Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.50M
2: EX-10.1 Amendment to Global Restricted Stock Unit HTML 35K
Agreement
3: EX-10.2 Form of Global Restricted Stock Unit Agreement HTML 75K
4: EX-10.3 Letter Agreement - Andrew Del Matto HTML 32K
5: EX-10.4 Benefits Continuation Agreement - Robert Calderoni HTML 46K
6: EX-31.1 Rule 13A-14(A)/ 15D-14(A) Certifications HTML 34K
7: EX-31.2 Rule 13A-14(A)/ 15D-14(A) Certifications HTML 34K
8: EX-32.1 Certification Pursuant to 18 U.S.C Section 1350 HTML 31K
15: R1 Cover Page HTML 80K
16: R2 Condensed Consolidated Balance Sheets (Unaudited) HTML 137K
17: R3 Condensed Consolidated Balance Sheets (Unaudited) HTML 51K
(Parenthetical)
18: R4 Condensed Consolidated Statements Of Income HTML 111K
(Unaudited)
19: R5 Condensed Consolidated Statements of Comprehensive HTML 63K
Income (Unuaudited)
20: R6 Condensed Consolidated Statements Of Cash Flows HTML 133K
(Unaudited)
21: R7 Basis of Presentation HTML 32K
22: R8 Significant Accounting Policies HTML 44K
23: R9 Revenue HTML 94K
24: R10 Earnings Per Share HTML 70K
25: R11 Acquisitions HTML 32K
26: R12 Investments HTML 82K
27: R13 Fair Value Measurements HTML 135K
28: R14 Stock-Based Compensation HTML 98K
29: R15 Goodwill And Other Intangible Assets HTML 65K
30: R16 Segment Information HTML 104K
31: R17 Debt HTML 66K
32: R18 Derivative Financial Instruments HTML 112K
33: R19 Comprehensive Income HTML 69K
34: R20 Income Taxes HTML 42K
35: R21 Treasury Stock HTML 38K
36: R22 Commitments And Contingencies HTML 44K
37: R23 Restructuring HTML 55K
38: R24 Statement of Changes in Equity HTML 336K
39: R25 Leases HTML 73K
40: R26 Significant Accounting Policies (Policy) HTML 56K
41: R27 Revenue (Tables) HTML 71K
42: R28 Earnings Per Share (Tables) HTML 64K
43: R29 Investments (Tables) HTML 65K
44: R30 Fair Value Measurements (Tables) HTML 127K
45: R31 Stock-Based Compensation (Tables) HTML 66K
46: R32 Goodwill And Other Intangible Assets (Tables) HTML 63K
47: R33 Segment Information (Tables) HTML 109K
48: R34 Debt (Tables) HTML 45K
49: R35 Derivative Financial Instruments (Tables) HTML 119K
50: R36 Comprehensive Income (Tables) HTML 70K
51: R37 Restructuring (Tables) HTML 53K
52: R38 Statement of Changes in Equity (Tables) HTML 336K
53: R39 Leases (Tables) HTML 77K
54: R40 Basis of Presentation (Details) HTML 28K
55: R41 Significant Accounting Policies - Recent HTML 39K
Accounting Pronouncements (Details)
56: R42 Revenue (Details) HTML 81K
57: R43 Revenue - Remaining Performance Obligations HTML 45K
(Details)
58: R44 Revenue - Remaining Performance Obligation Revenue HTML 48K
(Details)
59: R45 Earnings Per Share (Details) HTML 68K
60: R46 Acquisitions (Narrative) (Details) HTML 37K
61: R47 Investments (Narrative) (Details) HTML 55K
62: R48 Investments (Schedule of Available-for-sale HTML 50K
Securities) (Details)
63: R49 Fair Value Measurements (Assets And Liabilities HTML 115K
Measured At Fair Value On A Recurring Basis)
(Details)
64: R50 Fair Value Measurements (Assets and Liabilities on HTML 40K
a Nonrecurring Basis) (Details)
65: R51 Fair Value Measurements (Additional Information HTML 46K
Regarding Fair Value Measurements) (Details)
66: R52 Stock-Based Compensation (Narrative) (Details) HTML 155K
67: R53 Stock-Based Compensation (Assumptions Used To HTML 59K
Value Option Grants, Stock Awards and ESPP Shares)
(Details)
68: R54 Stock-Based Compensation (Detail Of The Total HTML 41K
Stock-Based Compensation Recognized By Income
Statement Classification) (Details)
69: R55 Goodwill And Other Intangible Assets (Schedule Of HTML 39K
Change In Goodwill) (Details)
70: R56 Goodwill And Other Intangible Assets (Schedule Of HTML 58K
Intangible Assets) (Details)
71: R57 Goodwill And Other Intangible Assets (Schedule Of HTML 43K
Estimated Future Amortization Expense) (Details)
72: R58 Segment Information (Additional Information) HTML 39K
(Details)
73: R59 Segment Information (Revenues By Product Grouping) HTML 39K
(Details)
74: R60 Segment Information (Revenues By Geographic HTML 37K
Location) (Details)
75: R61 Segment Information (Revenue by Customer Type) HTML 34K
(Details)
76: R62 Segment Information (Subscription Revenues) HTML 37K
(Details)
77: R63 Debt (Narrative) (Details) HTML 113K
78: R64 Debt - Schedule of Interest Expense (Details) HTML 40K
79: R65 Derivative Financial Instruments (Narrative) HTML 33K
(Details)
80: R66 Derivative Financial Instruments (Schedule Of The HTML 46K
Fair Values Of Derivative Instruments) (Details)
81: R67 Derivative Financial Instruments (Schedule Of HTML 45K
Effect Of Derivative Instruments On Financial
Performance) (Details)
82: R68 Derivative Financial Instruments (Schedule Of Net HTML 30K
Notional Foreign Currency Forward Contracts
Outstanding) (Details)
83: R69 Comprehensive Income (Changes in Accumulated Other HTML 59K
Comprehensive Loss by Component) (Details)
84: R70 Comprehensive Income (Reclassifications out of HTML 46K
Accumulated Other Comprehensive Loss) (Details)
85: R71 Income Taxes (Details) HTML 40K
86: R72 Treasury Stock (Details) HTML 51K
87: R73 Commitments and Contingencies (Details) HTML 33K
88: R74 Restructuring Restructuring (Details) HTML 39K
89: R75 Restructuring (Narrative) (Details) HTML 39K
90: R76 Restructuring (Activity in Restructuring Accruals) HTML 40K
(Details)
91: R77 Statement of Changes in Equity (Details) HTML 132K
92: R78 Statement of Changes in Equity - Subsequent Event HTML 28K
(Details)
93: R79 Leases - Lease Cost (Details) HTML 36K
94: R80 Leases - Supplemental Cash Flow Information HTML 33K
(Details)
95: R81 Leases - Lease Term and Discount Rate (Details) HTML 33K
96: R82 Leases - Maturity of Lease Liabilities (Details) HTML 46K
97: R83 Leases - Supplemental Balance Sheet Information HTML 35K
(Details)
99: XML IDEA XML File -- Filing Summary XML 184K
14: XML XBRL Instance -- ctxs06-30x201910xq_htm XML 3.63M
98: EXCEL IDEA Workbook of Financial Reports XLSX 116K
10: EX-101.CAL XBRL Calculations -- ctxs-20190630_cal XML 245K
11: EX-101.DEF XBRL Definitions -- ctxs-20190630_def XML 768K
12: EX-101.LAB XBRL Labels -- ctxs-20190630_lab XML 1.93M
13: EX-101.PRE XBRL Presentations -- ctxs-20190630_pre XML 1.15M
9: EX-101.SCH XBRL Schema -- ctxs-20190630 XSD 194K
100: JSON XBRL Instance as JSON Data -- MetaLinks 410± 621K
101: ZIP XBRL Zipped Folder -- 0000877890-19-000210-xbrl Zip 353K
(Exact name of registrant as specified in its charter)
iDelaware
i75-2275152
(State
or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
i851 West Cypress Creek Road
iFort
Lauderdale
iFlorida
i33309
(Address
of principal executive offices)
(Zip Code)
Registrant’s Telephone Number, Including Area Code:
(i954) i267-3000
Securities
registered pursuant to Section 12(b) of the Act
Title of each class
Trading symbol(s)
Name of each exchange on which registered
iCommon Stock, par value $.001 per share
iCTXS
iThe
NASDAQ Global Select Market
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. iYes☒ No ☐
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). iYes☒ No ☐
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.
