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Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,"“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
x Large accelerated filer
o Accelerated
filer
o Non-accelerated filer
o Smaller reporting company
o Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
1
Securities registered pursuant to Section 12(b) of the Act
Title of each class
Trading symbol(s)
Name
of each exchange on which registered
Common Stock, par value $.001 per share
CTXS
The NASDAQ Global Select Market
As of May 3, 2019, there were 131,651,832 shares of the registrant’s Common Stock, $.001 par value per share, outstanding.
Liabilities, Temporary Equity and Stockholders' Equity
Current liabilities:
Accounts
payable
$
81,476
$
75,551
Accrued expenses and other current liabilities
292,663
290,492
Income
taxes payable
2,220
44,409
Current portion of convertible notes
1,163,199
1,155,445
Current portion of deferred revenues
1,303,210
1,345,243
Total
current liabilities
2,842,768
2,911,140
Long-term portion of deferred revenues
453,507
489,329
Long-term debt
742,100
741,825
Long-term
income taxes payable
285,626
285,627
Operating lease liabilities
203,580
—
Other liabilities
83,834
148,499
Commitments
and contingencies
Temporary equity from convertible notes
1,163
8,110
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; 311,732 and 309,761 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
Adjustments
to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other
62,472
51,876
Stock-based compensation expense
65,234
35,723
Deferred
income tax expense
23,993
8,160
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies
(1,939
)
(1,906
)
Other
non-cash items
845
3,302
Total adjustments to reconcile net income to net cash provided by operating activities
150,605
97,155
Changes
in operating assets and liabilities, net of the effects of acquisitions:
Accounts receivable
204,406
285,104
Inventories
(1,876
)
34
Prepaid
expenses and other current assets
17,534
(13,494
)
Other assets
(15,891
)
9,071
Income taxes, net
(49,379
)
(35,996
)
Accounts
payable
6,134
1,828
Accrued expenses and other current liabilities
(81,979
)
(52,735
)
Deferred revenues
(77,855
)
(79,890
)
Other
liabilities
5,519
2,519
Total changes in operating assets and liabilities, net of the effects of acquisitions
6,613
116,441
Net
cash provided by operating activities
267,566
357,855
Investing Activities
Purchases of available-for-sale investments
(7,094
)
(125,687
)
Proceeds
from sales of available-for-sale investments
772,954
358,465
Proceeds from maturities of available-for-sale investments
134,325
95,341
Purchases
of property and equipment
(17,277
)
(15,997
)
Cash paid for acquisitions, net of cash acquired
—
(66,330
)
Cash paid for licensing agreements,
patents and technology
(590
)
(535
)
Other
575
3,257
Net cash provided by investing activities
882,893
248,514
Financing
Activities
Proceeds from issuance of common stock under stock-based compensation plans
—
70
Repayment of acquired debt
—
(5,674
)
Stock
repurchases, net
(93,805
)
(600,000
)
Accelerated stock repurchase program
—
(150,000
)
Cash paid for tax withholding on vested stock awards
(17,662
)
(13,602
)
Cash
paid for dividends
(46,024
)
—
Net cash used in financing activities
(157,491
)
(769,206
)
Effect of exchange rate changes on cash and cash equivalents
945
2,404
Change
in cash and cash equivalents
993,913
(160,433
)
Cash and cash equivalents at beginning of period
618,766
1,115,130
Cash and cash equivalents
at end of period
$
1,612,679
$
954,697
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, 2018.
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.
The
Company's revenues are derived from sales of its Digital Workspace solutions (formerly Workspace Services and Content Collaboration), Networking products 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 2019, the Company adopted new accounting guidance related to leases which is described below. There have been no other significant changes in the
Company’s accounting policies during the three months ended March 31, 2019 as compared to the significant accounting policies described in its Annual Report on Form 10-K for the year ended December 31, 2018.
Recent Accounting Pronouncements
Leases
In February 2016, the Financial Accounting Standards Board issued an accounting standard update on the accounting for leases (“ASC 842”). The new guidance requires that lessees in a leasing arrangement recognize a right-of-use (“ROU”) asset and a lease liability for
most leases (other than leases that meet the definition of a short-term lease). The Company adopted this standard as of January 1, 2019 using a modified retrospective approach, and recognized a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification and not reassess whether any expired or existing contract
is a lease or contains a lease.
Adoption of this standard had a material impact in the Company’s condensed consolidated balance sheets, but did not have an impact on its condensed consolidated income statements. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while its accounting for finance leases remained substantially unchanged. Adoption of the new standard resulted in the recording of additional right-of-use assets for operating leases (net of previously recorded lease losses related to the consolidation of leased facilities of $42.2 million and deferred rent liability of $20.5 million under the old guidance) of approximately $194.5 million and
operating lease liabilities of approximately $256.4 million, as of January 1, 2019. The difference between the additional lease assets and lease liabilities, net of the deferred tax impact, was recorded as an adjustment to retained earnings of $0.8 million. Adoption of this standard had no impact to cash from or used in operating, financing, or investing in the Company’s condensed consolidated cash flows statements. Adoption of this standard had no impact on the Company's debt covenant compliance under its current agreement or on liquidity. See Note 19 for additional information regarding the
Company’s leases.
7
Premium Amortization on Call Debt Securities
In March 2017, the Financial Accounting Standards Board issued an accounting standard update on the accounting for amortization of premium costs on purchased callable debt securities. The new guidance amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The standard does not require any accounting change for debt securities held at a discount; the discount continues to be amortized to maturity. The
Company adopted the standard effective January 1, 2019 on a modified retrospective basis. 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 Cloud Computing Costs
In August 2018, the Financial Accounting Standards Board issued an accounting standard update on the accounting for implementation costs incurred by customers in cloud computing arrangements that are service contracts. The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract
with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company early adopted this standard on a prospective basis effective January 1, 2019. Adoption of this standard did not have a material impact on the Company's condensed consolidated financial position, results of operations and cash flows.
Fair Value Measurements
In August 2018, the Financial Accounting Standards Board issued an accounting standard update on fair value measurements. The new guidance modifies the disclosure requirements on fair value measurements by removing certain disclosure requirements related to the fair value hierarchy,
modifying existing disclosure requirements related to measurement uncertainty, and adding new disclosure requirements. The new guidance is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's condensed consolidated financial position, results of operations and cash flows.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported
in the condensed consolidated financial statements and accompanying notes. Significant estimates made by management include the standalone selling price related to revenue recognition, the provision for doubtful accounts receivable, the provision to reduce obsolete or excess inventory to market, the provision for estimated returns, as well as sales allowances, the assumptions used in the valuation of stock-based awards, the assumptions used in the discounted cash flows to mark certain of its investments to market, the valuation of the Company’s goodwill, net realizable value of product related and other intangible assets, the provision for income taxes, valuation allowance for deferred tax assets, uncertain tax positions, 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 March 31, 2019 and December 31, 2018 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.
8
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.
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 Digital Workspace 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.
Support and services
Support and services includes license updates, maintenance and professional services revenues. License updates and maintenance revenues are primarily comprised of software and hardware maintenance, when and if-available updates and technical support. For performance obligations related to license updates and maintenance, revenue is generally recognized on a straight-line basis over the period of service because the Company transfers control evenly by providing a stand-ready service. That is, the Company is continuously working on improving its products and pushing those updates through to the customer, and stands ready to provide software
updates on a when and if-available basis. Services revenues are comprised of fees from consulting services primarily related to the implementation of the Company’s products and fees from product training and certification.
The Company’s typical performance obligations include the following:
9
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 solutions or services, or bundles of solutions 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. Solutions and services that are not both capable of being distinct and distinct within the context of the contract are combined and treated as a single performance obligation in determining the allocation and recognition of revenue.
The standalone selling price is the price at which the Company would sell a promised product or service separately to the customer. For the majority of the Company's software licenses and hardware, CSP and on-premise subscription software licenses,
the Company uses the observable price in transactions with multiple performance obligations. For the majority of the Company’s support and services, and cloud-hosted subscription offerings, the Company uses the observable price when the Company sells that support and service and cloud-hosted subscription separately to similar customers. If the standalone selling price for a performance obligation is not directly observable, the Company estimates it. The Company estimates
standalone selling price by taking into consideration market conditions, economics of the offering and customers’ behavior. The Company maximizes the use of observable inputs and applies estimation methods consistently in similar circumstances. The Company allocates the transaction price to each distinct performance obligation on a relative standalone selling price basis.
Revenues are recognized when control of the promised products or services are transferred to customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those products or services. The
Company generates all of its revenues from contracts with customers.
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 $1.35 billion and $489.3 million, respectively, as of December 31, 2018 and $1.30 billion
and $453.5 million, respectively, as of March 31, 2019. 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 months ended March 31, 2019, the Company recognized $455.7 million of revenue
that was included in the deferred revenue balance as of December 31, 2018. During the three months ended March 31, 2018, the Company recognized $454.8 million of revenue that was included in the deferred revenue balance as of January 1, 2018.
The Company performs its obligations under a contract with a customer by transferring solutions 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 months ended March 31, 2019 and 2018.
For
the Company’s software and hardware products, the timing of payment is typically upfront for its perpetual offerings and the Company’s on-premise subscriptions. Therefore, deferred revenue is created when a contract includes performance obligations such as license updates and maintenance or certain professional services that are satisfied over time. For subscription contracts, the timing of payment is typically in advance of services, and deferred revenue is created as these services are provided over time.
A significant portion of the
Company’s contracts have an original duration of one year or less; therefore, the Company applies a practical expedient to determine whether a significant financing component exists and does not consider the effects of the time value of money. For multi-year contracts, the Company bills annually.
Transaction price allocated to the remaining performance obligations
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at
the end of the reporting period (in thousands):
The Company is required to capitalize certain contract acquisition costs consisting primarily of commissions paid and related payroll taxes when contracts are signed. The asset recognized from capitalized incremental and recoverable acquisition costs is amortized on a basis consistent with the pattern of transfer of the products or services to which the asset relates.
The Company’s typical contracts include performance obligations
related to product and licenses and support. In these contracts, incremental costs of obtaining a contract are allocated to the performance obligations based on the relative estimated standalone selling prices and then recognized on a basis that is consistent with the transfer of the goods or services to which the asset relates. The commissions paid on annual renewals of support for product and licenses are not commensurate with the initial commission. The costs allocated to product and licenses are expensed at the time of sale, when revenue for the product and functional software licenses is recognized. The costs allocated to customer support for product and licenses are amortized ratably over a period of the greater of the contract
term or the average customer life, the expected period of benefit of the asset capitalized. The Company currently estimates an average customer life of three to five years, which it believes is appropriate based on consideration of the historical average customer life and the estimated useful life of the underlying product and license sold as part of the transaction. Amortization of contract acquisition costs related to support are limited to the contractual period of the arrangement as the Company intends to pay a commensurate commission upon renewal of the related support. For contracts
that contain multi-year services or subscriptions, the amortization period of the capitalized costs is the expected period of benefit, which is the greater of the contractual term or the expected customer life.
