Quarterly Report




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                      .

Commission File Number 0-27084
 
 
 
CITRIX SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
       
Delaware
  
75-2275152
(State or other jurisdiction of
incorporation or organization)
  
(IRS Employer
Identification No.)
 
 
 
851 West Cypress Creek Road
Fort Lauderdale, Florida
  
33309
(Address of principal executive offices)
  
(Zip Code)
Registrant’s Telephone Number, Including Area Code:
(954) 267-3000
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  x    No o  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
x   Large accelerated filer
  
o     Accelerated filer
o     Non-accelerated filer
  
o     Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o     No   x
As of October 28, 2016 there were 155,966,012 shares of the registrant’s Common Stock, $.001 par value per share, outstanding.

1



CITRIX SYSTEMS, INC.
Form 10-Q
For the Quarterly Period Ended September 30, 2016
CONTENTS

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

2



PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
September 30, 2016
 
December 31, 2015
 
(Unaudited)
 
(Derived from audited financial statements)
 
(In thousands, except par value)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,308,683

 
$
368,518

Short-term investments, available-for-sale
354,328

 
502,852

Accounts receivable, net of allowances of $5,561 and $7,719 at September 30, 2016 and December 31, 2015, respectively
475,085

 
669,276

Inventories, net
14,809

 
10,521

Prepaid expenses and other current assets
119,482

 
132,784

Total current assets
2,272,387

 
1,683,951

Long-term investments, available-for-sale
789,038

 
891,964

Property and equipment, net
352,521

 
373,817

Goodwill
1,965,024

 
1,962,722

Other intangible assets, net
247,392

 
283,418

Deferred tax assets, net
231,681

 
215,196

Other assets
64,460

 
56,449

Total assets
$
5,922,503

 
$
5,467,517

Liabilities, Temporary Equity and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
85,655

 
$
95,396

Accrued expenses and other current liabilities
279,947

 
317,468

Income taxes payable
51,341

 
18,351

Current portion of deferred revenues
1,194,101

 
1,249,754

Convertible notes, short-term
1,338,782

 

Total current liabilities
2,949,826

 
1,680,969

Long-term portion of deferred revenues
418,169

 
414,314

Convertible notes, long-term

 
1,311,071

Other liabilities
114,931

 
87,717

Commitments and contingencies

 

Temporary equity from Convertible notes
87,841

 

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

 

Common stock at $.001 par value: 1,000,000 shares authorized; 302,107 and 299,113 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
302

 
299

Additional paid-in capital
4,687,343

 
4,566,919

Retained earnings
3,810,887

 
3,474,625

Accumulated other comprehensive loss
(22,835
)
 
(28,527
)
 
8,475,697

 
8,013,316

Less - common stock in treasury, at cost (146,420 and 145,296 shares at September 30, 2016 and December 31, 2015, respectively)
(6,123,961
)
 
(6,039,870
)
Total stockholders' equity
2,351,736

 
1,973,446

Total liabilities, temporary equity and stockholders' equity
$
5,922,503

 
$
5,467,517

See accompanying notes.

3



CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except per share information)
Revenues:
 
 
 
 
 
 
 
Product and licenses
$
206,179

 
$
206,252

 
$
628,002

 
$
594,507

Software as a service
207,050

 
190,757

 
606,544

 
537,705

License updates and maintenance
398,171

 
379,585

 
1,178,053

 
1,128,043

Professional services
29,851

 
36,676

 
97,310

 
110,576

Total net revenues
841,251

 
813,270

 
2,509,909

 
2,370,831

Cost of net revenues:
 
 
 
 
 
 
 
Cost of product and license revenues
28,059

 
34,859

 
93,077

 
83,833

Cost of services and maintenance revenues
93,829

 
91,295

 
281,440

 
270,218

Amortization of product related intangible assets
14,959

 
19,140

 
45,744

 
56,225

Impairment of product related intangible assets
1,128

 
960

 
1,128


1,335

Total cost of net revenues
137,975

 
146,254

 
421,389

 
411,611

Gross margin
703,276

 
667,016

 
2,088,520

 
1,959,220

Operating expenses:
 
 
 
 
 
 
 
Research and development
126,887

 
139,128

 
375,607

 
423,972

Sales, marketing and services
291,848

 
293,587

 
883,045

 
896,250

General and administrative
93,686

 
79,799

 
281,601

 
241,697

Amortization of other intangible assets
7,387

 
12,534

 
22,067

 
32,967

Impairment of other intangible assets

 
64,404

 

 
64,404

Restructuring
12,061

 
13,766

 
62,142

 
62,251

Separation
17,580

 

 
46,190

 

Total operating expenses
549,449

 
603,218

 
1,670,652

 
1,721,541

Income from operations
153,827

 
63,798

 
417,868

 
237,679

Interest income
4,193

 
3,004

 
12,108

 
8,679

Interest expense
11,254

 
11,075

 
33,605

 
33,196

Other income (expense), net
494

 
(2,369
)
 
(781
)
 
(13,480
)
Income before income taxes
147,260

 
53,358

 
395,590

 
199,682

Income tax expense (benefit)
15,359

 
(2,567
)
 
59,328

 
11,595

Net income
$
131,901

 
$
55,925

 
$
336,262

 
$
188,087

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.85

 
$
0.35

 
$
2.17

 
$
1.17

Diluted
$
0.84

 
$
0.35

 
$
2.15

 
$
1.16

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
155,525

 
160,359

 
154,847

 
160,359

Diluted
157,532

 
161,777

 
156,697

 
161,716


See accompanying notes.

4



CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
 
 
 
 
 
 
 
 
Net income
$
131,901

 
$
55,925

 
$
336,262

 
$
188,087

Other comprehensive income:
 
 
 
 
 
 
 
Available for sale securities:
 
 
 
 
 
 
 
Change in net unrealized (losses) gains
(1,029
)
 
94

 
4,863


1,392

Less: reclassification adjustment for net (gains) losses included in net income
(928
)
 
232

 
(1,220
)
 
164

Net change (net of tax effect)
(1,957
)
 
326

 
3,643

 
1,556

Cash flow hedges:
 
 
 
 
 
 
 
Change in unrealized gains (losses)
382

 
(2,348
)
 
386

 
(5,692
)
Less: reclassification adjustment for net losses included in net income
641

 
1,794

 
1,663

 
11,462

Net change (net of tax effect)
1,023

 
(554
)
 
2,049

 
5,770

Other comprehensive (loss) income
(934
)
 
(228
)
 
5,692

 
7,326

Comprehensive income
$
130,967

 
$
55,697

 
$
341,954

 
$
195,413


See accompanying notes.




5



CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended September 30,
 
2016
 
2015
 
(In thousands)
Operating Activities
 
 
 
Net income
$
336,262

 
$
188,087

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization and other
219,155

 
295,810

Stock-based compensation expense
136,202

 
103,674

Excess tax benefit from stock-based compensation
(12,374
)
 
(2,236
)
Deferred income tax benefit
(23,912
)
 
(31,873
)
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies
(3,489
)
 
13,382

Other non-cash items
9,247

 
11,155

Total adjustments to reconcile net income to net cash provided by operating activities
324,829

 
389,912

Changes in operating assets and liabilities, net of the effects of acquisitions:
 
 
 
Accounts receivable
193,023

 
198,075

Inventories
(5,354
)
 
1,084

Prepaid expenses and other current assets
14,306

 
(7,375
)
Other assets
(8,341
)
 
(1,460
)
Income taxes, net
51,967

 
21,088

Accounts payable
(17,778
)
 
6,658

Accrued expenses and other current liabilities
484

 
(674
)
Deferred revenues
(47,128
)
 
(47,982
)
Other liabilities
14,513

 
5,400

Total changes in operating assets and liabilities, net of the effects of acquisitions
195,692

 
174,814

Net cash provided by operating activities
856,783

 
752,813

Investing Activities
 
 
 
Purchases of available-for-sale investments
(1,411,077
)
 
(1,806,781
)
Proceeds from sales of available-for-sale investments
1,156,168

 
1,552,983

Proceeds from maturities of available-for-sale investments
511,023

 
518,755

Purchases of property and equipment
(105,339
)
 
(119,591
)
Cash paid for acquisitions, net of cash acquired
(11,455
)
 
(250,986
)
Cash paid for licensing agreements and technology
(26,079
)
 
(10,666
)
Other
464

 
(3,400
)
Net cash provided by (used in) investing activities
113,705

 
(119,686
)
Financing Activities
 
 
 
Proceeds from issuance of common stock under stock-based compensation plans
39,438

 
79,338

Proceeds from credit facility

 
95,000

Repayment of credit facility

 
(95,000
)
Repayment of acquired debt

 
(7,569
)
Excess tax benefit from stock-based compensation
12,374

 
2,236

Stock repurchases, net
(28,689
)
 
(398,070
)
Cash paid for tax withholding on vested stock awards
(55,402
)
 
(32,351
)
Net cash used in financing activities
(32,279
)
 
(356,416
)
Effect of exchange rate changes on cash and cash equivalents
1,956

 
(9,266
)
Change in cash and cash equivalents
940,165

 
267,445

Cash and cash equivalents at beginning of period
368,518

 
260,149

Cash and cash equivalents at end of period
$
1,308,683

 
$
527,594

See accompanying notes.

