):
 
 
June 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
$
371,079

 
$
431

 
$
(3,494
)
 
$
368,016

 
$
441,315

 
$
509

 
$
(2,760
)
 
$
439,064

Corporate securities
667,265

 
188

 
(5,283
)
 
662,170

 
810,444

 
268

 
(3,020
)
 
807,692

Municipal securities
2,500

 
8

 

 
2,508

 
3,965

 
2

 
(2
)
 
3,965

Government securities
281,495

 
9

 
(1,387
)
 
280,117

 
367,595

 
44

 
(1,516
)
 
366,123

Total
$
1,322,339

 
$
636

 
$
(10,164
)
 
$
1,312,811

 
$
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 June 30, 2018 were approximately six months and two years, respectively.
Realized Gains and Losses on Available-for-sale Investments
For the three and six months ended June 30, 2018, the Company received proceeds from the sales of available-for-sale investments of $76.4 million and $434.9 million, respectively, and for the three and six months ended June 30, 2017, the Company received proceeds from the sales of available-for-sale investments of $104.1 million and $562.1 million, respectively.
For the three months ended June 30, 2018, the Company had no realized gains on the sales of available-for-sale investments. For the six months ended June 30, 2018, the Company had $0.1 million in realized gains on the sales of available-for-sale investments, and during the three and six months ended June 30, 2017, the Company had $0.2 million and $0.7 million, respectively, in realized gains on the sales of available-for-sale investments.
For the three and six months ended June 30, 2018, the Company had realized losses on available-for-sale investments of $0.3 million and $1.4 million, respectively, and for the three and six months ended June 30, 2017, it had realized losses on available-for-sale investments of $0.1 million and $0.2 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 (expense) income, net, in the accompanying condensed consolidated statements of income.
Unrealized Losses on Available-for-Sale Investments
The gross unrealized losses on the Company’s available-for-sale investments that are not deemed to be other-than-temporarily impaired as of June 30, 2018 and December 31, 2017 were $10.2 million and $7.3 million, respectively. Because the Company does not intend to sell any of its investments in an unrealized loss position and it is more likely than not that it will not be required to sell the securities before the recovery of its amortized cost basis, which may not occur until maturity, it does not consider the securities to be other-than-temporarily impaired.

17



Equity Securities without Readily Determinable Fair Values
The Company held direct investments in privately-held companies of $6.9 million as of June 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 six months ended June 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 $9.9 million as of June 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 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.

18




Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
As of June 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
$
307,466

 
$
307,466

 
$

 
$

Money market funds
671,400

 
671,400

 

 

Corporate securities
5,844

 

 
5,844

 

Agency securities
299

 

 
299

 

Government securities
36,699

 

 
36,699

 

Available-for-sale securities:
 
 
 
 
 
 
 
Agency securities
368,016

 

 
368,016

 

Corporate securities
662,170

 

 
661,457

 
713

Municipal securities
2,508

 

 
2,508

 

Government securities
280,117

 

 
280,117

 

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
Foreign currency derivatives
308

 

 
308

 

Total assets
$
2,334,827

 
$
978,866

 
$
1,355,248

 
$
713

Accrued expenses and other current liabilities:
 
 
 
 
 
 
 
Foreign currency derivatives
3,345

 

 
3,345

 

Total liabilities
$
3,345

 
$

 
$
3,345

 
$

 
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 these securities based on pricing from the Service, whose sources may use quoted prices in active markets for identical assets

19



(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 and six months ended June 30, 2018, certain direct investments in privately-held companies with a combined carrying value of $0.4 million and $2.8 million, respectively, were determined to be impaired and written down to their estimated fair values of zero and $1.9 million, respectively. Accordingly, the Company recorded $0.4 million and $0.9 million, respectively, of impairment charges during the three and six months ended June 30, 2018, which are included in Other (expense) income, net in the accompanying condensed consolidated statements of income. For the three months ended June 30, 2017, no cost method investments were determined to be impaired. For the six months ended June 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 (expense) income, 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 June 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 June 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
$
727,778

 
$
741,277

Convertible Notes
$
2,059,942

 
$
1,406,157

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 June 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 exercisable or issuable upon vesting. The Company’s policy is to recognize compensation cost for awards with only service

20



conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. As of June 30, 2018, there were 22,730,247 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 16,956,200 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 June 30, 2018, 1,512,624 shares have been issued under the 2015 ESPP. The Company recorded stock-based compensation costs related to the 2015 ESPP of $2.5 million and $1.9 million for the three months ended June 30, 2018 and 2017, respectively, and $5.5 million and $3.5 million for the six months ended June 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:
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
Expected volatility factor
0.27 - 0.29

 
0.29

Risk free interest rate
1.12% - 1.63%

 
0.60
%
Expected dividend yield
0
%
 
0
%
Expected life (in years)
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 expected dividend yield input was zero as it has not historically paid cash dividends on its common stock. The Company will reevaluate changes to the dividend yield in calculating the fair value of the 2015 ESPP awards for subsequent Payment Periods, subject to Board of Directors approval. 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
 
Six Months Ended
Income Statement Classifications
June 30, 2018

June 30, 2017
 
June 30, 2018
 
June 30, 2017
Cost of subscription, support and services
$
2,241

 
$
815

 
$
3,721

 
$
1,407

Research and development
17,715

 
11,660

 
28,508

 
21,326

Sales, marketing and services
19,618

 
14,728

 
33,185

 
26,325

General and administrative
16,270

 
13,476

 
26,153

 
26,429

Total
$
55,844

 
$
40,679

 
$
91,567

 
$
75,487


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 June 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 5,724,774. As of June 30, 2018, there was $396.4 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 1.99 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. There were no changes in reporting units nor indicators of impairment during the three months ended June 30, 2018. See Note 5 for more information regarding the Company's acquisitions.
The following table presents the change in goodwill during the six months ended June 30, 2018 (in thousands):
 
Balance at January 1, 2018
 
Additions
 
 
Other
 
 
Balance at June 30, 2018
Goodwill
$
1,614,494

 
$
47,944

(1)
 
$

 
 
$
1,662,438


(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.
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.