1
☒
iLarge
accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
i☐
Smaller reporting company
i☐
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 i☐ No ☒
As of July 26, 2019, there were i130,902,113 shares of the registrant’s Common Stock, $.001 par value per share, outstanding.
Liabilities,
Temporary Equity and Stockholders' Equity
Current liabilities:
Accounts payable
$
i96,768
$
i75,551
Accrued
expenses and other current liabilities
i284,385
i290,492
Income
taxes payable
i11,463
i44,409
Current
portion of convertible notes
i—
i1,155,445
Current
portion of deferred revenues
i1,288,910
i1,345,243
Total
current liabilities
i1,681,526
i2,911,140
Long-term
portion of deferred revenues
i455,804
i489,329
Long-term
debt
i742,482
i741,825
Long-term
income taxes payable
i259,391
i285,627
Operating
lease liabilities
i200,084
i—
Other
liabilities
i87,887
i148,499
Commitments
and contingencies
i
i
Temporary
equity from convertible notes
i—
i8,110
Stockholders'
equity:
Preferred stock at $.01 par value: 5,000 shares authorized, none issued and outstanding
i—
i—
Common
stock at $.001 par value: 1,000,000 shares authorized; 316,969 and 309,761 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
i317
i310
Additional
paid-in capital
i6,078,960
i5,404,500
Retained
earnings
i4,277,586
i4,169,019
Accumulated
other comprehensive loss
(i4,610
)
(i8,154
)
i10,352,253
i9,565,675
Less
- common stock in treasury, at cost (186,486 and 178,327 shares at June 30, 2019 and December 31, 2018, respectively)
(i9,844,231
)
(i9,014,156
)
Total
stockholders' equity
i508,022
i551,519
Total
liabilities, temporary equity and stockholders' equity
Adjustments
to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other
i118,689
i106,266
Stock-based
compensation expense
i133,554
i91,567
Deferred
income tax expense
i18,870
i5,756
Effects
of exchange rate changes on monetary assets and liabilities denominated in foreign currencies
i1,326
i6,021
Other
non-cash items
i3,921
i5,166
Total
adjustments to reconcile net income to net cash provided by operating activities
i276,360
i214,776
Changes
in operating assets and liabilities, net of the effects of acquisitions:
Accounts receivable
i155,170
i182,469
Inventories
(i2,594
)
(i6,645
)
Prepaid
expenses and other current assets
i22,733
(i38,080
)
Other
assets
(i31,126
)
i1,795
Income
taxes, net
(i67,283
)
(i72,405
)
Accounts
payable
i21,256
i19,851
Accrued
expenses and other current liabilities
(i62,812
)
i10,435
Deferred
revenues
(i89,858
)
(i41,100
)
Other
liabilities
i4,224
i5,850
Total
changes in operating assets and liabilities, net of the effects of acquisitions
(i50,290
)
i62,170
Net
cash provided by operating activities
i429,913
i528,038
Investing
Activities
Purchases of available-for-sale investments
(i19,984
)
(i332,136
)
Proceeds
from sales of available-for-sale investments
i938,031
i434,901
Proceeds
from maturities of available-for-sale investments
i153,708
i196,791
Purchases
of property and equipment
(i38,061
)
(i32,929
)
Cash
paid for acquisitions, net of cash acquired
i—
(i65,983
)
Cash
paid for licensing agreements, patents and technology
(i2,158
)
(i1,217
)
Other
i1,165
i3,002
Net
cash provided by investing activities
i1,032,701
i202,429
Financing
Activities
Proceeds from issuance of common stock under stock-based compensation plans
i—
i113
Repayment
of acquired debt
i—
(i5,674
)
Repayment
on convertible notes
(i1,164,497
)
i—
Stock
repurchases, net
(i250,000
)
(i764,978
)
Cash
paid for tax withholding on vested stock awards
(i70,552
)
(i49,936
)
Cash
paid for dividends
(i91,851
)
i—
Net
cash used in financing activities
(i1,576,900
)
(i820,475
)
Effect
of exchange rate changes on cash and cash equivalents
i240
(i3,414
)
Change
in cash and cash equivalents
(i114,046
)
(i93,422
)
Cash
and cash equivalents at beginning of period
i618,766
i1,115,130
Cash
and cash equivalents at end of period
$
i504,720
$
i1,021,708
See
accompanying notes.
6
CITRIX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. iBASIS
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, Networking products and
related Support and services. The Company operates under ione reportable segment. See Note 10 for more information on the Company's segment.
2. iSIGNIFICANT
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 and six months ended June 30, 2019 as compared to the significant accounting policies described in its Annual Report on Form 10-K for the year ended December 31, 2018.
i
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 a material 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 $i42.2 million and deferred rent liability of $i20.5
million under the old guidance) of approximately $i194.5 million and operating lease liabilities of approximately $i256.4
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 $i0.8 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.
i
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.
i
Available-for-sale Investments
Short-term and long-term available-for-sale investments as of June 30, 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
i
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.
i
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. iREVENUE
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 Citrix Service Provider ("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.
9
i
The
Company’s typical performance obligations include the following:
Performance Obligation
When Performance Obligation
is Typically Satisfied
Subscription
Cloud hosted offerings
Over the contract term, beginning on the date that service is made available to the customer (over time)
CSP
As
the usage occurs (over time)
On-premise subscription software licenses
When software activation keys have been made available for download (point in time)
Product and license
Software Licenses
When software activation keys have been made available for download (point in time)
Hardware
When control of the product passes to the customer; typically upon shipment (point in time)
Support
and services
License updates and maintenance
Ratably over the course of the service term (over time)
Professional services
As the services are provided (over time)
Significant Judgments
At contract inception, the Company assesses the 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.
Products and services transferred at a point in time
$
i178,160
$
i215,523
$
i341,124
$
i397,849
Products
and services transferred over time
i570,537
i526,842
i1,126,716
i1,041,708
Total
net revenues
$
i748,697
$
i742,365
$
i1,467,840
$
i1,439,557
(1)
Includes
a net reclassification from Products and services transferred at a point in time to Products and services transferred over time of $i10.0 million for the six months ended June 30, 2018. For the three months ended March 31, 2018, the
Company reclassified $i11.6 million from Product and services transferred over time to Product and services transferred at a point in time. For the three months ended June 30, 2018, the Company reclassified $i21.6
million from Product and services transferred at a point in time to Product and services transferred over time. The change in presentation does not affect the Company's condensed consolidated financial position, results from operations or cash flows.
The Company's short-term and long-term contract assets were $i4.6
million and $i3.7 million, respectively as of December 31, 2018, and $i8.1
million and $i14.3 million, respectively as of June 30, 2019. The Current portion of deferred revenues and the Long-term portion of deferred revenues were $i1.35
billion and $i489.3 million, respectively, as of December 31, 2018 and $i1.29
billion and $i455.8 million, respectively, as of June 30, 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 and six months ended June 30, 2019, the Company recognized $i467.6 million and $i835.9
million, respectively, of revenue that was included in the deferred revenue balance as of March 31, 2019 and December 31, 2018, respectively.
