Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission File Number 0-27084
 
 
 
CITRIX SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
    
Delaware
  
75-2275152
(State or other jurisdiction of
incorporation or organization)
  
(IRS Employer
Identification No.)
 
 
 
851 West Cypress Creek Road
Fort Lauderdale, Florida
  
33309
(Address of principal executive offices)
  
(Zip Code)
Registrant’s Telephone Number, Including Area Code:
(954) 267-3000
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x   No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x   No o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
x  Large accelerated filer
  
o    Accelerated filer
o    Non-accelerated filer
  
o    Smaller reporting company
 
 
o    Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of October 27, 2017, there were 150,675,226 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, 2017
CONTENTS

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

2



PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30, 2017
 
December 31, 2016
 
(In thousands, except par value)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
940,869

 
$
836,095

Short-term investments, available-for-sale
562,893

 
726,923

Accounts receivable, net of allowances of $3,508 and $5,883 at September 30, 2017 and December 31, 2016, respectively
464,801

 
681,206

Inventories, net
14,892

 
12,522

Prepaid expenses and other current assets
168,218

 
124,842

Current assets of discontinued operations

 
179,689

Total current assets
2,151,673

 
2,561,277

Long-term investments, available-for-sale
1,054,952

 
980,142

Property and equipment, net
254,297

 
261,954

Goodwill
1,617,124

 
1,585,893

Other intangible assets, net
168,093

 
173,681

Deferred tax assets, net
195,755

 
233,900

Other assets
57,502

 
54,449

Long-term assets of discontinued operations

 
538,931

Total assets
$
5,499,396

 
$
6,390,227

Liabilities, Temporary Equity and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
56,772

 
$
72,724

Accrued expenses and other current liabilities
225,036

 
256,799

Income taxes payable
3,493

 
39,771

Current portion of deferred revenues
1,173,348

 
1,208,229

Short-term debt
40,000

 

Convertible notes, short-term

 
1,348,156

Current liabilities of discontinued operations

 
172,670

Total current liabilities
1,498,649

 
3,098,349

Long-term portion of deferred revenues
505,723

 
476,135

Convertible notes, long-term
1,376,673

 

Other liabilities
122,740

 
119,813

Long-term liabilities of discontinued operations

 
7,708

Commitments and contingencies

 

Temporary equity from Convertible notes

 
79,495

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; 305,436 and 302,851 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
305

 
303

Additional paid-in capital
4,994,854

 
4,761,588

Retained earnings
3,790,452

 
4,010,737

Accumulated other comprehensive loss
(8,667
)
 
(28,704
)
 
8,776,944

 
8,743,924

Less - common stock in treasury, at cost (154,807 and 146,552 shares at September 30, 2017 and December 31, 2016, respectively)
(6,781,333
)
 
(6,135,197
)
Total stockholders' equity
1,995,611

 
2,608,727

Total liabilities, temporary equity and stockholders' equity
$
5,499,396

 
$
6,390,227

See accompanying notes.

3



CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except per share information)
Revenues:
 
 
 
 
 
 
 
Product and licenses
$
192,102

 
$
206,041

 
$
594,708

 
$
627,581

Software as a service
45,810

 
34,673

 
126,053

 
98,552

License updates and maintenance
420,951

 
398,171

 
1,232,734

 
1,178,053

Professional services
32,062

 
29,851

 
93,334

 
97,310

Total net revenues
690,925

 
668,736

 
2,046,829

 
2,001,496

Cost of net revenues:
 
 
 
 
 
 
 
Cost of product and license revenues
27,277

 
28,059

 
89,723

 
93,077

Cost of services and maintenance revenues
61,096

 
55,337

 
184,922

 
168,874

Amortization of product related intangible assets
17,564

 
14,775

 
43,062

 
43,222

Total cost of net revenues
105,937

 
98,171

 
317,707

 
305,173

Gross margin
584,988

 
570,565

 
1,729,122

 
1,696,323

Operating expenses:
 
 
 
 
 
 
 
Research and development
107,113

 
101,741

 
316,478

 
304,624

Sales, marketing and services
249,499

 
244,495

 
764,564

 
724,343

General and administrative
79,378

 
79,617

 
237,033

 
236,775

Amortization of other intangible assets
3,733

 
3,907

 
11,071

 
11,449

Restructuring
8,552

 
12,176

 
18,678

 
61,312

Total operating expenses
448,275

 
441,936

 
1,347,824

 
1,338,503

Income from operations
136,713

 
128,629

 
381,298

 
357,820

Interest income
7,873

 
4,193

 
19,045


12,108

Interest expense
(11,726
)
 
(11,254
)
 
(35,286
)
 
(33,605
)
Other income (expense), net
981

 
494

 
3,166

 
(781
)
Income from continuing operations before income taxes
133,841

 
122,062

 
368,223

 
335,542

Income tax expense
7,121

 
10,325

 
62,349

 
44,262

Income from continuing operations
126,720

 
111,737

 
305,874

 
291,280

Income (loss) from discontinued operations, net of income taxes


20,164


$
(42,704
)

$
44,982

Net income
$
126,720

 
$
131,901

 
$
263,170

 
$
336,262

Basic earnings (loss) per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.84

 
$
0.72

 
$
2.01

 
$
1.88

Income (loss) from discontinued operations

 
0.13

 
(0.28
)
 
0.29

Basic net earnings per share
$
0.84

 
$
0.85

 
$
1.73

 
$
2.17

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.82

 
$
0.71

 
$
1.96


$
1.86

Income (loss) from discontinued operations

 
0.13

 
(0.28
)

0.29

Diluted net earnings per share:
$
0.82

 
$
0.84

 
$
1.68


$
2.15

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
151,156

 
155,525

 
151,896

 
154,847

Diluted
154,627

 
157,532

 
156,384

 
156,697


See accompanying notes.

4



CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Net income
$
126,720

 
$
131,901

 
$
263,170

 
$
336,262

Other comprehensive income:
 
 
 
 
 
 
 
Available for sale securities:
 
 
 
 
 
 
 
Change in net unrealized gains (losses)
60

 
(1,029
)
 
1,500


4,863

Less: reclassification adjustment for net losses (gains) included in net income
120

 
(928
)
 
(340
)
 
(1,220
)
Net change (net of tax effect)
180

 
(1,957
)
 
1,160

 
3,643

Gain on pension liability
272

 

 
263

 

Cash flow hedges:
 
 
 
 
 
 
 
Change in unrealized gains
776

 
382

 
4,663

 
386

Less: reclassification adjustment for net (gains) losses included in net income
(1,116
)
 
641

 
551

 
1,663

Net change (net of tax effect)
(340
)
 
1,023

 
5,214

 
2,049

Other comprehensive income (loss)
112

 
(934
)
 
6,637

 
5,692

Comprehensive income
$
126,832

 
$
130,967

 
$
269,807

 
$
341,954


See accompanying notes.