6



CITRIX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Citrix Systems, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. All adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown, are of a normal recurring nature and have been reflected in the condensed consolidated financial statements and accompanying notes. The results of operations for the periods presented are not necessarily indicative of the results expected for the full year or for any future period partially because of the seasonality of the Company’s business. Historically, the Company’s revenue for the fourth quarter of any year is typically higher than the revenue for the first quarter of the subsequent year. The information included in these condensed consolidated financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report and the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 .
The condensed consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries in the Americas, Europe, the Middle East and Africa (“EMEA”), and Asia-Pacific. All significant transactions and balances between the Company and its subsidiaries have been eliminated in consolidation.
As part of its continued transformation, effective January 1, 2016, the Company reorganized a part of its business by creating a new Cloud Services business unit that primarily includes the ShareFile product line. Prior to 2016, the ShareFile product line was included within the Company's Workflow Cloud products under the GoTo Business segment (formerly Mobility Apps). The Company's management has changed how it views the business primarily due to operational initiatives announced in 2015, which include increased emphasis and investments in core enterprise products for secure and reliable application and data delivery. As a result, the Company realigned its Cloud Services products and services to be included in the Enterprise and Service Provider segment effective January 1, 2016 in contemplation of the strategic shift and the proposed separation of the GoTo Business. See Note 18 more information on the Company's proposed separation of its GoTo Business.
The Company's revenues are derived from sales of Enterprise and Service Provider products which include Workspace Services products, Delivery Networking products, Cloud Services products and related License updates and maintenance and Professional services and sales of the GoTo Business, which are delivered as cloud-based SaaS, and include Communications Cloud and Workflow Cloud service offerings. The Enterprise and Service Provider and the GoTo business units constitute the Company's two reportable segments. See Note 9 for more information on the Company's segments.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant estimates made by management include the provision for doubtful accounts receivable, the provision to reduce obsolete or excess inventory to market, the provision for estimated returns, as well as sales allowances, the assumptions used in the valuation of stock-based awards, the assumptions used in the discounted cash flows to mark certain of its investments to market, the valuation of the Company’s goodwill, net realizable value of product related and other intangible assets, the fair value of convertible senior notes, the provision for lease losses, the provision for income taxes and the amortization and depreciation periods for intangible and long-lived assets. While the Company believes that such estimates are fair when considered in conjunction with the condensed consolidated financial position and results of operations taken as a whole, the actual amounts of such items, when known, will vary from these estimates.
Available-for-sale Investments
Short-term and long-term available-for-sale investments as of September 30, 2016 and December 31, 2015 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.

7



The Company’s investment policy is designed to limit exposure to any one issuer depending on credit quality. The Company uses information provided by third parties to adjust the carrying value of certain of its investments to fair value at the end of each period. Fair values are based on a variety of inputs and may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. See Note 5 for investment information.
Revenue Recognition
Net revenues include the following categories: Product and licenses, SaaS, License updates and maintenance and Professional services. Product and licenses revenues primarily represent fees related to the licensing of the Company’s software and hardware appliances. These revenues are reflected net of sales allowances, cooperative advertising agreements, partner incentive programs and provisions for returns. SaaS revenues consist primarily of fees related to online service agreements, which are recognized ratably over the contract term, which is typically 12 months. In addition, SaaS revenues may also include set-up fees, which are recognized ratably over the contract term or the expected customer life, whichever is longer. License updates and maintenance revenues consist of fees related to the Subscription Advantage program and maintenance fees, which include technical support and hardware and software maintenance. Subscription Advantage is a renewable program that provides subscribers with immediate access to software upgrades, enhancements and maintenance releases when and if they become available during the term of the contract. Subscription Advantage and maintenance fees are recognized ratably over the term of the contract, which is typically 12 to 24 months. The Company capitalizes certain third-party commissions related to Subscription Advantage, maintenance and support renewals. The capitalized commissions are amortized to Sales, marketing and services expense at the time the related deferred revenue is recognized as revenue. Hardware and software maintenance and support contracts are typically sold separately. Hardware maintenance includes technical support, the latest software upgrades when and if they become available, and replacement of malfunctioning appliances. Dedicated account management is available as an add-on to the program for a higher level of service. Software maintenance includes unlimited technical support, immediate access to software upgrades, enhancements and maintenance releases when and if they become available during the term of the contract during the term of the contract. Professional services revenues are comprised of fees from consulting services related to the implementation of the Company’s products and fees from product training and certification, which are recognized as the services are provided.
The Company recognizes revenue when it is earned and when all of the following criteria are met: persuasive evidence of the arrangement exists; delivery has occurred or the service has been provided and the Company has no remaining obligations; the fee is fixed or determinable; and collectability is probable.
The majority of the Company’s product and license revenue consists of revenue from the sale of software products. Software sales generally include a perpetual license to the Company’s software and is subject to the industry specific software revenue recognition guidance. In accordance with this guidance, the Company allocates revenue to license updates related to its stand-alone software and any other undelivered elements of the arrangement based on vendor specific objective evidence (“VSOE”) of fair value of each element and such amounts are deferred until the applicable delivery criteria and other revenue recognition criteria described above have been met. The balance of the revenues, net of any discounts inherent in the arrangement, is recognized at the outset of the arrangement using the residual method as the product licenses are delivered. If management cannot objectively determine the fair value of each undelivered element based on VSOE of fair value, revenue recognition is deferred until all elements are delivered, all services have been performed, or until fair value can be objectively determined.
For hardware appliance and software transactions, the arrangement consideration is allocated to stand-alone software deliverables as a group and the non-software deliverables based on the relative selling prices using the selling price hierarchy in the revenue recognition guidance. The selling price hierarchy for a deliverable is based on its VSOE if available, third-party evidence of selling price ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available. The Company then recognizes revenue on each deliverable in accordance with its policies for product and service revenue recognition. VSOE of selling price is based on the price charged when the element is sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices fall within a reasonable range based on historical discounting trends for specific products and services. TPE of selling price is established by evaluating competitor products or services in stand-alone sales to similarly situated customers. However, as the Company’s products contain a significant element of proprietary technology and its solutions offer substantially different features and functionality, the comparable pricing of products with similar functionality typically cannot be obtained. Additionally, as the Company is unable to reliably determine what competitors products’ selling prices are on a stand-alone basis, the Company is not typically able to determine TPE. The estimate of selling price is established considering multiple factors including, but not limited to, pricing practices in different geographies and through different sales channels and competitor pricing strategies.

8



The Citrix Service Provider ("CSP") program provides subscription-based services in which the CSP partners host software services to their end users. The fees from the CSP program are recognized based on usage and as the CSP services are provided to their end users.
For the Company’s non-software transactions, it allocates the arrangement consideration based on the relative selling price of the deliverables. For the Company’s hardware appliances, it uses ESP as its selling price. For the Company’s support and services, it generally uses VSOE as its selling price. When the Company is unable to establish selling price using VSOE for its support and services, the Company uses ESP in its allocation of arrangement consideration.
The Company’s GoTo Business products and a majority of Cloud Services are considered hosted service arrangements per the authoritative guidance, or SaaS. Generally, the Company’s GoTo Business products are sold separately and not bundled with the Enterprise and Service Provider business unit’s products and services.
In the normal course of business, the Company is not obligated to accept product returns from its distributors under any conditions, unless the product item is defective in manufacture. The Company establishes provisions for estimated returns, as well as other sales allowances, concurrently with the recognition of revenue. The provisions are established based upon consideration of a variety of factors, including, among other things, recent and historical return rates for both specific products and distributors and the impact of any new product releases and projected economic conditions. Product returns are provided for in the condensed consolidated financial statements and have historically been within management’s expectations. Allowances for estimated product returns amounted to approximately $1.2 million and $1.4 million at September 30, 2016 and December 31, 2015 , respectively. The Company also records estimated reductions to revenue for customer programs and incentive offerings, including volume-based incentives. The Company could take actions to increase its customer incentive offerings, which could result in an incremental reduction to revenue at the time the incentive is offered.
Foreign Currency
The functional currency for all of the Company’s wholly-owned foreign subsidiaries is the U.S. dollar. Monetary assets and liabilities of such subsidiaries are remeasured into U.S. dollars at exchange rates in effect at the balance sheet date, and revenues and expenses are remeasured at average rates prevailing during the year. Effective January 1, 2015, the functional currency of the Company’s wholly-owned foreign subsidiaries of its GoTo Business segment became the U.S. dollar as a result of a reorganization in the foreign subsidiaries' operations. Prior to January 1, 2015, the functional currency of the Company’s wholly-owned foreign subsidiaries of its GoTo Business segment was the currency of the country in which each subsidiary is located. The Company translated assets and liabilities of these foreign subsidiaries at exchange rates in effect at the balance sheet date and included accumulated net translation adjustments in equity as a component of Accumulated other comprehensive loss. The change in functional currency is applied on a prospective basis, therefore a ny gains and losses that were previously recorded in Accumulated other comprehensive loss remain unchanged from January 1, 2015. Foreign currency transaction gains and losses are the result of exchange rate changes on transactions denominated in currencies other than the functional currency, including U.S. dollars. The remeasurement of those foreign currency transactions is included in determining net income or loss for the period of exchange. See Note 9 for information on the Company's Enterprise and Service Provider and GoTo Business segments.
Accounting for Stock-Based Compensation Plans
The Company has various stock-based compensation plans for its employees and outside directors and accounts for stock-based compensation arrangements in accordance with the authoritative guidance, which requires the Company to measure and record compensation expense in its condensed consolidated financial statements using a fair value method. See Note 7 for further information regarding the Company’s stock-based compensation plans.
3. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted-average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise or settlement of stock awards (calculated using the treasury stock method) during the period they were outstanding.