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 ino asset impairment charges related to contract assets for the three and six
months ended June 30, 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
i
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 ithree years to ifive
years, which it believes is appropriate based on consideration of the historical average customer life and the estimated useful life of the underlying product and license sold as part of the transaction. Amortization of contract acquisition costs related to support are limited to the contractual period of the arrangement as the Company intends to pay a commensurate commission upon renewal of the related support. For contracts that contain multi-year services or subscriptions, the amortization period of the capitalized costs is the expected period of benefit, which is the greater of the contractual term or the expected customer life.
The
Company elects to apply a practical expedient to expense contract acquisition costs as incurred where the expected period of benefit is one year or less.
For the three and six months ended June 30, 2019, the Company recorded amortization of capitalized contract acquisition costs of $i10.9
million and $i21.6 million, respectively, and for the three and six months ended June 30, 2018, the Company recorded amortization of capitalized contract
acquisition costs of $i8.3 million and $i16.2
million, respectively, which is recorded in Sales, marketing and services expense in the accompanying condensed consolidated statement of income. The Company's short-term and long-term contract acquisition costs were $i43.7 million and $i66.5
million, respectively, as of June 30, 2019. There was ino impairment loss in relation to costs capitalized during the three and six months ended June 30, 2019 and 2018.
4.
iEARNINGS 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 i0.500% Convertible Notes due 2019 (the “Convertible Notes”) and the Company's warrants.
12
i
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
i131,309
i135,993
i131,396
i137,614
Effect
of dilutive employee stock awards
i1,453
i1,940
i2,145
i2,360
Effect
of dilutive Convertible Notes
i782
i6,023
i2,867
i5,258
Effect
of dilutive warrants
i733
i1,491
i1,227
i477
Denominator
for diluted earnings per share - weighted-average shares outstanding
i134,277
i145,447
i137,635
i145,709
Basic
earnings per share
$
i0.71
$
i0.79
$
i1.55
$
i1.82
Diluted
earnings per share
$
i0.70
$
i0.73
$
i1.48
$
i1.72
/
For
the three and six months ended June 30, 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 quarters was above the weighted-average warrant strike price of $i94.53
per share and $i94.69 per share, respectively. For the three and six months ended June 30, 2018, the weighted-average number of shares outstanding used in the computation of diluted earnings per share includes the
dilutive effect of the Company's warrants, as the average stock price during the quarters was above the weighted-average warrant strike price of $i95.25 per share. 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 because upon conversion the Company paid cash up to the aggregate principal amount of the Convertible Notes converted and delivered shares of common stock in respect of the remainder of the Company’s conversion obligation in excess of the aggregate principal amount of the Convertible Notes converted. The conversion spread had a dilutive impact on diluted earnings per share when the average market price of the Company’s common stock for a given period exceeded the conversion price. For the three and six
months ended June 30, 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.
5. iACQUISITIONS
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 cash consideration for this transaction was $i182.7
million, net of $i3.7 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
13
hybrid and multi-cloud deployments. The total cash consideration for this transaction was $i66.0
million, net of $i6.0 million cash acquired. Transaction costs associated with the acquisition were not significant.
6. iINVESTMENTS
Available-for-sale
Investments
i
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 June 30, 2019 were approximately iseven
months and itwo years, respectively.
Realized Gains and Losses on Available-for-sale Investments
For the three and six months ended June 30, 2019, the
Company received proceeds from the sales of available-for-sale investments of $i165.0 million and $i938.0
million respectively, and for the three and six months ended June 30, 2018, the Company received proceeds from the sales of available-for-sale investments of $i76.4 million and $i434.9
million, respectively.
For the three and six months ended June 30, 2019, the Company had realized gains on the sales of available-for-sale investments of $i0.5
million and $i1.5 million respectively. For the three months ended June 30, 2018, the Company had ino
realized gains on the sales of available-for-sale investments. For the six months ended June 30, 2018, the Company had $i0.1 million in realized gains on the sales of available-for-sale investments.
For
the three and six months ended June 30, 2019, the Company had realized losses on available-for-sale investments of $i0.5 million and $i0.9
million, respectively, and for the three and six months ended June 30, 2018, the Company had realized losses on available-for-sale investments of $i0.3 million and $i1.4
million, respectively, primarily related to sales of these investments during these periods.
All realized gains and losses related to the sales of available-for-sale investments are included in Other (expense) income, net, in the accompanying condensed consolidated statements of income.
Unrealized Losses on Available-for-Sale Investments
The gross unrealized losses on the Company’s available-for-sale investments that are not deemed to be other-than-temporarily impaired as of June 30, 2019
and December 31, 2018 were $i0.2 million and $i2.9
million, respectively. Because the Company does not currently intend to sell any of its investments in an unrealized loss position and it is more likely than not that it will not be required to sell the securities before the recovery of its amortized cost basis, which may not occur until maturity, it does not consider the securities to be other-than-temporarily impaired.
14
Equity Securities without Readily Determinable Fair Values
The
Company held direct investments in privately-held companies of $i12.4 million and $i13.4
million as of June 30, 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 and six months ended June 30, 2019. 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
$i11.7 million and $i10.9 million
as of June 30, 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 $i0.7
million as of June 30, 2019.
7. iFAIR VALUE MEASUREMENTS
The authoritative guidance defines fair value as an exit price, representing the amount that would either be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
•
Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities;
•
Level 2. Inputs, other than the quoted prices
in active markets, that are observable either directly or indirectly; and
•
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Available-for-sale securities included in Level 2 are valued utilizing inputs obtained from an independent pricing service (the “Service”) which uses quoted market prices for identical or comparable instruments rather than direct observations of quoted prices in active markets. The Service applies a four level hierarchical pricing methodology to all of the Company’s
fixed income securities based on the circumstances. The hierarchy starts with the highest priority pricing source, then subsequently uses inputs obtained from other third-party sources and large custodial institutions. The Service’s providers utilize a variety of inputs to determine their quoted prices. These inputs may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. Substantially all of the Company’s available-for-sale investments are valued utilizing inputs obtained from the Service and accordingly are categorized as Level 2 in the table below. The Company periodically independently assesses the pricing obtained from the Service and historically has not adjusted the Service's pricing as a result of
this assessment. Available-for-sale securities are included in Level 3 when relevant observable inputs for a security are not available.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and liabilities within the fair value hierarchy. In certain instances, the inputs used to measure fair value may meet the definition of more than one level of the fair value hierarchy. The input with the lowest level priority is used to determine the applicable level in the fair value hierarchy.
15
i
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.
16
The
Company measures its cash flow hedges, which are classified as Prepaid expenses and other current assets and Accrued expenses and other current liabilities, at fair value based on indicative prices in active markets (Level 2 inputs).
Assets Measured at Fair Value on a Non-recurring Basis Using Significant Unobservable Inputs (Level 3)
During the three and six months ended June 30, 2019, a certain direct investment in a privately-held company with a carrying value of $i1.9
million was acquired by a third party and the Company received proceeds of $i0.2 million. As a result, the
Company wrote down the investment to a fair value of izero and recorded an impairment charge of $i1.7
million, which is included in Other (expense) income, net in the accompanying condensed consolidated statements of income.
For the three and six months ended June 30, 2018, the Company determined that certain direct investments in privately-held companies were impaired and recorded charges of $i0.4
million and $i0.9 million, respectively, which were included in Other (expense) income, net in the accompanying condensed
consolidated statements of income. In determining the fair value of the investments, the Company considers many factors including but not limited to operating performance of the investee, the amount of cash that the investee has on-hand, the ability to obtain additional financing and the overall market conditions in which the investee operates.