5



CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended September 30,
 
2017
 
2016
 
(In thousands)
Operating Activities
 
 
 
Net income
$
263,170

 
$
336,262

Loss (income) from discontinued operations
42,704

 
(44,982
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization and other
149,813

 
166,381

Stock-based compensation expense
127,219

 
115,271

Excess tax benefit from stock-based compensation

 
(12,374
)
Deferred income tax expense (benefit)
32,367

 
(23,912
)
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies
(8,063
)
 
(3,489
)
Other non-cash items
9,608

 
6,385

Total adjustments to reconcile net income to net cash provided by operating activities
310,944

 
248,262

Changes in operating assets and liabilities, net of the effects of acquisitions:
 
 
 
Accounts receivable
216,139

 
190,685

Inventories
(3,350
)
 
(5,354
)
Prepaid expenses and other current assets
(15,836
)
 
13,651

Other assets
(2,393
)
 
(7,722
)
Income taxes, net
(58,278
)
 
70,753

Accounts payable
(17,039
)
 
(19,288
)
Accrued expenses and other current liabilities
(17,372
)
 
(6,236
)
Deferred revenues
(10,746
)
 
(51,078
)
Other liabilities
2,645

 
14,664

Total changes in operating assets and liabilities, net of the effects of acquisitions
93,770

 
200,075

Net cash provided by operating activities of continuing operations
710,588

 
739,617

Net cash (used in) provided by operating activities of discontinued operations
(56,070
)
 
117,166

Net cash provided by operating activities
654,518

 
856,783

Investing Activities
 
 
 
Purchases of available-for-sale investments
(966,067
)
 
(1,411,077
)
Proceeds from sales of available-for-sale investments
678,533

 
1,156,168

Proceeds from maturities of available-for-sale investments
377,719

 
511,023

Purchases of property and equipment
(61,670
)
 
(66,267
)
Cash paid for acquisitions, net of cash acquired
(60,449
)
 
(11,456
)
Cash paid for licensing agreements and technology
(5,865
)
 
(25,755
)
Other
490

 
464

Net cash (used in) provided by investing activities of continuing operations
(37,309
)
 
153,100

Net cash used in investing activities of discontinued operations
(3,891
)
 
(39,395
)
Net cash (used in) provided by investing activities
(41,200
)
 
113,705

Financing Activities
 
 
 
Proceeds from issuance of common stock under stock-based compensation plans
2,094

 
39,438

Proceeds from credit facility
165,000

 

Repayment of credit facility
(125,000
)
 

Repayment of acquired debt
(4,000
)
 

Excess tax benefit from stock-based compensation

 
12,374

Stock repurchases, net
(574,957
)
 
(28,689
)
Cash paid for tax withholding on vested stock awards
(71,179
)
 
(55,402
)
Transfer of cash to GoTo Business resulting from the separation
(28,523
)
 

Net cash used in financing activities
(636,565
)
 
(32,279
)
Effect of exchange rate changes on cash and cash equivalents
7,160

 
1,956

Change in cash and cash equivalents
(16,087
)
 
940,165

Cash and cash equivalents at beginning of period, including cash of discontinued operations of $120,861 and $57,762, respectively
956,956

 
368,518

Cash and cash equivalents at end of period
940,869

 
1,308,683

Less cash of discontinued operations


 
(79,020
)
Cash and cash equivalents at end of period
$
940,869

 
$
1,229,663

See accompanying notes.

6



CITRIX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BACKGROUND AND BASIS OF PRESENTATION
Background
On January 31, 2017, Citrix Systems, Inc. ("Citrix" or the "Company") completed the spin-off of its GoTo family of service offerings (the “Spin-off”) and subsequent merger of that business with LogMeIn, Inc. (the “Merger”) pursuant to a pro rata distribution to its stockholders of 100% of the shares of common stock of GetGo, Inc., its wholly-owned subsidiary ("GetGo"). Pursuant to the transaction, the Company transferred its GoTo Business to GetGo, and after the close of business on January 31, 2017, the Company distributed approximately 26.9 million shares of GetGo common stock to the Company’s stockholders of record as of the close of business on January 20, 2017 (the “Record Date”). Immediately following the distribution, Lithium Merger Sub, Inc., a wholly-owned subsidiary of LogMeIn, merged with and into GetGo, with GetGo as the surviving corporation (the “Merger”). In connection with the Merger, GetGo became a wholly-owned subsidiary of LogMeIn, and each share of GetGo common stock was converted into the right to receive one share of LogMeIn common stock. As a result of these transactions, the Company’s stockholders received approximately 26.9 million shares of LogMeIn common stock in the aggregate, or 0.171844291 of a share of LogMeIn common stock for each share of the Company’s common stock held of record by such stockholders on the Record Date. No fractional shares of LogMeIn were issued, and the Company’s stockholders instead received cash in lieu of any fractional shares.
The Company's revenues are derived from sales of its Workspace Services products, Networking products (formerly Delivery Networking), Data offerings (formerly Cloud) and related License updates and maintenance and Professional services. Prior to the Spin-off, the Company also derived its revenues from sales of the GoTo Business, which were delivered as cloud-based Software as a service ("SaaS"), and included Communications Cloud and Workflow Cloud service offerings. Subsequent to the Spin-off, the Company determined that it has one reportable segment. The Company identified its segment using the “management approach” which designates the internal organization that is used by management for making operating decisions and assessing performance. See Note 10 for more information on the Company's segment.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements of 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, 2016.
The condensed consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries in the Americas, Europe, the Middle East and Africa (“EMEA”), and Asia-Pacific and Japan ("APJ"). All significant transactions and balances between the Company and its subsidiaries have been eliminated in consolidation.

In these condensed consolidated financial statements, unless otherwise indicated, references to Citrix and the Company, refer to Citrix Systems, Inc. and its consolidated subsidiaries after giving effect to the Spin-off.

As a result of the Spin-off, the condensed consolidated financial statements reflect the GoTo Business operations, assets and liabilities, and cash flows as discontinued operations for all periods presented. Refer to Note 3 for additional information regarding the Spin-off.

7



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, 2017 and December 31, 2016 primarily consist of agency securities, corporate securities, municipal securities and government securities. Investments classified as available-for-sale are stated at fair value with unrealized gains and losses, net of taxes, reported in Accumulated other comprehensive loss. The Company classifies its available-for-sale investments as current and non-current based on their actual remaining time to maturity. The Company does not recognize changes in the fair value of its available-for-sale investments in income unless a decline in value is considered other-than-temporary in accordance with the authoritative guidance.
The Company’s investment policy is designed to limit exposure to any one issuer depending on credit quality. The Company uses information provided by third parties to adjust the carrying value of certain of its investments to fair value at the end of each period. Fair values are based on a variety of inputs and may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. See Note 6 for additional information regarding the Company’s investments.
Revenue Recognition
Net revenues include the following categories: Product and licenses, Software as a Service (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. Should the Company charge set-up fees, they would be recognized ratably over the contract term or the expected customer life, whichever is longer. License updates and maintenance revenues consist of fees related to maintenance and support fees, which include technical support and hardware and software maintenance. Maintenance and support 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 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, including the new Customer Success Services, 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 and configuration and installation support along with acceleration and automation tools. 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: (1) persuasive evidence of the arrangement exists; (2) delivery has occurred or the service has been provided and the Company has no remaining obligations; (3) the fee is fixed or determinable; and (4) 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

8



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.
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 majority of the Company's SaaS offerings are considered hosted service arrangements per the authoritative guidance.
In the normal course of business, the Company is not obligated to accept product returns from its resellers or end customers 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 $0.8 million and $2.0 million at September 30, 2017 and December 31, 2016, 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. 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. Prior to January 1, 2015, the functional currency of the Company’s wholly-owned foreign subsidiaries of its former GoTo Business 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. As a result of the change in functional currency, the gains and losses that were previously recorded in Accumulated other comprehensive loss prior to January 1, 2015 were kept constant. As a result of the Spin-off, accumulated net translation adjustments associated with the GoTo Business recorded in Accumulated other comprehensive loss of $13.4 million were reclassified to Retained earnings during the period ended September 30, 2017. See Note 3 for additional information regarding discontinued operations.