The Company elects to apply a practical expedient to expense contract acquisition costs as incurred where the expected
11
period of benefit is one year or less.
For the three months ended March 31,
2019 and March 31, 2018, the Company recorded amortization of capitalized contract acquisition costs of $10.7 million and $7.9 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 months ended March 31, 2019 and 2018.
4.
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted-average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise or settlement of stock awards and shares issuable under the employee stock purchase plan (calculated using the treasury stock method) during the period they were outstanding and potential dilutive common shares from the conversion spread on the Company’s 0.500% Convertible Notes due 2019 (the “Convertible Notes”) and the
Company's warrants.
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share information):
Denominator for basic earnings per share - weighted-average shares outstanding
131,483
139,248
Effect
of dilutive employee stock awards
2,834
2,780
Effect of dilutive Convertible Notes
5,016
4,360
Effect of dilutive warrants
1,692
—
Denominator
for diluted earnings per share - weighted-average shares outstanding
141,025
146,388
Basic earnings per share
$
0.84
$
1.04
Diluted
earnings per share
$
0.78
$
0.99
For the three months ended March 31, 2019, 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 $94.62 per share. For the three months ended March 31, 2018, the weighted-average number of shares outstanding used in the computation of 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 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 $71.44 per share of common stock. For the three months ended March 31, 2019 and 2018, 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.
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5.
ACQUISITIONS
2018 Business Combinations
Sapho, Inc.
On November 13, 2018, the Company acquired all of the issued and outstanding securities of Sapho, Inc. (“Sapho”), whose technology is intended to advance the Company’s development of the intelligent workspace. The acquired technology enables efficient workstyles by creating a unified and customizable notification experience for business applications. The total preliminary cash consideration for this transaction was $182.9
million, net of $3.7 million cash acquired. Transaction costs associated with the acquisition were not significant. The Company continues to evaluate certain income tax assets and liabilities related to the Sapho acquisition that may be subject to change through the remainder of the measurement period, which will extend not more than twelve months from the acquisition date.
Cedexis, Inc.
On February 6, 2018, the Company acquired all of the issued and outstanding securities of Cedexis, Inc. (“Cedexis”) whose solution is a real-time data driven
service for dynamically optimizing the flow of traffic across public clouds and data centers that provides a dynamic and reliable way to route and manage Internet performance for customers moving towards hybrid and multi-cloud deployments. The total cash consideration for this transaction was $66.0 million, net of $6.0 million cash acquired. Transaction costs associated with the acquisition were not significant.
6. INVESTMENTS
Available-for-sale Investments
Investments in available-for-sale securities at fair value were as follows for the periods ended (in thousands):
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 and other than temporary impairments, as well as prepayments of available-for-sale investments purchased at a premium. 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 March 31, 2019 were approximately seven months
and two years, respectively.
Realized Gains and Losses on Available-for-sale Investments
For the three months ended March 31, 2019 and 2018, the Company received proceeds from the sales of available-for-sale investments of $773.0 million and $358.5 million, respectively.
For the three months ended March 31, 2019
and 2018, the Company had realized gains on the sales of available-for-sale investments of $1.0 million and $0.1 million, respectively. For the three months ended March 31, 2019 and 2018, the Company had realized losses on available-for-sale investments of $0.4 million and $1.1 million, respectively, primarily related to sales of these investments
during these periods. All realized gains and losses related to the sales of available-for-sale investments are included in Other income (expense), net, in the accompanying condensed consolidated statements of income.
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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 March 31, 2019
and December 31, 2018 were $1.1 million and $2.9 million, respectively. Because the Company does not currently intend to sell any of its investments in an unrealized loss position other than as noted above and it is more likely than not that it will not be required to sell the securities before the recovery of its amortized cost basis, which may not occur until maturity, it does not consider the securities to be other-than-temporarily impaired.
Equity Securities without Readily Determinable Fair Values
The
Company held direct investments in privately-held companies of $14.3 million and $13.4 million as of March 31, 2019 and December 31, 2018, respectively, 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.
The Company determined that there were no material adjustments resulting from observable price changes to the Company's investments in privately-held companies without a readily determinable fair value for the three months ended March 31, 2019 and 2018. 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 $10.6 million and $10.9 million as of March 31, 2019 and December 31, 2018, respectively, 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. These private equity
funds focus on making venture capital investments, principally by investing in equity securities of early and late stage privately held corporations. The funds’ general partner shall determine the amount, timing and form (whether cash or in kind) of all distributions made by the funds. The Company may only transfer its investments in private equity fund interests subject to the general partner’s written consent and cannot trade its fund interests in established securities markets, secondary markets or equivalents thereof. The Company has unfunded commitments of $1.0 million as of March 31, 2019.
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.
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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.
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
The Company’s fixed income available-for-sale security portfolio generally consists of investment grade securities from diverse issuers with a minimum credit rating of A-/A3 and a weighted-average credit rating of AA-/Aa3. The Company values these securities based on pricing from the Service, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value, and accordingly, the Company classifies all of its fixed income available-for-sale
securities as Level 2.
The Company measures its cash flow hedges, which are classified as Prepaid expenses and other current assets and Accrued expenses and other current liabilities, at fair value based on indicative prices in active markets (Level 2 inputs).
Assets Measured at Fair Value on a Non-recurring Basis Using Significant Unobservable Inputs (Level 3)
During the three months ended March 31, 2019, no direct investments in privately-held companies were determined to be impaired. For the
three months ended March 31, 2018, the Company determined that certain direct investments in privately-held companies were impaired and recorded charges of $0.4 million, which were included in Other income (expense), net in the accompanying condensed consolidated statements of income. In determining the fair value of the investments, the Company considers many factors including but not limited to operating performance of the investee, the amount of cash that the investee has on-hand, the ability to obtain additional financing and the overall market conditions in which the
investee operates.
Additional Disclosures Regarding Fair Value Measurements
The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short maturity of these items.
As of March 31, 2019, the fair value of the $750.0 million of unsecured senior notes due December 1, 2027 (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 March 31, 2019, 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
$
741,825
$
742,100
Convertible Notes
$
1,651,210
$
1,163,199
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 March 31, 2019, 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 March 2019, the Company's Board of Directors approved an amendment to the Amended and Restated 2014 Equity Incentive Plan, which is subject to stockholder approval at the Company Annual Meeting of Stockholders on June 4, 2019. There will be no grants under this amended plan until the amendment is approved by the Company's stockholders. The
Company’s superseded stock plans with outstanding awards include the Amended and Restated 2005 Equity Incentive Plan (the "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 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 conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. As of March 31, 2019, there were 19,011,885 shares of common stock reserved for issuance pursuant to the Company’s stock-based
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compensation plans including authorization under its 2014 Plan to grant stock-based awards covering 14,756,769 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 March 31, 2019, 1,937,455 shares have been issued under the 2015 ESPP. The Company recorded stock-based compensation costs related to the 2015 ESPP of $2.9 million and $2.9 million for the three months ended March 31,
2019 and 2018, respectively.
The Company used the Black-Scholes model to estimate the fair value of 2015 ESPP awards with the following weighted-average assumptions:
The Company determined the expected volatility factor by considering the implied volatility in six-month market-traded options of the
Company's common stock based on third-party volatility quotes. The Company's decision to use implied volatility was based upon the availability of actively traded options on the Company's common stock and its assessment that implied volatility is more representative of future stock price trends than historical volatility. The risk-free interest rate was based on a U.S. Treasury instrument whose term is consistent with the expected term of the stock options. The Company's historical dividend yield input was zero in prior periods as it had not historically paid cash dividends on its common stock. The current dividend yield has been updated for expected dividend yield payout due to the
Company's intention to pay a recurring quarterly dividend beginning in December 2018. The expected term is based on the term of the purchase period for grants made under the ESPP.
Stock-Based Compensation
The detail of the total stock-based compensation recognized by income statement classification is as follows (in thousands):
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
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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. Certain awards for senior level employees, none of whom were executive officers, were modified in December 2018 to replace the pre-established custom index group used to measure performance and related award payout with companies that are part of the Nasdaq Composite index. As a result, the awards were revalued as of the modification date. The impact of the modification was not material to the condensed consolidated financial statements.
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 (Modified)
March 2017 Grant
Expected volatility factor
0.16-0.32
0.27-0.32
Risk
free interest rate
2.67
%
1.48
%
Expected dividend yield
0
%
0
%
For the unmodified 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.
For the modified March 2017 grant, all input variables chosen are as of the modification date. The range of expected
volatilities utilized was based on the historical volatilities of the Company's common stock and the average of the Nasdaq
Composite index 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 1.06 year period, which is commensurate with
the awards' remaining performance period at the modification 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 remaining performance period. The Company used a zero dividend yield input for this award as dividends are assumed to be reinvested. The estimated
incremental fair value of each modified award as of the modification date was $99.54.
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. 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.
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Company Performance Stock Units
In February 2019, the Company awarded certain senior level employees 93,500 non-vested performance stock units granted under the 2014 Plan. The number of non-vested stock units underlying the award will be determined within sixty days following the completion of the performance
period ending December 31, 2020 and will be based on the achievement of specific corporate financial performance goals related to annual free cash flow per share growth between the fiscal years ended December 31, 2018 and December 31, 2020. Within sixty days following an interim measurement period of 12 months, the Compensation Committee will determine the number of restricted stock units that would be deemed earned based on performance to date and up to 50% of the target award may be earned based on such performance. However, any stock units that are deemed earned will remain subject to continued
service vesting until the end of the performance period, or a change in control, if earlier. 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. 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.
In March 2018, the Company awarded senior level employees 268,729 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 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 184,322 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 March 31, 2019, the total number of non-vested stock units outstanding, including company performance awards, market performance and service condition awards and service-based awards was 4,206,721. As of March 31, 2019,
there was $325.0 million of total unrecognized compensation cost related to non-vested stock units. The unrecognized cost of the awards legally granted through March 31, 2019 is expected to be recognized over a weighted-average period of 1.7 years.
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Subsequent Event
On April 1, 2019, the Company awarded senior level employees and certain other employees,
2,093,910 non-vested stock units granted under the 2014 Plan that vest based on service. These non-vested stock unit awards vest 33.33% on each anniversary subsequent to the grant date of the award.
Additionally, on April 1, 2019, the Company awarded senior level employees 293,991 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, 2021 and
will be based on the achievement of specific corporate financial performance goals related to subscription bookings as a percentage of total subscription and product bookings measured during the period from January 1, 2021 to December 31, 2021. 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. Compensation expense will be recorded through the end of the performance period on December 31, 2021 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.
