CITRIX SYSTEMS INC - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



Form	10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019



☐	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

Securities registered pursuant to Section 12(b) of the Act



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, par value $.001 per share	CTXS	The NASDAQ Global Select Market

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



☒	Large accelerated filer	☐	Accelerated filer
☐	Non-accelerated filer	☐	Smaller reporting company
		☐	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 ☐ No ☒

As of October 25, 2019, there were 130,219,842 shares of the registrant’s Common Stock, $.001 par value per share, outstanding.

CITRIX SYSTEMS, INC.

Form 10-Q

For the Quarterly Period Ended September 30, 2019

CONTENTS




		Page Number
PART I:	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets: September 30, 2019 (Unaudited) and December 31, 2018 (Derived from audited financial statements)	3

	Condensed Consolidated Statements of Income: Three and Nine Months ended September 30, 2019 and 2018 (Unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income: Three and Nine Months ended September 30, 2019 and 2018 (Unaudited)	5

	Condensed Consolidated Statements of Cash Flows: Nine Months ended September 30, 2019 and 2018 (Unaudited)	6

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54

Item 4.	Controls and Procedures	54

PART II:	OTHER INFORMATION

Item 1.	Legal Proceedings	55

Item 1A.	Risk Factors	55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 3.	Defaults Upon Senior Securities	57

Item 4.	Mine Safety Disclosures	57

Item 5.	Other Information	58

Item 6.	Exhibits	59

Signature		60

PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CITRIX SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



	September 30, 2019			December 31, 2018
	(Unaudited)			(Derived from audited financial statements)
	(In thousands, except par value)
Assets
Current assets:
Cash and cash equivalents	$	493,834		$	618,766
Short-term investments, available-for-sale	55,372			583,615
Accounts receivable, net of allowances of $6,962 and $4,530 at September 30, 2019 and December 31, 2018, respectively	426,842			688,420
Inventories, net	18,518			21,905
Prepaid expenses and other current assets	199,434			174,195
Total current assets	1,194,000			2,086,901
Long-term investments, available-for-sale	21,374			574,319
Property and equipment, net	236,788			243,396
Operating lease right-of-use assets	218,625			—
Goodwill	1,798,408			1,802,670
Other intangible assets, net	119,055			167,187
Deferred tax assets, net	301,062			136,998
Other assets	141,781			124,578
Total assets	$	4,031,093		$	5,136,049
Liabilities, Temporary Equity and Stockholders' Equity
Current liabilities:
Accounts payable	$	72,659		$	75,551
Accrued expenses and other current liabilities	294,915			290,492
Income taxes payable	45,615			44,409
Current portion of convertible notes	—			1,155,445
Current portion of deferred revenues	1,200,496			1,345,243
Total current liabilities	1,613,685			2,911,140
Long-term portion of deferred revenues	415,076			489,329
Long-term debt	742,704			741,825
Long-term income taxes payable	259,391			285,627
Operating lease liabilities	221,032			—
Other liabilities	66,294			148,499
Commitments and contingencies
Temporary equity from convertible notes	—			8,110
Stockholders' equity:
Preferred stock at $.01 par value: 5,000 shares authorized, none issued and outstanding	—			—
Common stock at $.001 par value: 1,000,000 shares authorized; 317,549 and 309,761 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively	318			310
Additional paid-in capital	6,170,577			5,404,500
Retained earnings	4,500,876			4,169,019
Accumulated other comprehensive loss	(6,482		)	(8,154		)
	10,665,289			9,565,675
Less - common stock in treasury, at cost (187,661 and 178,327 shares at September 30, 2019 and December 31, 2018, respectively)	(9,952,378		)	(9,014,156		)
Total stockholders' equity	712,911			551,519
Total liabilities, temporary equity and stockholders' equity	$	4,031,093		$	5,136,049

See accompanying notes.

CITRIX SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(In thousands, except per share information)
Revenues:
Subscription	$	159,873		$	111,539		$	457,312		$	325,493
Product and license	131,057			170,952			406,733			523,707
Support and services	441,971			449,985			1,336,696			1,322,833
Total net revenues	732,901			732,476			2,200,741			2,172,033
Cost of net revenues:
Cost of subscription, support and services	76,885			64,717			227,130			195,625
Cost of product and license revenues	27,411			27,571			75,033			91,150
Amortization and impairment of product related intangible assets	22,622			11,629			42,707			34,177
Total cost of net revenues	126,918			103,917			344,870			320,952
Gross margin	605,983			628,559			1,855,871			1,851,081
Operating expenses:
Research and development	126,420			111,557			390,712			323,050
Sales, marketing and services	274,874			262,562			847,958			800,505
General and administrative	80,042			86,084			238,751			227,151
Amortization of other intangible assets	4,937			4,063			11,671			11,748
Restructuring	8,879			(486		)	16,022			13,138
Total operating expenses	495,152			463,780			1,505,114			1,375,592
Income from operations	110,831			164,779			350,757			475,489
Interest income	2,649			10,896			16,193			29,029
Interest expense	(8,822		)	(19,962		)	(37,144		)	(60,840		)
Other income (expense), net	3,456			3,702			3,735			(1,847		)
Income before income taxes	108,114			159,415			333,541			441,831
Income tax (benefit) expense	(162,743		)	558			(141,159		)	31,882
Net income	$	270,857		$	158,857		$	474,700		$	409,949
Earnings per share:
Basic	$	2.08		$	1.18		$	3.62		$	3.00
Diluted	$	2.04		$	1.08		$	3.48		$	2.80
Weighted average shares outstanding:
Basic	130,277			135,055			131,020			136,752
Diluted	132,655			147,568			136,297			146,554

See accompanying notes.

CITRIX SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(In thousands)
Net income	$	270,857		$	158,857		$	474,700		$	409,949
Other comprehensive income:
Available for sale securities:
Change in net unrealized gains (losses)	57			816			2,859			(3,394		)
Less: reclassification adjustment for net losses (gains) included in net income	7			62			(577		)	1,307
Net change (net of tax effect)	64			878			2,282			(2,087		)
Cash flow hedges:
Change in unrealized losses	(1,774		)	(1,636		)	(1,439		)	(4,367		)
Less: reclassification adjustment for net (gains) losses included in net income	(162		)	1,185			829			(1,031		)
Net change (net of tax effect)	(1,936		)	(451		)	(610		)	(5,398		)
Other comprehensive (loss) income	(1,872		)	427			1,672			(7,485		)
Comprehensive income	$	268,985		$	159,284		$	476,372		$	402,464

See accompanying notes.

CITRIX SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Nine Months Ended September 30,
	2019			2018
	(In thousands)
Operating Activities
Net income	$	474,700		$	409,949
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other	188,443			161,582
Stock-based compensation expense	202,523			144,306
Deferred income tax (benefit) expense	(184,573		)	2,508
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies	2,712			7,226
Other non-cash items	7,888			5,558
Total adjustments to reconcile net income to net cash provided by operating activities	216,993			321,180
Changes in operating assets and liabilities, net of the effects of acquisitions:
Accounts receivable	256,628			296,286
Inventories	443			(7,549		)
Prepaid expenses and other current assets	(13,539		)	(51,726		)
Other assets	(50,068		)	(17,540		)
Income taxes, net	(42,119		)	(83,273		)
Accounts payable	(2,645		)	2,945
Accrued expenses and other current liabilities	(48,485		)	40,503
Deferred revenues	(219,000		)	(85,072		)
Other liabilities	4,111			3,233
Total changes in operating assets and liabilities, net of the effects of acquisitions	(114,674		)	97,807
Net cash provided by operating activities	577,019			828,936
Investing Activities
Purchases of available-for-sale investments	(19,999		)	(435,876		)
Proceeds from sales of available-for-sale investments	938,031			442,360
Proceeds from maturities of available-for-sale investments	165,944			320,259
Purchases of property and equipment	(50,453		)	(54,289		)
Cash paid for acquisitions, net of cash acquired	—			(65,983		)
Cash paid for licensing agreements, patents and technology	(2,405		)	(2,140		)
Other	919			1,399
Net cash provided by investing activities	1,032,037			205,730
Financing Activities
Proceeds from issuance of common stock under stock-based compensation plans	—			164
Proceeds from credit facility	200,000			—
Repayment of credit facility	(200,000		)	—
Repayment of acquired debt	—			(5,674		)
Repayment on convertible notes	(1,164,497		)	—
Stock repurchases, net	(353,904		)	(881,153		)
Cash paid for tax withholding on vested stock awards	(74,794		)	(53,589		)
Cash paid for dividends	(137,224		)	—
Net cash used in financing activities	(1,730,419		)	(940,252		)
Effect of exchange rate changes on cash and cash equivalents	(3,569		)	(4,362		)
Change in cash and cash equivalents	(124,932		)	90,052
Cash and cash equivalents at beginning of period	618,766			1,115,130
Cash and cash equivalents at end of period	$	493,834		$	1,205,182

See accompanying notes.

CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Citrix Systems, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. All adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown, are of a normal recurring nature and have been reflected in the condensed consolidated financial statements and accompanying notes. The results of operations for the periods presented are not necessarily indicative of the results expected for the full year or for any future period partially because of the seasonality of the Company’s business. Historically, the Company’s revenue for the fourth quarter of any year is typically higher than the revenue for the first quarter of the subsequent year. The information included in these condensed consolidated financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report and the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

The condensed consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries in the Americas; Europe, the Middle East and Africa (“EMEA”); and Asia-Pacific and Japan (“APJ”). All significant transactions and balances between the Company and its subsidiaries have been eliminated in consolidation.

The Company's revenues are derived from sales of its Digital Workspace solutions, Networking products and related Support and services. The Company operates under one reportable segment. See Note 10 for more information on the Company's segment.