9



Accounting for Stock-Based Compensation Plans
The Company has various stock-based compensation plans for its employees and outside directors and accounts for stock-based compensation arrangements in accordance with the authoritative guidance, which requires the Company to measure and record compensation expense in its condensed consolidated financial statements using a fair value method. See Note 8 for further information regarding the Company’s stock-based compensation plans.
Reclassifications
Certain reclassifications of the prior years' amounts have been made to conform to the current year's presentation.
3. DISCONTINUED OPERATIONS
On January 31, 2017, the Company completed the Spin-off of the GoTo Business. Refer to Note 1 for additional information regarding the Spin-off. The financial results of the GoTo Business are presented as Income (loss) from discontinued operations, net of income taxes in the condensed consolidated statements of income. The following table presents the financial results of the GoTo Business through the date of the Spin-off for the indicated periods and do not include corporate overhead allocations:
Major classes of line items constituting Income (loss) from discontinued operations related to the GoTo Business
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2017
 
2016
 
(in thousands)
Net revenues
$
172,515

 
$
58,215

 
$
508,413

Cost of net revenues
39,804

 
15,456

 
116,216

Gross margin
132,711

 
42,759

 
392,197

Operating expenses:
 
 
 
 
 
Research and development
25,146

 
9,108

 
70,983

Sales, marketing and services
47,353

 
20,881

 
158,702

General and administrative
14,986

 
7,636

 
46,572

Amortization of other intangible assets
3,480

 
1,176

 
10,618

Restructuring
(115
)
 
3,189

 
830

Separation
16,663

 
40,573

 
44,444

Total operating expenses
107,513

 
82,563

 
332,149

Income (loss) from discontinued operations before income taxes

25,198

 
(39,804
)
 
60,048

Income tax expense
5,034

 
2,900

 
15,066

Income (loss) from discontinued operations, net of income tax
$
20,164

 
$
(42,704
)
 
$
44,982

The Company incurred significant costs in connection with the separation of its GoTo Business. These costs relate primarily to third-party advisory and consulting services, retention payments to certain employees, incremental stock-based compensation and other costs directly related to the separation of the GoTo Business. During the three months ended September 30, 2016, the Company incurred $0.9 million of separation costs which are included in General and administrative expense from continuing operations in the accompanying condensed consolidated statements of income. No separation costs were incurred in continuing operations during the three months ended September 30, 2017. During the nine months ended September 30, 2017 and 2016, the Company incurred $0.5 million and $1.7 million of separation costs, respectively, which are included in General and administrative expense from continuing operations in the accompanying condensed consolidated statements of income.
The assets and liabilities of the GoTo Business were re-classified as discontinued operations as of December 31, 2016.

10



Carrying amounts of major classes of assets and liabilities included as part of discontinued operations related to the GoTo Business

 
December 31, 2016
 
(in thousands)
Assets
 
Current assets:
 
Cash
$
120,861

Accounts receivable, net
44,734

Prepaid expenses and other current assets
14,094

Total current assets of discontinued operations
179,689

Property and equipment, net
81,866

Goodwill
380,917

Other intangible assets, net
54,312

Deferred tax assets, net
18,496

Other assets
3,340

Long-term assets of discontinued operations
$
538,931

Total major classes of assets of discontinued operations

$
718,620

 
 
Liabilities
 
Current liabilities:
 
Accounts payable
$
11,333

Accrued expenses and other current liabilities
46,088

Current portion of deferred revenues
115,249

Total current liabilities of discontinued operations
172,670

Long-term portion of deferred revenues
4,224

Other liabilities
3,484

Long-term liabilities of discontinued operations
$
7,708

Total major classes of liabilities of discontinued operations

$
180,378

As a result of the Spin-off, the Company recorded a $478.2 million reduction in retained earnings which included net assets of $464.8 million. Of this amount, $28.5 million represents cash transferred to the GoTo Business, with the remainder considered a non-cash activity in the condensed consolidated statements of cash flows. The Spin-off also resulted in a reduction of Accumulated other comprehensive loss associated with foreign currency translation adjustments of $13.4 million, which was reclassified to Retained earnings.
Citrix and GetGo entered into several agreements in connection with the Spin-off, including a transition services agreement ("TSA"), separation and distribution agreement, tax matters agreement, intellectual property matters agreement, and an employee matters agreement. Pursuant to the TSA, Citrix, GetGo and their respective subsidiaries are providing various services to each other on an interim, transitional basis. Services being provided by Citrix include, among others, finance, information technology and certain other administrative services. The services generally commenced on February 1, 2017 and are generally expected to terminate within 12 months of that date. Billings by Citrix under the TSA were not material for the three or nine months ended September 30, 2017.
4. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted-average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise or settlement of stock awards (calculated using the treasury stock method) during the period they were outstanding.

11



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,
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
126,720

 
$
111,737

 
$
305,874

 
$
291,280

Income (loss) from discontinued operations, net of income taxes


 
20,164

 
(42,704
)
 
44,982

Net income
$
126,720

 
$
131,901

 
$
263,170

 
$
336,262

Denominator:
 
 
 
 
 
 
 
Denominator for basic net earnings per share - weighted-average shares outstanding
151,156

 
155,525

 
151,896

 
154,847

Effect of dilutive employee stock awards
1,987

 
2,007

 
2,538

 
1,850

Effect of dilutive Convertible Notes
1,484

 

 
1,950

 

Denominator for diluted net earnings per share - weighted-average shares outstanding
154,627

 
157,532

 
156,384

 
156,697

 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.84

 
$
0.72

 
$
2.01

 
$
1.88

Income (loss) from discontinued operations

 
0.13

 
(0.28
)
 
0.29

Basic net earnings per share
$
0.84

 
$
0.85

 
$
1.73

 
$
2.17

Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.82

 
$
0.71

 
$
1.96

 
$
1.86

Income (loss) from discontinued operations

 
0.13

 
(0.28
)
 