The April 1, 2019 awards were accounted for as stock-settled debt as of March 31, 2019 as the dollar value of the awards was approved before the grant date and constitutes a fixed
dollar value of awards that will be settled in a variable number of non-vested stock units on the April 1, 2019 grant date. Total unrecognized cost related to these awards as of March 31, 2019 was $237.3 million, which is expected to be recognized over a weighted-average period of 3.0 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 2018. 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 2018.
The following table presents the change in goodwill during the three months ended March 31, 2019
(in thousands):
Amount
relates to adjustments to the preliminary purchase price allocation associated with 2018 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.
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Intangible assets consist of the following (in thousands):
Amortization
of product-related intangible assets, which consists primarily of product-related technologies and patents, was $10.3 million and $11.0 million for the three months ended March 31, 2019 and 2018, 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 $3.5 million and $3.6 million for the three months ended March 31,
2019 and 2018, 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 March 31, 2019 is as follows (in thousands):
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):
Digital
Workspace revenues are primarily comprised of sales from the Company’s application virtualization solutions, which include Citrix Virtual Apps and Desktops, the Company's unified endpoint management solutions, which include Citrix Endpoint Management, related license updates and maintenance and support, Citrix Content Collaboration and cloud offerings.
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(2)
Networking revenues primarily include Citrix ADC
and Citrix SD-WAN, related license updates and maintenance and support and cloud offerings.
(3)
Professional services revenues are primarily comprised of revenues from consulting services and product training and certification services.
Revenues by Geographic Location
The following table presents revenues by geographic location, for the following periods (in thousands):
As of March 31, 2019, one distributor, The Arrow Group, accounted for 10% of the Company's total gross accounts receivable.
Strategic
Service Providers
The Company defines Strategic Service Providers (SSP) as its three historically largest hyperscale Networking customers. The following table summarizes SSP revenue for the following periods (in thousands):
Subscription revenue relates to fees which are generally recognized ratably over the contractual term. The Company's subscription revenue includes Software as a Service (SaaS), which primarily consists of subscriptions delivered via a cloud service whereby the customer does not take possession of the software and hybrid subscription offerings; and non-SaaS, which consists primarily of on-premise licensing, hybrid subscription offerings, CSP services and the related support. The Company's hybrid subscription offerings are allocated between SaaS and non-SaaS, which are generally recognized at a point in time. The following table presents subscription revenues by SaaS and non-SaaS components, for the following periods (in thousands):
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 4.500% 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 agreement (the "Credit Agreement")
with a group of financial institutions (the “Lenders”). The credit facility provides for a five year revolving line of credit in the aggregate amount of $250.0 million, subject to continued covenant compliance. The Company may elect to increase the revolving credit facility by up to $250.0 million if existing or new lenders provide additional revolving commitments in accordance with the terms of the Credit Agreement. A portion of the revolving line of credit (i) in the aggregate amount of $25.0 million may be available for issuances of letters of credit and (ii) in the aggregate amount of $10.0 million may be available for swing line loans, as part of,
not in addition to, the aggregate revolving commitments. The credit facility bears interest at LIBOR plus 1.10% and adjusts in the range of 1.00% to 1.30% above LIBOR based on the ratio of the Company’s total debt to its adjusted earnings before interest, taxes, depreciation, amortization and certain other items (“EBITDA”) as defined in the Credit 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 March 31, 2019, 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 March 31, 2019.
Convertible Notes Offering
As noted below under “Subsequent Event,”
all of the outstanding Convertible Notes were converted prior to their maturity on April 15, 2019. The following discussion gives effect to the Convertible Notes outstanding as of March 31, 2019.
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
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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.
In accordance with the terms of the Indenture, the conversion rate for
the Convertible Notes was adjusted to 13.9983 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which corresponds to a conversion price of $71.44 per share of common stock, as a result of a cash dividend paid in March 2019. 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.
As of October
15, 2018, the Company received conversion notices from noteholders with respect to $273.0 million in aggregate principal amount of Convertible Notes requesting conversion as a result of the sales price condition having been met during the second and third quarter of 2018. In accordance with the terms of the Convertible Notes, in the fourth quarter of 2018 the Company made cash payments of this aggregate principal amount and delivered 1.3 million newly issued shares of its common stock in respect of the remainder of the Company's conversion obligation in excess of the aggregate principal amount of the Convertible Notes being
converted, in full satisfaction of such converted notes. The Company received shares of its common stock under the Bond Hedges (as defined below) that offset the issuance of shares of common stock upon conversion of the Convertible Notes. See the discussion under “Convertible Note Hedge and Warrant Transaction” in this Note 11 for detailed information on the Bond Hedges. In addition, on or after October 15, 2018 until the close of business on the second scheduled trading day immediately preceding the April 15, 2019 maturity date, holders of the Convertible Notes had the right to convert their notes at any time, regardless of whether the sales price condition was met. Any conversions with respect to conversion notices received by the
Company on or after October 15, 2018 settled on the maturity date. As of March 31, 2019, the outstanding balance, net of discount, of $1.16 billion of the Convertible Notes was included in current liabilities and the difference between the face value and carrying value of $1.2 million was included in temporary equity in the accompanying condensed consolidated balance sheets.
In accounting for the settlement of the Convertible Notes, the Company allocated the fair value of the settlement consideration remitted to the noteholders between the liability and equity components. The portion of the settlement consideration
allocated to the extinguishment of the liability component was based on the fair value of that component immediately before extinguishment. The Company allocated the remaining settlement consideration to the reacquisition of the equity component and recognized this amount as a reduction of Stockholders' equity.
The Company may not redeem the Convertible Notes prior to the maturity date and no “sinking fund” is provided for the Convertible Notes, which means that the Company is not required to periodically redeem or retire the Convertible Notes. Upon the occurrence of certain fundamental changes involving the
Company, holders of the Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes in principal amounts of $1,000 or an integral multiple thereof at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
In accounting for the issuance of the Convertible Notes, the Company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated fair value of a similar liability that does not have an
associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Convertible Notes as a whole. The excess of the principal amount of the liability component over its carrying amount ("debt discount") is amortized to interest expense over the term of the Convertible Notes using the effective interest method with an effective interest rate of 3.0 percent per annum. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the Convertible Note issuance, the Company allocated the total amount incurred to the liability and equity components based on
their relative values. Issuance costs attributable to the $1.4 billion liability component are being amortized to expense over the term of the Convertible Notes, and issuance costs attributable to the equity component are included along with the equity component in stockholders' equity. Additionally, a deferred tax liability of $8.2 million related to a portion of the equity component transaction costs which are deductible for tax purposes is included in Other liabilities in the accompanying condensed consolidated balance sheets.
24
The Convertible Notes consist of the following (in thousands):
See
Note 7 to the Company's condensed consolidated financial statements for fair value disclosures related to the Company's Convertible Notes and 2027 Notes.
Convertible Note Hedge and Warrant Transactions
In connection with the pricing of the Convertible Notes, the Company entered into convertible note hedge transactions relating to approximately 16.0 million shares of common stock (the "Bond Hedges") and also entered into separate warrant transactions (the "Warrant Transactions") with each of the Option Counterparties relating to approximately 16.0 million
shares of common stock. As a result of the spin-off of its GoTo Business, the number of shares of the Company's common stock covered by the Bond Hedges and Warrant Transactions was adjusted to approximately 20.0 million shares.
The Bond Hedges are generally expected to reduce the potential dilution upon conversion of the Convertible Notes and/or offset any payments in cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, that the Company is required to make in excess of the principal amount of the Convertible Notes upon conversion of any Convertible Notes, as the case may be,
in the event that the market price per share of common stock, as measured under the terms of the Bond Hedges, is greater than the strike price of the Bond Hedges, which initially corresponds to the conversion price of the Convertible Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Convertible Notes. The Warrant Transactions will separately have a dilutive effect to the extent that the market value per share of common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants issued pursuant to the Warrant Transactions (the “Warrants”). The strike price of the Warrants was adjusted to $94.62 per share and the number of shares of the Company's common stock covered by the Warrant Transactions was adjusted
to approximately 20.1 million shares as a result of the cash dividend paid in March 2019. 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 March 31, 2019, 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.
25
Subsequent Event
All Convertible Notes were converted by their beneficial owners prior to their maturity on April 15, 2019. In accordance with the terms of the Indenture, on April 15, 2019the
Company paid $1.16 billion in the outstanding aggregate principal amount of the Convertible Notes and delivered 4.9 million newly issued shares of its common stock in respect of the remainder of the Company's conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted, in full satisfaction of such converted notes. The Company received shares of its common stock under the Bond Hedges that offset the issuance of shares of common stock upon conversion of the Convertible Notes.
12. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives
Designated as Hedging Instruments
As of March 31, 2019, the Company’s derivative assets and liabilities primarily resulted from cash flow hedges related to its forecasted operating expenses transacted in local currencies. A substantial portion of the Company’s overseas expenses are and will continue to be transacted in local currencies. To protect against fluctuations in operating expenses and the volatility of future cash flows caused by changes in currency exchange rates, the Company has established a program that uses foreign exchange forward contracts
to hedge its exposure to these potential changes. The terms of these instruments, and the hedged transactions to which they relate, generally do not exceed 12 months.
Generally, when the dollar is weak, foreign currency denominated expenses will be higher, and these higher expenses will be partially offset by the gains realized from the Company’s hedging contracts. Conversely, if the dollar is strong, foreign currency denominated expenses will be lower. These lower expenses will in turn be partially offset by the losses incurred from the Company’s hedging contracts.
Derivative instruments are recognized as either assets or liabilities and are measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Gains and losses on derivatives that are designated as cash flow hedges are initially reported as a component of Accumulated other comprehensive loss and are subsequently recognized in income when the hedged exposure is recognized in income. Gains and losses from changes in fair values of derivatives that are not designated as hedges are recognized in Other income (expense), net.
The total cumulative unrealized gain on cash flow derivative instruments was $0.1 million at March 31, 2019 and is included in
Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. The total cumulative unrealized loss on cash flow derivative instruments was $1.0 million at December 31, 2018, 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 gain as of March 31, 2019 is expected to be recognized in income over the next 12 months at the same time the hedged items are recognized in income.
Derivatives not Designated as Hedging Instruments
A substantial portion of the
Company’s overseas assets and liabilities are and will continue to be denominated in local currencies. To protect against fluctuations in earnings caused by changes in currency exchange rates when remeasuring the Company’s balance sheet, it utilizes foreign exchange forward contracts to hedge its exposure to this potential volatility.