9



The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share information):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net income
$
131,901

 
$
55,925

 
$
336,262

 
$
188,087

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share - weighted-average shares outstanding
155,525

 
160,359

 
154,847

 
160,359

Effect of dilutive employee stock awards
2,007

 
1,418

 
1,850

 
1,357

Denominator for diluted earnings per share - weighted-average shares outstanding
157,532

 
161,777

 
156,697

 
161,716

Basic earnings per share
$
0.85

 
$
0.35

 
$
2.17

 
$
1.17

Diluted earnings per share
$
0.84

 
$
0.35

 
$
2.15

 
$
1.16

Anti-dilutive weighted-average shares from stock awards
60

 
1,572

 
460

 
2,416

The weighted-average number of shares outstanding used in the computation of basic and diluted earnings per share does not include the effect of the potential outstanding common stock from the Company's Convertible Senior Notes (the "Convertible Notes") and warrants. The effects of these potentially outstanding shares were not included in the calculation of diluted earnings per share because the effect would have been anti-dilutive.
The Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on its Convertible Notes on diluted earnings per share, if applicable, as upon conversion, the Company will pay cash up to the aggregate principal amount of the Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, in respect of the remainder, if any, of the Company’s conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted. The conversion spread will have a dilutive impact on diluted earnings per share when the average market price of the Company’s common shares for a given period exceeds the conversion price of $90.00 per share. For the three and nine months ended September 30, 2016 and 2015 , the Convertible Notes have been excluded from the computation of diluted earnings per share as the effect would be anti-dilutive since the conversion price of the Convertible Notes exceeded the average market price of the Company’s common stock. In addition, the Company uses the treasury stock method for calculating any potential dilutive effect related to the warrants. See Note 10 to the Company's condensed consolidated financial statements for detailed information on the Convertible Notes offering.
4. ACQUISITIONS AND DIVESTITURES
2016 Business Combination
On September 7, 2016, the Company acquired all of the issued and outstanding securities of a privately held company. The acquisition provides a software solution that cuts the cost of desktop and application virtualization and delivers workspace performance by accelerating desktop logon and application response times for any Microsoft Windows-based environment. The acquired company became part of the Company’s Enterprise and Service Provider segment. The total cash consideration for this transaction was approximately $11.5 million , net of $0.8 million cash acquired. Transaction costs were $0.4 million , of which $0.3 million were recorded during the three months ended September 30, 2016 and $0.4 million during the nine months ended September 30, 2016 . All transaction costs are presented within General and administrative expense in the accompanying condensed consolidated statements of income. The assets related to this acquisition relate primarily to $8.2 million of product technology identifiable intangible assets with a 4 year life and goodwill of $2.9 million .
2016 Asset Acquisition
On January 8, 2016, the Company acquired certain monitoring technology assets from a privately-held company for total cash consideration of $23.6 million . The acquisition provides a monitoring solution for Citrix's products as it relates to Microsoft Windows applications and desktop delivery. The identifiable intangible assets acquired related primarily to product technologies.

10



2016 Divestiture
On February 29, 2016, the Company sold its CloudPlatform and CloudPortal Business Manager products to Persistent Telecom Solutions, Inc. The agreement included contingent consideration in the form of an earnout provision based on revenue for a period of five years following the closing date. Any income associated with the contingent consideration will be recognized if the earnout provisions are met. No earnout provisions were met during the nine months ended September 30, 2016 , therefore no income was recognized during the nine months ended September 30, 2016 .
2015 Acquisitions
Sanbolic
On January 8, 2015, the Company acquired all of the issued and outstanding securities of Sanbolic, Inc. (“Sanbolic”). The Company expected the Sanbolic technology would reduce the complexity of Microsoft Windows application delivery and desktop virtualization deployments. Sanbolic became part of the Company's Enterprise and Service Provider segment. The total cash consideration for this transaction was approximately $89.4 million , net of $0.2 million cash acquired. Transaction costs associated with the acquisition were $0.5 million . No transaction costs were recorded during the three months ended September 30, 2015 and the Company expensed $0.2 million during the nine months ended September 30, 2015 , and are included in General and administrative expense in the accompanying condensed consolidated statements of income. In addition, in connection with the acquisition, the Company assumed non-vested stock units which were converted into the right to receive, in the aggregate, up to 37,057 shares of the Company's common stock, for which the vesting period began on the closing of the transaction. During the fourth quarter of 2015, management performed a comprehensive operational review which included an evaluation of all of the Company's products. In connection with this review, management determined that the Sanbolic technology was a non-core solution and that the related product offerings will no longer be developed. As a result, the Company impaired the remaining carrying value of the intangible assets related to this acquisition in the fourth quarter of 2015.
Grasshopper
On May 18, 2015, the Company acquired all of the membership interests of Grasshopper Group, LLC (“Grasshopper”), a leading provider of cloud-based phone solutions for small businesses. With the acquisition, the Company will expand its breadth of communication and collaboration solutions for small businesses, including GoToMeeting, GoToTraining, GoToWebinar and OpenVoice. Grasshopper became part of the GoTo Business segment. Total cash consideration for this transaction was approximately $161.5 million , net of $3.6 million cash acquired. No transaction costs were recorded during the three months ended September 30, 2015 and the Company expensed $0.3 million during the nine months ended September 30, 2015 , and are included in General and administrative expense in the accompanying condensed consolidated statements of income. In addition, in connection with the acquisition, the Company assumed non-vested stock units which were converted into the right to receive, in the aggregate, up to 105,765 shares of the Company's common stock, for which the vesting period commenced on the closing of the transaction.
5. INVESTMENTS
Available-for-sale Investments
Investments in available-for-sale securities at fair value were as follows for the periods ended (in thousands):
 
 
September 30, 2016
 
December 31, 2015
Description of the
Securities
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency securities
$
376,248

 
$
727

 
$
(206
)
 
$
376,769

 
$
530,981

 
$
757

 
$
(1,216
)
 
$
530,522

Corporate securities
606,851

 
855

 
(357
)
 
607,349

 
699,210

 
90

 
(1,929
)
 
697,371

Municipal securities
9,990

 
15

 

 
10,005

 
14,872

 
14

 
(8
)
 
14,878

Government securities
149,252

 
89

 
(98
)
 
149,243

 
152,376

 
9

 
(340
)
 
152,045

Total
$
1,142,341

 
$
1,686

 
$
(661
)
 
$
1,143,366

 
$
1,397,439

 
$
870

 
$
(3,493
)
 
$
1,394,816

The change in net unrealized gains (losses) on available-for-sale securities recorded in Other comprehensive income includes unrealized gains (losses) that arose from changes in market value of specifically identified securities that were held during the period, gains (losses) that were previously unrealized, but have been recognized in current period net income due to sales, as well as prepayments of available-for-sale investments purchased at a premium. This reclassification has no effect on

11



total comprehensive income or equity and was not material for all periods presented. See Note 13 for more information related to comprehensive income.
The average remaining maturities of the Company’s short-term and long-term available-for-sale investments at September 30, 2016 were approximately eight months and three years, respectively.
Realized Gains and Losses on Available-for-sale Investments
For the three and nine months ended September 30, 2016 , the Company received proceeds from the sales of available-for-sale investments of $709.2 million and $1.16 billion , respectively, and for the three and nine months ended September 30, 2015 , it received proceeds from the sales of available-for-sale investments of $718.4 million and $1.55 billion , respectively.
The Company had realized gains on the sales of available-for-sale investments during the three and nine months ended September 30, 2016 of $1.0 million and $1.6 million , respectively, and for the three and nine months ended September 30, 2015 , it had realized gains on the sales of available-for-sale investments of $0.3 million and $0.7 million , respectively.
For the three and nine months ended September 30, 2016 , the Company had realized losses on available-for-sale investments of $0.1 million and $0.3 million , respectively, and for the three and nine months ended September 30, 2015 , it had realized losses of $0.6 million and $0.9 million , respectively, primarily related to sales of these investments during the period.
All realized gains and losses related to the sales of available-for-sale investments are included in Other income (expense), net, in the accompanying condensed consolidated statements of income.
Unrealized Losses on Available-for-Sale Investments
The gross unrealized losses on the Company’s available-for-sale investments that are not deemed to be other-than-temporarily impaired as of September 30, 2016 and December 31, 2015 were $0.7 million and $3.5 million , respectively. Because the Company does not intend to sell any of its investments in an unrealized loss position and it is more likely than not that it will not be required to sell the securities before the recovery of its amortized cost basis, which may not occur until maturity, it does not consider the securities to be other-than-temporarily impaired.
Cost Method Investments
The Company held direct investments in privately-held companies of approximately $19.7 million and $19.9 million as of September 30, 2016 and December 31, 2015 , respectively, which are accounted for based on the cost method and are included in Other assets in the accompanying condensed consolidated balance sheets. The Company periodically reviews these investments for impairment. If the Company determines that an other-than-temporary impairment has occurred, it will write-down the investment to its fair value. For the three months ended September 30, 2016 , certain cost method investments with a combined carrying value of $1.0 million were determined to be impaired and written down to their estimated fair values of $0.1 million . For the nine months ended September 30, 2016 , certain cost method investments with a combined carrying value of $1.2 million were determined to be impaired and written down to their estimated fair values $0.1 million . Accordingly, the Company recorded $0.9 million and $1.1 million impairment charges during the three and nine months ended September 30, 2016 respectively, which are included in Other income (expense), net in the accompanying condensed consolidated financial statements. For the three months ended September 30, 2015 , no cost method investments were determined to be impaired. For the nine months ended September 30, 2015 , the Company determined that certain cost method investments were impaired and recorded a charge of $3.0 million , which was included in Other income (expense), net in the accompanying condensed consolidated statements of income.
6. FAIR VALUE MEASUREMENTS
The authoritative guidance defines fair value as an exit price, representing the amount that would either be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2 . Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3 . Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