Additional Disclosures Regarding Fair Value Measurements
The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short maturity of these items.
i
As
of June 30, 2019, the fair value of the $i750.0 million of unsecured senior notes due December 1, 2027 (the “2027 Notes"), which was determined based on inputs that are observable in the market (Level 2) based on the closing trading price per $i100
as of the last day of trading for the quarter ended June 30, 2019, and carrying value of the 2027 Notes was as follows (in thousands):
Fair Value
Carrying Value
2027 Notes
$
i777,015
$
i742,482
/
See
Note 11 for more information on the 2027 Notes.
8. iSTOCK-BASED COMPENSATION
The Company’s stock-based compensation program is a long-term retention program that is intended to attract and reward talented employees and align stockholder and
employee interests. As of June 30, 2019, the Company had ione 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 adopted an amendment to the Amended and Restated 2014 Equity Incentive Plan, which was approved at the Company's Annual Meeting of Stockholders on June 4, 2019. 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. Pursuant to the June
2019 amendment, the maximum number of shares of common stock available for issuance under the 2014 Plan was reduced to i43,400,000. In addition, the amendment removes the fungible share adjustment used to determine shares available for issuance. Under the original terms of the 2014 Plan, shares available for issuance
were adjusted by a i2.75 fungible share factor. Pursuant to the amendment, beginning on June 4, 2019, each share award granted under the 2014 Plan will reduce the share reserve by one share and all share awards granted on June
4, 2019 and thereafter that are later forfeited, canceled or terminated will be returned to the share reserve in the same manner. 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 June 30,
2019, there were i12,232,522 shares of common stock reserved for issuance pursuant to the Company’s stock-based compensation plans including authorization under its 2014 Plan to grant stock-based awards covering i5,797,048
shares of common stock.
17
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 i1%
nor greater than i10% 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 i12,000 shares for any one employee during a Payment Period. Shares are purchased at a price equal to i85%
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 i5%
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 i16,000,000 shares of common stock. As of June 30,
2019, i1,937,455 shares have been issued under the 2015 ESPP. The Company recorded stock-based compensation costs related to the 2015 ESPP of $i2.6
million and $i2.5 million for the three months ended June 30, 2019 and 2018, respectively, and $i5.5
million for the six months ended June 30, 2019 and 2018, respectively.
i
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
i
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, i275,148
non-vested stock units that vest based on certain target performance and service conditions. The number of non-vested stock units underlying the award will be determined within isixty 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
18
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 i200% 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 i100%
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. In December 2018, certain awards for senior level employees, none of whom were executive officers, were modified 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. iThe 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
i2.67
%
i1.48
%
Expected
dividend yield
i0
%
i0
%
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 i2.75
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 $i104.05.
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 i1.06
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 $i99.54.
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 i33.33%
on each anniversary subsequent to the date of the award. Each non-vested stock unit, upon vesting, represents the right to receive ione 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 i12 equal installments based on service and, upon vesting, each
stock unit represents the right to receive one share of the Company's common stock.
Company Performance Stock Units
In April 2019, the Company awarded senior level employees i293,991
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 isixty 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
19
at i200%
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.
In
February 2019, the Company awarded certain senior level employees i93,500 non-vested performance stock units granted under the 2014 Plan. The number of non-vested stock
units underlying the award will be determined within isixty 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 i12
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 i50% 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 i200%
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 i268,729 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 isixty 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 i200%
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 i184,322
non-vested performance stock units granted under the 2014 Plan. The number of non-vested stock units underlying each award will be determined within isixty 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 i200%
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.
20
Unrecognized Compensation Related to Stock Units
As of June 30, 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 i6,387,078. As of June 30, 2019, there was $i479.8
million of total unrecognized compensation cost related to non-vested stock units. The unrecognized cost of the awards legally granted through June 30, 2019 is expected to be recognized over a weighted-average period of i1.96 years.
Modification
of Market and Company Performance Stock Units
On April 22, 2019, the change in control provisions of the unvested and outstanding March 2017 market performance stock unit awards and the February 2019, March 2018 and August 2017 company performance stock unit awards were modified such that if a change in control were to occur prior to the end of the award’s performance period, the award would be deemed earned at i200%
of the target award, subject to time-based vesting and the awardee’s continuous employment through the end of the award’s performance periods. Previously, the change in control provisions of these awards allowed for either pro rata vesting or vesting based on interim performance through the change in control date. iNo incremental compensation expense was recorded as a result of this modification given
the improbable nature of a change in control event.
9. iGOODWILL 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 ino impairment of goodwill or indefinite lived intangible assets as a result of the annual impairment
test analysis completed during the fourth quarter of 2018.
i
The following table presents the change in goodwill during the six months ended June 30, 2019 (in thousands):
Amount
relates to adjustments to the 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 iseven
years, except for patents, which are amortized over the lesser of their remaining life or seven to iten 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.
i
Intangible assets consist of the following (in thousands):
Amortization
of product-related intangible assets, which consists primarily of product-related technologies and patents, was $i9.8 million and $i11.5
million for the three months ended June 30, 2019 and 2018, respectively, and $i20.1 million and $i22.5
million for the six months ended June 30, 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 $i3.2
million and $i4.0 million for the three months ended June 30, 2019 and 2018, respectively, and $i6.7
million and $i7.7 million for the six months ended
21
June 30,
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.
i
Estimated future amortization expense of intangible assets with finite lives as of June 30, 2019 is as follows (in thousands):
Citrix has ione 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
i
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.
(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.
/
22
Revenues by Geographic Location
i
The
following table presents revenues by geographic location, for the following periods (in thousands):
As
of June 30, 2019, ione distributor, The Arrow Group, accounted for i15%
of the Company's total gross accounts receivable.
Strategic Service Providers
i
The Company defines Strategic Service Providers (SSP) as its ithree
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. iThe
following table presents subscription revenues by SaaS and non-SaaS components, for the following periods (in thousands):
On November 15, 2017, the Company issued $i750.0
million of unsecured senior notes due December 1, 2027. The 2027 Notes accrue interest at a rate of i4.500% 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 $i741.0 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
23
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) i100% 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 i101%
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 $i250.0
million, subject to continued covenant compliance. The Company may elect to increase the revolving credit facility by up to $i250.0 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 $i25.0
million may be available for issuances of letters of credit and (ii) in the aggregate amount of $i10.0 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 i1.10%
and adjusts in the range of i1.00% to i1.30%
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 i0.125%
to i0.20% of the aggregate revolving commitments under the credit facility and based on the ratio of the Company’s total debt to the Company’s consolidated EBITDA. As of June 30,
2019, there were ino 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 i3.5:1.0
and a consolidated interest coverage ratio of not less than i3.0:1.0. In addition, the Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the ability of the Company to grant liens, merge, dissolve
or consolidate, dispose of all or substantially all of its assets, pay dividends during the existence of a default under the Credit Agreement, change its business and incur subsidiary indebtedness, in each case subject to customary exceptions for a credit facility of this size and type. The Company was in compliance with these covenants as of June 30, 2019.
Convertible Notes
During 2014, the Company completed a private placement of approximately $i1.44
billion principal amount of i0.500% Convertible Notes due 2019. As of October 15, 2018, the Company had received conversion notices from noteholders with respect to $i273.0
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 i1.3
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. 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. 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 governing the Convertible Notes, on April 15, 2019the Company paid $i1.16
billion in the outstanding aggregate principal amount of the Convertible Notes and delivered i4.9 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.
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.
24
i
The following table includes total interest expense recognized related to the Convertible Notes and the 2027 Notes (in thousands):
See
Note 7 to the Company's condensed consolidated financial statements for fair value disclosures related to the Company's 2027 Notes.
Convertible Note Hedge and Warrant Transactions
To minimize the impact of potential dilution upon conversion of the Convertible Notes, the Company entered into convertible note hedge transactions relating to approximately i16.0
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 i16.0 million shares of common stock to offset any payments in cash or shares of common stock at the Company’s election. 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 i20.0 million shares.