These contracts are not designated for hedge accounting treatment under the authoritative guidance. Accordingly, changes in the fair value of these contracts are recorded in Other income (expense), net.
Details about accumulated other comprehensive loss components
Amount reclassified from accumulated other comprehensive loss, net of tax
Affected line item in the Condensed Consolidated Statements of Income
Unrealized net gains on available-for-sale securities
$
(558
)
Other
income (expense), net
Unrealized net losses on cash flow hedges
894
Operating expenses *
$
336
*
Operating expenses amounts allocated to Research and development, Sales, marketing and services, and General and administrative are not individually significant.
28
14. INCOME TAXES
The Company is required to estimate its income taxes in each of the jurisdictions in which it operates as part of the process of preparing its condensed consolidated financial statements. The Company maintains certain strategic management and operational activities in overseas subsidiaries
and its foreign earnings are taxed at rates that are generally lower than in the United States.
The Company’s effective tax rate generally differs from the U.S. federal statutory rate primarily due to lower tax rates on earnings generated by the Company’s foreign operations that are taxed primarily in Switzerland.
The Company’s effective tax rate was 6.6% and 4.4% for the three months ended March 31, 2019
and 2018, respectively. The increase in the effective tax rate when comparing the three months ended March 31, 2019 to the three months ended March 31, 2018 was primarily due to an increase in the proportion of projected annual U.S. earnings relative to foreign earnings for the period ended March 31, 2019, and tax items unique to the period ended March 31, 2018.
The Company’s
net unrecognized tax benefits totaled $95.9 million and $89.9 million as of March 31, 2019 and December 31, 2018, respectively. All amounts included in the balance at March 31, 2019 for tax positions would affect the annual effective tax rate if recognized. The Company recognizes interest accrued related to uncertain tax positions and penalties in income tax expense. As of March 31, 2019, the
Company has accrued $5.0 million for the payment of interest.
The Company and one or more of its subsidiaries are subject to U.S. federal income taxes in the United States, as well as income taxes of multiple state and foreign jurisdictions. The Company is not currently under examination by the United States Internal Revenue Service. With few exceptions, the Company is generally not subject to examination for state and local income tax, or in non-U.S. jurisdictions, by tax authorities for years prior to 2015.
The
Company's U.S. liquidity needs are currently satisfied using cash flows generated from its U.S. operations, borrowings, or both. The Company also utilizes a variety of tax planning strategies in an effort to ensure that its worldwide cash is available in locations in which it is needed. The Company expects to repatriate a substantial portion of its foreign earnings over time, to the extent that the foreign earnings are not restricted by local laws or result in significant incremental costs associated with repatriating the foreign earnings.
At March 31, 2019, the Company had
$102.1 million in net deferred tax assets. The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company reviews deferred tax assets periodically for recoverability and makes estimates and judgments regarding the expected geographic sources of taxable income and gains from investments, as well as tax planning strategies in assessing the need for a valuation allowance. If the estimates and assumptions used in the Company's determination change in the future, the Company could be required
to revise its estimates of the valuation allowances against its deferred tax assets and adjust its provisions for additional income taxes.
15. TREASURY STOCK
Stock Repurchase Program
The Company’s Board of Directors authorized an ongoing stock repurchase program, of which $750.0 million was approved in October 2018. The Company may use the approved dollar authority to repurchase stock at any time until the approved amount is exhausted. The objective of the Company’s
stock repurchase program is to improve stockholders’ returns. At March 31, 2019, approximately $674.1 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock. A portion of the funds used to repurchase stock over the course of the program was provided by net proceeds from the Convertible Notes and 2027 Notes offerings, as well as proceeds from employee stock awards and the related tax benefit. The Company is authorized to make purchases of its common stock using general corporate funds through open market purchases, pursuant to a Rule 10b5-1 plan or in privately negotiated transactions.
In February 2018, the
Company entered into an ASR transaction with a counterparty to pay an aggregate of $750.0 million in exchange for the delivery of approximately 6.5 million shares of its common stock based on current market prices. The purchase price per share under the ASR was based on the volume-weighted average price of the Company's common stock during the term of the ASR, less a discount. The ASR was entered into pursuant to the Company's existing share repurchase program. Final settlement of the ASR agreement was completed in April 2018 and the Company received delivery of an additional 1.6 million
additional shares of its common stock.
During the three months ended March 31, 2019, the Company expended approximately $93.8 million on open market purchases under the stock repurchase program, repurchasing 911,060 shares of common stock at an average price of $102.96.
29
During the three months ended March 31,
2018, the Company had no additional open market purchases of its common stock.
Shares for Tax Withholding
During the three months ended March 31, 2019, the Company withheld 593,988 shares from equity awards that vested, totaling $60.1 million, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. During the three months ended March 31,
2018, the Company withheld 507,274 shares from equity awards that vested, totaling $46.9 million, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. These shares are reflected as treasury stock in the Company’s condensed consolidated balance sheets and the related cash outlays do not reduce the Company’s total stock repurchase authority.
16. COMMITMENTS AND CONTINGENCIES
Legal
Matters
The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the Company's views on the probable outcomes of any pending claims, suits, assessments, regulatory investigations, or other legal proceedings change, changes in the Company's accrued liabilities
would be recorded in the period in which such determination is made. In addition, in accordance with the relevant authoritative guidance, for matters in which the likelihood of material loss is at least reasonably possible, the Company provides disclosure of the possible loss or range of loss. If a reasonable estimate cannot be made, however, the Company will provide disclosure to that effect.
Due to the nature of the Company's business, the Company is subject to patent infringement claims, including current litigation alleging infringement by various Company solutions and services. The
Company believes that it has meritorious defenses to the allegations made in its pending litigation and intends to vigorously defend itself; however, it is unable currently to determine the ultimate outcome of these or similar matters or the potential exposure to loss, if any. In addition, the Company is a defendant in various litigation matters generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcomes of these cases, the Company believes that outcomes that will materially and adversely affect its business, financial position, results of operations or cash flows are reasonably possible but not estimable at this time.
The
Company also is the victim of a cyberattack, in which, the Company believes, between October 13, 2018 and March 8, 2019, international cyber criminals gained intermittent access to Citrix’s internal network through “password spraying”, and over a limited number of days stole business documents and files from a shared network drive and a drive associated with a web-based tool used in the Company's consulting practice. The shared drive from which documents and files were stolen was used to store current and historical business documents and files, such as human resources and employee records, some of which contained sensitive and personal identification information of the
Company's current and former employees and, in limited cases, their beneficiaries and dependents; customer engagement documents, including consulting services project materials, statements of work and proofs of concept, some of which were also stored on the drive associated with a web-based tool used in the Company's consulting practice; marketing materials; sales and finance documents; contracts and other legal records; and a wide assortment of other company records. The cyber criminals also may have accessed the individual virtual drives of a very limited number of compromised users, accessed the company email accounts of the same very limited number of compromised users, and launched without further exploitation
a limited number of internal applications. The Company has commenced a substantial discovery process to review the documents and files stolen from the shared network drive and the drive associated with the web-based tool used in the Company's consulting practice, and the accessed documents and files on the individual virtual drives and the company e-mail accounts of the very limited number of comprised users. Based upon the Company’s investigation to date, there is no indication that the cyber criminals discovered and exploited any vulnerabilities in the
Company’s products or customer cloud services to gain entry, and there is no indication that the security of any Citrix product or customer cloud service was compromised. The Company’s investigation remains ongoing. At this time, however, the Company is not aware of any impact to its financial reporting systems from this cyberattack. Additionally, the Company continues to assess its internal controls over financial reporting and disclosure controls and procedures related to cyberattacks as its investigation continues.
Further, the Company has a program of network-security (or cyber risk)
insurance policies that, with standard exclusions, insure against the costs of detecting and mitigating cyber breaches, the cost of credit monitoring, and reasonable expenses for defending and settling privacy and network security lawsuits. These policies are subject to a $500,000 self-insured retention and a total insurance limit of $200.0 million. There can be no assurance, however, that this insurance coverage is sufficient to cover this or any other cyberattack. In addition to these insurance policies, the Company maintains customary business coverage under its crime, commercial general liability, and director and officer insurance policies.
30
Although
it is difficult to predict the ultimate outcomes of this cyberattack, based on the Company’s investigation to date, the Company believes that it is reasonably possible that outcomes from potential unasserted claims related to this cyberattack could materially and adversely affect its business, financial position, results of operations or cash flows. However, due to the ongoing nature of the Company’s investigation, it is not possible to estimate the amount or a range of potential loss, if any, at this time.
Guarantees
The authoritative guidance requires certain
guarantees to be recorded at fair value and requires a guarantor to make disclosures, even when the likelihood of making any payments under the guarantee is remote. For those guarantees and indemnifications that do not fall within the initial recognition and measurement requirements of the authoritative guidance, the Company must continue to monitor the conditions that are subject to the guarantees and indemnifications, as required under existing generally accepted accounting principles, to identify if a loss has been incurred. If the Company determines that it is probable that a loss has been incurred, any such estimable loss would be recognized. The initial recognition and measurement requirements do not apply to the provisions contained in the majority of the
Company’s software license agreements that indemnify licensees of the Company’s software from damages and costs resulting from claims alleging that the Company’s software infringes the intellectual property rights of a third party. The Company has not made material payments pursuant to these provisions. The Company has not identified any losses that are probable under these provisions and, accordingly, the Company has not recorded a liability related to these indemnification provisions.
17.
RESTRUCTURING
The Company has implemented multiple restructuring plans to reduce its cost structure, align resources with its product strategy and improve efficiency, which has resulted in workforce reductions and the consolidation of certain leased facilities.
For the three months ended March 31, 2019 and 2018, restructuring charges were comprised of the following (in thousands):
During
the three months ended March 31, 2019 and 2018, the Company incurred costs of $2.8 million and $1.0 million, respectively, related to initiatives intended to accelerate the transformation to a cloud-based subscription business, increase strategic focus, and improve operational efficiency.
In connection with the Company's restructuring initiatives, the Company
had previously vacated or consolidated properties and subsequently reassessed its obligations on non-cancelable leases. The fair value estimate of these non-cancelable leases was based on the contractual lease costs over the remaining term, partially offset by estimated future sublease rental income. During the three months ended March 31, 2018, the Company incurred costs of $5.1 million, related to the consolidation of leased facilities. No costs were incurred during the three months ended March 31, 2019 related to
the consolidation of leased facilities.
Restructuring accruals
The activity in the Company’s restructuring accruals for the three months ended March 31, 2019 is summarized as follows (in thousands):
As of March 31, 2019, the $4.7 million in outstanding restructuring accruals primarily relate to employee severance and related costs. As a result of the adoption on the new lease standard, the provision for lease losses was reclassified, resulting in a reduction to operating lease right-of-use assets as of January 1, 2019. Refer
to Note 2 for additional information on adoption of the lease standard.