2. SIGNIFICANT ACCOUNTING POLICIES

During the first quarter of 2019, the Company adopted new accounting guidance related to leases, which is described below. There have been no other significant changes in the Company’s accounting policies during the three and nine months ended September 30, 2019 as compared to the significant accounting policies described in its Annual Report on Form 10-K for the year ended December 31, 2018.

Recent Accounting Pronouncements

Leases

In February 2016, the Financial Accounting Standards Board issued an accounting standard update on the accounting for leases (“ASC 842”). The new guidance requires that lessees in a leasing arrangement recognize a right-of-use (“ROU”) asset and a lease liability for most leases (other than leases that meet the definition of a short-term lease). The Company adopted this standard as of January 1, 2019 using a modified retrospective approach and recognized a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification and not reassess whether any expired or existing contract is a lease or contains a lease.

Adoption of this standard had a material impact in the Company’s condensed consolidated balance sheets, but did not have a material impact on its condensed consolidated income statements. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while the Company's accounting for finance leases remained substantially unchanged. Adoption of the new standard resulted in the recording of additional right-of-use assets for operating leases (net of previously recorded lease losses related to the consolidation of leased facilities of $42.2 million and deferred rent liability of $20.5 million under the old guidance) of approximately $194.5 million and operating lease liabilities of approximately $256.4 million, as of January 1, 2019. The difference between the additional lease assets and lease liabilities, net of the deferred tax impact, was recorded as an adjustment to retained earnings of $0.8 million. Adoption of this standard had no impact to cash from or used in operating, financing, or investing in the Company’s condensed consolidated cash flows statements. Adoption of this standard had no impact on the Company's debt covenant compliance under its current agreement or on liquidity. See Note 19 for additional information regarding the Company’s leases.

Current Expected Credit Losses

In June 2016, the Financial Accounting Standards Board issued an accounting standard update on the measurement of credit losses on financial instruments. Previously, credit losses were measured using an incurred loss approach when it was probable that a credit loss had been incurred. The new guidance changes the credit loss model from an incurred loss to an expected loss approach. It requires the application of a current expected credit loss (“CECL”) impairment model to financial assets measured at amortized cost (including trade accounts receivable) and certain off-balance-sheet credit exposures. Under the CECL model, lifetime expected credit losses on such financial assets are measured and recognized at each reporting date based on historical, current, and forecasted information. The standard also changes the impairment model for available-for-sale debt securities, eliminating the concept of other than temporary impairment and requiring credit losses to be recorded through an allowance for credit losses. The amount of the allowance for credit losses for available-for-sale debt securities is limited to the amount by which fair value is below amortized cost. The standard is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted. A modified retrospective adoption method is required, with a cumulative-effect adjustment to the opening retained earnings balance in the period of adoption. The adoption of this standard is not expected to have a material impact on the Company's condensed consolidated financial position, results of operations and cash flows. Additionally, the Company is not planning to early adopt this standard.

Premium Amortization on Call Debt Securities

In March 2017, the Financial Accounting Standards Board issued an accounting standard update on the accounting for amortization of premium costs on purchased callable debt securities. The new guidance amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The standard does not require any accounting change for debt securities held at a discount; the discount continues to be amortized to maturity. The Company adopted the standard effective January 1, 2019 on a modified retrospective basis. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial position, results of operations and cash flows.

Accounting for Cloud Computing Costs

In August 2018, the Financial Accounting Standards Board issued an accounting standard update on the accounting for implementation costs incurred by customers in cloud computing arrangements that are service contracts. The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company early adopted this standard on a prospective basis effective January 1, 2019. Adoption of this standard did not have a material impact on the Company's condensed consolidated financial position, results of operations and cash flows.

Fair Value Measurements

In August 2018, the Financial Accounting Standards Board issued an accounting standard update on fair value measurements. The new guidance modifies the disclosure requirements on fair value measurements by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty, and adding new disclosure requirements. The new guidance is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's condensed consolidated financial position, results of operations and cash flows.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant estimates made by management include the standalone selling price related to revenue recognition, the provision for doubtful accounts receivable, the provision to reduce obsolete or excess inventory to market, the provision for estimated returns, as well as sales allowances, the assumptions used in the valuation of stock-based awards, the assumptions used in the discounted cash flows to mark certain of its investments to market, the valuation of the Company’s goodwill, net realizable value of product related and other intangible assets, the provision for income taxes, valuation allowance for deferred tax assets, uncertain tax positions, and the amortization and depreciation periods for contract acquisition costs, intangible and long-lived assets. While the Company believes that such estimates are fair when considered in conjunction with the condensed consolidated financial position and results of operations taken as a whole, the actual amounts of such items, when known, will vary from these estimates.

Available-for-sale Investments

Short-term and long-term available-for-sale investments in debt securities as of September 30, 2019 and December 31, 2018 primarily consist of agency securities, corporate securities, municipal securities and government securities. Investments classified as available-for-sale debt securities are stated at fair value with unrealized gains and losses, net of taxes, reported in Accumulated other comprehensive loss. The Company classifies its available-for-sale investments as current and non-current based on their actual remaining time to maturity. The Company does not recognize changes in the fair value of its available-for-sale investments in income unless a decline in value is considered other-than-temporary in accordance with the authoritative guidance.

The Company’s investment policy is designed to limit exposure to any one issuer depending on credit quality. The Company uses information provided by third parties to adjust the carrying value of certain of its investments to fair value at the end of each period. Fair values are based on a variety of inputs and may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. See Note 6 for additional information regarding the Company’s investments.

Foreign Currency

The functional currency for all of the Company’s wholly-owned foreign subsidiaries is the U.S. dollar. Monetary assets and liabilities of such subsidiaries are remeasured into U.S. dollars at exchange rates in effect at the balance sheet date, and revenues and expenses are remeasured at average rates prevailing during the year. Foreign currency transaction gains and losses are the result of exchange rate changes on transactions denominated in currencies other than the functional currency, including U.S. dollars. The remeasurement of those foreign currency transactions is included in determining net income or loss for the period of exchange.

Accounting for Stock-Based Compensation Plans

The Company has various stock-based compensation plans for its employees and outside directors and accounts for stock-based compensation arrangements in accordance with the authoritative guidance, which requires the Company to measure and record compensation expense in its condensed consolidated financial statements using a fair value method. See Note 8 for further information regarding the Company’s stock-based compensation plans.

3. REVENUE

The following is a description of the principal activities from which the Company generates revenue.

Subscription

Subscription revenues primarily consist of cloud-hosted offerings which provide customers a right to use, or a right to access, one or more of the Company’s cloud-hosted subscription offerings, with routine customer support, as well as revenues from the Citrix Service Provider ("CSP") program and on-premise subscription software licenses. For the Company’s cloud-hosted performance obligations, revenue is generally recognized on a ratable basis over the contract term beginning on the date that the Company's service is made available to the customer, as the Company continuously provides online access to the web-based software that the customer can use at any time. The CSP program provides subscription-based services in which the CSP partners host software services to their end users.

Product and license

Product and license revenues are primarily derived from perpetual offerings related to the Company’s Digital Workspace solutions and Networking products. For performance obligations related to perpetual software license agreements, the Company determined that its licenses are functional intellectual property that are distinct as the user can benefit from the software on its own.

Support and services

Support and services includes license updates, maintenance and professional services revenues. License updates and maintenance revenues are primarily comprised of software and hardware maintenance, when and if-available updates and technical support. For performance obligations related to license updates and maintenance, revenue is generally recognized on a straight-line basis over the period of service because the Company transfers control evenly by providing a stand-ready service. That is, the Company is continuously working on improving its products and pushing those updates through to the customer, and stands ready to provide software updates on a when and if-available basis. Services revenues are comprised of fees from consulting services primarily related to the implementation of the Company’s products and fees from product training and certification.

The Company’s typical performance obligations include the following:



Performance Obligation	When Performance Obligation is Typically Satisfied
Subscription
Cloud hosted offerings	Over the contract term, beginning on the date that service is made available to the customer (over time)
CSP	As the usage occurs (over time)
On-premise subscription software licenses	When software activation keys have been made available for download (point in time)
Product and license
Software Licenses	When software activation keys have been made available for download (point in time)
Hardware	When control of the product passes to the customer; typically upon shipment (point in time)
Support and services
License updates and maintenance	Ratably over the course of the service term (over time)
Professional services	As the services are provided (over time)

Significant Judgments

At contract inception, the Company assesses the solutions or services, or bundles of solutions and services, obligated in the contract with a customer to identify each performance obligation within the contract, and then evaluates whether the performance obligations are capable of being distinct and distinct within the context of the contract. Solutions and services that are not both capable of being distinct and distinct within the context of the contract are combined and treated as a single performance obligation in determining the allocation and recognition of revenue.

The standalone selling price is the price at which the Company would sell a promised product or service separately to the customer. For the majority of the Company's software licenses and hardware, CSP and on-premise subscription software licenses, the Company uses the observable price in transactions with multiple performance obligations. For the majority of the Company’s support and services, and cloud-hosted subscription offerings, the Company uses the observable price when the Company sells that support and service and cloud-hosted subscription separately to similar customers. If the standalone selling price for a performance obligation is not directly observable, the Company estimates it. The Company estimates standalone selling price by taking into consideration market conditions, economics of the offering and customers’ behavior. The Company maximizes the use of observable inputs and applies estimation methods consistently in similar circumstances. The Company allocates the transaction price to each distinct performance obligation on a relative standalone selling price basis.

Revenues are recognized when control of the promised products or services are transferred to customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those products or services. The Company generates all of its revenues from contracts with customers.

Sales tax

The Company records revenue net of sales tax.