As noted above, the Bond Hedges reduced the dilution upon conversion of the Convertible Notes, as the market price per share of common stock, as measured
under the terms of the Bond Hedges, was greater than the strike price of the Bond Hedges, which initially corresponded to the conversion price of the Convertible Notes and was 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 $i94.27
per share and the number of shares of the Company's common stock covered by the Warrant Transactions was adjusted to approximately i20.2 million shares as a result of the cash dividend paid in June 2019. The Warrants will expire in ratable portions on a series of expiration dates commencing on July 15, 2019. The Warrants
are not marked to market as the value of the Warrants were initially recorded in stockholders' equity and continue to be classified within stockholders' equity.
Aside from the initial payment of a premium to the Option Counterparties under the Bond Hedges, which amount was partially offset by the receipt of a premium under the Warrant Transactions, the Company was not required to make any cash payments to the Option Counterparties under the Bond Hedges and will not receive any proceeds if the Warrants are exercised.
12. iDERIVATIVE
FINANCIAL INSTRUMENTS
Derivatives Designated as Hedging Instruments
As of June 30, 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 i12 months.
Generally, when the dollar is weak, foreign currency denominated expenses will be higher, and these higher expenses will be partially offset by the gains realized from the
Company’s hedging contracts. Conversely, if the dollar is strong, foreign currency denominated expenses will be lower. These lower expenses will in turn be partially offset by the losses incurred from the Company’s hedging contracts. Derivative instruments are recognized as either assets or liabilities and are measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Gains and losses on derivatives that are designated as cash flow hedges are initially reported as a component of Accumulated other comprehensive loss and are subsequently recognized in income when the hedged exposure is recognized in income.
Gains and losses from changes in fair values of derivatives that are not designated as hedges are recognized in Other (expense) income, net.
25
The total cumulative unrealized gain on cash flow derivative instruments was $i0.3
million at June 30, 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 $i1.0 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 June 30, 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 (expense) income, 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
$
(i584
)
Other
(expense) income, net
Unrealized net losses on cash flow hedges
i991
Operating
expenses *
$
i407
/
*
Operating expenses amounts allocated to Research and development, Sales, marketing and services, and General and administrative are not individually significant.
14. iINCOME 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 i12.8% and i18.7%
for the three months ended June 30, 2019 and 2018, respectively. The decrease in the effective tax rate when comparing the three months ended June 30, 2019 to the three months ended June 30, 2018 was primarily due to tax items unique to the period ended June 30, 2018, as well as additional tax benefit from stock-based compensation deductions in the period ended June 30, 2019.
28
The Company’s effective tax rate was i9.6% and i11.1%
for the six months ended June 30, 2019 and 2018, respectively. The decrease in the effective tax rate when comparing the six months ended June 30, 2019 to the six months ended June 30, 2018 was primarily due to tax items unique to the period ended June 30, 2018, as well as additional tax benefit from stock-based compensation deductions in the period ended June 30,
2019.
The Company’s net unrecognized tax benefits totaled $i101.6 million and $i89.9
million as of June 30, 2019 and December 31, 2018, respectively. At June 30, 2019, $i74.8 million included in the balance 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 June 30, 2019, the Company has accrued $i6.0 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 June 30, 2019, the Company had $i114.6
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.
On July 24, 2018, the U.S. Ninth Circuit Court of Appeals overturned the U.S. Tax Court’s unanimous decision in Altera v. Commissioner, where the Tax Court held the Treasury regulation requiring participants in a qualified cost sharing arrangement to share stock-based compensation costs to be invalid. On August 7, 2018, the U.S. Ninth Circuit Court of Appeals, on its own motion, withdrew its July 24, 2018 opinion to allow time for a reconstituted panel to confer. Given the increased uncertainty as to the Ninth Circuit panel's eventual ruling and the impact it will have on the Internal Revenue Service’s ability to challenge the technical merits of the
Company's position, the Company accrued amounts for this uncertain tax position as of the year ended December 31, 2018.
On June 7, 2019, a reconstituted panel issued a new opinion which again reversed the Tax Court's holding in Altera v. Commissioner and upheld a 2003 regulation that requires participants in a cost-sharing arrangement to share stock-based compensation costs. The Ninth Circuit panel concluded that the 2003 regulations were valid under the Administrative Procedure Act. Since the Company previously accrued amounts for this uncertain tax position, there were no changes to the
Company's position or treatment of its cost-sharing arrangements in the current period. On July 22, 2019, Altera Corp. filed an appeal with the Ninth Circuit to rehear this case, which is ongoing. Therefore, the case's final disposition may result in a benefit for the Company in the future if the case is reversed.
15. iTREASURY STOCK
Stock
Repurchase Program
The Company’s Board of Directors authorized an ongoing stock repurchase program, of which $i750.0 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 June 30, 2019, approximately $i517.9 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 $i750.0
million in exchange for the delivery of approximately i6.5 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
29
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 i1.6 million additional shares of its common stock.
During
the three months ended June 30, 2019, the Company expended approximately $i156.2 million on open market purchases under the stock repurchase program, repurchasing i1,599,822
shares of common stock at an average price of $i97.63. During the six months ended June 30, 2019, the Company expended approximately $i250.0
million on open market purchases under the stock repurchase program, repurchasing i2,510,882 shares of common stock at an average price of $i99.57.
During
the three and six months ended June 30, 2018, the Company expended approximately $i15.0 million on open market purchases under the stock repurchase program, repurchasing i0.1
million shares of common stock at an average price of $i106.83.
Shares for Tax Withholding
During the three and six months ended June 30, 2019,
the Company withheld i104,129 shares and i698,117
shares, respectively, from equity awards that vested, totaling $i10.4 million and $i70.6
million, respectively, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. During the three and six months ended June 30, 2018, the Company withheld i30,502
shares and i537,776 shares, respectively, from equity awards that vested, totaling $i3.0
million and $i49.9 million, respectively, 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. iCOMMITMENTS 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 subject to various other legal proceedings, including suits, assessments, regulatory actions and investigations generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcomes of these matters, 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
was the victim of a previously disclosed cyber attack during which international cyber criminals gained intermittent access to Citrix’s internal network. The Company has conducted an investigation into this incident. The Company’s investigation confirmed that 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 some cases, their beneficiaries, dependents and others; 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 is reviewing documents and files that may have been accessed or were stolen in this incident, which include 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 email accounts
of the very limited number of compromised users. The
30
Company’s investigation found no indication that the cyber criminals discovered and exploited any vulnerabilities in the Company’s products or customer cloud services to gain entry, and no indication that the security of any Citrix product or customer cloud service was compromised. The Company found no impact to its financial reporting systems from this cyberattack. Additionally, the Company has taken steps to enhance its internal controls over
financial reporting and disclosure controls and procedures related to cyberattacks.
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 $i500,000
self-insured retention and a total insurance limit of $i200.0 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.
Although it is difficult to predict the ultimate
outcomes of this cyberattack, to date, three putative class action lawsuits have been filed against the Company in the United States District Court for the Southern District of Florida. These matters, Howard v. Citrix, Jackson and Sargent v. Citrix, and Ramus, Young and Charles v. Citrix, were filed on May 24, 2019, May 30, 2019, and June 23, 2019, respectively, and have been consolidated. The plaintiffs, who purport to represent various classes of current and former employees (and their dependents) of the Company, generally claim to have been harmed by the Company’s alleged
actions and/or omissions in connection with this incident and their personal data. They assert a variety of common law and statutory claims seeking monetary damages or other related relief.
The Company is unable to currently determine the ultimate outcome of these legal proceedings or the potential exposure or loss, if any, because the legal proceedings remain in the early stages, there is uncertainty as to the likelihood of a class or classes being certified or the ultimate size of any class if certified, and there are significant factual and legal issues to be resolved.