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18. STATEMENT OF CHANGES IN EQUITY
The following tables presents the changes in total stockholders' equity during the three months ended March 31, 2019 and March 31, 2018 (in thousands):
On January 23, 2019the Company announced that its Board of Directors approved a quarterly cash dividend of $0.35 per share which was paid on March 22, 2019 to all shareholders of record as of the close of business on March 8, 2019.
Subsequent Event
On April 24, 2019, the Company announced that its Board of Directors approved a quarterly cash dividend of $0.35 per share. This
dividend is payable on June 21, 2019 to all shareholders of record as of the close of business on June 7, 2019. Future dividends will be subject to Board approval.
34
19. LEASES
The Company leases certain office space and equipment under various leases. In addition to rent, the leases require the Company to pay for taxes, insurance, maintenance
and other operating expenses. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, accrued expenses and other current liabilities, and operating lease liabilities in the Company’s condensed consolidated balance sheets. Finance leases are included in property and equipment, net, accrued expenses and other current liabilities and other long term liabilities in the Company’s condensed consolidated balance sheets. Finance leases are not material to the condensed consolidated financial statements as of March 31, 2019.
ROU
assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the later of the adoption date of the new standard or the commencement date. The lease liability is based on the present value of lease payments over the lease term (or remaining term for existing leases). As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The
Company uses the implicit rate when readily determinable. The operating lease ROU asset is based on the liability, subject to adjustment, such as for initial direct costs, and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. For most operating leases, expense for lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.
The Company has lease agreements
with lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) and non-lease components (e.g., common-area maintenance costs), which are generally accounted for as a single lease component, such as for real estate leases. For certain equipment leases, such as colocation facilities, the Company accounts for the lease and non-lease components separately.
The components of lease expense were as follows (in thousands):
Lease Cost
Three
Months Ended March 31,
Classification
2019
Operating lease cost
General and administrative expense
$
12,400
Variable lease cost
General and administrative expense
2,569
Sublease
income
Other income (expense), net
(198
)
Net lease cost
$
14,771
Supplemental cash flow information related to leases was as follows (in thousands):
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our operating results and financial condition have varied in the past and could in the future vary significantly depending on a number of factors. From time to time, information provided by us or statements made by our employees contain “forward-looking” information that involves risks and uncertainties. In particular, statements contained in this Quarterly Report on Form 10-Q, and in the documents incorporated by reference into this Quarterly Report on Form 10-Q, that are not historical facts, including, but not limited to, statements concerning our strategy and operational and growth initiatives, our transition to a subscription-based business model, financial information and results of operations
for future periods, seasonal factors, stock-based compensation, licensing and subscription renewal programs, international operations, investment transactions and valuations of investments and derivative instruments, restructuring charges, reinvestment or repatriation of foreign earnings, fluctuations in foreign exchange rates, tax estimates and other tax matters, liquidity, stock repurchases and dividends, our debt, changes in accounting rules or guidance, changes in domestic and foreign economic conditions, acquisitions, litigation matters and the security of our network, products and services, constitute forward-looking statements and are made under the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are neither promises nor guarantees. Our actual results of operations and financial condition could vary materially from those stated in any forward-looking
statements. The factors described in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2018, as updated by Part II, Item 1A in this Quarterly Report on Form 10-Q, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q, in the documents incorporated by reference into this Quarterly Report on Form 10-Q or presented elsewhere by our management from time to time. Such factors, among others, could have a material adverse effect upon our business, results of operations and financial condition. We caution readers not to place undue reliance on any forward-looking statements, which only speak as of the date made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the
date on which such statement is made.
Overview
Management’s discussion and analysis of financial condition and results of operations is intended to help the reader understand our financial condition and results of operations. This section is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the three months ended March 31, 2019. The results of operations for the periods presented in this report are not necessarily indicative of the results expected for the full year or for any future period, due
in part to the seasonality of our business. Historically, our revenue for the fourth quarter of any year is typically higher than our revenue for the first quarter of the subsequent year.
Citrix is powering a better way to work with unified workspace, networking, and analytics solutions that help organizations unlock innovation, engage customers, and boost productivity, without sacrificing security. With Citrix, users get a seamless work experience and IT has a unified platform to secure, manage, and monitor diverse technologies in complex cloud environments.
We market and license our solutions through multiple channels worldwide, including selling through resellers and direct over the Web. Our partner community comprises thousands of value-added resellers, or VARs, known as Citrix Solution Advisors, value-added distributors, or VADs,
systems integrators, or SIs, independent software vendors, or ISVs, original equipment manufacturers, or OEMs, and Citrix Service Providers, or CSPs.
We are a Delaware corporation incorporated on April 17, 1989.
Executive Summary
During the three months ended March 31, 2019, our transition to the cloud and a subscription-based business model continued to progress well. In the first quarter, we delivered solid financial results, primarily driven by accelerated revenue growth in our Digital Workspace offerings.
On March 6, 2019, the FBI informed us that international cyber criminals had gained access to Citrix’s internal network through a “password
spraying” attack, a technique that exploits weak passwords. Immediately, we engaged outside forensics and security experts, took actions to expel the cyber criminals from our internal systems, and adopted additional security measures. Additionally, we launched a comprehensive forensic investigation led by a leading, independent cybersecurity firm. Based on our investigation to date, we believe this cyberattack commenced at least as early as October 13, 2018, and encompassed a cyber incident that we became aware of in December 2018 and took certain steps to remediate based on our assessment at the time. Further, we received a notification from the Department of Homeland Security in late February 2019
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concerning
a network compromise that may have been part of this same cyberattack. While waiting for clarification from the Department of Homeland Security, we were contacted by the FBI on March 6, 2019.
We believe that between October 13, 2018 and March 8, 2019, cyber criminals intermittently accessed Citrix's internal network and over a limited number of days stole business documents and files from a shared network drive and a drive associated with a web-based tool used in our consulting practice. The shared drive from which documents and files were stolen was used to store current and historical business documents and files, such as human resources and employee records, some of which contained sensitive and personal identification information of our current and former employees and, in
limited cases, their beneficiaries and dependents; customer engagement documents, including consulting services project materials, statements of work and proofs of concept, some of which were also stored on the drive associated with a web-based tool used in our consulting practice; marketing materials; sales and finance documents; contracts and other legal records; and a wide assortment of other company records. The cyber criminals also may have accessed the individual virtual drives of a very limited number of compromised users, accessed the company email accounts of the same very limited number of compromised users, and launched without further exploitation a limited number of internal applications. We have commenced a substantial discovery process to review the documents and files stolen from
the shared network drive and the drive associated with the web-based tool used in our consulting practice, and the accessed documents and files on the individual virtual drives and the company e-mail accounts of the very limited number of comprised users. Based upon our investigation to date, we have no indication that the cyber criminals discovered and exploited any vulnerabilities in our products or customer cloud services to gain entry, and there is no indication that the security of any Citrix product or customer cloud service was compromised. Our investigation remains ongoing. At this time, however, we are not aware of any impact to our financial reporting systems from this cyberattack. Additionally, we continue to assess our internal controls over financial reporting and disclosure controls and procedures related to cyberattacks as our investigation continues.
Further,
we have a program of network-security (or cyber risk) insurance policies that, with standard exclusions, insure against the costs of detecting and mitigating cyber breaches, the cost of credit monitoring, and reasonable expenses for defending and settling privacy and network security lawsuits. These policies are subject to a $500,000 self-insured retention and a total insurance limit of $200.0 million. There can be no assurance, however, that this insurance coverage is sufficient to cover this or any other cyberattack. In addition to these insurance policies, we maintain customary business coverage under our crime, commercial general liability, and director and officer insurance policies. The costs associated with this incident, to the extent not covered by insurance, are not material to the quarter ended March 31, 2019.
On April
24, 2019, we announced that our Board of Directors declared a $0.35 per share dividend payable June 21, 2019 to all shareholders of record as of the close of business on June 7, 2019. Our Board of Directors will continue to review our capital allocation strategy for potential modifications and will determine whether to repurchase shares of our common stock and/or declare future dividends based on our financial performance, business outlook and other considerations.
On April 24, 2019, we also announced that Andrew H. Del Matto resigned from his role as Executive Vice President and Chief Financial Officer of the Company, effective April 26, 2019.
The Board of Directors of the Company appointed Jessica Soisson, Vice President, Corporate Controller and Chief Accounting Officer, as Interim Chief Financial Officer of the Company, effective as of April 24, 2019.
Summary of Results
For the three months ended March 31, 2019 compared to the three months ended March 31, 2018, a summary of our results included:
•
Subscription
revenue increased 37.3% to $141.6 million;
•
SaaS revenue increased 42.6% to $85.4 million and accounted for 60.3% of total subscription revenue;
•
Product and license revenue decreased 16.0% to $135.0 million;
•
Support
and services revenue increased 2.1% to $442.5 million;
•
Gross margin as a percentage of revenue increased 0.6% to 85.1%;
•
Operating income decreased 25.8% to $122.8 million;
•
Diluted
net income per share decreased 21.2% to $0.78; and
•
Unbilled revenue increased $295.1 million to $380.4 million.
Our Subscription revenue increased primarily due to increased customer adoption of our cloud-based solutions from our Digital Workspace offerings delivered via the cloud. Our Product and license revenue decreased primarily due to lower sales of our perpetual Networking products. The increase in Support and services revenue was primarily due to increased sales of maintenance services across our Digital Workspace perpetual offerings and higher sales of implementation services related
to
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our Digital Workspace solutions. We currently expect total revenue to increase when comparing the second quarter of 2019 to the second quarter of 2018. The decrease in operating income was primarily due to an increase in operating expenses, as we have realigned the organization to better support our subscription model transition and have made more intentional investments in product and engineering as well as customer facing resources. The increase in operating expenses was partially offset by the increase in gross margin due to higher sales. The decrease in diluted net income per share was primarily due to a decrease in operating margin, partially offset by a decrease in the number of weighted average shares outstanding due to share repurchases.
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2018 Business Combinations
Sapho, Inc.
On November 13, 2018, we acquired all of the issued and outstanding securities of Sapho, Inc. (“Sapho”), whose technology is intended to advance our development of the intelligent workspace. The acquired technology enables efficient workstyles by creating a unified and customizable notification experience for business applications. The total preliminary cash consideration for this transaction was $182.9 million, net of $3.7 million cash
acquired. Transaction costs associated with the acquisition were not significant.
Cedexis, Inc.