23



Intangible assets consist of the following (in thousands):
 
June 30, 2018
 
December 31, 2017
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Product related intangible assets
$
689,873

 
$
577,482

 
$
663,004

 
$
554,934

Other
226,323

 
196,725

 
222,923

 
189,041

Total
$
916,196

 
$
774,207

 
$
885,927

 
$
743,975

Amortization of product-related intangible assets, which consists primarily of product-related technologies and patents, was $11.5 million and $12.4 million for the three months ended June 30, 2018 and 2017, respectively, and $22.5 million and $25.5 million for the six months ended June 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 $4.0 million and $3.7 million for the three months ended June 30, 2018 and 2017, respectively, and $7.7 million and $7.3 million for the six months ended June 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 June 30, 2018 is as follows (in thousands): 
Year ending December 31,
Amount

2018 (remaining six months)
$
31,022

2019
39,719

2020
27,220

2021
13,232

2022
11,381

Thereafter
19,415

     Total
$
141,989

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

2017 (5)
 
2018
 
2017 (5)
Net revenues:
 
 
 
 
 
 
 
Workspace Services revenues(1)
$
454,903

 
$
423,509

 
$
867,483

 
$
824,137

Networking revenues(2)
207,342

 
196,867

 
415,965

 
390,287

Content Collaboration revenues(3)
46,218

 
41,022

 
90,898

 
79,933

Professional services(4)
33,902

 
31,829

 
65,211

 
61,547

Total net revenues
$
742,365

 
$
693,227

 
$
1,439,557

 
$
1,355,904



24



(1)
Workspace Services revenues are primarily comprised of sales from the Company’s application virtualization products, which include XenDesktop and XenApp, the Company's enterprise mobility management products, which include XenMobile 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. 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2018

2017 (1)
 
2018
 
2017 (1)
Net revenues:
 
 
 
 
 
 
 
Americas
$
430,184

 
$
403,072

 
$
844,184

 
$
794,418

EMEA
234,131

 
217,313

 
448,706

 
419,165

APJ
78,050

 
72,842

 
146,667

 
142,321

Total net revenues
$
742,365

 
$
693,227

 
$
1,439,557

 
$
1,355,904

 
 
(1)
As noted above, prior period amounts have not been adjusted under the modified retrospective method. See Note 2 for further information regarding the Company’s adoption of the revenue recognition standard.
At June 30, 2018, one distributor, the Arrow Group, accounted for 12% of 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 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,

25



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 June 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 June 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.
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 June 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) during the calendar quarter ending September 30, 2018. The period during which the Convertible Notes will be eligible for conversion pursuant to this sales price condition will terminate on September 30, 2018 unless the sales price condition is met for the calendar quarter then ended. Accordingly, as of June 30, 2018, the Company reclassified the outstanding balance, net of discount, of $1.41 billion of the Convertible Notes from other liabilities to current liabilities and the difference between the face value and carrying value of $28.1 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 July 2, 2018. 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.
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

26



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

 
$
1,437,483

     Less: note discount and issuance costs
(31,326
)
 
(51,159
)
Net carrying amount
$
1,406,157

 
$
1,386,324

 
 
 
 
Equity component
 
 
 
Temporary equity
$
28,081

 
$

Additional paid-in capital
134,788

 
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
 
Six Months Ended
 
June 30,
 
June 30,
 
2018

2017
 
2018
 
2017
Contractual interest expense
$
10,327

 
$
1,797

 
$
20,562

 
$
3,594

Amortization of debt issuance costs
1,374

 
1,039

 
2,379

 
2,071

Amortization of debt discount
8,811

 
8,472

 
17,476

 
16,882

 
$
20,512

 
$
11,308

 
$
40,417

 
$
22,547

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.

27



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 June 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.
12. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives Designated as Hedging Instruments
As of June 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 (expense) income, net.
The total cumulative unrealized loss on cash flow derivative instruments was $2.8 million at June 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 June 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 (expense) income, net.

28



Fair Values of Derivative Instruments
 
Asset Derivatives
 
Liability Derivatives
 
(In thousands)
 
June 30, 2018
 
December 31, 2017
 
June 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
 
$65
 
Prepaid
expenses
and other
current
assets
 
$2,481
 
Accrued
expenses
and other
current
liabilities
 
$3,108
 
Accrued
expenses
and other
current
liabilities
 
$110
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset Derivatives
 
Liability Derivatives
 
(In thousands)
 
June 30, 2018
 
December 31, 2017
 
June 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
and other
current
assets
 
$243
 
Prepaid
expenses
and other
current
assets
 
$17
 
Accrued
expenses
and other
current
liabilities
 
$237
 
Accrued
expenses
and other
current
liabilities
 
$704

The Effect of Derivative Instruments on Financial Performance
 
For the Three Months Ended June 30,
 
(In thousands)
Derivatives in Cash Flow
Hedging Relationships
Amount of (Loss) Gain Recognized in Other
Comprehensive Income
(Effective Portion)
 
Location of Gain (Loss) Reclassified
from Accumulated Other
Comprehensive Loss into
Income
(Effective Portion)
 
Amount of Gain (Loss) Reclassified from
Accumulated Other 
Comprehensive Loss
(Effective Portion)
 
2018
 
2017
 
 
 
2018
 
2017
Foreign currency forward contracts
$
(4,419