12



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.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
As of September 30, 2016
 
Quoted
Prices In
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash
$
498,627

 
$
498,627

 
$

 
$

Money market funds
797,035

 
797,035

 

 

Corporate securities
13,021

 

 
13,021

 

Available-for-sale securities:
 
 
 
 
 
 
 
Agency securities
376,769

 

 
376,769

 

Corporate securities
607,349

 

 
606,201

 
1,148

Municipal securities
10,005

 

 
10,005

 

Government securities
149,243

 

 
149,243

 

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
Foreign currency derivatives
1,902

 

 
1,902

 

Total assets
$
2,453,951

 
$
1,295,662

 
$
1,157,141

 
$
1,148

Accrued expenses and other current liabilities:
 
 
 
 
 
 
 
Foreign currency derivatives
2,364

 

 
2,364

 

Total liabilities
$
2,364

 
$

 
$
2,364

 
$


13



 
As of December 31, 2015
 
Quoted
Prices In
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash
$
261,962

 
$
261,962

 
$

 
$

Money market funds
102,968

 
102,968

 

 

Corporate securities
3,588

 

 
3,588

 

Available-for-sale securities:
 
 
 
 
 
 
 
Agency securities
530,522

 

 
530,522

 

Corporate securities
697,371

 

 
695,809

 
1,562

Municipal securities
14,878

 

 
14,878

 

Government securities
152,045

 

 
152,045

 

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
Foreign currency derivatives
1,063

 

 
1,063

 

Total assets
$
1,764,397

 
$
364,930

 
$
1,397,905

 
$
1,562

Accrued expenses and other current liabilities:
 
 
 
 
 
 
 
Foreign currency derivatives
3,678

 

 
3,678

 

Total liabilities
$
3,678

 
$

 
$
3,678

 
$

The Company’s fixed income available-for-sale security portfolio generally consists of investment grade securities from diverse issuers with a minimum credit rating of A-/A3 and a weighted-average credit rating of AA-/Aa3. The Company values these securities based on pricing from the Service, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value, and accordingly, the Company classifies all of its fixed income available-for-sale securities as Level 2.
The Company measures its cash flow hedges, which are classified as Prepaid expenses and other current assets and Accrued expenses and other current liabilities, at fair value based on indicative prices in active markets (Level 2 inputs).
Assets Measured at Fair Value on a Non-recurring Basis Using Significant Unobservable Inputs (Level 3)
During the three months ended September 30, 2016 , certain cost method investments with a combined carrying value of $1.0 million were determined to be impaired and written down to their estimated fair values of $0.1 million . During the nine months ended September 30, 2016 , certain cost method investments with a combined carrying value of $1.2 million were determined to be impaired and written down to their estimated fair values $0.1 million . Accordingly, the Company recorded $0.9 million and $1.1 million impairment charges during the three and nine months ended September 30, 2016 respectively, which are included in Other income (expense), net in the accompanying condensed consolidated financial statements. For the three months ended September 30, 2015 , no cost method investments were determined to be impaired. For the nine months ended September 30, 2015 , the Company determined that certain cost method investments were impaired and recorded a charge of $3.0 million , which was included in Other income (expense), net in the accompanying condensed consolidated statements of income. In determining the fair value of cost method investments, the Company considers many factors including but not limited to operating performance of the investee, the amount of cash that the investee has on-hand, the ability to obtain additional financing and the overall market conditions in which the investee operates. The fair value of the cost method investments represent a Level 3 valuation as the assumptions used in valuing these investments were not directly or indirectly observable.
For certain intangible assets where the unamortized balances exceeded the undiscounted future net cash flows, the Company measures the amount of the impairment by calculating the amount by which the carrying values exceed the estimated fair values, which are based on projected discounted future net cash flows. These non-recurring fair value measurements are categorized as Level 3 significant unobservable inputs. See Note 8 to the Company's condensed consolidated financial statements for detailed information related to Goodwill and Other Intangible Assets.
In connection with the change in segment composition, during the first quarter of 2016, the Company performed an assessment of its goodwill reporting units and determined that the recent Cloud Services reorganization resulted in the identification of three goodwill reporting units. The identification of these reporting units triggered a reallocation of goodwill as of January 1, 2016 based on the relative fair value approach. The fair value of each reporting unit was determined using a

14



combination of the market approach and the income approach. Under the market approach, fair value is based on revenue and earnings multiples for guideline public companies and guideline transactions in the reporting unit's peer group. Specific to the income approach, key assumptions used include forecasts of revenue and expenses over an extended period of time, tax rates, long term growth rates and estimated costs of debt and equity capital to discount the projected cash flows. This non-recurring fair value measurement was categorized as Level 3, as significant unobservable inputs were used in the valuation analysis. Certain of these assumptions involve significant judgment, are based on management’s estimate of current and forecasted market conditions and are sensitive and susceptible to change. For Level 3 measurements, significant increases or decreases in long-term growth rates or discount rates in isolation or in combination could result in a significantly lower or higher fair value measurement. See Note 8 to the Company's condensed consolidated financial statements for detailed information related to Goodwill and Other Intangible Assets.
Additional Disclosures Regarding Fair Value Measurements
The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short maturity of these items.
As of September 30, 2016 , the fair value of the Convertible Notes, which was determined based on inputs that are observable in the market (Level 2) based on the closing trading price per $100 as of the last day of trading for the quarter ended September 30, 2016 , and carrying value of debt instruments (carrying value excludes the equity component of the Company’s Convertible Notes classified in equity) was as follows (in thousands):
 
Fair Value
 
Carrying Value
Convertible Senior Notes
$
1,583,550

 
$
1,338,782


15



7. STOCK-BASED COMPENSATION
The Company’s stock-based compensation program is a long-term retention program that is intended to attract and reward talented employees and align stockholder and employee interests. As of September 30, 2016 , the Company had one stock-based compensation plan under which it was granting equity awards. The Company is currently granting stock-based awards from its 2014 Equity Incentive Plan (the "2014 Plan"). In December 2014, the Company's Board of Directors approved the 2015 Employee Stock Purchase Plan (the “2015 ESPP”), which was approved by stockholders at the Company's Annual Meeting of Stockholders held on May 28, 2015. The 2015 ESPP has replaced the Company's Amended and Restated 2005 Employee Stock Purchase Plan (as amended, the "2005 ESPP"). In connection with certain of the Company’s acquisitions, the Company has assumed certain plans from acquired companies. The Company’s Board of Directors has provided that no new awards will be granted under the Company’s acquired stock plans. Awards previously granted under the Company's superseded and expired stock plans that are still outstanding typically expire between five and ten years from the date of grant and will continue to be subject to all the terms and conditions of such plans, as applicable. The Company’s superseded and expired stock plans include the Amended and Restated 2005 Equity Incentive Plan and the 2005 ESPP.
Under the terms of the 2014 Plan, the Company is authorized to grant incentive stock options (“ISOs”), non-qualified stock options (“NSOs”), non-vested stock, non-vested stock units, stock appreciation rights (“SARs”), and performance units and to make stock-based awards to full and part-time employees of the Company and its subsidiaries or affiliates, where legally eligible to participate, as well as to consultants and non-employee directors of the Company. SARs and ISOs are not currently being granted. Currently, the 2014 Plan provides for the issuance of 29,000,000 shares of common stock. In addition, shares of common stock underlying any awards granted under the Company’s Amended and Restated 2005 Equity Incentive Plan, as amended, that are forfeited, canceled or otherwise terminated (other than by exercise) are added to its shares of common stock available for issuance under the 2014 Plan. Under the 2014 Plan, NSOs must be granted at exercise prices no less than fair market value on the date of grant. Non-vested stock awards may be granted for such consideration in cash, other property or services, or a combination thereof, as determined by the Company’s Compensation Committee of its Board of Directors. Stock-based awards are generally exercisable or issuable upon vesting. The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. As of September 30, 2016 , there were 21,286,552 shares of common stock reserved for issuance pursuant to the Company’s stock-based compensation plans including authorization under its 2014 Plan to grant stock-based awards covering 16,230,548 shares of common stock.
Under the 2015 ESPP, all full-time and certain part-time employees of the Company are eligible to purchase common stock of the Company twice per year at the end of a six -month payment period (a “Payment Period”). During each Payment Period, eligible employees who so elect may authorize payroll deductions in an amount no less than 1% nor greater than 10% of his or her base pay for each payroll period in the Payment Period. At the end of each Payment Period, the accumulated deductions are used to purchase shares of common stock from the Company up to a maximum of 12,000 shares for any one employee during a Payment Period. Shares are purchased at a price equal to 85% of the fair market value of the Company's common stock, on either the first business day of the Payment Period or the last business day of the Payment Period, whichever is lower. Employees who, after exercising their rights to purchase shares of common stock in the 2015 ESPP, would own shares representing 5% or more of the voting power of the Company’s common stock, are ineligible to continue to participate under the 2015 ESPP. The 2015 ESPP provides for the issuance of a maximum of 16,000,000 shares of common stock. As of September 30, 2016 , 3,872,661 shares had been issued under the 2005 ESPP. As of September 30, 2016 , 825,513 shares have been issued under the 2015 ESPP. The Company recorded stock-based compensation costs related to its employee stock purchase plans of $2.6 million and $7.8 million for the three and nine months ended September 30, 2016 , respectively, and the Company recorded stock-based compensation costs of $2.3 million and $5.2 million for the three and nine months ended September 30, 2015 , respectively.
The Company used the Black-Scholes model to estimate the fair value of its Employee Stock Purchase Plan awards with the following weighted-average assumptions:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
Expected volatility factor
0.27 - 0.41