0.29

Diluted net earnings per share:
$
0.82

 
$
0.84

 
$
1.68

 
$
2.15

Anti-dilutive weighted-average shares from stock awards
393

 
60

 
225

 
460

The weighted-average number of shares outstanding used in the computation of basic and diluted earnings per share does not include common stock issuable upon the exercise of the Company's warrants. The effects of these potentially issuable shares were not included in the calculation of diluted earnings per share because the effect would have been anti-dilutive.
The Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on its Convertible Notes on diluted earnings per share, if applicable, because upon conversion the Company will pay cash up to the aggregate principal amount of the Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, in respect of the remainder, if any, of the Company’s conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted. The conversion spread will have a dilutive impact on diluted earnings per share when the average market price of the Company’s common stock for a given period exceeds the conversion price. Prior to the separation of the GoTo Business on January 31, 2017, the conversion price was $90.00 per share. As a result of the Spin-off, the conversion rate for the Convertible Notes was re-set as of the opening of business on February 1, 2017 to 13.9061 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which corresponds to a conversion price of $71.91 per share of common stock. Similar adjustments were made to the conversion rates for the Convertible Note Hedge and Warrant Transactions as of the opening of business on February 1, 2017. For the three and nine months ended September 30, 2017, the average market price of the Company's common stock exceeded the new conversion price; therefore, the dilutive effect of the Convertible Notes was included in the denominator of diluted earnings per share. For the three and nine months ended September 30, 2016, the Convertible Notes have been excluded from the computation of diluted earnings per share as the effect would be anti-dilutive since the prior 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 11 for detailed information on the Convertible Notes offering.

12



5. ACQUISITIONS AND DIVESTITURES
2017 Business Combination
On January 3, 2017, the Company acquired all of the issued and outstanding securities of Unidesk Corporation (“Unidesk” or the “2017 Business Combination"). Citrix acquired Unidesk to enhance its application management and delivery offerings. The total cash consideration for this transaction was $60.4 million, net of $2.7 million of cash acquired. Transaction costs associated with the acquisition were $0.4 million. No transaction costs were incurred during the three months ended September 30, 2017. The Company expensed $0.1 million of transaction costs during the nine months ended September 30, 2017, which were included in General and administrative expense in the accompanying condensed consolidated statements of income.
Purchase Accounting for the 2017 Business Combination
The purchase price for Unidesk was allocated to the acquired net tangible and intangible assets based on estimated fair values as of the date of the acquisition. The allocation of the total purchase price is summarized below (in thousands):
 
Unidesk
 
Purchase Price Allocation
 
Asset Life
Current assets
$
5,321

 
 
Property and equipment
131

 
 
Intangible assets
39,470

 
4 years
Goodwill
31,231

 
Indefinite
Other assets
90

 
 
Assets acquired
76,243

 
 
Other current liabilities assumed
2,290

 
 
Current portion of deferred revenues
3,042

 
 
Long term portion of deferred revenues
2,412

 
 
Long-term liabilities assumed
4,086

 
 
Deferred taxes
1,266

 
 
Net assets acquired
$
63,147

 
 
Current assets acquired in connection with the Unidesk acquisition consisted primarily of cash, accounts receivable and other short term assets. Current liabilities assumed in connection with the acquisition consisted primarily of accounts payable and other accrued expenses. Long-term liabilities assumed in connection with the acquisition consisted primarily of long-term debt, which was paid in full subsequent to the acquisition date. The Company continues to evaluate certain income tax assets and liabilities related to the Unidesk acquisition.
The goodwill related to the Unidesk acquisition is not deductible for tax purposes and is comprised primarily of expected synergies from combining operations and other intangible assets that do not qualify for separate recognition.
The Company has included the effect of the Unidesk acquisition in its results of operations prospectively from the date of acquisition. The effect of the acquisition was not material to the Company's consolidated results for the periods presented; accordingly, pro forma financial disclosures have not been presented.
Identifiable intangible assets acquired in connection with the Unidesk acquisition (in thousands) and the weighted-average lives are as follows:
 
Unidesk
 
Asset Life
Developed technology
$
35,230

 
4 years
Customer contracts
4,240

 
4 years
Total
$
39,470

 
 


13




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 total cash consideration for this transaction was $11.5 million, net of $0.8 million cash acquired. Transaction costs were $0.4 million, none of which were incurred during the three and nine months ended September 30, 2017. The Company expensed $0.3 million of transaction costs during the three months ended September 30, 2016 and $0.4 million of transaction costs during the nine months ended September 30, 2016. 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 $4.7 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.
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 three and nine months ended September 30, 2017. Therefore, no income was recognized during the three and nine months ended September 30, 2017.
6. INVESTMENTS
Available-for-sale Investments
Investments in available-for-sale securities at fair value were as follows for the periods ended (in thousands):
 
 
September 30, 2017
 
December 31, 2016
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
$
483,398

 
$
557

 
$
(1,297
)
 
$
482,658

 
$
411,963

 
$
699

 
$
(1,169
)
 
$
411,493

Corporate securities
802,969

 
576

 
(1,065
)
 
802,480

 
842,887

 
193

 
(2,114
)
 
840,966

Municipal securities
3,965

 
12

 

 
3,977

 
9,989

 
3

 
(4
)
 
9,988

Government securities
329,245

 
55

 
(570
)
 
328,730

 
445,083

 
135

 
(600
)
 
444,618

Total
$
1,619,577

 
$
1,200

 
$
(2,932
)
 
$
1,617,845

 
$
1,709,922

 
$
1,030

 
$
(3,887
)
 
$
1,707,065

The change in net unrealized gains (losses) on available-for-sale securities recorded in Other comprehensive income includes unrealized gains (losses) that arose from changes in market value of specifically identified securities that were held during the period, gains (losses) that were previously unrealized, but have been recognized in current period net income due to sales, as well as prepayments of available-for-sale investments purchased at a premium. This reclassification has no effect on total comprehensive income or equity and was not material for all periods presented. See Note 14 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, 2017 were approximately seven months and two years, respectively.
Realized Gains and Losses on Available-for-sale Investments
For the three and nine months ended September 30, 2017, the Company received proceeds from the sales of available-for-sale investments of $116.4 million and $678.5 million, respectively, and for the three and nine months ended September 30, 2016, it received proceeds from the sales of available-for-sale investments of $709.2 million and $1.16 billion, respectively.
For the three months ended September 30, 2017, the Company had no realized gains on the sales of available-for-sale investments, and during the nine months ended September 30, 2017, the Company had $0.7 million in realized gains on the