Timing of revenue recognition



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(In thousands)
Products and services transferred at a point in time	$	159,326	$	186,039	$	500,450	$	583,888
Products and services transferred over time	573,575		546,437		1,700,291		1,588,145
Total net revenues	$	732,901	$	732,476	$	2,200,741	$	2,172,033

Contract balances

The Company's short-term and long-term contract assets were $4.6 million and $3.7 million, respectively, as of December 31, 2018, and $9.1 million and $17.6 million, respectively, as of September 30, 2019. The Current portion of deferred revenues and the Long-term portion of deferred revenues were $1.35 billion and $489.3 million, respectively, as of December 31, 2018 and $1.20 billion and $415.1 million, respectively, as of September 30, 2019. The difference in the opening and closing balances of the Company’s contract assets and liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment. During the three and nine months ended September 30, 2019, the Company recognized $478.7 million and $1.13 billion, respectively, of revenue that was included in the deferred revenue balance as of June 30, 2019 and December 31, 2018, respectively.

The Company performs its obligations under a contract with a customer by transferring solutions and services in exchange for consideration from the customer. Accounts receivable are recorded when the right to consideration becomes unconditional. The timing of the Company’s performance often differs from the timing of the customer’s payment, which results in the recognition of a contract asset or a contract liability. The Company recognizes a contract asset when the Company transfers products or services to a customer and the right to consideration is conditional on something other than the passage of time. The Company recognizes a contract liability when it has received consideration or an amount of consideration is due from the customer and the Company has a future obligation to transfer products or services. The Company had no asset impairment charges related to contract assets for the three and nine months ended September 30, 2019 and 2018.

For the Company’s software and hardware products, the timing of payment is typically upfront for its perpetual offerings and the Company’s on-premise subscriptions. Therefore, deferred revenue is created when a contract includes performance obligations such as license updates and maintenance or certain professional services that are satisfied over time. For subscription contracts, the timing of payment is typically in advance of services, and deferred revenue is created as these services are provided over time.

A significant portion of the Company’s contracts have an original duration of one year or less; therefore, the Company applies a practical expedient to determine whether a significant financing component exists and does not consider the effects of the time value of money. For multi-year contracts, the Company bills annually.

Transaction price allocated to the remaining performance obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period (in thousands):



	<1-3 years		3-5 years		5 years or more		Total
Subscription	$	644,959	$	74,039	$	1,148	$	720,146
Support and services	1,408,910		44,587		1,362		1,454,859
Total net revenues	$	2,053,869	$	118,626	$	2,510	$	2,175,005

Contract acquisition costs

The Company is required to capitalize certain contract acquisition costs consisting primarily of commissions paid and related payroll taxes when contracts are signed. The asset recognized from capitalized incremental and recoverable acquisition costs is amortized on a basis consistent with the pattern of transfer of the products or services to which the asset relates.

The Company’s typical contracts include performance obligations related to product and licenses and support. In these contracts, incremental costs of obtaining a contract are allocated to the performance obligations based on the relative estimated standalone selling prices and then recognized on a basis that is consistent with the transfer of the goods or services to which the asset relates. The commissions paid on annual renewals of support for product and licenses are not commensurate with the

initial commission. The costs allocated to product and licenses are expensed at the time of sale, when revenue for the product and functional software licenses is recognized. The costs allocated to customer support for product and licenses are amortized ratably over a period of the greater of the contract term or the average customer life, the expected period of benefit of the asset capitalized. The Company currently estimates an average customer life of three years to five years, which it believes is appropriate based on consideration of the historical average customer life and the estimated useful life of the underlying product and license sold as part of the transaction. Amortization of contract acquisition costs related to support are limited to the contractual period of the arrangement as the Company intends to pay a commensurate commission upon renewal of the related support. For contracts that contain multi-year services or subscriptions, the amortization period of the capitalized costs is the expected period of benefit, which is the greater of the contractual term or the expected customer life.

The Company elects to apply a practical expedient to expense contract acquisition costs as incurred where the expected period of benefit is one year or less.

For the three and nine months ended September 30, 2019, the Company recorded amortization of capitalized contract acquisition costs of $11.4 million and $33.0 million, respectively, and for the three and nine months ended September 30, 2018, the Company recorded amortization of capitalized contract acquisition costs of $9.5 million and $25.7 million, respectively, which is recorded in Sales, marketing and services expense in the accompanying condensed consolidated statements of income. As of September 30, 2019, the Company's short-term and long-term contract acquisition costs were $45.0 million and $69.7 million, respectively, and are included in Prepaid and other current assets and Other assets, respectively, in the accompanying condensed consolidated balance sheets. There was no impairment loss in relation to costs capitalized during the three and nine months ended September 30, 2019 and 2018.

4. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted-average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise or settlement of stock awards and shares issuable under the employee stock purchase plan (calculated using the treasury stock method) during the period they were outstanding and potential dilutive common shares from the conversion spread on the Company’s 0.500% Convertible Notes due 2019 (the “Convertible Notes”) during the period they were outstanding and the Company's warrants.

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share information):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Numerator:
Net income	$	270,857	$	158,857	$	474,700	$	409,949
Denominator:
Denominator for basic earnings per share - weighted-average shares outstanding	130,277		135,055		131,020		136,752
Effect of dilutive employee stock awards	1,823		2,731		2,050		2,594
Effect of dilutive Convertible Notes	—		6,999		1,901		5,892
Effect of dilutive warrants	555		2,783		1,326		1,316
Denominator for diluted earnings per share - weighted-average shares outstanding	132,655		147,568		136,297		146,554

Basic earnings per share	$	2.08	$	1.18	$	3.62	$	3.00

Diluted earnings per share	$	2.04	$	1.08	$	3.48	$	2.80

For the three and nine months ended September 30, 2019, the weighted-average number of shares outstanding used in the computation of diluted earnings per share includes the dilutive effect of the Company's warrants, as the average stock price during the quarters was above the weighted-average warrant strike price of $94.18 per share and $94.52 per share, respectively. For the three and nine months ended September 30, 2018, the weighted-average number of shares outstanding used in the computation of diluted earnings per share includes the dilutive effect of the Company's warrants, as the average stock price

during the quarters was above the weighted-average warrant strike price of $95.25 per share. Anti-dilutive stock-based awards excluded from the calculations of diluted earnings per share were immaterial during the periods presented.

The Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on its Convertible Notes on diluted earnings per share because upon conversion the Company paid cash up to the aggregate principal amount of the Convertible Notes converted and delivered shares of common stock in respect of the remainder of the Company’s conversion obligation in excess of the aggregate principal amount of the Convertible Notes converted. The conversion spread had a dilutive impact on diluted earnings per share when the average market price of the Company’s common stock for a given period exceeded the conversion price. For the nine months ended September 30, 2019 and three and nine months ended September 30, 2018, the average market price of the Company's common stock exceeded the conversion price; therefore, the dilutive effect of the Convertible Notes was included in the denominator of diluted earnings per share. For the three months ended September 30, 2019, there was no dilution as the Convertible Notes matured on April 15, 2019. See Note 11 for detailed information on the Convertible Notes offering.

5. ACQUISITIONS

2018 Business Combinations

Sapho, Inc.

On November 13, 2018, the Company acquired all of the issued and outstanding securities of Sapho, Inc. (“Sapho”), whose technology is intended to advance the Company’s development of the intelligent workspace. The acquired technology enables efficient workstyles by creating a unified and customizable notification experience for business applications. The total cash consideration for this transaction was $182.7 million, net of $3.7 million cash acquired. Transaction costs associated with the acquisition were not significant.

Cedexis, Inc.

On February 6, 2018, the Company acquired all of the issued and outstanding securities of Cedexis, Inc. (“Cedexis”), whose solution is a real-time data driven service for dynamically optimizing the flow of traffic across public clouds and data centers that provides a dynamic and reliable way to route and manage Internet performance for customers moving towards hybrid and multi-cloud deployments. The total cash consideration for this transaction was $66.0 million, net of $6.0 million cash acquired. Transaction costs associated with the acquisition were not significant. During the third quarter of 2019, the Company tested certain intangible assets for recoverability due to changes in facts and circumstances associated with the shift in strategic focus and reduced profitability expectations. As a result, the Company impaired a portion of the carrying value of the intangible assets related to this acquisition in the third quarter of 2019. See Note 9 for more information on the impairment.

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, 2019									December 31, 2018
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	$	1,681	$	—	$	(2	)	$	1,679	$	314,982	$	333	$	(2,367	)	$	312,948
Corporate securities	61,044		1		(160		)	60,885		612,698		116		(4,156		)	608,658
Municipal securities	—		—		—			—		2,500		4		—			2,504
Government securities	14,179		7		(4		)	14,182		234,668		91		(935		)	233,824
Total	$	76,904	$	8	$	(166	)	$	76,746	$	1,164,848	$	544	$	(7,458	)	$	1,157,934

The change in net unrealized gains (losses) on available-for-sale securities recorded in Other comprehensive income includes unrealized gains (losses) that arose from changes in market value of specifically identified securities that were held during the period, gains (losses) that were previously unrealized, but have been recognized in current period net income due to sales and other than temporary impairments, as well as prepayments of available-for-sale investments purchased at a premium. See Note 13 for more information related to comprehensive income.

The average remaining maturities of the Company’s short-term and long-term available-for-sale investments at September 30, 2019 were approximately five months and two years, respectively.

Realized Gains and Losses on Available-for-sale Investments

For the three months ended September 30, 2019, the Company had no proceeds from the sales of available-for-sale investments. For the nine months ended September 30, 2019, the Company received proceeds from the sales of available-for-sale investments of $938.0 million. For the three and nine months ended September 30, 2018, the Company received proceeds from the sales of available-for-sale investments of $7.5 million and $442.4 million, respectively.