 
0.35

 
0.27 - 0.41

 
0.35

Risk free interest rate
0.35% - 0.42%

 
0.25
%
 
0.25% - 0.42%

 
0.25
%
Expected dividend yield
0
%
 
0
%
 
0
%
 
0
%
Expected life (in years)
0.5

 
0.5

 
0.5

 
0.5


16



The Company determined the expected volatility factor by considering the implied volatility in six-month market-traded options of the Company's common stock based on third party volatility quotes. The Company's decision to use implied volatility was based upon the availability of actively traded options on the Company's common stock and its assessment that implied volatility is more representative of future stock price trends than historical volatility. The risk-free interest rate was based on a U.S. Treasury instrument whose term is consistent with the expected term of the stock options. The Company's expected dividend yield input was zero as it has not historically paid, nor expects in the future to pay, cash dividends on its common stock. The expected term is based on the term of the purchase period for grants made under the ESPP.
Stock-Based Compensation
The detail of the total stock-based compensation recognized by income statement classification is as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
Income Statement Classifications
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
Cost of services and maintenance revenues
$
911

 
$
803

 
$
2,561

 
$
2,095

Research and development
13,256

 
9,118

 
35,878

 
31,454

Sales, marketing and services
14,848

 
16,922

 
41,442

 
38,083

General and administrative
19,267

 
11,828

 
56,321

 
32,042

Total
$
48,282

 
$
38,671

 
$
136,202

 
$
103,674

Non-vested Stock Units
Performance, Market Performance and Service Condition Stock Units
In January 2016, the Company granted its Chief Executive Officer 220,235 non-vested stock units that vest based on certain target performance conditions; and in March 2016, the Company granted senior level employees 234,816 non-vested stock units that vest based on certain target performance conditions. The attainment level under the awards will be based on the Company's compound annualized total return to stockholders over a three -year performance period, with 100% of such stock units earned if the Company achieves total shareholder return of 10% over the performance period. Further, if the Company achieves annualized total shareholder return of less than 10% during the performance period, the awardees may earn all or a portion of the target award, but not in excess of 100% of such stock units, depending upon the Company’s relative total shareholder return compared to companies listed in the S&P Computer Software Select Index. If the Company's compound annualized total shareholder return is 5% or above, the number of non-vested stock units earned will be based on interpolation, with the maximum number of non-vested stock units earned capped at 200% of the target number of non-vested stock units for a compound annualized total return to stockholders of 30% over a three-year performance period as set forth in the award agreement. Within sixty days following an interim measurement period of 18 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 33% 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 three-year performance period, or a change in control, if earlier. Within sixty days following the conclusion of the performance period, the Company’s Compensation Committee will determine the number of restricted stock units that would vest upon the final day of the performance period based on the Company’s performance during the period and in accordance with the terms of the award. On the vesting date, the greater of the full period restricted stock units, or the interim earned restricted stock units, will vest in one installment. 
In March 2015, the Company granted senior level employees non-vested stock unit awards representing, in the aggregate, 393,464 non-vested stock units that vest based on certain target market performance and service conditions. The number of non-vested stock units underlying the award will be determined within sixty days of the calendar year following the end of a three -year performance period ending December 31, 2017. The attainment level under the award will be based on the Company's total return to stockholders over the performance period compared to the return on the Nasdaq Composite Total Return Index (the "XCMP"). If the Company's return is positive and meets or exceeds the indexed return, the number of non-vested stock units earned will be based on interpolation, with the maximum number of non-vested stock units earned pursuant to the award capped at 200% of the target number of non-vested stock units set forth in the award agreement if the Company's return exceeds the indexed return by 40% or more. If the Company's return over the performance period is positive but underperforms the index, a number of non-vested stock units will be issued, below the target award, based on interpolation; however, no non-vested stock units will be issued if the Company's return underperforms the index by more than 20% over the performance period. In the event the Company's return to stockholders is negative but still meets or exceeds the indexed return, only 75% of the target award shall be issued. If the awardee is not employed by the Company at the end of the performance

17



period; the extent to which the awardee will vest in the award, if at all, is dependent upon the timing and character of the termination as provided in the award agreement. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company's common stock.
The market condition requirements are reflected in the grant date fair value of the award, and the compensation expense for the award will be recognized assuming that the requisite service is rendered regardless of whether the market conditions are achieved. The grant date fair value of the non-vested performance stock unit awards was determined through the use of a Monte Carlo simulation model, which utilized multiple input variables that determined the probability of satisfying the market condition requirements applicable to each award as follows:
 
March 2016 Grant
January 2016 Grant
March 2015 Grant
Expected volatility factor
0.29 - 0.39

0.29 - 0.37

0.14 - 0.29

Risk free interest rate
0.91
%
1.10
%
0.85
%
Expected dividend yield
0
%
0
%
0
%
For the March 2016 and January 2016 grants, 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 a three year period, which is commensurate with the awards’ performance period at the date of grant. The risk free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues with remaining terms equivalent to the performance period. The Company does not intend to pay dividends on its common stock in the foreseeable future. Accordingly, the Company used a dividend yield of zero in its model. The estimated fair value of each award as of the date of grant was $66.18 for the March 2016 grant and $49.68 for the January 2016 grant.
For the March 2015 grant, the range of expected volatilities utilized was based on the historical volatilities of the Company's common stock and the XCMP. The Company chose to use historical volatility to value these awards because historical stock prices were used to develop the correlation coefficients between the Company and the XCMP in order to model the stock price movements. The volatilities used were calculated over a 2.76 year period, which was the remaining term of the performance period at the date of grant. The risk free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues with remaining terms equivalent to the remaining performance period. The Company does not intend to pay dividends on its common stock in the foreseeable future. Accordingly, the Company used a dividend yield of zero in its model. The estimated fair value of the award as of the date of grant was $61.01 .
Service Based Stock Units
The Company also awards senior level employees, certain other employees and new non-employee directors, non-vested stock units granted under the 2014 Plan that vest based on service. The majority of these non-vested stock unit awards generally vest 33.33% on each anniversary subsequent to the date of the award. The Company also assumes non-vested stock units in connection with certain of its acquisitions. The assumed awards have the same three year vesting schedule. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. In addition, the Company awards non-vested stock units to all of its continuing non-employee directors. These awards vest monthly in 12 equal installments based on service and, upon vesting, each stock unit represents the right to receive one share of the Company's common stock.
Performance Stock Units
During 2015, the Company awarded certain senior level employees non-vested performance stock units granted under the 2014 Plan. The number of non-vested stock units underlying each award will be determined within sixty days of the calendar year following completion of the one -year performance period ending December 31, 2016 and will be based on achievement of a specific corporate financial performance goal determined at the time of the award. 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 100% of the base 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. If the performance goals are not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed.