14



sales of available-for-sale investments. For the three and nine months ended September 30, 2016, it had realized gains on the sales of available-for-sale investments of $1.0 million and $1.6 million, respectively.
For the three and nine months ended September 30, 2017, the Company had realized losses on available-for-sale investments of $0.2 million and $0.4 million, respectively, and for the three and nine months ended September 30, 2016, it had realized losses on available-for-sale investments of $0.1 million and $0.3 million, respectively, primarily related to sales of these investments during these periods.
All realized gains and losses related to the sales of available-for-sale investments are included in Other income (expense), net, in the accompanying condensed consolidated statements of income.
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, 2017 and December 31, 2016 were $2.9 million and $3.9 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 $19.1 million and $19.2 million as of September 30, 2017 and December 31, 2016, 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, 2017, no cost method investments were determined to be impaired. For the nine months ended September 30, 2017, certain cost method investments with a combined carrying value of $2.6 million were determined to be impaired and written down to their estimated fair values of $1.2 million. Accordingly, the Company recorded $1.4 million in impairment charges during the nine months ended September 30, 2017, which are included in Other income (expense), net in the accompanying condensed consolidated statements of income. For the three and nine months ended September 30, 2016, the Company determined that certain cost method investments were impaired and recorded a charge of $0.9 million and $1.1 million, respectively, which was included in Other income (expense), net in the accompanying condensed consolidated statements of income. During the nine months ended September 30, 2017, certain companies in which the Company held direct investments were acquired by third parties and as a result of these sales transactions the Company recorded gains of $1.2 million, which were included in Other income (expense), net, in the accompanying condensed consolidated statements of income. No gains were recognized during the three months ended September 30, 2017.
7. FAIR VALUE MEASUREMENTS
The authoritative guidance defines fair value as an exit price, representing the amount that would either be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Available-for-sale securities included in Level 2 are valued utilizing inputs obtained from an independent pricing service (the “Service”) which uses quoted market prices for identical or comparable instruments rather than direct observations of quoted prices in active markets. The Service applies a four level hierarchical pricing methodology to all of the Company’s fixed income securities based on the circumstances. The hierarchy starts with the highest priority pricing source, then subsequently uses inputs obtained from other third-party sources and large custodial institutions. The Service’s providers utilize a variety of inputs to determine their quoted prices. These inputs may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. Substantially all of the Company’s available-for-sale investments are valued utilizing inputs obtained from the Service and accordingly are categorized as Level 2 in the table below. The Company periodically independently assesses the pricing obtained from the Service and historically has

15



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, 2017
 
Quoted
Prices In
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash
$
869,770

 
$
869,770

 
$

 
$

Money market funds
66,245

 
66,245

 

 

Corporate securities
4,854

 

 
4,854

 

Available-for-sale securities:
 
 
 
 
 
 
 
Agency securities
482,658

 

 
482,658

 

Corporate securities
802,480

 

 
802,086

 
394

Municipal securities
3,977

 

 
3,977

 

Government securities
328,730

 

 
328,730

 

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
Foreign currency derivatives
4,531

 

 
4,531

 

Total assets
$
2,563,245

 
$
936,015

 
$
1,626,836

 
$
394

Accrued expenses and other current liabilities:
 
 
 
 
 
 
 
Foreign currency derivatives
622

 

 
622

 

Total liabilities
$
622

 
$

 
$
622

 
$

 
As of December 31, 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
$
528,637

 
$
528,637

 
$

 
$

Money market funds
224,765

 
224,765

 

 

Corporate securities
82,693

 

 
82,693

 

Available-for-sale securities:
 
 
 
 
 
 
 
Agency securities
411,493

 

 
411,493

 

Corporate securities
840,966

 

 
839,968

 
998

Municipal securities
9,988

 

 
9,988

 

Government securities
444,618

 

 
444,618

 

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
Foreign currency derivatives
2,506

 

 
2,506

 

Total assets
$
2,545,666

 
$
753,402

 
$
1,791,266

 
$
998

Accrued expenses and other current liabilities:
 
 
 
 
 
 
 
Foreign currency derivatives
4,435

 

 
4,435

 

Total liabilities
$
4,435

 
$

 
$
4,435

 
$


16



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)
For the three months ended September 30, 2017, no cost method investments were determined to be impaired. During the nine months ended September 30, 2017, certain cost method investments with a combined carrying value of $2.6 million were determined to be impaired and written down to their estimated fair values of $1.2 million. Accordingly, the Company recorded $1.4 million of impairment charges during the nine months ended September 30, 2017, which are included in Other income (expense), net in the accompanying condensed consolidated statements of income. For the three and nine months ended September 30, 2016, the Company determined that certain cost method investments were impaired and recorded a charge of $0.9 million and $1.1 million, respectively, 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 9 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, 2017, 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, 2017, 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
$
1,672,095

 
$
1,376,673

8. STOCK-BASED COMPENSATION
The Company’s stock-based compensation program is a long-term retention program that is intended to attract and reward talented employees and align stockholder and employee interests. As of September 30, 2017, the Company had one stock-based compensation plan under which it was granting equity awards. The Company is currently granting stock-based awards from its Amended and Restated 2014 Equity Incentive Plan (the "2014 Plan"), which was approved at the Company's Annual Meeting of Stockholders on June 22, 2017. In connection with certain of the Company’s acquisitions, the Company has assumed certain plans from acquired companies. The Company’s Board of Directors has provided that no new awards will be granted under the Company’s acquired stock plans. Awards previously granted under the Company's superseded stock plans that are still outstanding typically expire between five and ten years from the date of grant and will continue to be subject to all the terms and conditions of such plans, as applicable. The Company’s superseded stock plans with outstanding awards include the Amended and Restated 2005 Equity Incentive Plan ("2005 Plan").
Under the terms of the 2014 Plan, the Company is authorized to grant incentive stock options (“ISOs”), non-qualified stock options (“NSOs”), non-vested stock, non-vested stock units, stock appreciation rights (“SARs”), and performance units and to make stock-based awards to full and part-time employees of the Company and its subsidiaries or affiliates, where legally eligible to participate, as well as to consultants and non-employee directors of the Company. SARs and ISOs are not currently being granted. Currently, the 2014 Plan provides for the issuance of 46,000,000 shares of common stock. In addition, shares of

17



common stock underlying any awards granted under the Company’s 2014 Plan or the 2005 Plan that are forfeited, canceled or otherwise terminated (other than by exercise) are added to the shares of common stock available for issuance under the 2014 Plan. Under the 2014 Plan, NSOs must be granted at exercise prices no less than fair market value on the date of grant. Non-vested stock awards may be granted for such consideration in cash, other property or services, or a combination thereof, as determined by the Company’s Compensation Committee of its Board of Directors. Stock-based awards are generally exercisable or issuable upon vesting. The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. As of September 30, 2017, there were 29,119,133 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 24,185,548 shares of common stock. In connection with the completion of the Spin-off, these awards were modified as described below.

In December 2014, the Company’s Board of Directors approved the 2015 Employee Stock Purchase Plan (the “2015 ESPP”), which was approved by stockholders at the Company’s Annual Meeting of Stockholders held on May 28, 2015. Under the 2015 ESPP, all full-time and certain part-time employees of the Company are eligible to purchase common stock of the Company twice per year at the end of a six-month payment period (a “Payment Period”). During each Payment Period, eligible employees who so elect may authorize payroll deductions in an amount no less than 1% nor greater than 10% of his or her base pay for each payroll period in the Payment Period. At the end of each Payment Period, the accumulated deductions are used to purchase shares of common stock from the Company up to a maximum of 12,000 shares for any one employee during a Payment Period. Shares are purchased at a price equal to 85% of the fair market value of the Company's common stock, on either the first business day of the Payment Period or the last business day of the Payment Period, whichever is lower. Employees who, after exercising their rights to purchase shares of common stock in the 2015 ESPP, would own shares representing 5% or more of the voting power of the Company’s common stock, are ineligible to continue to participate under the 2015 ESPP. The 2015 ESPP provides for the issuance of a maximum of 16,000,000 shares of common stock. As of September 30, 2017, 1,260,420 shares have been issued under the 2015 ESPP. The Company recorded stock-based compensation costs related to the 2015 ESPP of $4.4 million and $2.3 million for the three months ended September 30, 2017 and 2016, respectively, and it recorded $7.9 million and $6.7 million for the nine months ended September 30, 2017 and 2016, respectively.
The Company used the Black-Scholes model to estimate the fair value of 2015 ESPP awards with the following weighted-average assumptions:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Expected volatility factor
0.27 - 0.29