Beyond the matters described above, 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, it is not possible to estimate the amount or a range of potential loss, if any, at this time, and the Company will continue to evaluate information as it becomes known, and will record an accrual for estimated losses at the time or times it is determined that a loss is both probable and reasonably estimable.
On July 25, 2019, a class action lawsuit was filed against Citrix, LogMeIn, Inc. (“LogMeIn”) and certain of their directors and officers in the Circuit Court of the 15th Judicial Circuit, Palm Beach County, Florida. The complaint alleges that the defendants violated federal securities laws by making
alleged misstatements and omissions in LogMeIn’s Registration Statement and Prospectus filed in connection with the 2017 spin-off of Citrix’s GoTo family of service offerings and subsequent merger of that business with LogMeIn. The complaint seeks among other things the recovery of monetary damages. The Company believes that Citrix and its directors have meritorious defenses to these allegations, however, the Company is unable to currently determine the ultimate outcome of this matter or the potential exposure or loss, if any.
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.
Other Purchase Commitments
In June 2019, the Company entered into an amended agreement with a third-party provider, in the ordinary course of business, for the Company's use of certain cloud services through June 2021. Under the amended agreement, the Company is committed to a purchase of $i25.0
million in fiscal year 2019 and $i25.0 million in fiscal year 2020.
31
17. iRESTRUCTURING
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.
i
For the three and six months ended June 30, 2019
and 2018, restructuring charges were comprised of the following (in thousands):
For
the three months ended June 30, 2019 and 2018, the Company incurred costs of $i4.3 million and $i1.3
million, respectively, and for the six months June 30, 2019 and 2018, the Company incurred costs of $i7.1 million and $i2.3
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. iNo costs
were incurred during the three and six months ended June 30, 2019 related to the consolidation of leased facilities. During the three and six months ended June 30, 2018, the Company incurred costs of $i6.2
million and $i11.3 million, respectively, related to the consolidation of leased facilities.
Restructuring accruals
i
The
activity in the Company’s restructuring accruals for the six months ended June 30, 2019 is summarized as follows (in thousands):
As of June 30,
2019, the $i3.8 million in outstanding restructuring accruals primarily relate to employee severance and related costs. As a result of the adoption of 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.
32
18.
iSTATEMENT OF CHANGES IN EQUITY
i
The following tables presents the changes in total stockholders'
equity during the three and six months ended June 30, 2019 (in thousands):
On July 24, 2019the Company announced that its Board of Directors approved a quarterly cash dividend of $i0.35
per share which will be paid on September 20, 2019 to all shareholders of record as of the close of business on September 6, 2019.
19. iLEASES
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 were not material to the condensed consolidated financial statements as of June 30, 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.
i
The
components of lease expense were 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, revenue trends, 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, the security of our network, products and
services, and the impact of the cybersecurity incident on our business and results of operations 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 and six months ended June 30, 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 June 30,
2019, our results reflect an acceleration in subscription bookings compared to the year-ago period, demonstrating execution of our strategy to transition more of our business to subscription. We believe that this dynamic is best captured in our Subscription and SaaS Annualized Recurring Revenue, or ARR. This operating metric represents the contracted recurring value of all termed subscriptions normalized to a one-year period. It is calculated at the end of a reporting period by taking each contract’s recurring total contract value and dividing by the length of the contract. ARR includes only active contractually committed, fixed subscription fees. All contracts
are annualized, including 30 day offerings where we take monthly recurring revenue multiplied by 12 to annualize. ARR may be influenced by seasonality within the year. ARR should be viewed independently of U.S. GAAP revenue, deferred revenue and unbilled revenue and is not intended to be combined with or to replace those items. ARR is not a forecast of future revenue. As we continue through this business model transition, we believe ARR is a key indicator of the overall health and trajectory of our business.
38
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. From our investigation, we learned that the cyberattack commenced on October 13, 2018, and encompassed a cyber incident that we became aware of in late 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 conducted
an investigation, which confirmed 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 some cases, their beneficiaries, dependents and others; 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 are reviewing documents and files that may have been accessed or were stolen in this incident, which include 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 email accounts of the very limited number of compromised users. Our investigation found no indication that the cyber criminals discovered and exploited any vulnerabilities in our products or customer cloud services to gain entry, and no indication that the security of any Citrix product or customer cloud service was compromised. We found no impact to our financial reporting systems from this cyberattack. Additionally, we have taken steps to enhance our internal controls over financial reporting and disclosure controls and procedures related to cyberattacks.
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 June 30, 2019.
On July 24, 2019, we announced that our Board of Directors declared a $0.35 per share dividend payable September 20, 2019 to all shareholders of record as of the close of business on September 6, 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.
Summary of Results
For the three months ended June 30, 2019 compared to the three months ended June 30, 2018, a summary of our results included:
•
Subscription revenue increased 40.6% to $155.8 million;
•
SaaS
revenue increased 40.7% to $91.2 million and accounted for 58.5% of total subscription revenue;
•
Product and license revenue decreased 26.8% to $140.7 million;
•
Support and services revenue increased 2.9% to $452.2 million;
•
Gross
margin as a percentage of revenue decreased 0.2% to 85.2%;
•
Operating income decreased 19.3% to $117.1 million;
•
Diluted net income per share decreased 4.1% to $0.70;
•
Unbilled
revenue increased $267.5 million to $484.2 million;
•
Subscription ARR increased $152.0 million to $614.4 million; and
•
SaaS ARR increased $136.0 million to $418.0 million.
39
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 increased sales of hardware maintenance related to our perpetual Networking products. We currently expect total revenue to decrease when comparing the third quarter of 2019 to the third quarter of 2018 due to the acceleration of our transition to a subscription-based model. 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 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. Both Subscription and SaaS ARR increased due to the acceleration of subscription bookings.
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 cash consideration for this
transaction was $182.7 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 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
41
•
Networking
products, which primarily include Citrix ADC and Citrix SD-WAN.
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 June 30, 2019 compared to the three months ended June 30, 2018 and for the six months ended June 30, 2019 compared to the six months ended June 30, 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 third quarter of 2019 to the third 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 June 30, 2019 to the three months ended June 30, 2018 and when comparing the six months ended June 30, 2019 to the six months ended June 30, 2018
primarily due to lower sales of our perpetual Networking products, primarily due to cyclical ordering patterns at large hyperscale providers and our customers continuing to shift to the cloud. We currently expect Product and license revenue to decrease when comparing the third quarter of 2019 to the third quarter of 2018 as customers continue to shift to our cloud-based solutions and away from our Networking hardware products.
Support and services
Support and services revenue increased for the three months ended June 30, 2019 compared
to the three months ended June 30, 2018 primarily driven by increased sales of maintenance services across our Digital Workspace perpetual offerings of $8.4 million and higher sales of hardware maintenance related to our perpetual Networking products of $2.7 million. Support and services revenue increased for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily driven by increased sales of maintenance services across our Digital Workspace perpetual offerings. We currently expect Support and services revenue to
remain consistent when comparing the third quarter of 2019 to the third 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.
42
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 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 $89.9 million as of June 30, 2019 compared to December 31, 2018
primarily due to a decrease in maintenance and support of $136.3 million, primarily due to seasonality, partially offset by an increase in subscription of $54.9 million. Unbilled revenue as of June 30, 2019 increased $145.8 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 June 30, 2019, the amount of product and license backlog was not material. As of June 30, 2018, we had product and license backlog of $37.8 million. 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 47.0% and 48.0% of our net revenues for the three and six
months ended June 30, 2019, respectively, and 46.4% and 45.7% of our net revenues for the three and six months ended June 30, 2018, respectively. The increase in our international revenues as a percentage of our net revenues for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 was primarily driven by an increase in revenue in our
EMEA region, consisting primarily of increases in Subscription of $13.0 million and Support and services of $5.9 million, partially offset by a decrease in Product and license of $12.6 million. The increase in our international revenues as a percentage of our net revenues for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 was primarily driven by an increase in revenue in our EMEA region of $28.5 million, consisting primarily of increases in Subscription of $24.3 million and Support and services of $15.5 million, partially offset by a decrease in Product and license of $11.3 million, and an increase in revenue in our APJ region of $10.5 million, consisting
primarily of increases in Product and license of $6.0 million and Subscription of $4.9 million. See Note 10 to our condensed consolidated financial statements for detailed information on net revenues by geography.