18



Unrecognized Compensation Related to Stock Units
As of September 30, 2016 , the number of all non-vested stock units outstanding, including market performance and service condition awards and service-based awards, including service-based awards assumed in connection with acquisitions, were 4,904,470 . As of September 30, 2016 , there was $243.3 million of total unrecognized compensation cost related to non-vested stock units. The unrecognized cost is expected to be recognized over a weighted-average period of 1.99 years. See Note 4 for more information regarding the Company's acquisitions.
Non-vested Stock
During the nine months ended September 30, 2016 , the Company granted non-vested stock awards of 118,588 shares to certain executive officers which typically vest between one to three years from the date of grant, subject to the holder’s continued employment with the Company. Non-vested stock is issued and outstanding upon grant; however, award holders are restricted from selling the shares until they vest. If the vesting conditions are not met, the award will be forfeited. Compensation expense is measured based on the closing market price of the Company’s common stock at the date of grant and is recognized on a straight-line basis over the vesting period. For the three and nine months ended September 30, 2016 , the Company recognized $2.8 million and $8.2 million , respectively, of stock-based compensation expense related to non-vested stock awards. At September 30, 2016 , there was approximately $6.7 million of total unrecognized compensation expense related to these awards, which is expected to be recognized over a weighted average period of 2.03 years.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The Company accounts for goodwill in accordance with the authoritative guidance, which requires that goodwill and certain intangible assets are not amortized, but are subject to an annual impairment test. There was no impairment of goodwill or indefinite lived intangible assets as a result of the annual impairment test analysis completed during the fourth quarter of 2015 . There were no indicators of impairment during the nine months ended September 30, 2016 . See Note 4 for more information regarding the Company's acquisitions and Note 9 for more information regarding the Company's segments.
As part of its continued transformation, effective January 1, 2016, the Company reorganized a part of its business by creating a new Cloud Services business unit, which resulted in a change in segment composition. In connection with this change, during the first quarter of 2016, the Company performed an assessment of its goodwill reporting units and determined that the recent Cloud Services reorganization resulted in the identification of three goodwill reporting units (Enterprise and Service Provider excluding Cloud Services, Cloud Services and GoTo Business). The identification of these reporting units triggered a reallocation of goodwill as of January 1, 2016 based on the relative fair value approach. The Company’s reportable segments remain unchanged.
The following table presents the change in goodwill allocated to the Company’s reportable segments during the nine months ended September 30, 2016 (in thousands):
 
Balance at January 1, 2016
 
Additions
 
 
Other
 
 
Balance at September 30, 2016
Enterprise and Service Provider
$
1,581,805

(1)
$
2,927

(2)
 
$
(625
)
(3)
 
$
1,584,107

GoTo Business
380,917

(1)

  
 

 
 
380,917

Consolidated
$
1,962,722

 
$
2,927

 
 
$
(625
)
 
 
$
1,965,024

 
 
(1)
Beginning balance as of January 1, 2016 adjusted to reflect the Company’s re-alignment of its reporting unit structure. The change resulted in a goodwill reallocation of $86.5 million from the GoTo Business segment into the Enterprise and Service Provider segment.
(2)
Amount relates to preliminary purchase price allocation of goodwill associated with the 2016 business combination. See Note 4 for more information regarding the Company's acquisitions.
(3)
Amount relates to goodwill associated with the sale of the Company’s CloudPlatform and CloudPortal Business Manager products and to adjustments to the preliminary purchase price allocation associated with 2015 acquisitions. See Note 4 for more information regarding the Company's acquisitions and divestitures.
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

19



computed over the estimated useful lives of the respective assets, generally three to seven years, except for patents, which are amortized over the lesser of their remaining life or ten years. In-process R&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When in-process R&D projects are completed, the corresponding amount is reclassified as an amortizable intangible asset and is amortized over the asset's estimated useful life.
Intangible assets consist of the following (in thousands):
 
September 30, 2016
 
December 31, 2015
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Product related intangible assets
$
602,060

 
$
499,231

 
$
589,847

 
$
476,141

Other
449,560

 
304,997

 
447,816

 
278,104

Total
$
1,051,620

 
$
804,228

 
$
1,037,663

 
$
754,245

Amortization of product-related intangible assets, which consists primarily of product-related technologies and patents, was $15.0 million and $19.1 million for the three months ended September 30, 2016 and 2015 , respectively, and $45.7 million and $56.2 million for the nine months ended September 30, 2016 and 2015 , 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 $7.4 million and $12.5 million for the three months ended September 30, 2016 and 2015 , respectively, and $22.1 million and $33.0 million for the nine months ended September 30, 2016 and 2015 , respectively, and is classified as a component of Operating expenses in the accompanying condensed consolidated statements of income.
The Company monitors its intangible assets for indicators of impairment. If the Company determines that an impairment has occurred, it will write-down the intangible asset to its fair value. For certain intangible assets where the unamortized balances exceeded the undiscounted future net cash flows, the Company measures the amount of the impairment by calculating the amount by which the carrying values exceed the estimated fair values, which are based on projected discounted future net cash flows. During the nine months ended September 30, 2015 , due to disruptions in the business as a result of the announced plan to explore strategic alternatives, the Company identified certain definite-lived intangible assets, primarily customer relationships from the acquisition of ByteMobile, that were impaired within the Enterprise and Service Provider business unit and recorded non-cash impairment charges of $65.4 million to write down the intangible assets to their estimated fair value of $27.6 million . Of the impairment charge, $64.4 million is included in Impairment of other intangible assets and $1.0 million is included in Impairment of product related intangible assets in the accompanying condensed consolidated statements of income. This non-recurring fair value measurement was categorized as Level 3, as significant unobservable inputs were used in the valuation analysis. Key assumptions used in the valuation include forecasts of revenue and expenses over an extended period of time, customer retention rates, tax rates, and estimated costs of debt and equity capital to discount the projected cash flows. Certain of these assumptions involve significant judgment, are based on management’s estimate of current and forecasted market conditions and are sensitive and susceptible to change, therefore , further disruptions in the business could result in additional amounts becoming impaired.
Estimated future amortization expense of intangible assets with finite lives as of September 30, 2016 is as follows (in thousands):  
Year ending December 31,
Amount

2016 (remaining three months)
$
20,558

2017
69,636

2018
62,135

2019
39,594

2020
20,943

Thereafter
34,526

     Total
$
247,392


20



9. SEGMENT INFORMATION
The Enterprise and Service Provider and the GoTo business units constitute the Company’s two reportable segments. The Company does not engage in intercompany revenue transfers between segments. The Company’s chief operating decision maker (“CODM”) evaluates the Company’s performance based primarily on profitability from its Enterprise and Service Provider and GoTo Business segment products. The Company's CEO is the CODM. Segment profit for each segment includes certain research and development, sales, marketing and services and general and administrative expenses directly attributable to the segment as well as other corporate costs allocated to the segment and excludes certain expenses that are managed outside of the reportable segments. Costs excluded from segment profit primarily consist of certain restructuring charges, stock-based compensation costs, charges or benefits related to significant litigation that are not anticipated to be ongoing costs, amortization and impairment of product and other related intangible assets, net interest and other expense, net and separation costs. Accounting policies of the Company’s segments are the same as its consolidated accounting policies.
As part of its continued transformation, effective January 1, 2016, the Company reorganized a part of its business by creating a new Cloud Services business unit that primarily includes the ShareFile product line. Prior to 2016, the ShareFile product line was included within the Company's Workflow Cloud products under the GoTo Business segment. The Company's CODM has changed how it views the business primarily due to operational initiatives announced in 2015, which include increased emphasis and investments in core enterprise products for secure and reliable application and data delivery. As a result, the Company realigned its Cloud Services products and services to the Enterprise and Service Provider segment effective January 1, 2016 in contemplation of the strategic shift and the proposed separation of the GoTo Business. See Note 18 for more information on the Company's proposed separation of its GoTo Business. In addition, previously reported segment results have been recast to conform to the 2016 presentation.
Net revenues and segment profit, classified by the Company’s two reportable segments were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net revenues:
 
 
 
 
 
 
 
Enterprise and Service Provider
$
668,736

 
$
649,185

 
$
2,001,496

 
$
1,906,223

GoTo Business
172,515

 
164,085

 
508,413

 
464,608

Consolidated
$
841,251

 
$
813,270

 
$
2,509,909

 
$
2,370,831

Segment profit:
 
 
 
 
 
 
 
Enterprise and Service Provider
$
209,991

 
$
175,488

 
$
621,930

 
$
454,088

GoTo Business
45,233

 
37,785

 
109,412

 
103,465

Unallocated expenses (1) :
 
 
 
 
 
 
 
Amortization and impairment
of intangible assets
(23,474
)
 
(97,038
)
 
(68,939
)
 
(154,931
)
Stock-based compensation
(48,282
)
 
(38,671
)
 
(136,202
)
 
(103,674
)
Restructuring
(12,061
)
 
(13,766
)
 
(62,142
)
 
(62,251
)
Separation
(17,580
)
 

 
(46,190
)
 

Other

 

 

 
982

Net interest and other expense, net
(6,567
)
 
(10,440
)
 
(22,279
)
 
(37,997
)
Consolidated income before income taxes
$
147,260

 
$
53,358

 
$
395,590

 
$
199,682

 
 
(1)
Represents expenses presented to management on a consolidated basis only and not allocated to the operating segments.