 
0.27 - 0.41

 
0.27 - 0.29

 
0.27 - 0.41

Risk free interest rate
0.60% - 1.12%

 
0.35% - 0.42%

 
0.60% - 1.12%

 
0.25% - 0.42%

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

 
0.5

 
0.5

 
0.5

The Company determined the expected volatility factor by considering the implied volatility in six-month market-traded options of the Company's common stock based on third party volatility quotes. The Company's decision to use implied volatility was based upon the availability of actively traded options on the Company's common stock and its assessment that implied volatility is more representative of future stock price trends than historical volatility. The risk-free interest rate was based on a U.S. Treasury instrument whose term is consistent with the expected term of the stock options. The Company's 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.
Modifications of Share-Based Awards
In connection with the completion of the Spin-off, the terms of the Company's existing stock-based compensation arrangements required adjustments to the number and exercise price of outstanding stock options, non-vested stock units, non-vested stock, performance units, and other share-based awards to preserve the intrinsic value of the awards immediately before and after the Spin-off. The outstanding awards continue to vest over the original vesting periods. Certain outstanding awards at the time of the Spin-off held by employees of the GoTo Business were forfeited at the time of the separation. The stock awards held as of January 31, 2017 were adjusted as follows:
The number of shares of common stock subject to each outstanding stock option was increased and the corresponding exercise price was decreased to maintain the intrinsic value of each outstanding stock option immediately before and after the Spin-off. There was no incremental expense related to this adjustment.

18



The number of shares of common stock underlying each outstanding non-vested stock unit and performance unit was increased to preserve the intrinsic value of such award immediately prior to the Spin-off.
The opening prices of the performance units granted in 2015 and 2016 were adjusted to reflect the value of the shares of LogMeIn stock distributed to the Company's shareholders as a result of the Spin-off. These adjustments resulted in $6.5 million in incremental compensation expense to be recognized over the remaining vesting life of the underlying awards.
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, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Cost of services and maintenance revenues
$
1,132

 
$
590

 
$
2,539

 
$
1,626

Research and development
14,365

 
10,501

 
35,691

 
27,945

Sales, marketing and services
16,063

 
13,405

 
42,388

 
36,909

General and administrative
20,172

 
16,347

 
46,601

 
48,791

Total
$
51,732

 
$
40,843

 
$
127,219

 
$
115,271

Non-vested Stock Units
Market Performance and Service Condition Stock Units
In March 2017, the Company granted senior level employees non-vested stock unit awards representing, in the aggregate, 275,148 non-vested stock units that vest based on certain target performance and service conditions. The number of non-vested stock units underlying the award will be determined within sixty days of the three-year performance period ending December 31, 2019. The attainment level under the award will be based on the Company's relative total return to stockholders over the performance period compared to a pre-established custom index group. If the Company’s relative total return to stockholders is between the 41st percentile and the 80th percentile when compared to the index companies, the number of non-vested stock units earned will be based on interpolation. The maximum number of non-vested stock units that may vest pursuant to the awards is capped at 200% of the target number of non-vested stock units set forth in the award agreement and is earned if the Company's relative total return to stockholders when compared to the index companies is at or greater than the 80th percentile. If the Company’s total return to stockholders is negative, the number of non-vested stock units earned will be no more than 100% regardless of the Company’s relative total return to stockholders compared to the index companies. If the awardee is not employed by the Company at the end of the performance period, the extent to which the awardee will vest in the award, if at all, is dependent upon the timing and character of the termination as provided in the award agreement. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company's common stock.
In January 2016, the Company granted its former 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. These awards were modified as described above as a result of the Spin-off. 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.

19



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. 
The market condition requirements are reflected in the grant date fair value of the award, and the compensation expense for the award will be recognized assuming that the requisite service is rendered regardless of whether the market conditions are achieved. The grant date fair value of the non-vested performance stock unit awards was determined through the use of a Monte Carlo simulation model, which utilized multiple input variables that determined the probability of satisfying the market condition requirements applicable to each award as follows:
 
March 2017 Grant
March 2016 Grant
January 2016 Grant
Expected volatility factor
0.27-0.32

0.29 - 0.39

0.29 - 0.37

Risk free interest rate
1.48
%
0.91
%
1.10
%
Expected dividend yield
0
%
0
%
0
%
For the March 2017 grant, the range of expected volatilities utilized was based on the historical volatilities of the Company's common stock and the average of its peer group. The Company chose to use historical volatility to value these awards because historical stock prices were used to develop the correlation coefficients between the Company and its peer group in order to model the stock price movements. The volatilities used were calculated over the most recent 2.75 year period, which is commensurate with the awards' performance period at the 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 $104.05.
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.
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.
Unrecognized Compensation Related to Stock Units
As of September 30, 2017, 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, was 4,876,811. As of September 30, 2017, there was $257.8 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 2.05 years.

20



Non-vested Stock
During the nine months ended September 30, 2016, the Company granted non-vested stock awards of 118,588 shares to its former Chief Executive Officer, with a vesting period of approximately three years from the date of grant, subject to the holder’s continued employment with the Company and accelerated vesting under certain circumstances. 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. In connection with the departure of its former Chief Executive officer, the Company recognized $4.0 million of stock-based compensation expense during the three months ended September 30, 2017 related to the acceleration of these awards in accordance with his separation agreement. For the nine months ended September 30, 2017, the Company recognized $5.3 million of stock-based compensation expense related to non-vested stock awards. At September 30, 2017, no additional stock-based compensation expense is expected to be recognized related to these awards.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The Company accounts for goodwill in accordance with the authoritative guidance, which requires that goodwill and certain intangible assets are not amortized, but are subject to an annual impairment test. As part of its continued transformation, effective January 1, 2016, the Company reorganized a part of its business by creating a new Data (formerly Cloud) product grouping. In connection with this change, during the fourth quarter of 2016, the Company performed an assessment of its goodwill reporting units and determined that the reorganization resulted in the identification of two goodwill reporting units (excluding the GoTo Business). 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 2016.
On January 31, 2017, the Company completed the Spin-off of the GoTo Business and $380.9 million of the goodwill attributable to the GoTo Business as of December 31, 2016 was distributed to GetGo. As a result of the Spin-off, the Company performed an assessment of the two remaining goodwill reporting units for the quarter ended March 31, 2017 and determined that these goodwill reporting units remain unchanged. There were no changes in reporting units nor indicators of impairment during the three months ended September 30, 2017. See Note 5 for more information regarding the Company's acquisitions and divestitures.
The following table presents the change in goodwill during the three and nine months ended September 30, 2017 (in thousands):
 
Balance at January 1, 2017
 
Additions
 
 
Other
 
 
Balance at September 30, 2017
Goodwill
$
1,585,893

 
$
31,231

(1)
 
$

 
 