Cost of subscription, support and services revenues
$
78,817
$
67,523
$
150,245
$
130,908
$
11,294
$
19,337
Cost
of product and license revenues
21,878
29,707
47,622
63,579
(7,829
)
(15,957
)
Amortization
of product related intangible assets
9,784
11,519
20,085
22,548
(1,735
)
(2,463
)
Total
cost of net revenues
$
110,479
$
108,749
$
217,952
$
217,035
$
1,730
$
917
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
43
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 and six months ended June 30,
2019 compared to the three and six months ended June 30, 2018 primarily due to an increase in costs related to providing our subscription offerings. We currently expect Cost of subscription, support and services revenues to increase when comparing the third quarter of 2019 to the third quarter of 2018, consistent with the expected increases in Subscription revenue as discussed above.
Cost of product and license revenues decreased for the three and six months ended June 30,
2019 compared to the three and six months ended June 30, 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 decrease when comparing the third quarter of 2019 to the third quarter of 2018, consistent with the expected decrease in Product and license revenue.
Amortization of product related intangible assets decreased for the three and six months ended June 30,
2019 compared to the three and six months ended June 30, 2018 primarily due to lower amortization of certain intangible assets becoming fully amortized.
Gross Margin
Gross margin as a percentage of revenue was 85.2% and 85.2% for the three and six months ended June 30, 2019, respectively, and 85.4% and 84.9%
for the three and six months ended June 30, 2018, respectively. The change in gross margin when comparing the three and six months ended June 30, 2019 to June 30, 2018 was not significant.
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 June 30, 2019 compared to the three months ended June 30, 2018 primarily due to an increase in compensation and other employee-related costs of $9.3 million related to a net increase in headcount and an increase in stock-based compensation of $7.7 million. Research and development expenses increased during the
six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily due to an increase in stock-based compensation of $24.7 million and an increase in compensation and other employee-related costs of $19.6 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 June 30, 2019 compared to the three months ended June 30, 2018 primarily due to
an increase in stock-based compensation of $4.8 million, an increase in compensation and other employee-related costs of $3.7 million due to a net increase in sales and services headcount, and an increase in professional fees of $2.0 million. Sales, marketing and services expenses increased during the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily due to an increase in stock-based compensation of $11.2 million, an increase in compensation and other employee-related costs of $10.4 million due to a net increase in sales and services headcount, and an increase in professional fees of $5.1 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 June 30, 2019 compared to the three months ended June 30, 2018 primarily due to an increase in professional fees. General and administrative expenses increased during the six months ended June 30, 2019 compared to the six
months ended June 30, 2018 primarily due to an increase in professional fees of $9.1 million and an increase in compensation and other employee-related costs of $4.7 million due to a net increase in headcount.
2019 Operating Expense Outlook
When comparing the third quarter of 2019 to the third quarter of 2018, we currently expect Operating expenses to increase with respect to sales, marketing and services expenses due to our continued investment in demand generation, and to better serve customer success. We also expect an increase with respect to research and development expenses
as we continue to invest in product and engineering, and remain consistent with respect to general and administrative expenses.
Interest
income primarily consists of interest earned on our cash, cash equivalents and investment balances. Interest income decreased for the three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018
45
primarily due to lower cash, cash equivalents and investment balances as a result of the repayment of the outstanding principal balance of our Convertible
Notes on April 15, 2019. 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 and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018 due to the repayment of the outstanding principal balance of our Convertible Notes on April 15, 2019. See Note 11 to our condensed consolidated financial statements for additional details regarding our debt.
Other
(expense) income, 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 (expense) income, net during the three months ended June 30, 2019 compared to the three months ended June 30, 2018 was not significant. The change in Other (expense) income, net
during the six months ended June 30, 2019 compared to the six months ended June 30, 2018 was primarily driven by gains from fair value adjustments on our investments accounted for using net asset value of $2.3 million, realized gains on our available-for-sale investments of $1.9 million and gains from the remeasurement of foreign currency transactions of $1.1 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 12.8% and 18.7% for the three months ended June 30, 2019 and 2018,
respectively. The decrease in the effective tax rate when comparing the three months ended June 30, 2019 to the three months ended June 30, 2018 was primarily due to tax items unique to the period ended June 30, 2018, as well as additional tax benefit from stock-based compensation deductions in the period ended June 30, 2019.
Our effective tax rate was 9.6% and 11.1% for the six months ended June 30,
2019 and 2018, respectively. The decrease in the effective tax rate when comparing the six months ended June 30, 2019 to the six months ended June 30, 2018 was primarily due to tax items unique to the period ended June 30, 2018, as well as additional tax benefit from stock-based compensation deductions in the period ended June 30, 2019.
Our
net unrecognized tax benefits totaled $101.6 million and $89.9 million as of June 30, 2019 and December 31, 2018, respectively. At June 30, 2019, $74.8 million included in the balance for tax positions would affect the annual effective tax rate if recognized. We have $6.0 million accrued for the payment of interest as of June 30, 2019.
46
On July 24, 2018, the U.S. Ninth Circuit Court of Appeals overturned the U.S. Tax Court’s unanimous decision in Altera v. Commissioner, where the Tax Court held the Treasury regulation requiring participants in a qualified cost sharing arrangement to share stock-based compensation costs to be invalid. On August 7, 2018, the U.S. Ninth Circuit Court of Appeals, on its own motion, withdrew its July 24, 2018 opinion to allow time for a reconstituted panel to confer. Given the increased uncertainty as to the Ninth Circuit panel's eventual ruling and the impact it will have on the Internal Revenue Service’s ability to challenge the technical merits of our position, we accrued amounts
for this uncertain tax position as of the year ended December 31, 2018.
On June 7, 2019, a reconstituted panel issued a new opinion which again reversed the Tax Court's holding in Altera v. Commissioner and upheld a 2003 regulation that requires participants in a cost-sharing arrangement to share stock-based compensation costs. The Ninth Circuit panel concluded that the 2003 regulations were valid under the Administrative Procedure Act. Since we previously accrued amounts for this uncertain tax position, there were no changes to our position or treatment of our cost-sharing arrangements in the current period. On July 22, 2019, Altera Corp. filed an appeal with the Ninth Circuit to rehear this case, which is ongoing. Therefore, the
case's final disposition may result in a benefit for us in the future if the case is reversed.
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 June 30, 2019, we had $114.6 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.
Liquidity and Capital Resources
During the six months ended June 30, 2019, we generated operating cash flows of $429.9 million. These operating cash flows related primarily to net income of $203.8 million, adjusted for, among other things,
non-cash charges, stock-based compensation expense of $133.6 million, depreciation and amortization expenses of $109.1 million, and deferred income tax expense of $18.9 million. Partially offsetting these cash inflows was a change in operating assets and liabilities of $50.3 million, net of effect of our acquisitions. The change in our net operating assets and liabilities was primarily a result of an outflow in deferred revenue of $89.9 million, an outflow in income taxes, net of $67.3 million due to decreases in income taxes payable, and an outflow in accrued expenses and other current liabilities of $62.8 million, primarily due to decreases in employee-related
accruals of $39.7 million and payments on lease liabilities of $27.1 million. These outflows are partially offset by an inflow in accounts receivable of $155.2 million driven by an increase in collections and an inflow from prepaid expenses and other current assets of $22.7 million, primarily due to decreases from prepaid cloud commitment agreements. Our investing activities provided $1.03 billion of cash consisting primarily of cash received from the net proceeds from the sale of investments of $1.07 billion, partially offset by cash paid for the purchase of property and equipment of $38.1 million. Our financing activities used cash of $1.58 billion primarily due to the cash repayment of the outstanding
principal balance of our Convertible Notes of $1.16 billion, stock repurchases of $250.0 million, cash dividends on our common stock of $91.9 million and cash paid for tax withholding on vested stock awards of $70.6 million.