21



Revenues by Product Grouping
Revenues by product grouping for the Company’s Enterprise and Service Provider and GoTo business units were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net revenues:
 
 
 
 
 
 
 
Enterprise and Service Provider
 
 
 
 
 
 
 
Workspace Services revenues (1)
$
414,394

 
$
394,523

 
$
1,227,172

 
$
1,188,186

Delivery Networking revenues (2)
191,243

 
189,746

 
581,612

 
527,987

Cloud Services revenues (3)
33,185

 
26,448

 
95,229

 
73,142

Professional services (4)
29,851

 
36,675

 
97,310

 
110,575

Other
63

 
1,793

 
173

 
6,333

Total Enterprise and Service Provider revenues
668,736

 
649,185

 
2,001,496

 
1,906,223

GoTo Business revenues
172,515

 
164,085

 
508,413

 
464,608

Total net revenues
$
841,251

 
$
813,270

 
$
2,509,909

 
$
2,370,831

 
 
(1)
Workspace Services revenues are primarily comprised of sales from the Company’s windows app delivery products, which include XenDesktop and XenApp, and the Company's mobile app delivery products, which include XenMobile and related license updates and maintenance and support.
(2)
Delivery Networking revenues primarily include NetScaler, ByteMobile Smart Capacity and CloudBridge products and related license updates and maintenance and support.
(3)
Cloud Services revenues primarily include ShareFile, Podio and Citrix Cloud products.
(4)
Professional services revenues are primarily comprised of revenues from consulting services and product training and certification services.
Revenues by Geographic Location
The following table presents revenues by segment and geographic location, for the following periods (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net revenues:
 
 
 
 
 
 
 
Enterprise and Service Provider
 
 
 
 
 
 
 
Americas
$
397,349

 
$
369,574

 
$
1,188,719

 
$
1,072,092

EMEA
199,837

 
208,224

 
611,832

 
621,582

Asia-Pacific
71,550

 
71,387

 
200,945

 
212,549

Total Enterprise and Service Provider revenues
668,736

 
649,185

 
2,001,496

 
1,906,223

GoTo Business
 
 
 
 
 
 
 
Americas
144,682

 
135,922

 
428,760

 
386,547

EMEA
22,356

 
22,632

 
64,888

 
62,819

Asia-Pacific
5,477

 
5,531

 
14,765

 
15,242

Total GoTo Business revenues
172,515

 
164,085

 
508,413

 
464,608

Total net revenues
$
841,251

 
$
813,270

 
$
2,509,909

 
$
2,370,831


22



10. CONVERTIBLE SENIOR NOTES
Convertible Notes Offering
During 2014, the Company completed a private placement of approximately $1.44 billion principal amount of 0.500% Convertible Notes due 2019. The net proceeds from this offering were approximately $1.42 billion , after deducting the initial purchasers’ discounts and commissions and the estimated offering expenses payable by the Company. The Company used approximately $82.6 million of the net proceeds to pay the cost of the Bond Hedges described below (after such cost was partially offset by the proceeds to the Company from the Warrant Transactions described below). The Company used the remainder of the net proceeds from the offering and a portion of its existing cash and investments to purchase an aggregate of approximately $1.5 billion of its common stock, as authorized under its share repurchase program. The Company used approximately $101.0 million to purchase shares of common stock from certain purchasers of the Convertible Notes in privately negotiated transactions concurrently with the closing of the offering, and the remaining $1.4 billion to purchase additional shares of common stock through an Accelerated Share Repurchase ("ASR") which the Company entered into with Citibank, N.A. (the “ASR Counterparty”) on April 25, 2014 (the “ASR Agreement”).
The Convertible Notes are governed by the terms of an indenture, dated as of April 30, 2014 (the “Indenture”), between the Company and Wilmington Trust, National Association, as trustee (the “Trustee”). The Convertible Notes are the senior unsecured obligations of the Company and bear interest at a rate of 0.500%  per annum, payable semi-annually in arrears on April 15 and October 15 of each year. The Convertible Notes will mature on April 15, 2019, unless earlier repurchased or converted. Upon conversion, the Company will pay cash up to the aggregate principal amount of the Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, in respect of the remainder, if any, of the Company’s conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted.
The conversion rate for the Convertible Notes is 11.1111 shares of common stock per $1,000 principal amount of Convertible Notes, which corresponds to a conversion price of approximately $90.00 per share of common stock. The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of certain stock dividends on common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, the payment of cash dividends and certain issuer tender or exchange offers.
The Company may not redeem the Convertible Notes prior to the maturity date and no “sinking fund” is provided for the Convertible Notes, which means that the Company is not required to periodically redeem or retire the Convertible Notes. Upon the occurrence of certain fundamental changes involving the Company, holders of the Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes in principal amounts of $1,000 or an integral multiple thereof at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
In accounting for the issuance of the Convertible Notes, the Company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Convertible Notes as a whole. The excess of the principal amount of the liability component over its carrying amount ("debt discount") is amortized to interest expense over the term of the Convertible Notes using the effective interest method with an effective interest rate of 3.0 percent per annum. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the Convertible Note issuance, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Issuance costs attributable to the $1.34 billion liability component are being amortized to expense over the term of the Convertible Notes, and issuance costs attributable to the equity component are included along with the equity component in stockholders' equity. Additionally, a deferred tax liability of $8.2 million related to a portion of the equity component transaction costs which are deductible for tax purposes is included in Other liabilities in the accompanying condensed consolidated balance sheets.
As a result of the structure of the proposed Reverse Morris Trust (RMT) transaction with LogMeIn, Inc., and the notification on October 10, 2016 to noteholders in accordance with the Indenture, the Convertible Notes will be convertible until the earlier of (1) the close of business on the business day immediately preceding the ex-dividend date for the distribution of the outstanding shares of GetGo common stock to the Company’s stockholders by way of a pro rata dividend, and (2) the Company’s announcement that such distribution will not take place, even though the Convertible Notes were not otherwise convertible at September 30, 2016. The conversion rate for the Convertible Notes, Convertible Note Hedge and Warrant

23



Transactions also will be subject to adjustment as of the opening of business on the ex-dividend date for the distribution. The $1.44 billion Convertible Notes became convertible with the notice to noteholders. Accordingly, as of September 30, 2016 , the carrying amount of the Convertible Notes of $1.34 billion was reclassified from Other liabilities to Current liabilities and the difference between the face value and carrying value of $87.8 million was reclassified from stockholders’ equity to temporary equity in the accompanying condensed consolidated balance sheets. See Note 18 for more information on the Company's proposed separation of its GoTo Business.
The Convertible Notes consist of the following (in thousands):
 
 
 
September 30, 2016
December 31, 2015
Liability component
 
 
     Principal
$
1,437,500

$
1,437,500

     Less: note discount and issuance costs
(98,718
)
(126,429
)
Net carrying amount
$
1,338,782

$
1,311,071

 
 
 
Equity component
 


     Temporary equity
$
87,841

$

     Additional paid-in capital
75,028

162,869

Total equity (including temporary equity)
$
162,869

$
162,869

The following table includes total interest expense recognized related to the Convertible Notes (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Contractual interest expense
$
1,797

 
$
1,797

 
$
5,391

 
$
5,391

Amortization of debt issuance costs
1,021

 
997

 
3,045

 
2,971

Amortization of debt discount
8,284

 
8,039

 
24,667

 
23,939

 
$
11,102

 
$
10,833

 
$
33,103

 
$
32,301

See Note 6 to the Company's condensed consolidated financial statements for fair value disclosures related to the Company's Convertible Notes.
Convertible Note Hedge and Warrant Transactions
In connection with the pricing of the Convertible Notes, the Company entered into convertible note hedge transactions relating to approximately 16.0 million shares of common stock (the "Bond Hedges"), with JPMorgan Chase Bank, National Association, London Branch; Goldman, Sachs & Co.; Bank of America, N.A.; and Royal Bank of Canada (the “Option Counterparties”) and also entered into separate warrant transactions (the "Initial Warrant Transactions") with each of the Option Counterparties relating to approximately 16.0 million shares of common stock. 
The Bond Hedges are generally expected to reduce the potential dilution upon conversion of the Convertible Notes and/or offset any payments in cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, that the Company is required to make in excess of the principal amount of the Convertible Notes upon conversion of any Convertible Notes, as the case may be, in the event that the market price per share of common stock, as measured under the terms of the Bond Hedges, is greater than the strike price of the Bond Hedges, which initially corresponds to the conversion price of the Convertible Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Convertible Notes. The Warrant Transactions will separately have a dilutive effect to the extent that the market value per share of common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants issued pursuant to the Warrant Transactions (the “Warrants”). The initial strike price of the Warrants is $120.00 per share. The Warrants will expire in ratable portions on a series of expiration dates commencing after the maturity of the Convertible Notes. The Bond Hedges and Warrants are not marked to market. The value of the Bond Hedges and Warrants were initially recorded in stockholders' equity and continue to be classified within stockholders' equity. As of