$
1,617,124

 
 
(1)
Amount relates to preliminary purchase price allocation of goodwill associated with the 2017 Business Combination. See Note 5 for more information regarding the Company's acquisitions.
Intangible Assets
The Company has intangible assets which were primarily acquired in conjunction with business combinations and technology purchases. Intangible assets with finite lives are recorded at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally three to seven years, except for patents, which are amortized over the lesser of their remaining life or ten years. In-process R&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When in-process R&D projects are completed, the corresponding amount is reclassified as an amortizable intangible asset and is amortized over the asset's estimated useful life.
Intangible assets consist of the following (in thousands):
 
September 30, 2017
 
December 31, 2016
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Product related intangible assets
$
686,901

 
$
558,809

 
$
647,594

 
$
520,746

Other
227,932

 
187,931

 
223,692

 
176,859

Total
$
914,833

 
$
746,740

 
$
871,286

 
$
697,605


21



Amortization of product-related intangible assets, which consists primarily of product-related technologies and patents, was $17.6 million and $14.8 million for the three months ended September 30, 2017 and 2016, respectively, and $43.1 million and $43.2 million for the nine months ended September 30, 2017 and 2016, respectively, is classified as a component of Cost of net revenues in the accompanying condensed consolidated statements of income. Amortization of other intangible assets, which consist primarily of customer relationships, trade names and covenants not to compete was $3.7 million and $3.9 million for the three months ended September 30, 2017 and 2016, respectively, and $11.1 million and $11.4 million for the nine months ended September 30, 2017 and 2016, respectively, 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.
Estimated future amortization expense of intangible assets with finite lives as of September 30, 2017 is as follows (in thousands): 
Year ending December 31,
Amount

2017 (remaining three months)
$
15,664

2018
59,816

2019
39,191

2020
25,032

2021
9,070

Thereafter
19,320

     Total
$
168,093

10. SEGMENT INFORMATION
On January 31, 2017, Citrix completed the Spin-off of the GoTo Business. As a result, the Company re-evaluated its operating segments in the first quarter of 2017, and determined that it has one reportable segment. The Company's chief operating decision maker (“CODM”) reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company's CEO is the CODM. During the first quarter of 2017, the Company classified the results of the GoTo Business, formerly a reportable segment, as discontinued operations in its financial statements for all periods presented. See Note 3 for more information regarding discontinued operations.
On July 7, 2017, the Company's board of directors appointed David J. Henshall, formerly the chief financial officer and chief operating officer of the Company, as the Company's president, chief executive officer and a member of the board of directors. As a result, during the third quarter of 2017, the Company re-evaluated its CODM and determined that the CODM continues to be the CEO and that the Company's operating segment remains unchanged.
Revenues by Product Grouping
Revenues by product grouping were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Net revenues:
 
 
 
 
 
 
 
Workspace Services revenues(1)
$
431,592

 
$
412,773

 
$
1,255,728

 
$
1,222,786

Networking revenues(2)
185,539

 
191,243

 
575,827

 
581,612

Data revenues(3)
41,632

 
34,806

 
121,566

 
99,615

Professional services(4)
32,162

 
29,914

 
93,708

 
97,483

Total net revenues
$
690,925

 
$
668,736

 
$
2,046,829

 
$
2,001,496

 
 

22



(1)
Workspace Services revenues are primarily comprised of sales from the Company’s application virtualization products, which include XenDesktop and XenApp, the Company's enterprise mobility management products, which include XenMobile and related license updates and maintenance and support, and related cloud offerings.
(2)
Networking revenues primarily include NetScaler ADC and NetScaler SD-WAN, related license updates and maintenance and support, and related cloud offerings.
(3)
Data revenues primarily include ShareFile, Podio, and related cloud offerings.
(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 geographic location, for the following periods (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Net revenues:
 
 
 
 
 
 
 
Americas
$
406,322

 
$
397,349

 
$
1,200,740

 
$
1,188,719

EMEA
213,954

 
199,837

 
633,119

 
611,832

APJ
70,649

 
71,550

 
212,970

 
200,945

Total net revenues
$
690,925

 
$
668,736

 
$
2,046,829

 
$
2,001,496

11. 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 initial conversion rate for the Convertible Notes was 11.1111 shares of common stock per $1,000 principal amount of Convertible Notes, which corresponds to a conversion price of $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. As a result of the Spin-off, the conversion rate for the Convertible Notes was adjusted under the terms of the Indenture. As a result of this adjustment, the conversion rate for the Convertible Notes was re-set as of the opening of business on February 1, 2017 to 13.9061 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which corresponds to a conversion price of $71.91 per share of common stock. Similar adjustments were made to the conversion rates for the Convertible Note Hedge and Warrant Transactions (as defined below) as of the opening of business on February 1, 2017.

23



The Company may not redeem the Convertible Notes prior to the maturity date and no “sinking fund” is provided for the Convertible Notes, which means that the Company is not required to periodically redeem or retire the Convertible Notes. Upon the occurrence of certain fundamental changes involving the Company, holders of the Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes in principal amounts of $1,000 or an integral multiple thereof at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
In accounting for the issuance of the Convertible Notes, the Company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Convertible Notes as a whole. The excess of the principal amount of the liability component over its carrying amount ("debt discount") is amortized to interest expense over the term of the Convertible Notes using the effective interest method with an effective interest rate of 3.0 percent per annum. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the Convertible Note issuance, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Issuance costs attributable to the $1.4 billion liability component are being amortized to expense over the term of the Convertible Notes, and issuance costs attributable to the equity component are included along with the equity component in stockholders' equity. Additionally, a deferred tax liability of $8.2 million related to a portion of the equity component transaction costs which are deductible for tax purposes is included in Other liabilities in the accompanying condensed consolidated balance sheets.
As a result of the structure of the 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 became 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 December 31, 2016. The $1.44 billion Convertible Notes became convertible with the notice to noteholders. Accordingly, as of December 31, 2016, the carrying amount of the Convertible Notes of $1.3 billion was reclassified from Other liabilities to Current liabilities and the difference between the face value and carrying value of $79.5 million was reclassified from stockholders’ equity to temporary equity in the accompanying condensed consolidated balance sheets. The conversion period terminated as of the close of business on January 31, 2017 in connection with the Spin-off. As a result, the Convertible Notes were reclassified to Other liabilities from Current liabilities, and the amount previously recorded as Temporary equity was reclassified to Stockholders' equity as of March 31, 2017. See Note 3 for more information on the Company's separation of its GoTo Business.
The Convertible Notes consist of the following (in thousands):

24



 
September 30, 2017
December 31, 2016
Liability component
 
 
     Principal
$
1,437,483

$
1,437,500

     Less: note discount and issuance costs
(60,810
)
(89,344
)
Net carrying amount
$
1,376,673

$
1,348,156

 
 