47
During the six months ended June 30, 2018, we generated operating cash flows of $528.0 million. These operating cash flows related primarily to net income of
$251.1 million, adjusted for, among other things, non-cash charges, stock-based compensation expense of $91.6 million, depreciation and amortization expenses of $86.3 million, the effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies of $6.0 million and deferred income tax expense of $5.8 million. Also contributing to these cash inflows was a change in operating assets and liabilities of $62.2 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 $182.5 million driven by an increase in collections from
higher prior period bookings. This inflow is partially offset by an outflow in income taxes, net of $72.4 million due to decreases in income taxes payable and an increase in prepaid taxes, as well as changes in deferred revenue of $41.1 million primarily due to the upfront recognition of term licenses per the new revenue standard as well as seasonality. Our investing activities provided $202.4 million of cash consisting primarily of cash received from the net proceeds from the sale of investments of $302.6 million, partially offset by cash paid for acquisitions of $66.0 million and cash paid for the purchase of property and equipment of $32.9 million. Our financing activities used cash of $820.5
million primarily due to cash paid for stock repurchases of $765.0 million and cash paid for tax withholding on vested stock awards of $49.9 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 thereto, in each case as set forth in the Credit Agreement. As of June 30, 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 June 30, 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
During 2014, we completed a private placement of approximately $1.44 billion principal amount of 0.500% Convertible Notes due 2019. As of October 15, 2018, we had 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
48
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. 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 governing the Convertible Notes, 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 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 raise additional funds through the issuance of debt or equity securities for larger acquisitions and for general corporate purposes.
The
decrease in Cash, cash equivalents and investments when comparing June 30, 2019 to December 31, 2018, is primarily due to the cash repayment of the outstanding principal amount of our Convertible Notes of $1.16 billion, cash paid for stock repurchases of $250.0 million, cash dividends on our common stock of $91.9 million, cash paid for tax withholding on vested stock awards of $70.6 million, and cash paid for property and equipment of $38.1 million, partially offset by cash provided by operating activities of $429.9 million.
As of June 30, 2019, $346.1 million of the $593.6 million 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 June 30, 2019, $517.9
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.
49
During the three months ended June 30, 2019, we expended approximately $156.2 million on open market purchases under the stock repurchase program, repurchasing 1,599,822
shares of common stock at an average price of $97.63. During the six months ended June 30, 2019, we expended approximately $250.0 million on open market purchases under the stock repurchase program, repurchasing 2,510,882 shares of common stock at an average price of $99.57.
During the three and six months ended June 30, 2018, we expended approximately $15.0 million on open market purchases under the stock repurchase program,
repurchasing 0.1 million shares of common stock at an average price of $106.83.
Shares for Tax Withholding
During the three and six months ended June 30, 2019, we withheld 104,129 shares and 698,117 shares, respectively, from equity awards that vested, totaling $10.4 million and $70.6 million, respectively, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. During the three
and six months ended June 30, 2018, we withheld 30,502 shares and 537,776 shares, respectively, from equity awards that vested, totaling $3.0 million and $49.9 million, respectively, 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.
Contractual Obligations
Other Purchase Commitments
In June 2019, we entered
into an amended agreement, in the ordinary course of business, with a third-party provider for our use of certain cloud services through June 2021. Under the amended agreement, we are committed to a purchase of $25.0 million in fiscal year 2019 and $25.0 million in fiscal year 2020.
Off-Balance Sheet Arrangements
We do not have any special purpose entities or off-balance sheet financing arrangements.
50
ITEM 3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes during the quarter ended June 30, 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 June 30, 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 June 30, 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 June 30, 2019, there were no 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.
51
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 were 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. We recently conducted an investigation, and we are reviewing documents and files that may have been accessed or were stolen in this incident. Please also see Management’s Discussion and Analysis - Executive Summary.
Although it is difficult to predict the ultimate outcomes of this cyberattack, to date, three putative class action lawsuits have been filed against us in the United States District Court for the Southern District of Florida. These matters, Howard v. Citrix, Jackson and Sargent v. Citrix, and Ramus, Young and Charles v. Citrix, were filed on May 24, 2019, May 30, 2019, and June
23, 2019, respectively, and have been consolidated. The plaintiffs, who purport to represent various classes of our current and former employees (and their dependents), generally claim to have been harmed by our alleged actions and/or omissions in connection with this incident and their personal data. They assert a variety of common law and statutory claims seeking monetary damages or other related relief.
We are unable to currently determine the ultimate outcome of these proceedings or the potential exposure or loss, if any, because the legal proceedings remain in the early stages, there is uncertainty as to the likelihood of a class or classes being certified or the ultimate size of any class if certified, and there are significant factual and legal issues to be resolved.
Beyond the matters described above, 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, it is not possible to estimate the amount or a range of potential loss, if any, at this time, and we will continue to evaluate information as it becomes known and will record an accrual for estimated losses at the time or times it is determined that a loss is both probable and reasonably estimable.
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.
On July 25, 2019, a class action lawsuit was filed against Citrix, LogMeIn and certain of their directors and officers in the Circuit Court of the 15th Judicial Circuit, Palm Beach County, Florida. The complaint alleges that the defendants violated federal securities laws by making alleged misstatements and omissions in LogMeIn’s Registration Statement and Prospectus filed in connection with the 2017 spin-off of Citrix’s GoTo family of service offerings and subsequent merger of that business with LogMeIn. The complaint seeks among other things the recovery of monetary damages. We believe that Citrix and
our directors have meritorious defenses to these allegations; however, we are unable to currently determine the ultimate outcome of this matter or the potential exposure or loss, if any.
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.
52
We may not be able to forecast the rate at which our customers’ purchases trend away from perpetual licenses to subscriptions, which may impact our forecasted and actual revenue and operating results.
We are undergoing a business model transition and as our customers’ purchases trend away from perpetual licenses to subscriptions, our subscription bookings as a percentage of total product bookings increases. We forecast our future revenue and
operating results and provide financial projections based on a number of assumptions, including a forecasted rate at which our subscription bookings as a percentage of total product bookings will increase throughout our business model transition. If any of our assumptions about our business model transition or the estimated rate at which our subscription bookings as a percentage of total product bookings will increase and in which periods are incorrect, our forecasted revenue and operating results may be impacted and could vary materially from those we provide as guidance or from those anticipated by investors and analysts. For example, in the second quarter of fiscal year 2019, our subscription bookings as a percentage of total product bookings was higher than anticipated, which impacted our operating results for that period and our guidance for the third quarter and full fiscal year 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. From our investigation, we confirmed that the cyberattack commenced on October 13, 2018, and encompassed a cyber incident that we became
aware of in late 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 conducted an investigation, which confirmed 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 some cases, their beneficiaries, dependents, and others; 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 company email accounts of the same very limited number of compromised users, and launched without
further exploitation a limited number of internal applications. We are reviewing documents and files that may have been accessed or were stolen in this incident. Our investigation found no indication that the cyber criminals discovered and exploited any vulnerabilities in our products or customer cloud services to gain entry, and no indication that the security of any Citrix product or customer cloud service was compromised.
This cyberattack has resulted in three class action complaints related to the loss of personal data of current and former employees, and 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.
53
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.
54
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 June 30, 2019, $517.9 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 June 30, 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 104,129 shares withheld from restricted stock units that vested in the second 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.
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 6th day of August, 2019.