For the three months ended September 30, 2019, the Company had no realized gains on the sales of available-for-sale investments. For the nine months ended September 30, 2019, the Company had realized gains on the sales of available-for-sale investments of $1.5 million. For the three months ended September 30, 2018, the Company had no realized gains on the sales of available-for-sale investments. For the nine months ended September 30, 2018, the Company had $0.1 million in realized gains on the sales of available-for-sale investments.

For the three months ended September 30, 2019, the Company had no realized losses on available-for-sale investments. For the nine months ended September 30, 2019, the Company had realized losses on available-for-sale investments of $0.9 million. For the three and nine months ended September 30, 2018, the Company had realized losses on available-for-sale investments of $0.1 million and $1.5 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, 2019 and December 31, 2018 were $0.2 million and $2.9 million, respectively. Because the Company does not currently intend to sell any of its investments in an unrealized loss position and it is more likely than not that it will not be required to sell the securities before the recovery of its amortized cost basis, which may not occur until maturity, it does not consider the securities to be other-than-temporarily impaired.

Equity Securities without Readily Determinable Fair Values

The Company held direct investments in privately-held companies of $12.3 million and $13.4 million as of September 30, 2019 and December 31, 2018, respectively, which are accounted for at cost, less impairment plus or minus adjustments resulting from observable price changes in orderly transactions for an identical or a similar investment of the same issuer. These investments are included in Other assets in the accompanying condensed consolidated balance sheets. The Company periodically reviews these investments for impairment and observable price changes on a quarterly basis, and adjusts the carrying value accordingly. The Company determined that there were no material adjustments resulting from observable price changes to the Company's investments in privately-held companies without a readily determinable fair value for the three and nine months ended September 30, 2019. The fair value of these investments represents a Level 3 valuation as the assumptions used in valuing these investments are not directly or indirectly observable. See Note 7 for detailed information on fair value measurements.

Equity Securities Accounted for at Net Asset Value

The Company held equity interests in certain private equity funds of $11.9 million and $10.9 million as of September 30, 2019 and December 31, 2018, respectively, which are accounted for under the net asset value practical expedient. These investments are included in Other assets in the accompanying condensed consolidated balance sheets. The net asset value of these investments is determined using quarterly capital statements from the funds, which are based on the Company’s contributions to the funds, allocation of profit and loss and changes in fair value of the underlying fund investments. These private equity funds focus on making venture capital investments, principally by investing in equity securities of early and late stage privately held corporations. The funds’ general partner shall determine the amount, timing and form (whether cash or in kind) of all distributions made by the funds. The Company may only transfer its investments in private equity fund interests subject to the general partner’s written consent and cannot trade its fund interests in established securities markets, secondary markets or equivalents thereof. The Company has unfunded commitments of $0.7 million as of September 30, 2019.

7. FAIR VALUE MEASUREMENTS

The authoritative guidance defines fair value as an exit price, representing the amount that would either be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:


•	Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities;


•	Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and


•	Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Available-for-sale securities included in Level 2 are valued utilizing inputs obtained from an independent pricing service (the “Service”) which uses quoted market prices for identical or comparable instruments rather than direct observations of quoted prices in active markets. The Service applies a four level hierarchical pricing methodology to all of the Company’s fixed income securities based on the circumstances. The hierarchy starts with the highest priority pricing source, then subsequently uses inputs obtained from other third-party sources and large custodial institutions. The Service’s providers utilize a variety of inputs to determine their quoted prices. These inputs may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. Substantially all of the Company’s available-for-sale investments are valued utilizing inputs obtained from the Service and accordingly are categorized as Level 2 in the table below. The Company periodically independently assesses the pricing obtained from the Service and historically has not adjusted the Service's pricing as a result of this assessment. Available-for-sale securities are included in Level 3 when relevant observable inputs for a security are not available.

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, 2019		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	$	402,579	$	402,579	$	—	$	—
Money market funds	74,863		74,863		—		—
Corporate securities	16,392				16,392
Available-for-sale securities:
Agency securities	1,679		—		1,679		—
Corporate securities	60,885		—		59,885		1,000
Government securities	14,182		—		14,182		—
Prepaid expenses and other current assets:
Foreign currency derivatives	542		—		542		—
Total assets	$	571,122	$	477,442	$	92,680	$	1,000
Accrued expenses and other current liabilities:
Foreign currency derivatives	2,320		—		2,320		—
Total liabilities	$	2,320	$	—	$	2,320	$	—



	As of December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Assets:
Cash and cash equivalents:
Cash	$	505,363	$	505,363	$	—	$	—
Money market funds	88,126		88,126		—		—
Agency securities	3,296		—		3,296		—
Corporate securities	9,371		—		9,371		—
Government securities	12,610		—		12,610		—
Available-for-sale securities:
Agency securities	312,948		—		312,948		—
Corporate securities	608,658		—		607,945		713
Municipal securities	2,504		—		2,504		—
Government securities	233,824		—		233,824		—
Prepaid expenses and other current assets:
Foreign currency derivatives	764		—		764		—
Total assets	$	1,777,464	$	593,489	$	1,183,262	$	713
Accrued expenses and other current liabilities:
Foreign currency derivatives	2,543		—		2,543		—
Total liabilities	$	2,543	$	—	$	2,543	$	—

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 the majority of its fixed income available-for-sale securities as Level 2.

The Company measures its cash flow hedges, which are classified as Prepaid expenses and other current assets and Accrued expenses and other current liabilities, at fair value based on indicative prices in active markets (Level 2 inputs).

Assets Measured at Fair Value on a Non-recurring Basis Using Significant Unobservable Inputs (Level 3)

During the three months ended September 30, 2019, certain direct investments in privately-held companies with a carrying value of $0.5 million were determined to be impaired and written down to their fair value of $0.1 million, resulting in impairment charges of $0.4 million. During the nine months ended September 30, 2019, certain direct investments in privately-held companies with a carrying value of $2.4 million were determined to be impaired and written down to their fair value of $0.4 million, resulting in impairment charges of $2.0 million. The impairment charges were included in Other income (expense), net in the accompanying condensed consolidated statements of income.

During the three months ended September 30, 2018, no direct investments in privately-held companies were determined to be impaired. During the nine months ended September 30, 2018, the Company determined that certain direct investments in privately-held companies were impaired and recorded charges of $0.9 million, which were included in Other income (expense), net in the accompanying condensed consolidated statements of income. In determining the fair value of the investments, the Company considers many factors including but not limited to operating performance of the investee, the amount of cash that the investee has on-hand, the ability to obtain additional financing and the overall market conditions in which the investee operates.

Additional Disclosures Regarding Fair Value Measurements

The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short maturity of these items.

As of September 30, 2019, the fair value of the $750.0 million of unsecured senior notes due December 1, 2027 (the “2027 Notes"), which was determined based on inputs that are observable in the market (Level 2) based on the closing trading price per $100 as of the last day of trading for the quarter ended September 30, 2019, and carrying value of the 2027 Notes was as follows (in thousands):



	Fair Value		Carrying Value
2027 Notes	$	811,485	$	742,704

See Note 11 for more information on the 2027 Notes.

8. STOCK-BASED COMPENSATION

The Company’s stock-based compensation program is a long-term retention program that is intended to attract and reward talented employees and align stockholder and employee interests. As of September 30, 2019, the Company had one stock-based compensation plan under which it was granting equity awards. The Company is currently granting stock-based awards from its Amended and Restated 2014 Equity Incentive Plan (the "2014 Plan"), which was approved at the Company's Annual Meeting of Stockholders on June 22, 2017. In March 2019, the Company's Board of Directors adopted an amendment to the 2014 Plan, which was approved at the Company's Annual Meeting of Stockholders on June 4, 2019. The Company’s superseded stock plans with outstanding awards include the Amended and Restated 2005 Equity Incentive Plan.

Under the terms of the 2014 Plan, the Company is authorized to grant incentive stock options (“ISOs”), non-qualified stock options (“NSOs”), non-vested stock, non-vested stock units, stock appreciation rights (“SARs”), and performance units and to make stock-based awards to full and part-time employees of the Company and its subsidiaries or affiliates, where legally eligible to participate, as well as to consultants and non-employee directors of the Company. ISOs, NSOs, and SARs are not currently being granted. Pursuant to the June 2019 amendment, the maximum number of shares of common stock available for issuance under the 2014 Plan was reduced to 43,400,000. In addition, the amendment removed the fungible share adjustment used to determine shares available for issuance. Under the original terms of the 2014 Plan, shares available for issuance were adjusted by a 2.75 fungible share factor. Pursuant to the amendment, beginning on June 4, 2019, each share award granted under the 2014 Plan reduces the share reserve by one share and all share awards granted on June 4, 2019 and thereafter that are later forfeited, canceled or terminated are returned to the share reserve in the same manner. Under the 2014 Plan, NSOs must be granted at exercise prices no less than fair market value on the date of grant. Non-vested stock awards may be granted for such consideration in cash, other property or services, or a combination thereof, as determined by the Company’s Compensation Committee of its Board of Directors. Stock-based awards are generally exercisable or issuable upon vesting. The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. As of September 30, 2019, there were 12,411,438 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 6,129,472 shares of common stock.