 
Equity component
 


     Temporary equity
$

$
79,495

     Additional paid-in capital
162,869

83,374

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,
 
2017
 
2016
 
2017
 
2016
Contractual interest expense
$
1,797

 
$
1,797

 
$
5,391

 
$
5,391

Amortization of debt issuance costs
1,045

 
1,021

 
3,117

 
3,045

Amortization of debt discount
8,536

 
8,284

 
25,418

 
24,667

 
$
11,378

 
$
11,102

 
$
33,926

 
$
33,103

See Note 7 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 "Warrant Transactions") with each of the Option Counterparties relating to approximately 16.0 million shares of common stock. As a result of the Spin-off, the number of shares of the Company's common stock covered by the Bond Hedges and Warrant Transactions was adjusted to approximately 20.0 million shares.
The Bond Hedges are generally expected to reduce the potential dilution upon conversion of the Convertible Notes and/or offset any payments in cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, that the Company is required to make in excess of the principal amount of the Convertible Notes upon conversion of any Convertible Notes, as the case may be, in the event that the market price per share of common stock, as measured under the terms of the Bond Hedges, is greater than the strike price of the Bond Hedges, which initially corresponds to the conversion price of the Convertible Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Convertible Notes. The Warrant Transactions will separately have a dilutive effect to the extent that the market value per share of common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants issued pursuant to the Warrant Transactions (the “Warrants”). The initial strike price of the Warrants is $120.00 per share. Subsequent to the Spin-off, the strike price of the Warrants was adjusted to a weighted-average strike price of $95.25 as of February 1, 2017. 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 September 30, 2017, no warrants have been exercised.
Aside from the initial payment of a premium to the Option Counterparties under the Bond Hedges, which amount is partially offset by the receipt of a premium under the Warrant Transactions, the Company is not required to make any cash payments to the Option Counterparties under the Bond Hedges and will not receive any proceeds if the Warrants are exercised.

25



12. 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 1.57%. As of September 30, 2017, there was $40.0 million 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, 2017.
13. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives Designated as Hedging Instruments
As of September 30, 2017, 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 gain on cash flow derivative instruments was $2.1 million at September 30, 2017, and is included in Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. The total cumulative unrealized loss on cash flow derivative instruments was $3.1 million at December 31, 2016, and is included in Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. See Note 14 for more information related to comprehensive income. The net unrealized gain as of September 30, 2017 is expected to be recognized in income over the next 12 months at the same time the hedged items are recognized in income.
Derivatives not Designated as Hedging Instruments
A substantial portion of the Company’s overseas assets and liabilities are and will continue to be denominated in local currencies. To protect against fluctuations in earnings caused by changes in currency exchange rates when remeasuring the Company’s balance sheet, it utilizes foreign exchange forward contracts to hedge its exposure to this potential volatility.
These contracts are not designated for hedge accounting treatment under the authoritative guidance. Accordingly, changes in the fair value of these contracts are recorded in Other income (expense), net.

26



Fair Values of Derivative Instruments
 
Asset Derivatives
 
Liability Derivatives
 
(In thousands)
 
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
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
 
$2,569
 
Prepaid
expenses
and other
current
assets
 
$460
 
Accrued
expenses
and other
current
liabilities
 
$293
 
Accrued
expenses
and other
current
liabilities
 
$3,816
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset Derivatives
 
Liability Derivatives
 
(In thousands)
 
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
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
 
$1,962
 
Prepaid
expenses
and other
current
assets
 
$2,046
 
Accrued
expenses
and other
current
liabilities
 
$329
 
Accrued
expenses
and other
current
liabilities
 
$619

The Effect of Derivative Instruments on Financial Performance
 
For the Three Months Ended September 30, 2017
 
(In thousands)
Derivatives in Cash Flow
Hedging Relationships
Amount of (Loss) Gain Recognized in Other
Comprehensive Income
(Effective Portion)
 
Location of Gain (Loss) Reclassified
from Accumulated Other
Comprehensive Loss into
Income
(Effective Portion)
 
Amount of Gain (Loss) Reclassified from
Accumulated Other 
Comprehensive Loss
(Effective Portion)
 
2017
 
2016
 
 
 
2017
 
2016
Foreign currency forward contracts
$
(340
)
 
$
1,023

 
Operating expenses
 
$
1,116

 
$
(641
)
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2017
 
(In thousands)
Derivatives in Cash Flow
Hedging Relationships
Amount of Gain Recognized in Other
Comprehensive 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)
 
2017
 
2016
 
 
 
2017
 
2016
Foreign currency forward contracts
$
5,214

 
$
2,049

 
Operating expenses
 
$
(551
)
 
$
(1,663
)
There was no material ineffectiveness in the Company’s foreign currency hedging program in the periods presented.
 

27



 
For the Three Months Ended September 30, 2017
 
(In thousands)
Derivatives Not Designated as Hedging Instruments
Location of Loss Recognized in Income on
Derivative
 
Amount of Loss Recognized in Income on Derivative
 
 
 
2017
 
2016
Foreign currency forward contracts
Other income (expense), net
 
$
(1,148
)
 
$
(1,693
)
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2017
 
(In thousands)
Derivatives Not Designated as Hedging Instruments
Location of Loss Recognized in Income on
Derivative
 
Amount of Loss Recognized in Income on Derivative
 
 
 
2017
 
2016
Foreign currency forward contracts
Other income (expense), net
 
$
(6,298
)
 
$
(5,658
)
Outstanding Foreign Currency Forward Contracts
As of September 30, 2017, the Company had the following net notional foreign currency forward contracts outstanding (in thousands):
Foreign Currency
Currency
Denomination
Australian Dollar
AUD 20,770
Brazilian Real
BRL 11,870
Pounds Sterling
GBP 5,700
Canadian Dollar
CAD 2,640
Chinese Yuan Renminbi
CNY 53,279
Danish Krone
DKK 8,596
Euro
EUR 11,300
Hong Kong Dollar
HKD 26,000
Indian Rupee
INR 238,745
Japanese Yen
JPY 2,012,317
Singapore Dollar
SGD 10,400
Swiss Franc
CHF 2,030
14. COMPREHENSIVE INCOME
The changes in Accumulated other comprehensive loss by component, net of tax, are as follows:
 
Foreign currency
 
Unrealized loss on available-for-sale securities
 
Unrealized (loss) gain on derivative instruments
 
Other comprehensive loss on pension liability
 
Total
 
(In thousands)
Balance at December 31, 2016
$
(16,346
)
 
$
(3,108
)
 
$
(3,130
)
 
$
(6,120
)
 
$
(28,704
)
Other comprehensive income before reclassifications

 
1,500

 
4,663

 

 
6,163

Amounts reclassified from accumulated other comprehensive loss

 
(340
)
 
551

 
263

 
474

Net current period other comprehensive income

 
1,160

 
5,214

 
263

 
6,637

Distribution of the GoTo Business
$
13,400

 
$

 
$

 
$

 
$
13,400

Balance at September 30, 2017
$
(2,946
)
 
$
(1,948
)
 
$
2,084

 
$
(5,857
)
 
$
(8,667
)
Income tax expense or benefit allocated to each component of other comprehensive income (loss) is not material.

28



Reclassifications out of Accumulated other comprehensive loss are as follows:
 
 
For the Three Months Ended September 30, 2017
 
 
(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 losses on available-for-sale securities
 
$
120

 
Other income (expense), net
Unrealized net gains on cash flow hedges
 
(1,116
)
 
Operating expenses *
 
 
$
(996
)