On February 6, 2018, we acquired all of the issued and outstanding securities of Cedexis, Inc. (“Cedexis”) whose solution is a real-time data driven service for dynamically optimizing the flow of traffic across public clouds and data centers that provides a dynamic and reliable way to route and manage Internet performance for customers moving towards hybrid and multi-cloud deployments. The total cash consideration for this transaction was $66.0 million, net of $6.0 million cash acquired. Transaction costs associated with the acquisition were not significant.
Critical
Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base these estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from
our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted.
For more information regarding our critical accounting policies and estimates please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” contained in our Annual Report on Form 10-K for the year ended December 31, 2018, or the Annual Report, and Note 2 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. There have been no material changes to the critical accounting policies disclosed in the Annual Report.
40
Results
of Operations
The following table sets forth our unaudited condensed consolidated statements of income data and presentation of that data as a percentage of change from period-to-period (in thousands):
Net
revenues include Subscription, Product and license and Support and services revenues.
Subscription revenue relates to fees which are generally recognized ratably over the contractual term. Our subscription revenue includes Software as a Service (SaaS), which primarily consists of subscriptions delivered via a cloud service whereby the Customer does not take possession of the software and hybrid subscription offerings; and non-SaaS, which consists primarily of on-premise licensing, hybrid subscription offerings, CSP services and the related support. Our hybrid subscription offerings are allocated between SaaS and non-SaaS, which are generally recognized at a point in time. For our on-premise and hybrid subscription offerings, a portion of the revenue is recognized at a point in time. In addition, our CSP program provides subscription-based services in which the CSP partners host software services to their end users. The fees
from the CSP program are recognized based on usage and as the CSP services are provided to their end users.
Product and license revenue primarily represents fees related to the perpetual licensing of the following major solutions:
•
Digital Workspace is primarily comprised of our Application Virtualization solutions which include Citrix Virtual Apps and Desktops, our unified endpoint management solutions, which include Citrix Endpoint Management, Citrix Content Collaboration, and Citrix Workspace; and
•
Networking
products, which primarily include Citrix ADC and Citrix SD-WAN.
41
We offer incentive programs to our VADs and VARs to stimulate demand for our solutions. Product and license revenues associated with these programs are partially offset by these incentives to our VADs and VARs.
Support and services revenue consists of maintenance and support fees related to the following offerings:
•
Customer Success Services, which gives customers a choice of tiered support offerings that combine the elements
of product version upgrades, guidance, enablement, support and proactive monitoring to help our customers and our partners fully realize their business goals. Fees associated with this offering are recognized ratably over the term of the contract; and
•
Hardware Maintenance fees for our perpetual Networking products, which include technical support and hardware and software maintenance, are recognized ratably over the contract term; and
•
Fees
from consulting services related to the implementation of our solutions, which are recognized as the services are provided; and
•
Fees from product training and certification, which are recognized as the services are provided.
Subscription
revenue increased for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to increased customer adoption of our cloud-based solutions from our Digital Workspace offerings. We currently expect our Subscription revenue to increase when comparing the second quarter of 2019 to the second quarter of 2018 as customers continue to shift to our cloud-based solutions.
Product and license
Product and license revenue decreased when comparing the three months ended March 31,
2019 to the three months ended March 31, 2018 primarily due to lower sales of our perpetual Networking products, mostly due to cyclical ordering patterns at large hyperscale providers. We currently expect Product and license revenue to decrease when comparing the second quarter of 2019 to the second quarter of 2018 as customers continue to shift to our cloud-based solutions.
Support and services
Support and services revenue increased for the three months ended March 31, 2019
compared to the three months ended March 31, 2018 primarily driven by increased sales of maintenance services across our Digital Workspace perpetual offerings of $6.1 million and higher sales of implementation services related to our Digital Workspace solutions of $1.3 million. We currently expect Support and services revenue to increase when comparing the second quarter of 2019 to the second quarter of 2018.
Deferred Revenue, Unbilled Revenue and Backlog
Deferred revenues are primarily comprised of Support and services revenue from maintenance fees, which include software and hardware maintenance, technical support related to our perpetual offerings and services revenue
related to our consulting contracts. Deferred revenues also include Subscription revenue from our Content Collaboration and cloud-based subscription offerings.
Deferred revenue primarily consists of billings or payments received in advance of revenue recognition and is recognized in our condensed consolidated balance sheets and statements of income as the revenue recognition criteria are met. Unbilled revenue primarily represents future billings under our subscription agreements that have not been invoiced and, accordingly, are not recorded in accounts receivable or deferred revenue within our condensed consolidated financial statements. Deferred revenue and unbilled revenue are influenced by several factors, including new business seasonality within the year, the specific timing, size and duration of customer subscription agreements,
annual billing cycles of subscription agreements, and invoice
42
timing. Fluctuations in unbilled revenue may not be a reliable indicator of future performance and the related revenue associated with these contractual commitments.
The following table presents the amounts of deferred revenue and unbilled revenue (in thousands):
Deferred revenue decreased $77.9 million as of March 31, 2019 compared to December 31, 2018
primarily due to a decrease in maintenance and support, mostly due to seasonality. Unbilled revenue as of March 31, 2019 increased $42.0 million from December 31, 2018 primarily due to an increase in multi-year subscription agreements as a result of an increase in customer adoption of our cloud-based subscription offerings.
While it is generally our practice to promptly ship our products upon receipt of properly finalized orders, at any given time, we have confirmed product license orders that have not shipped and are unfulfilled. We refer to those unfulfilled product license orders at the end of a given period as “product and license backlog.”
As of March 31, 2019 and 2018, the amount of product and license backlog was not material. We do not believe that backlog, as of any particular date, is a reliable indicator of future performance.
International Revenues
International revenues (sales outside the United States) accounted for 49.1% of our net revenues for the three months ended March 31, 2019 and 45.0% of our net revenues for the three months ended March 31,
2018. The increase in our international revenues as a percentage of our net revenues for three months ended March 31, 2019 compared to the three months ended March 31, 2018 was mostly driven by an increase in revenue in our EMEA region of $22.2 million, consisting primarily of Subscription and Support and services, and an increase in revenue in our APJ region of $12.5 million, consisting primarily of Product and license and Subscription. See Note 10 to our condensed consolidated financial statements for detailed information on net revenues by geography.
Cost of subscription, support and services revenues
$
71,428
$
63,385
$
8,043
Cost
of product and license revenues
25,744
33,872
(8,128
)
Amortization of product related intangible assets
10,301
11,029
(728
)
Total
cost of net revenues
$
107,473
$
108,286
$
(813
)
Cost of subscription, support and services revenues consists primarily of compensation and other personnel-related costs of providing technical
support, consulting and cloud capacity costs, as well as the costs related to providing our offerings delivered via the cloud. Cost of product and license revenues consists primarily of hardware, shipping expense, royalties, product media and duplication, manuals and packaging materials. Also included in Cost of net revenues is amortization of product related intangible assets.
Cost of subscription, support and services revenues increased for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to an increase in sales of our subscription offerings. We currently expect Cost of subscription, support
and services revenues to increase when comparing the second quarter of 2019 to the second quarter of 2018, consistent with the expected increases in Subscription revenue and Support and services revenue as discussed above.
Cost of product and license revenues decreased for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to lower overall sales of our perpetual Networking products, which contain hardware components that have a higher cost than our software products. We currently expect Cost of product and
license revenues to
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decrease when comparing the second quarter of 2019 to the second quarter of 2018, consistent with the expected decrease in Product and license revenue.
Amortization of product related intangible assets decreased for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to lower
amortization of certain intangible assets becoming fully amortized.
Gross Margin
Gross margin as a percentage of revenue was 85.1% for the three months ended March 31, 2019 and 84.5% for the three months ended March 31, 2018, respectively. The increase in gross margin when comparing the three months ended March 31, 2019 to March 31,
2018 was primarily due to an increase in sales.
Operating Expenses
Foreign Currency Impact on Operating Expenses
The functional currency for all of our wholly-owned foreign subsidiaries is the U.S. dollar. A substantial majority of our overseas operating expenses and capital purchasing activities are transacted in local currencies and are therefore subject to fluctuations in foreign currency exchange rates. In order to minimize the impact on our operating results, we generally initiate our hedging of currency exchange risks up to 12 months in advance of anticipated foreign currency expenses. 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 our 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 our hedging contracts. There is a risk that there will be fluctuations in foreign currency exchange rates beyond the timeframe for which we hedge our risk.
Research
and development expenses consist primarily of personnel related costs and facility and equipment costs directly related to our research and development activities. We expensed substantially all development costs included in the research and development of our products.
Research and development expenses increased during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to an increase in stock-based compensation of $17.0 million and compensation and other employee-related costs of $10.3 million related to a net increase in headcount.
Sales,
marketing and services expenses consist primarily of personnel related costs, including sales commissions, pre-sales support, the costs of marketing programs aimed at increasing revenue, such as brand development, advertising, trade shows, public relations and other market development programs and costs related to our facilities, equipment, information systems and pre-sale demonstration related cloud capacity costs that are directly related to our sales, marketing and services activities.
Sales, marketing and services expenses increased during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to
an increase in compensation and other employee-related costs of $6.7 million due to a net increase in sales and services headcount, an increase in stock-based compensation of $6.4 million, and an increase in variable compensation of $4.9 million.
General
and administrative expenses consist primarily of personnel related costs and expenses related to outside consultants assisting with information systems, as well as accounting and legal fees.
General and administrative expenses increased during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to an increase in stock-based compensation of $5.4 million, an increase in professional fees of $4.6 million and an increase in compensation and employee-related costs of $3.6 million due to a net increase in headcount.
2019
Operating Expense Outlook
When comparing the second quarter of 2019 to the second quarter of 2018, we currently expect Operating expenses to increase in absolute dollars with respect to sales, marketing and services expenses due to our continued investment in demand generation, and to better serve customer success. We expect an increase in absolute dollars with respect to research and development expenses as we continue to invest in product and engineering as customer facing resources, as well as an increase in absolute dollars in general and administrative expenses.
Interest
income primarily consists of interest earned on our cash, cash equivalents and investment balances. Interest income increased for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 mostly due to higher yields on investments. See Note 6 to our condensed consolidated financial statements for additional details regarding our investments.
Interest expense primarily consists of interest paid on our Convertible
Notes, 2027 Notes and our credit facility. Interest expense decreased for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 due to a lower balance on our Convertible Notes as a result of the settlement of conversion notices received during the fourth quarter of 2018. See Note 11 to our condensed consolidated financial statements for additional details regarding our debt.
Other
income (expense), net is primarily comprised of gains (losses) from remeasurement of foreign currency transactions, realized losses related to changes in the fair value of our investments that have a decline in fair value considered other-than-temporary and recognized gains (losses) related to our investments, which was not material for all periods presented.