In December 2014, the Company’s Board of Directors approved the 2015 Employee Stock Purchase Plan (the “2015 ESPP”), which was approved by stockholders at the Company’s Annual Meeting of Stockholders held on May 28, 2015. Under the 2015 ESPP, all full-time and certain part-time employees of the Company are eligible to purchase common stock of the Company twice per year at the end of a six-month payment period (a “Payment Period”). During each Payment Period, eligible employees who so elect may authorize payroll deductions in an amount no less than 1% nor greater than 10% of his or her base pay for each payroll period in the Payment Period. At the end of each Payment Period, the accumulated deductions are used to purchase shares of common stock from the Company up to a maximum of 12,000 shares for any one employee during a Payment Period. Shares are purchased at a price equal to 85% of the fair market value of the Company's common stock, on either the first business day of the Payment Period or the last business day of the Payment Period, whichever is lower. Employees who, after exercising their rights to purchase shares of common stock in the 2015 ESPP, would own shares representing 5% or more of the voting power of the Company’s common stock, are ineligible to continue to participate under the 2015 ESPP. The 2015 ESPP provides for the issuance of a maximum of 16,000,000 shares of common stock. As of September 30, 2019, 2,192,755 shares have been issued under the 2015 ESPP. The Company recorded stock-based compensation costs related to the 2015 ESPP of $4.0 million and $1.8 million for the three months ended September 30, 2019 and 2018, respectively, and $9.5 million and $7.3 million for the nine months ended September 30, 2019 and 2018, respectively.

The Company used the Black-Scholes model to estimate the fair value of 2015 ESPP awards with the following weighted-average assumptions:



	Three Months Ended		Nine Months Ended
	September 30, 2019	September 30, 2018	September 30, 2019	September 30, 2018
Expected volatility factor	0.22 - 0.29	0.26 - 0.29	0.22 - 0.29	0.26 - 0.29
Risk free interest rate	2.06% - 2.49%	1.63% - 2.19%	2.06% - 2.49%	1.12% - 2.19%
Expected dividend yield	1.31% - 1.39%	0% - 1.27%	1.27% - 1.39%	0% - 1.27%
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 historical dividend yield input was zero in prior periods as it had not historically paid cash dividends on its common stock. The current dividend yield has been updated for expected dividend yield payout due to the Company's intention to pay a recurring quarterly dividend beginning in December 2018. The expected term is based on the term of the purchase period for grants made under the ESPP.

Stock-Based Compensation

The detail of the total stock-based compensation recognized by income statement classification is as follows (in thousands):



	Three Months Ended				Nine Months Ended
Income Statement Classifications	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Cost of subscription, support and services	$	2,898	$	2,106	$	8,056	$	5,827
Research and development	25,505		17,009		78,761		45,517
Sales, marketing and services	23,838		18,910		68,188		52,095
General and administrative	16,728		14,714		47,518		40,867
Total	$	68,969	$	52,739	$	202,523	$	144,306

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 December 2018, certain awards for senior level employees, none of whom were executive officers, were modified to replace the pre-established custom index group used to measure performance and related award payout with companies that are part of the Nasdaq Composite index. As a result, the awards were revalued as of the modification date. The impact of the modification was not material to the condensed consolidated financial statements.

The market condition requirements are reflected in the grant date fair value of the award, and the compensation expense for the award will be recognized assuming that the requisite service is rendered regardless of whether the market conditions are

achieved. The grant date fair value of the non-vested performance stock unit awards was determined through the use of a Monte Carlo simulation model, which utilized multiple input variables that determined the probability of satisfying the market condition requirements applicable to each award as follows:



	March 2017 Grant (Modified)		March 2017 Grant
Expected volatility factor	0.16-0.32		0.27-0.32
Risk free interest rate	2.67	%	1.48	%
Expected dividend yield	0	%	0	%

For the unmodified March 2017 grant, the range of expected volatilities utilized was based on the historical volatilities of the Company's common stock and the average of its peer group. The Company chose to use historical volatility to value these awards because historical stock prices were used to develop the correlation coefficients between the Company and its peer group in order to model the stock price movements. The volatilities used were calculated over the most recent 2.75 year period, which is commensurate with the awards' performance period at the grant date. The risk free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues with remaining terms equivalent to the performance period. In addition, the Company used a dividend yield of zero in its model. The estimated fair value of each award as of the date of grant was $104.05.

For the modified March 2017 grant, all input variables chosen are as of the modification date. The range of expected volatilities utilized was based on the historical volatilities of the Company's common stock and the average of the Nasdaq

Composite index peer group. The Company chose to use historical volatility to value these awards because historical stock

prices were used to develop the correlation coefficients between the Company and its peer group in order to model the stock

price movements. The volatilities used were calculated over the most recent 1.06 year period, which is commensurate with

the awards' remaining performance period at the modification date. The risk free interest rate was based on the implied yield

available on U.S. Treasury zero-coupon issues with remaining terms equivalent to the remaining performance period. The Company used a zero dividend yield input for this award as dividends are assumed to be reinvested. The estimated

incremental fair value of each modified award as of the modification date was $99.54.

Service-Based Stock Units

The Company also awards senior level employees, certain other employees and new non-employee directors, non-vested stock units granted under the 2014 Plan that vest based on service. The majority of these non-vested stock unit awards generally vest 33.33% on each anniversary subsequent to the date of the award. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. In addition, the Company awards non-vested stock units to all of its continuing non-employee directors. These awards vest monthly in 12 equal installments based on service and, upon vesting, each stock unit represents the right to receive one share of the Company's common stock.

Company Performance Stock Units

In April 2019, the Company awarded senior level employees 293,991 non-vested performance stock unit awards granted under the 2014 Plan. The number of non-vested stock units underlying the award will be determined within sixty days following completion of the performance period ending December 31, 2021 and will be based on the achievement of specific corporate financial performance goals related to subscription bookings as a percentage of total subscription and product bookings measured during the period from January 1, 2021 to December 31, 2021. The number of non-vested stock units issued will be based on a graduated slope, with the maximum number of non-vested stock units issuable pursuant to the award capped at 200% of the target number of non-vested stock units set forth in the award agreement. The Company is required to estimate the attainment expected to be achieved related to the defined performance goals and the number of non-vested stock units that will ultimately be awarded in order to recognize compensation expense over the vesting period. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. Compensation expense will be recorded through the end of the performance period on December 31, 2021 if it is deemed probable that the performance goals will be met. If the performance goals are not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed.

In February 2019, the Company awarded certain senior level employees 93,500 non-vested performance stock units granted under the 2014 Plan. The number of non-vested stock units underlying the award will be determined within sixty days following the completion of the performance period ending December 31, 2020 and will be based on the achievement of specific corporate financial performance goals related to annual free cash flow per share growth between the fiscal years ended December 31, 2018 and December 31, 2020. Within sixty days following an interim measurement period of 12 months, the Compensation Committee will determine the number of restricted stock units that would be deemed earned based on performance to date and up to 50% of the target award may be earned based on such performance. However, any stock units

that are deemed earned will remain subject to continued service vesting until the end of the performance period, or a change in control, if earlier. The number of non-vested stock units issued will be based on a graduated slope, with the maximum number of non-vested stock units issuable pursuant to the award capped at 200% of the target number of non-vested stock units set forth in the award agreement. The Company is required to estimate the attainment expected to be achieved related to the defined performance goals and the number of non-vested stock units that will ultimately be awarded in order to recognize compensation expense over the vesting period. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. Compensation expense will be recorded through the end of the performance period on December 31, 2020 if it is deemed probable that the performance goals will be met. If the performance goals are not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed.

In March 2018, the Company awarded senior level employees 268,729 non-vested performance stock unit awards granted under the 2014 Plan. The number of non-vested stock units underlying the award will be determined within sixty days following completion of the performance period ending December 31, 2020 and will be based on the achievement of specific corporate financial performance goals related to subscription bookings as a percentage of total product bookings measured during the period from January 1, 2020 to December 31, 2020. As defined in the applicable award agreements, total product bookings includes subscription bookings. The number of non-vested stock units issued will be based on a graduated slope, with the maximum number of non-vested stock units issuable pursuant to the award capped at 200% of the target number of non-vested stock units set forth in the award agreement. The Company is required to estimate the attainment expected to be achieved related to the defined performance goals and the number of non-vested stock units that will ultimately be awarded in order to recognize compensation expense over the vesting period. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. Compensation expense will be recorded through the end of the performance period on December 31, 2020 if it is deemed probable that the performance goals will be met. If the performance goals are not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed.

On August 1, 2017, the Company awarded certain senior level employees 184,322 non-vested performance stock units granted under the 2014 Plan. The number of non-vested stock units underlying each award will be determined within sixty days following completion of the performance period ending December 31, 2019 and will be based on achievement of specific corporate financial performance goals related to non-GAAP net operating margin and subscription bookings as a percent of total product bookings measured during the period from January 1, 2019 to December 31, 2019. As defined in the applicable award agreements, total product bookings includes subscription bookings. The number of non-vested stock units issued will be based on a graduated slope, with the maximum number of non-vested stock units issuable pursuant to the award capped at 200% of the target number of non-vested stock units set forth in the award agreement. The Company is required to estimate the attainment expected to be achieved related to the defined performance goals and the number of non-vested stock units that will ultimately be awarded in order to recognize compensation expense over the vesting period. Each non-vested stock unit, upon vesting, represents the right to receive one share of the Company’s common stock. The non-GAAP net operating margin and subscription bookings as a percent of total product bookings targets were set in the first quarter of 2018. As a result, such awards were not outstanding under U.S. GAAP until the first quarter of 2018 when the performance goals were determined and subsequently communicated to employees who received the awards. Compensation expense will be recorded through the end of the performance period on December 31, 2019 if it is deemed probable that the performance goals will be met. If the performance goals are not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed.

Unrecognized Compensation Related to Stock Units

As of September 30, 2019, the total number of non-vested stock units outstanding, including company performance awards, market performance and service condition awards and service-based awards was 6,233,225. As of September 30, 2019, there was $411.3 million of total unrecognized compensation cost related to non-vested stock units. The unrecognized cost of the awards legally granted through September 30, 2019 is expected to be recognized over a weighted-average period of 1.74 years.