24



September 30, 2016 , no warrants have been exercised.
Aside from the initial payment of a premium to the Option Counterparties under the Bond Hedges, which amount is partially offset by the receipt of a premium under the Warrant Transactions, the Company is not required to make any cash payments to the Option Counterparties under the Bond Hedges and will not receive any proceeds if the Warrants are exercised.
11. CREDIT FACILITY
Effective January 7, 2015, the Company entered into a Credit Facility with a group of financial institutions (the “Lenders”). The Credit Facility provides for a five year revolving line of credit in the aggregate amount of $250.0 million , subject to continued covenant compliance. The Company may elect to increase the revolving credit facility by up to $250.0 million if existing or new lenders provide additional revolving commitments in accordance with the terms of the Credit Agreement. A portion of the revolving line of credit (i) in the aggregate amount of $25.0 million may be available for issuances of letters of credit and (ii) in the aggregate amount of $10.0 million may be available for swing line loans, as part of, not in addition to, the aggregate revolving commitments. The Credit Facility bears interest at LIBOR plus 1.10% and adjusts in the range of 1.00% to 1.30% above LIBOR based on the ratio of the Company’s total debt to its adjusted earnings before interest, taxes, depreciation, amortization and certain other items (“EBITDA”) as defined in the agreement. In addition, the Company is required to pay a quarterly facility fee ranging from 0.125% to 0.20% of the aggregate revolving commitments under the Credit Facility and based on the ratio of the Company’s total debt to the Company’s consolidated EBITDA. The weighted average interest rate for the period that amounts were outstanding under the Credit Facility was 1.82% . As of September 30, 2016 , there were no amounts outstanding under the Credit Facility.
The Credit Agreement contains certain financial covenants that require the Company to maintain a consolidated leverage ratio of not more than 3.5 : 1.0 and a consolidated interest coverage ratio of not less than 3.0 : 1.0 . In addition, the Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the ability of the Company to grant liens, merge, dissolve or consolidate, dispose of all or substantially all of its assets, pay dividends during the existence of a default under the Credit Agreement, change its business and incur subsidiary indebtedness, in each case subject to customary exceptions for a credit facility of this size and type. The Company was in compliance with these covenants as of September 30, 2016 .
12. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives Designated as Hedging Instruments
As of September 30, 2016 , the Company’s derivative assets and liabilities primarily resulted from cash flow hedges related to its forecasted operating expenses transacted in local currencies. A substantial portion of the Company’s overseas expenses are and will continue to be transacted in local currencies. To protect against fluctuations in operating expenses and the volatility of future cash flows caused by changes in currency exchange rates, the Company has established a program that uses foreign exchange forward contracts to hedge its exposure to these potential changes. The terms of these instruments, and the hedged transactions to which they relate, generally do not exceed 12 months.
Generally, when the dollar is weak, foreign currency denominated expenses will be higher, and these higher expenses will be partially offset by the gains realized from the Company’s hedging contracts. Conversely, if the dollar is strong, foreign currency denominated expenses will be lower. These lower expenses will in turn be partially offset by the losses incurred from the Company’s hedging contracts. The change in the derivative component in Accumulated other comprehensive loss includes unrealized gains or losses that arose from changes in market value of the effective portion of derivatives that were held during the period, and gains or losses that were previously unrealized but have been recognized in the same line item as the forecasted transaction in current period net income due to termination or maturities of derivative contracts. This reclassification has no effect on total comprehensive income or equity.
The total cumulative unrealized loss on cash flow derivative instruments was $0.2 million at September 30, 2016 and $2.3 million at December 31, 2015 , and is included in Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. See Note 13 for more information related to comprehensive income. The net unrealized loss as of September 30, 2016 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.

25



These contracts are not designated for hedge accounting treatment under the authoritative guidance. Accordingly, changes in the fair value of these contracts are recorded in Other income (expense), net.
Fair Values of Derivative Instruments
 
Asset Derivatives
 
Liability Derivatives
 
(In thousands)
 
September 30, 2016
 
December 31, 2015
 
September 30, 2016
 
December 31, 2015
Derivatives Designated as
Hedging Instruments
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Foreign currency forward contracts
Prepaid
expenses
and other
current
assets
 
$1,476
 
Prepaid
expenses
and other
current
assets
 
$436
 
Accrued
expenses
and other
current
liabilities
 
$1,690
 
Accrued
expenses
and other
current
liabilities
 
$2,895
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset Derivatives
 
Liability Derivatives
 
(In thousands)
 
September 30, 2016
 
December 31, 2015
 
September 30, 2016
 
December 31, 2015
Derivatives Not Designated as
Hedging Instruments
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Foreign currency forward contracts
Prepaid
expenses
and other
current
assets
 
$425
 
Prepaid
expenses
and other
current
assets
 
$627
 
Accrued
expenses
and other
current
liabilities
 
$674
 
Accrued
expenses
and other
current
liabilities
 
$783

The Effect of Derivative Instruments on Financial Performance
 
For the Three Months Ended September 30,
 
(In thousands)
Derivatives in Cash Flow
Hedging Relationships
Amount of Gain (Loss) Recognized in Other
Comprehensive (Loss)Income
(Effective Portion)
 
Location of Loss Reclassified
from Accumulated Other
Comprehensive Loss into
Income
(Effective Portion)
 
Amount of Loss Reclassified from
Accumulated Other 
Comprehensive Loss
(Effective Portion)
 
2016
 
2015
 
 
 
2016
 
2015
Foreign currency forward contracts
$
1,023

 
$
(554
)
 
Operating expenses
 
$
(641
)
 
$
(1,794
)
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30,
 
(In thousands)
Derivatives in Cash Flow
Hedging Relationships
Amount of Gain Recognized in Other
Comprehensive (Loss) Income
(Effective Portion)

 
Location of Loss Reclassified
from Accumulated Other
Comprehensive Loss into
Income
(Effective Portion)
 
Amount of Loss Reclassified from
Accumulated Other 
Comprehensive Loss
(Effective Portion)
 
2016
 
2015
 
 
 
2016
 
2015
Foreign currency forward contracts
$
2,049

 
$
5,770

 
Operating expenses
 
$
(1,663
)
 
$
(11,462
)
There was no material ineffectiveness in the Company’s foreign currency hedging program in the periods presented.
 

26



 
For the Three Months Ended September 30,
 
(In thousands)
Derivatives Not Designated as Hedging Instruments
Location of (Loss) Gain Recognized in Income on
Derivative
 
Amount of (Loss) Gain Recognized in Income on Derivative
 
 
 
2016
 
2015
Foreign currency forward contracts
Other expense, net
 
$
(1,693
)
 
$
1,238

 
 
 
 
 
 
 
For the Nine Months Ended September 30,
 
(In thousands)
Derivatives Not Designated as Hedging Instruments
Location of (Loss) Gain Recognized in Income on
Derivative
 
Amount of (Loss) Gain Recognized in Income on Derivative
 
 
 
2016
 
2015
Foreign currency forward contracts
Other expense, net
 
$
(5,658
)
 
$
1,727

Outstanding Foreign Currency Forward Contracts
As of September 30, 2016 , the Company had the following net notional foreign currency forward contracts outstanding (in thousands):
Foreign Currency
Currency
Denomination
Australian Dollar
AUD 14,700
Brazilian Real
BRL 7,800
Pounds Sterling
GBP 2,567
Canadian Dollar
CAD 1,450
Chinese Yuan Renminbi
CNY 33,800
Danish Krone
DKK 20,276
Euro
EUR 23,832
Hong Kong Dollar
HKD 32,500
Indian Rupee
INR 320,873
Japanese Yen
JPY 1,321,457
Singapore Dollar
SGD 10,097
Swiss Franc
CHF 32,000
13. COMPREHENSIVE INCOME
The changes in Accumulated other comprehensive loss by component, net of tax, are as follows:
 
Foreign currency
 
Unrealized (loss) gain on available-for-sale securities
 
Unrealized (loss) gain on derivative instruments
 
Other comprehensive loss on pension liability
 
Total
 
(In thousands)
Balance at December 31, 2015
$
(16,346
)
 
$
(2,900
)
 
$
(2,255
)
 
$
(7,026
)
 
$
(28,527
)
Other comprehensive income before reclassifications

 
4,863

 
386

 

 
5,249

Amounts reclassified from accumulated other comprehensive loss

 
(1,220
)
 
1,663

 

 
443

Net current period other comprehensive income

 
3,643

 
2,049

 

 
5,692

Balance at September 30, 2016
$
(16,346
)
 
$
743

 
$
(206
)
 
$
(7,026
)
 
$
(22,835
)
Income tax expense or benefit allocated to each component of other comprehensive loss is not material.

27



Reclassifications out of Accumulated other comprehensive loss are as follows:
 
 
For the Three Months Ended September 30, 2016
 
 
(In thousands)
Details about accumulated other comprehensive loss components
 
Amount reclassified from accumulated other comprehensive loss, net of tax
 
Affected line item in the Condensed Consolidated Statements of Income
Unrealized net gains on available-for-sale securities
 
$
(928
)
 
Other income (expense), net
Unrealized net losses on cash flow hedges
 
641

 
Operating expenses *
 
 
$
(287
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2016
 
 
(In thousands)
Details about accumulated other comprehensive loss components
 
Amount reclassified from accumulated other comprehensive loss, net of tax
 
Affected line item in the Condensed Consolidated Statements of Income
Unrealized net gains on available-for-sale securities