The change in Other income (expense), net during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 was primarily driven by an increase from the remeasurement and settlements of foreign
currency transactions of $3.3 million, an increase in realized gains from our available-for-sale investments of $1.6 million and an increase related to our strategic investments of $1.2 million.
Income Taxes
We are required to estimate our income taxes in each of the jurisdictions in which we operate as part of the process of preparing our condensed consolidated financial statements. We maintain certain strategic management and operational activities in overseas subsidiaries and our foreign earnings are taxed at rates that are generally lower than in the United States.
Our effective tax rate generally differs from the U.S. federal
statutory rate primarily due to lower tax rates on earnings generated by our foreign operations that are taxed primarily in Switzerland.
Our effective tax rate was 6.6% and 4.4% for the three months ended March 31, 2019 and 2018, respectively. The increase in the effective tax rate when comparing the three months ended March 31, 2019 to the three months ended March 31, 2018 was primarily due to an increase in the proportion of projected annual U.S. earnings
relative to foreign earnings for the period ended March 31, 2019, and tax items unique to the period ended March 31, 2018.
Our net unrecognized tax benefits totaled $95.9 million and $89.9 million as of March 31, 2019 and December 31, 2018, respectively. All amounts included in the balance at March 31, 2019 for tax positions would affect the annual effective tax
rate if recognized. We have $5.0 million accrued for the payment of interest as of March 31, 2019.
We and one or more of our subsidiaries are subject to U.S. federal income taxes in the United States, as well as income taxes of multiple state and foreign jurisdictions. We are not currently under examination by the United States Internal Revenue Service. With few exceptions, we are generally not subject to examination for state and local income tax, or in non-U.S. jurisdictions, by tax authorities for years prior to 2015.
Our U.S. liquidity needs are currently satisfied using cash flows generated from our U.S.
operations, borrowings, or both. We also utilize a variety of tax planning strategies in an effort to ensure that its worldwide cash is available in locations in which it is needed. We expect to repatriate a substantial portion of our foreign earnings over time, to the extent that the foreign earnings are not restricted by local laws or result in significant incremental costs associated with repatriating the foreign earnings.
At March 31, 2019, we had $102.1 million in net deferred tax assets. The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We review deferred tax assets periodically for recoverability
and makes estimates and judgments regarding the expected geographic sources of taxable income and gains from investments, as well as tax planning strategies in assessing the need for a valuation allowance. If the estimates and assumptions used in our determination change in the future, we could be required to revise our estimates of the valuation allowances against our deferred tax assets and adjust our provisions for additional income taxes.
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Liquidity and Capital Resources
During the three months ended March 31, 2019,
we generated operating cash flows of $267.6 million. These operating cash flows related primarily to net income of $110.3 million, adjusted for, among other things, non-cash charges, stock-based compensation expense of $65.2 million, depreciation and amortization expenses of $54.4 million, and deferred income tax expense of $24.0 million. Also contributing to these cash inflows was a change in operating assets and liabilities of $6.6 million, net of effect of our acquisitions. The change in our net operating assets and liabilities was primarily a result of an inflow in accounts receivable of $204.4 million driven by an increase in collections from higher
prior period bookings and an inflow from prepaid expenses and other current assets of $17.5 million, primarily due to decreases from prepaid cloud commitment agreements. These inflows are partially offset by an outflow in accrued expenses and other current liabilities of $82.0 million, primarily due to decreases in employee-related accruals, changes in deferred revenue of $77.9 million, primarily maintenance and support, as well as an outflow in income taxes, net of $49.4 million due to decreases in income taxes payable. Our investing activities provided $882.9 million of cash consisting primarily of cash received from the net proceeds from the sale of investments of $900.8 million, partially offset
by cash paid for the purchase of property and equipment of $17.3 million. Our financing activities used cash of $157.5 million primarily due to cash paid for stock repurchases of $93.8 million, cash dividends on our common stock of $46.0 million and cash paid for tax withholding on vested stock awards of $17.7 million.
During the three months ended March 31, 2018, we generated operating cash flows of $357.9 million. These operating cash flows related primarily to net income of $144.3 million,
adjusted for, among other things, non-cash charges, stock-based compensation expense of $35.7 million, depreciation and amortization expenses of $41.9 million, and deferred income tax expense of $8.2 million. Also contributing to these cash inflows was a change in operating assets and liabilities of $116.4 million, net of effect of our acquisitions. The change in our net operating assets and liabilities was primarily a result of an inflow in accounts receivable of $285.1 million driven by an increase in collections from higher prior period bookings. This inflow is partially offset by changes in deferred revenue of $79.9 million mostly due to the upfront recognition of term licenses per the new revenue
standard as well as seasonality, changes in accrued expenses and other liabilities of $52.7 million primarily due an increase in the non-current portion of capitalized commissions under the new revenue standard and changes in employee-related accruals, changes in income taxes, net of $36.0 million mostly due to a decrease in income taxes payable, and changes in prepaid expenses and other current assets of $13.5 million. Our investing activities provided $248.5 million of cash consisting primarily of cash received from the net proceeds from the sale of investments of $331.4 million, partially offset by cash paid for acquisitions of $66.3 million and cash paid for the purchase of property and equipment
of $16.0 million. Our financing activities used cash of $769.2 million primarily due to cash paid for stock repurchases of $600.0 million, amounts paid for, but not settled, under our accelerated stock repurchase program of $150.0 million and cash paid for tax withholding on vested stock awards of $13.6 million.
Senior Notes
On November 15, 2017, we issued $750.0 million of the 2027 Notes. 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 us. Net proceeds from this offering were used to repurchase shares of our common stock through an ASR transaction which we entered into with the ASR Counterparty on November 13, 2017. The 2027 Notes will mature on December 1, 2027, unless earlier redeemed or repurchased in accordance with their terms prior to such date. We may redeem the 2027 Notes at our 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 (a) 100%
of the aggregate principal amount of the 2027 Notes to be redeemed and (b) 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 us 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. See Note 11 to our condensed consolidated financial statements for additional details on the 2027 Notes.
Credit Facility
On January 7, 2015, we entered into a credit agreement with Bank
of America, N.A., as Administrative Agent, and the other lenders party thereto from time to time collectively, the Lenders. The Credit Agreement provides for a $250.0 million unsecured revolving credit facility for a term of five years. We 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. The proceeds of borrowings under the Credit Agreement may be used for working capital and general corporate purposes, including acquisitions. Borrowings under the Credit Agreement will bear interest at a rate equal to either (a) a customary London interbank offered rate formula or (b) a customary base rate formula, plus the applicable margin with respect
47
thereto,
in each case as set forth in the Credit Agreement. As of March 31, 2019, there was no amount outstanding under the credit facility.
The Credit Agreement contains certain financial covenants that require us 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. The Credit Agreement includes customary events of default, with corresponding grace periods in certain circumstances, including, without limitation, payment defaults, cross-defaults, the occurrence of a change of control and bankruptcy-related defaults. The Lenders are
entitled to accelerate repayment of the loans under the Credit Agreement upon the occurrence of any of the events of default. In addition, the Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to grant liens, merge or consolidate, dispose of all or substantially all of our assets, change our business and incur subsidiary indebtedness, in each case subject to customary exceptions for a credit facility of this size and type. We were in compliance with these covenants as of March 31, 2019. In addition, the Credit Agreement contains customary representations and warranties. Please see Note 11 to our condensed consolidated financial statements for additional details on our Credit Agreement.
Convertible Notes Offering
In
April 2014, we completed a private placement of $1.44 billion principal amount of 0.500% Convertible Senior Notes due 2019, or the Convertible Notes. The net proceeds from this offering were approximately $1.42 billion after deducting the initial purchasers’ discounts and commissions and the offering expenses payable by us. We used approximately $82.6 million of the net proceeds to pay the cost of certain bond hedges entered into in connection with the offering (after such cost was partially offset by the proceeds to us from certain warrant transactions). See Note 11 to our condensed consolidated financial statements for additional details on the Convertible Notes offering and the related bond hedges and warrant transactions.
We used the remainder
of the net proceeds from the offering and a portion of our existing cash and investments to purchase an aggregate of approximately $1.5 billion of our common stock under our share repurchase program. We used approximately $101.0 million to purchase shares of our 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 our common stock through an accelerated share repurchase transaction, which we entered into with Citibank, N.A., or Citibank, on April 25, 2014, and which is discussed in further detail in Note 11 to our condensed consolidated financial statements.
As of October
15, 2018, we received conversion notices from noteholders with respect to $273.0 million in aggregate principal amount of Convertible Notes requesting conversion as a result of the sales price condition having been met during the second and third quarter of 2018. In accordance with the terms of the Convertible Notes, in the fourth quarter of 2018, we made cash payments of this aggregate principal amount and delivered 1.3 million newly issued shares of our common stock in respect of the remainder of our conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted, in full satisfaction of such converted notes. We received shares of our common stock under the Bond Hedges that offset the issuance of shares of common stock upon conversion of the Convertible Notes. In addition, on or after October
15, 2018 until the close of business on the second scheduled trading day immediately preceding the April 15, 2019 maturity date, holders of the Convertible Notes had the right to convert their notes at any time, regardless of whether the sales price condition was met. Any conversions with respect to conversion notices received by us on or after October 15, 2018 settled on the maturity date. As of March 31, 2019, the outstanding balance, net of discount, of $1.16 billion of the Convertible Notes was included in current liabilities and the difference between the face value and carrying value of $1.2 million was included in temporary equity
in the accompanying condensed consolidated balance sheets.
All Convertible Notes were converted by their beneficial owners prior to their maturity on April 15, 2019. In accordance with the terms of the Indenture, on April 15, 2019, we paid $1.16 billion in the outstanding aggregate principal amount of the Convertible Notes and delivered 4.9 million newly issued shares of our common stock in respect of the remainder of our conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted, in full satisfaction of such
converted notes. We received shares of our common stock under the Bond Hedges that offset the issuance of shares of common stock upon conversion of the Convertible Notes. Please see Note 11 to our condensed consolidated financial statements for additional details on our Convertible Notes and Bond Hedges.
Historically, significant portions of our cash inflows were generated by our operations. We currently expect this trend to continue throughout 2019. We believe that our existing cash and investments together with cash flows expected from operations will be sufficient to meet expected operating and capital expenditure requirements and service our short term debt obligations for the next 12 months. We continue to search for suitable acquisition candidates and could acquire or make investments in companies we believe are related to our strategic objectives. We could from time to time continue to seek to
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raise additional funds through the issuance of debt or equity securities for larger acquisitions and for general corporate purposes.
The
increase in Cash, cash equivalents and investments when comparing March 31, 2019 to December 31, 2018, is primarily due to cash provided by operating activities of $267.6 million, partially offset by cash paid for stock repurchases of $93.8 million, cash dividends on our common stock of $46.0 million, cash paid for tax withholding on vested stock awards of $17.7 million, and cash paid for property and equipment of $17.3 million.