Modification of Market and Company Performance Stock Units

On April 22, 2019, the change in control provisions of the unvested and outstanding March 2017 market performance stock unit awards and the February 2019, March 2018 and August 2017 company performance stock unit awards were modified such that if a change in control were to occur prior to the end of the award’s performance period, the award would be deemed earned at 200% of the target award, subject to time-based vesting and the awardee’s continuous employment through the end of the award’s performance periods. Previously, the change in control provisions of these awards allowed for either pro rata vesting or vesting based on interim performance through the change in control date. No incremental compensation expense was recorded as a result of this modification given the improbable nature of a change in control event.

9. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The Company accounts for goodwill in accordance with the authoritative guidance, which requires that goodwill and certain intangible assets are not amortized, but are subject to an annual impairment test. The Company performed a qualitative assessment in connection with its annual goodwill impairment test in the fourth quarter of 2018. As a result of the qualitative analysis, a quantitative impairment test was not deemed necessary. There was no impairment of goodwill or indefinite lived intangible assets as a result of the annual impairment test analysis completed during the fourth quarter of 2018.

The following table presents the change in goodwill during the nine months ended September 30, 2019 (in thousands):



	Balance at January 1, 2019		Additions		Other				Balance at September 30, 2019
Goodwill	$	1,802,670	$	—	$	(4,262	)	(1)	$	1,798,408


(1)	Amount relates to adjustments to the purchase price allocation associated with 2018 acquisitions.

Intangible Assets

The Company has intangible assets which were primarily acquired in conjunction with business combinations and technology purchases. Intangible assets with finite lives are recorded at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally three to seven years, except for patents, which are amortized over the lesser of their remaining life or seven to 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, 2019				December 31, 2018
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Product related intangible assets	$	732,699	$	625,000	$	746,152	$	601,993
Other	188,773		177,417		227,922		204,894
Total	$	921,472	$	802,417	$	974,074	$	806,887

Amortization and impairment of product-related intangible assets, which consists primarily of product-related technologies and patents, was $22.6 million and $11.6 million for the three months ended September 30, 2019 and 2018, respectively, and $42.7 million and $34.2 million for the nine months ended September 30, 2019 and 2018, respectively, and is classified as a component of Cost of net revenues in the accompanying condensed consolidated statements of income. Amortization of other intangible assets, which consist primarily of customer relationships, trade names and covenants not to compete was $4.9 million and $4.1 million for the three months ended September 30, 2019 and 2018, respectively, and $11.7 million for the nine months ended September 30, 2019 and 2018, respectively, and is classified as a component of Operating expenses in the accompanying condensed consolidated statements of income.

The Company monitors its intangible assets for indicators of impairment. If the Company determines impairment has occurred, it will write-down the intangible asset to its fair value. For certain intangible assets where the unamortized balances exceeded the undiscounted future net cash flows, the Company measures the amount of the impairment by calculating the amount by which the carrying values exceed the estimated fair values, which are based on projected discounted future net cash flows. During the three months ended September 30, 2019, the Company tested certain intangible assets for recoverability and, as a result, identified certain definite-lived intangible assets, primarily Cedexis developed technology, that were impaired and recorded non-cash impairment charges of $13.2 million to write down the intangible assets to their estimated fair value of $4.1 million. The impairment charge is included in Amortization and impairment of product related intangible assets in the accompanying condensed consolidated statements of income. These non-recurring fair value measurements were categorized as Level 3, as significant unobservable inputs were used in the valuation analysis. Key assumptions used in the valuation include forecasts of revenue and expenses over an extended period of time, customer churn rates, rate of migration to future technology, tax rates, and estimated costs of debt and equity capital to discount the projected cash flows. Certain of these assumptions involve significant judgment, are based on management’s estimate of current and forecasted market conditions and are sensitive

and susceptible to change; therefore, further disruptions in the business could potentially result in additional amounts becoming impaired.

Estimated future amortization expense of intangible assets with finite lives as of September 30, 2019 is as follows (in thousands):



Year ending December 31,
2019 (remaining three months)	$	11,495
2020	35,059
2021	22,768
2022	20,569
2023	16,259
Thereafter	12,905
Total	$	119,055

10. SEGMENT INFORMATION

Citrix has one reportable segment. The Company's chief operating decision maker (“CODM”) reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company's CEO is the CODM.

Revenues by Product Grouping

Revenues by product grouping were as follows (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Net revenues:
Digital Workspace revenues⁽¹⁾	$	512,838	$	508,706	$	1,562,508	$	1,467,087
Networking revenues⁽²⁾	188,191		195,421		537,628		611,386
Professional services⁽³⁾	31,872		28,349		100,605		93,560
Total net revenues	$	732,901	$	732,476	$	2,200,741	$	2,172,033


(1)	Digital Workspace revenues are primarily comprised of sales from the Company’s application virtualization solutions, which include Citrix Virtual Apps and Desktops, the Company's unified endpoint management solutions, which include Citrix Endpoint Management, related license updates and maintenance and support, Citrix Content Collaboration and cloud offerings.


(2)	Networking revenues primarily include Citrix ADC and Citrix SD-WAN, related license updates and maintenance and support and cloud offerings.


(3)	Professional services revenues are primarily comprised of revenues from consulting services and product training and certification services.

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,
	2019		2018		2019		2018
Net revenues:
Americas	$	418,301	$	432,689	$	1,251,729	$	1,276,873
EMEA	236,081		228,236		713,282		676,942
APJ	78,519		71,551		235,730		218,218
Total net revenues	$	732,901	$	732,476	$	2,200,741	$	2,172,033

As of September 30, 2019, one distributor, the Arrow Group, accounted for 14% of the Company's total gross accounts receivable.

Strategic Service Providers

The Company defines Strategic Service Providers (SSP) as its three historically largest hyperscale Networking customers. The following table summarizes SSP revenue for the following periods (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Net revenues:
SSP revenue	$	38,475	$	34,685	$	84,307	$	136,168
Non-SSP revenue	694,426		697,791		2,116,434		2,035,865
Total net revenues	$	732,901	$	732,476	$	2,200,741	$	2,172,033

Subscription Revenue

Subscription revenue relates to fees which are generally recognized ratably over the contractual term. The Company's subscription revenue includes Software as a Service (SaaS), which primarily consists of subscriptions delivered via a cloud hosted service whereby the customer does not take possession of the software and hybrid subscription offerings; and non-SaaS, which consists primarily of on-premise licensing, hybrid subscription offerings, CSP services and the related support. The Company's hybrid subscription offerings are allocated between SaaS and non-SaaS, which are generally recognized at a point in time. The following table presents subscription revenues by SaaS and non-SaaS components, for the following periods (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Subscription:
SaaS	$	100,857	$	70,768	$	277,512	$	195,527
Non-SaaS	59,016		40,771		179,800		129,966
Total Subscription revenue	$	159,873	$	111,539	$	457,312	$	325,493

11. DEBT

Senior Notes

On November 15, 2017, the Company issued $750.0 million of unsecured senior notes due December 1, 2027. The 2027 Notes accrue interest at a rate of 4.500% per annum. Interest on the 2027 Notes is due semi-annually on June 1 and December 1 of each year, beginning on June 1, 2018. The net proceeds from this offering were approximately $741.0 million, after deducting the underwriting discount and estimated offering expenses payable by the Company. Net proceeds from this offering were used to repurchase shares of the Company's common stock through an Accelerated Share Repurchase ("ASR") transaction which the Company entered into with Citibank, N.A. (the "ASR Counterparty") on November 13, 2017. The 2027 Notes will mature on December 1, 2027, unless earlier redeemed in accordance with their terms prior to such date. The Company may redeem the 2027 Notes at its option at any time in whole or from time to time in part prior to September 1, 2027 at a redemption price equal to the greater of (i) 100% of the aggregate principal amount of the 2027 Notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments under such 2027 Notes, plus in each case, accrued and unpaid interest to, but excluding, the redemption date. Among other terms, under certain circumstances, holders of the 2027 Notes may require the Company to repurchase their 2027 Notes upon the occurrence of a change of control prior to maturity for cash at a repurchase price equal to 101% of the principal amount of the 2027 Notes to be repurchased plus accrued and unpaid interest to, but excluding, the repurchase date.

Credit Facility

Effective January 7, 2015, the Company entered into a credit agreement (the "Credit Agreement") with a group of financial institutions (the “Lenders”). The credit facility provides for a five-year revolving line of credit in the aggregate

amount of $250.0 million, subject to continued covenant compliance. The Company may elect to increase the revolving credit facility by up to $250.0 million if existing or new lenders provide additional revolving commitments in accordance with the terms of the Credit Agreement. A portion of the revolving line of credit (i) in the aggregate amount of $25.0 million may be available for issuances of letters of credit and (ii) in the aggregate amount of $10.0 million may be available for swing line loans, as part of, not in addition to, the aggregate revolving commitments. The credit facility bears interest at LIBOR plus 1.10% and adjusts in the range of 1.00% to 1.30% above LIBOR based on the ratio of the Company’s total debt to its adjusted earnings before interest, taxes, depreciation, amortization and certain other items (“EBITDA”) as defined in the Credit Agreement. In addition, the Company is required to pay a quarterly facility fee ranging from 0.125% to 0.20% of the aggregate revolving commitments under the credit facility and based on the ratio of the Company’s total debt to the Company’s consolidated EBITDA. During the three months ended September 30, 2019, the Company borrowed and repaid $200.0 million under the credit facility. As of September 30, 2019, there were no amounts outstanding under the credit facility.