As of March 31,
2019, $642.1 million of the $1.87 billion of Cash, cash equivalents and investments was held by our foreign subsidiaries. As a result of the Tax Cuts and Jobs Act, which became effective January 1, 2018, the cash, cash equivalents and investments held by our foreign subsidiaries can be repatriated without incurring any additional U.S. federal tax. Upon repatriation of these funds, we could be subject to foreign and U.S. state income taxes. The amount of taxes due is dependent on the amount and manner of the repatriation, as well as the locations from which the funds are repatriated and received. We generally invest our cash
and cash equivalents in investment grade, highly liquid securities to allow for flexibility in the event of immediate cash needs. Our short-term and long-term investments primarily consist of interest-bearing securities.
Stock Repurchase Programs
Our Board of Directors authorized an ongoing stock repurchase program, of which $750.0 million was approved in October 2018. We may use the approved dollar authority to repurchase stock at any time until the approved amount is exhausted. The objective of the stock repurchase program is to improve stockholders’ returns. At March 31, 2019, $674.1 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased
are recorded as treasury stock. A portion of the funds used to repurchase stock over the course of the program was provided by net proceeds from the Convertible Notes and 2027 Notes offerings, as well as proceeds from employee stock awards and the related tax benefit. We are authorized to make purchases of our common stock using general corporate funds through open market purchases, pursuant to a Rule 10b5-1 plan or in privately negotiated transactions.
In February 2018, we entered into an ASR transaction with a counterparty to pay an aggregate of $750.0 million in exchange for the delivery of approximately 6.5 million shares of our common stock based on current market prices. The purchase price per share under the ASR was based on the volume-weighted average price of our common stock during the term of the ASR, less a discount. The
ASR was entered into pursuant to our existing share repurchase program. Final settlement of the ASR agreement was completed in April 2018 and we received delivery of an additional 1.6 million shares of our common stock.
During the three months ended March 31, 2019, we expended approximately $93.8 million on open market purchases under the stock repurchase program, repurchasing 911,060 shares of common stock at an average price of $102.96.
During the three months ended March 31,
2018, we had no additional open market purchases of our common stock.
Shares for Tax Withholding
During the three months ended March 31, 2019, we withheld 593,988 shares from equity awards that vested, totaling $60.1 million, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. During the three months ended March 31, 2018, we withheld 507,274 shares
from equity awards that vested, totaling $46.9 million, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. These shares are reflected as treasury stock in our condensed consolidated balance sheets and the related cash outlays do not reduce our total stock repurchase authority.
Off-Balance Sheet Arrangements
We do not have any special purpose entities or off-balance sheet financing arrangements.
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ITEM 3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes during the quarter ended March 31, 2019 with respect to the information appearing in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year ended December 31, 2018.
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
and Procedures
As of March 31, 2019, our management, with the participation of our principal executive and principal financial officers, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our principal executive officer and our principal financial officer concluded that, as of March 31, 2019, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated by and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the three months ended March 31, 2019, we implemented certain internal controls related to the evaluation of our lease agreements and the assessment of the impact of the new leases standard, ASC 842, on our financial statements to facilitate its adoption effective January 1, 2019. In addition, we have made some changes to certain internal controls to reflect new systems and processes that
were implemented as a result of the adoption of ASC 842. Except for the implementation of certain internal controls related to the adoption of ASC 842, there were no other changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM
1.
LEGAL PROCEEDINGS
We are subject to various legal proceedings, including suits, assessments, regulatory actions and investigations. We believe that we have meritorious defenses in these matters; however, we are unable currently to determine the ultimate outcome of these or similar matters or the potential exposure to loss, if any. In addition, due to the nature of our business, we are subject to various litigation matters, including patent infringement claims alleging infringement by various Citrix products and services. We believe that we have meritorious defenses to the allegations made in our pending cases and intend to vigorously defend these lawsuits; however, we are unable currently to determine the ultimate outcome of these or similar matters or the potential exposure to loss, if any. Although it is difficult to predict the ultimate
outcomes of these cases, we believe that outcomes that will materially and adversely affect our business, financial position, results of operations or cash flows are reasonably possible, but not estimable at this time.
We also are the victim of a cyberattack, in which international cyber criminals gained intermittent access to our internal network through “password spraying”, and over a limited number of days stole business documents and files from a shared network drive and a drive associated with a web-based tool used in our consulting practice. Our investigation remains ongoing. Please also see Management’s Discussion and Analysis - Executive Summary.
Further, we have a program of network-security (or cyber risk) insurance policies that, with standard exclusions, insure against the costs of detecting and mitigating cyber breaches, the cost of credit
monitoring, and reasonable expenses for defending and settling privacy and network security lawsuits. These policies are subject to a $500,000 self-insured retention and a total insurance limit of $200.0 million. There can be no assurance, however, that this insurance coverage is sufficient to cover this or any other cyberattack. In addition to these insurance policies, we maintain customary business coverage under our crime, commercial general liability, and director and officer insurance policies.
Although it is difficult to predict the ultimate outcomes of this cyberattack, based on our investigation to date, we believe that it is reasonably possible that outcomes from potential unasserted claims related to this cyberattack could materially and adversely affect our business, financial position, results of operations or cash flows. However, due to the ongoing nature of our investigation, it is not possible to estimate the
amount or a range of potential loss, if any, at this time.
ITEM 1A.
RISK FACTORS
The following information updates, and should be read in conjunction with, the information disclosed in Part 1, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which was filed with the Securities and Exchange Commission on February
15, 2019.
The cyberattack involving our internal network that we announced on March 8, 2019 could have a material adverse impact on our business, results of operations and financial condition.
On March 6, 2019, the FBI informed us that international cyber criminals had gained access to Citrix’s internal network through a “password spraying” attack, a technique that exploits weak passwords. Immediately, we engaged outside forensics and security experts, took actions to expel the cyber criminals from our internal systems, and adopted additional security measures. Additionally, we launched a comprehensive forensic investigation led by a leading, independent cybersecurity firm. Based on our investigation to date, we believe this cyberattack commenced at least as early as October
13, 2018, and encompassed a cyber incident that we became aware of in December 2018 and took certain steps to remediate based on our assessment at the time. Further, we received a notification from the Department of Homeland Security in late February 2019 concerning a network compromise that may have been part of this same cyberattack. While waiting for clarification from the Department of Homeland Security, we were contacted by the FBI on March 6, 2019.
We believe that between October 13, 2018 and March 8, 2019, cyber criminals intermittently accessed Citrix's internal network and over a limited number of days stole business documents and files from a shared network drive and a drive associated with a web-based tool used in our consulting practice. The shared drive from which
documents and files were stolen was used to store current and historical business documents and files, such as human resources and employee records, some of which contained sensitive and personal identification information of our current and former employees and, in limited cases, their beneficiaries and dependents; customer engagement documents, including consulting services project materials, statements of work and proofs of concept, some of which were also stored on the drive associated with a web-based tool used in our consulting practice; marketing materials; sales and finance documents; contracts and other legal records; and a wide assortment of other company records. The cyber criminals also may have accessed the individual virtual drives of a very limited number of compromised users, accessed the
company email accounts of the same very limited number of compromised
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users, and launched without further exploitation a limited number of internal applications. We have commenced a substantial discovery process to review the documents and files stolen from the shared network drive and the drive associated with the web-based tool used in our consulting practice, and the accessed documents and files on the individual virtual drives and the company e-mail accounts of the very limited number of comprised users. Based upon our investigation to date, we have no indication that the cyber criminals discovered and exploited any vulnerabilities in our products or customer cloud
services to gain entry, and there is no indication that the security of any Citrix product or customer cloud service was compromised.
Our investigation, however, remains ongoing, and this cyberattack could result in (among other consequences):
•
lost sales, including from disruption of customer relationships;
•
disruptions in the operation of our business;
•
harm
to our reputation or brand;
•
negative publicity;
•
lost trust from our customers, partners and employees;
•
regulatory enforcement action under the General Data Protection Regulation or other legal authority, which could result in significant fines and/or penalties or injunctive remedies;
•
individual
and/or class action lawsuits, due to, among other things, the compromise of sensitive employee or customer information, which could result in financial judgments against us or the payment of settlement amounts, which would cause us to incur legal fees and costs;
•
costs associated with responding to, and mitigating, the incident in excess of insurance policy limits, or that may not be covered by insurance;
•
disputes with our insurance carriers concerning coverage for the costs associated with responding to, and mitigating,
the incident; and
•
longer-term remediation and security enhancement expenses.
Consequently, this cyberattack could have a material adverse impact on our business, results of operations and financial condition.
Further, we have a program of network-security (or cyber risk) insurance policies that, with standard exclusions, insure against the costs of detecting and mitigating cyber breaches, the cost of credit monitoring, and reasonable expenses for defending and settling privacy and network security lawsuits. These policies are subject to a $500,000 self-insured retention and a total insurance limit of $200.0 million. There can be no assurance,
however, that this insurance coverage is sufficient to cover this or any other cyberattack. In addition to these insurance policies, we maintain customary business coverage under our crime, commercial general liability, and director and officer insurance policies.
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ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer
The
Company's Board of Directors authorized an ongoing stock repurchase program, of which $750.0 million was approved in October 2018. The objective of the stock repurchase program is to improve stockholders’ returns. As of March 31, 2019, $674.1 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock. The following table shows the monthly activity related to our stock repurchase program for the quarter ended March 31, 2019:
Total Number
of
Shares
(or Units)
Purchased
(1)
Average Price
Paid per Share
(or Unit)
Total Number of Shares
(or Units) Purchased as
Part of Publicly
Announced Plans or
Programs
Maximum Number
(or Approximate Dollar
Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Includes
approximately 593,988 shares withheld from restricted stock units that vested in the first quarter of 2019 to satisfy minimum tax withholding obligations that arose on the vesting of restricted stock units.
(2)
Shares withheld from restricted stock units that vested to satisfy minimum tax withholding obligations that arose on the vesting of awards do not deplete the dollar amount available for purchases under the repurchase program.
ITEM 3.
DEFAULTS
UPON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5.
OTHER
INFORMATION
Our policy governing transactions in Citrix securities by our directors, officers and employees permits our directors, officers and certain other persons to enter into trading plans complying with Rule 10b5-1 under the Exchange Act. We have been advised that Nanci E. Caldwell, a member of our Board of Directors, entered into a new trading plan in the first quarter of 2019 in accordance with Rule 10b5-1 and our policy governing transactions in our securities. We undertake no obligation to update or revise the information provided herein, including for revision or termination of an established trading plan.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on this 10th day of May, 2019.