The Credit Agreement contains certain financial covenants that require the Company to maintain a consolidated leverage ratio of not more than 3.5:1.0 and a consolidated interest coverage ratio of not less than 3.0:1.0. In addition, the Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the ability of the Company to grant liens, merge, dissolve or consolidate, dispose of all or substantially all of its assets, pay dividends during the existence of a default under the Credit Agreement, change its business and incur subsidiary indebtedness, in each case subject to customary exceptions for a credit facility of this size and type. The Company was in compliance with these covenants as of September 30, 2019.

Convertible Notes

During 2014, the Company completed a private placement of approximately $1.44 billion principal amount of 0.500% Convertible Notes due 2019. As of October 15, 2018, the Company had received conversion notices from noteholders with respect to $273.0 million in aggregate principal amount of Convertible Notes requesting conversion as a result of the sales price condition having been met during the second and third quarter of 2018. In accordance with the terms of the Convertible Notes, in the fourth quarter of 2018, the Company made cash payments of this aggregate principal amount and delivered 1.3 million newly issued shares of its common stock in respect of the remainder of the Company's conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted, in full satisfaction of such converted notes. The Company received shares of its common stock under the Bond Hedges (as defined below) that offset the issuance of shares of common stock upon conversion of the Convertible Notes. In addition, on or after October 15, 2018 until the close of business on the second scheduled trading day immediately preceding the April 15, 2019 maturity date, holders of the Convertible Notes had the right to convert their notes at any time, regardless of whether the sales price condition was met. All Convertible Notes were converted by their beneficial owners prior to their maturity on April 15, 2019. In accordance with the terms of the indenture governing the Convertible Notes, on April 15, 2019 the Company paid $1.16 billion in the outstanding aggregate principal amount of the Convertible Notes and delivered 4.9 million newly issued shares of its common stock in respect of the remainder of the Company's conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted, in full satisfaction of such converted notes. The Company received shares of its common stock under the Bond Hedges that offset the issuance of shares of common stock upon conversion of the Convertible Notes.

In accounting for the settlement of the Convertible Notes, the Company allocated the fair value of the settlement consideration remitted to the noteholders between the liability and equity components. The portion of the settlement consideration allocated to the extinguishment of the liability component was based on the fair value of that component immediately before extinguishment. The Company allocated the remaining settlement consideration to the reacquisition of the equity component and recognized this amount as a reduction of Stockholders' equity.

The following table includes total interest expense recognized related to the Convertible Notes and the 2027 Notes (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Contractual interest expense	$	8,438	$	9,721	$	26,945	$	30,283
Amortization of debt issuance costs	182		1,199		1,488		3,578
Amortization of debt discount	41		8,836		8,232		26,312
	$	8,661	$	19,756	$	36,665	$	60,173

See Note 7 to the Company's condensed consolidated financial statements for fair value disclosures related to the Company's 2027 Notes.

Convertible Note Hedge and Warrant Transactions

To minimize the impact of potential dilution upon conversion of the Convertible Notes, the Company entered into convertible note hedge transactions relating to approximately 16.0 million shares of common stock (the "Bond Hedges") and also entered into separate warrant transactions (the "Warrant Transactions") with each of the Option Counterparties relating to approximately 16.0 million shares of common stock to offset any payments in cash or shares of common stock at the Company’s election. As a result of the spin-off of its GoTo Business, the number of shares of the Company's common stock covered by the Bond Hedges and Warrant Transactions was adjusted to approximately 20.0 million shares.

As noted above, the Bond Hedges reduced the dilution upon conversion of the Convertible Notes, as the market price per share of common stock, as measured under the terms of the Bond Hedges, was greater than the strike price of the Bond Hedges, which initially corresponded to the conversion price of the Convertible Notes and was subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Convertible Notes. The Warrant Transactions will separately have a dilutive effect to the extent that the market value per share of common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants issued pursuant to the Warrant Transactions (the “Warrants”). The strike price of the Warrants was further adjusted to $93.92 per share and the number of shares of the Company's common stock covered by the remaining Warrant Transactions was adjusted to approximately 11.9 million shares as a result of the cash dividend paid in September 2019.

The Warrants expire in ratable portions on a series of expiration dates that commenced on July 15, 2019 and which conclude on November 18, 2019. During the quarter ended September 30, 2019, 7.0 million Warrants were exercised, and the Company delivered 0.2 million shares of its common stock as the volume weighted average stock price was above the Warrant strike price. Additionally, as of September 30, 2019, 5.4 million Warrants had expired unexercised on various dates and 7.9 million Warrants remained outstanding. The Warrants are not marked to market as the value of the Warrants were initially recorded in stockholders' equity and continue to be classified within stockholders' equity.

12. DERIVATIVE FINANCIAL INSTRUMENTS

Derivatives Designated as Hedging Instruments

As of September 30, 2019, the Company’s derivative assets and liabilities primarily resulted from cash flow hedges related to its forecasted operating expenses transacted in local currencies. A substantial portion of the Company’s overseas expenses are and will continue to be transacted in local currencies. To protect against fluctuations in operating expenses and the volatility of future cash flows caused by changes in currency exchange rates, the Company has established a program that uses foreign exchange forward contracts to hedge its exposure to these potential changes. The terms of these instruments, and the hedged transactions to which they relate, generally do not exceed 12 months.

Generally, when the dollar is weak, foreign currency denominated expenses will be higher, and these higher expenses will be partially offset by the gains realized from the Company’s hedging contracts. Conversely, if the dollar is strong, foreign currency denominated expenses will be lower. These lower expenses will in turn be partially offset by the losses incurred from the Company’s hedging contracts. Derivative instruments are recognized as either assets or liabilities and are measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Gains and losses on derivatives that are designated as cash flow hedges are initially reported as a component of Accumulated other comprehensive loss and are subsequently recognized in income when the hedged exposure is recognized in income. Gains and losses from changes in fair values of derivatives that are not designated as hedges are recognized in Other income (expense), net.

The total cumulative unrealized loss on cash flow derivative instruments was $1.6 million and $1.0 million at September 30, 2019 and December 31, 2018, respectively, and is included in Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. See Note 13 for more information related to comprehensive income. The net unrealized loss as of September 30, 2019 is expected to be recognized in income over the next 12 months at the same time the hedged items are recognized in income.

Derivatives not Designated as Hedging Instruments

A substantial portion of the Company’s overseas assets and liabilities are and will continue to be denominated in local currencies. To protect against fluctuations in earnings caused by changes in currency exchange rates when remeasuring the Company’s balance sheet, it utilizes foreign exchange forward contracts to hedge its exposure to this potential volatility. These contracts are not designated for hedge accounting treatment under the authoritative guidance. Accordingly, changes in the fair value of these contracts are recorded in Other income (expense), net.

Fair Values of Derivative Instruments

Asset Derivatives

Liability Derivatives

(In thousands)

September 30, 2019

December 31, 2018

September 30, 2019

December 31, 2018

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

$362

Prepaid

expenses

and other

current

assets

$708

Accrued

expenses

and other

current

liabilities

$2,102

Accrued

expenses

and other

current

liabilities

$1,811

Asset Derivatives

Liability Derivatives

(In thousands)

September 30, 2019

December 31, 2018

September 30, 2019

December 31, 2018

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

$180

Prepaid
expenses
and other
current
assets

$56

Accrued

expenses

and other

current

liabilities

$218

Accrued

expenses

and other

current

liabilities

$732

The Effect of Derivative Instruments on Financial Performance



	For the Three Months Ended September 30,
	(In thousands)
Derivatives in Cash Flow Hedging Relationships	Amount of Loss Recognized in Other Comprehensive (Loss) Income						Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss
	2019			2018				2019		2018
Foreign currency forward contracts	$	(1,936	)	$	(451	)	Operating expenses	$	162	$	(1,185	)



	For the Nine Months Ended September 30,
	(In thousands)
Derivatives in Cash Flow Hedging Relationships	Amount of Loss Recognized in Other Comprehensive (Loss) Income						Location of (Loss) Gain Reclassified from Accumulated Other Comprehensive Loss into Income	Amount of (Loss) Gain Reclassified from Accumulated Other Comprehensive Loss
	2019			2018				2019			2018
Foreign currency forward contracts	$	(610	)	$	(5,398	)	Operating expenses	$	(829	)	$	1,031



	For the Three Months Ended September 30,
	(In thousands)
Derivatives Not Designated as Hedging Instruments	Location of Gain Recognized in Income on Derivative	Amount of Gain Recognized in Income on Derivative
		2019		2018
Foreign currency forward contracts	Other income (expense), net	$	4,108	$	4,452



	For the Nine Months Ended September 30,
	(In thousands)
Derivatives Not Designated as Hedging Instruments	Location of Gain Recognized in Income on Derivative	Amount of Gain Recognized in Income on Derivative
		2019		2018
Foreign currency forward contracts	Other income (expense), net	$	2,128	$	8,054

Outstanding Foreign Currency Forward Contracts

As of September 30, 2019, the Company had the following net notional foreign currency forward contracts outstanding (in thousands):



Foreign Currency	Currency Denomination
Australian Dollar	AUD 20,300
Brazilian Real	BRL 1,900
Pounds Sterling	GBP 1,800
Canadian Dollar	CAD 2,050
Chinese Yuan Renminbi	CNY 59,880
Czech Koruna	CZK 78,000
Danish Krone	DKK 9,300
Euro	EUR 5,564
Hong Kong Dollar	HKD 33,700
Indian Rupee	INR 599,000
Japanese Yen	JPY 78,001
Korean Won	KRW 609,000
Singapore Dollar	SGD 13,400
Swiss Franc	CHF 15,418
Swedish Krona	SEK 7,600

13. 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 on derivative instruments			Other comprehensive loss on pension liability			Total
	(In thousands)
Balance at December 31, 2018	$	(2,946	)	$	(2,440	)	$	(985	)	$	(1,783	)	$	(8,154	)
Other comprehensive income (loss) before reclassifications	—			2,859			(1,439		)	—			1,420
Amounts reclassified from accumulated other comprehensive loss	—			(577		)	829			—			252
Net current period other comprehensive income	—			2,282			(610		)	—			1,672
Balance at September 30, 2019	$	(2,946	)	$	(158	)	$	(1,595	)	$	(1,783	)	$	(6,482	)

Income tax expense or benefit allocated to each component of other comprehensive loss is not material.

Reclassifications out of Accumulated other comprehensive loss are as follows:



	For the Three Months Ended September 30, 2019
	(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 loss on available-for-sale securities	$	7		Other income (expense), net
Unrealized net gains on cash flow hedges	(162		)	Operating expenses *
	$	(155	)



	For the Nine Months Ended September 30, 2019
	(In thousands)
Details about accumulated other comprehensive loss components	Amount reclassified from accumulated other comprehensive loss, net of tax			Affected line item in the Condensed Consolidated Statements of Income
Unrealized net gains on available-for-sale securities	$	(577	)	Other income (expense), net
Unrealized net losses on cash flow hedges	829			Operating expenses *
	$	252

* Operating expenses amounts allocated to Research and development, Sales, marketing and services, and General and administrative are not individually significant.

14. INCOME TAXES

The Company is required to estimate its income taxes in each of the jurisdictions in which it operates as part of the process of preparing its condensed consolidated financial statements. The Company maintains certain strategic management and operational activities in overseas subsidiaries and its foreign earnings are taxed at rates that are generally lower than in the United States.

The Company’s effective tax rate generally differs from the U.S. federal statutory rate primarily due to lower tax rates on earnings generated by the Company’s foreign operations that are taxed primarily in Switzerland.

The Company’s effective tax rate was (150.5)% and 0.4% for the three months ended September 30, 2019 and 2018, respectively. The decrease in the effective tax rate when comparing the three months ended September 30, 2019 to the three months ended September 30, 2018 was primarily due to tax items unique to the period ended September 30, 2019. These amounts include an estimated income tax benefit of $157.7 million due to the recognition of Swiss deferred tax assets related to the enactment of Switzerland’s Federal Act on Tax Reform and AHV Financing (“TRAF”), as well as a $17.3 million tax

benefit attributable to the 2015 U.S. federal income tax return statute of limitations closing during the three months ended September 30, 2019.

The Company’s effective tax rate was (42.3)% and 7.2% for the nine months ended September 30, 2019 and 2018, respectively. The decrease in the effective tax rate when comparing the nine months ended September 30, 2019 to the nine months ended September 30, 2018 was primarily due to tax items unique to the period ended September 30, 2019. These amounts include an estimated income tax benefit of $157.7 million due to the recognition of Swiss deferred tax assets related to the enactment of Switzerland’s TRAF, as well as a $17.3 million tax benefit attributable to the 2015 U.S. federal income tax return statute of limitations closing during the three months ended September 30, 2019.

The Company considers the income tax impact of the TRAF to be an estimate based on the Company's current interpretation of the TRAF and is subject to change upon valuation, further legislative guidance and the Swiss tax authority review of the federal tax filing. This additional federal benefit is expected to be fully realized over a 10 year amortization period. Additionally, there may be further updates due to the pending implementation of Swiss tax reform on the cantonal level anticipated in the fourth quarter of 2019 or first quarter of 2020. The Company will review any further issued guidance and continue to evaluate the federal and cantonal income tax impact of tax reform in Switzerland.

The Company’s net unrecognized tax benefits totaled $84.3 million and $89.9 million as of September 30, 2019 and December 31, 2018, respectively. At September 30, 2019, $57.3 million included in the balance for tax positions would affect the annual effective tax rate if recognized. The Company recognizes interest accrued related to uncertain tax positions and penalties in income tax expense. As of September 30, 2019, the Company has accrued $4.0 million for the payment of interest.

The Company and one or more of its subsidiaries are subject to U.S. federal income taxes in the United States, as well as income taxes of multiple state and foreign jurisdictions. The Company is not currently under examination by the United States Internal Revenue Service. With few exceptions, the Company is generally not subject to examination for state and local income tax, or in non-U.S. jurisdictions, by tax authorities for years prior to 2016.

The Company's U.S. liquidity needs are currently satisfied using cash flows generated from its U.S. operations, borrowings, or both. The Company also utilizes a variety of tax planning strategies in an effort to ensure that its worldwide cash is available in locations in which it is needed. The Company expects to repatriate a substantial portion of its foreign earnings over time, to the extent that the foreign earnings are not restricted by local laws or result in significant incremental costs associated with repatriating the foreign earnings.

At September 30, 2019, the Company had $300.3 million in net deferred tax assets. The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company reviews deferred tax assets periodically for recoverability and makes estimates and judgments regarding the expected geographic sources of taxable income and gains from investments, as well as tax planning strategies in assessing the need for a valuation allowance. If the estimates and assumptions used in the Company's determination change in the future, the Company could be required to revise its estimates of the valuation allowances against its deferred tax assets and adjust its provisions for additional income taxes.

On July 24, 2018, the U.S. Ninth Circuit Court of Appeals overturned the U.S. Tax Court’s unanimous decision in Altera v. Commissioner, where the Tax Court held the Treasury regulation requiring participants in a qualified cost sharing arrangement to share stock-based compensation costs to be invalid. On August 7, 2018, the U.S. Ninth Circuit Court of Appeals, on its own motion, withdrew its July 24, 2018 opinion to allow time for a reconstituted panel to confer. Given the increased uncertainty as to the Ninth Circuit panel's eventual ruling and the impact it will have on the Internal Revenue Service’s ability to challenge the technical merits of the Company's position, the Company accrued amounts for this uncertain tax position as of the year ended December 31, 2018. On June 7, 2019, a reconstituted panel issued a new opinion which again reversed the Tax Court's holding in Altera v. Commissioner and upheld a 2003 regulation that requires participants in a cost-sharing arrangement to share stock-based compensation costs. The Ninth Circuit panel concluded that the 2003 regulations were valid under the Administrative Procedure Act. Since the Company previously accrued amounts for this uncertain tax position, there were no changes to the Company's position or treatment of its cost-sharing arrangements in the current period. On July 22, 2019, Altera Corp. filed an appeal with the Ninth Circuit to rehear this case, which is ongoing. Therefore, the case's final disposition may result in a benefit for the Company in the future if the case is reversed.

15. TREASURY STOCK

Stock Repurchase Program

The Company’s Board of Directors authorized an ongoing stock repurchase program, of which $750.0 million was approved in October 2018 and an additional $600.0 million was approved in October 2019. The Company may use the approved dollar authority to repurchase stock at any time until the approved amount is exhausted. The objective of the Company’s stock repurchase program is to improve stockholders’ returns. At September 30, 2019, approximately $414.0 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock. A portion of the funds used to repurchase stock over the course of the program was provided by net proceeds from the Convertible Notes and 2027 Notes offerings, as well as proceeds from employee stock awards and the related tax benefit. The Company is authorized to make purchases of its common stock using general corporate funds through open market purchases, pursuant to a Rule 10b5-1 plan or in privately negotiated transactions.

In February 2018, the Company entered into an ASR transaction with a counterparty to pay an aggregate of $750.0 million in exchange for the delivery of approximately 6.5 million shares of its common stock based on current market prices. The purchase price per share under the ASR was based on the volume-weighted average price of the Company's common stock during the term of the ASR, less a discount. The ASR was entered into pursuant to the Company's existing share repurchase program. Final settlement of the ASR agreement was completed in April 2018 and the Company received delivery of an additional 1.6 million additional shares of its common stock.

During the three months ended September 30, 2019, the Company expended approximately $103.9 million on open market purchases under the stock repurchase program, repurchasing 1,130,100 shares of common stock at an average price of $91.94. During the nine months ended September 30, 2019, the Company expended approximately $353.9 million on open market purchases under the stock repurchase program, repurchasing 3,640,982 shares of common stock at an average price of $97.20.

During the three months ended September 30, 2018, the Company expended approximately $116.2 million on open market purchases under the stock repurchase program, repurchasing 1.0 million shares of common stock at an average price of $111.11. During the nine months ended September 30, 2018, the Company expended approximately $131.2 million on open market purchases under the stock repurchase program, repurchasing 1.2 million shares of common stock at an average price of $110.60.

Shares for Tax Withholding

During the three and nine months ended September 30, 2019, the Company withheld 44,829 shares and 742,946 shares, respectively, from equity awards that vested, totaling $4.2 million and $74.8 million, respectively, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. During the three and nine months ended September 30, 2018, the Company withheld 32,813 shares and 570,589 shares, respectively, from equity awards that vested, totaling $3.7 million and $53.6 million, respectively, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. These shares are reflected as treasury stock in the Company’s condensed consolidated balance sheets and the related cash outlays do not reduce the Company’s total stock repurchase authority.

16. COMMITMENTS AND CONTINGENCIES

Legal Matters

The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the Company's views on the probable outcomes of any pending claims, suits, assessments, regulatory investigations, or other legal proceedings change, changes in the Company's accrued liabilities would be recorded in the period in which such determination is made. In addition, in accordance with the relevant authoritative guidance, for matters in which the likelihood of material loss is at least reasonably possible, the Company provides disclosure of the possible loss or range of loss. If a reasonable estimate cannot be made, however, the Company will provide disclosure to that effect.

Due to the nature of the Company's business, the Company is subject to patent infringement claims, including current litigation alleging infringement by various Company solutions and services. The Company believes that it has meritorious defenses to the allegations made in its pending litigation and intends to vigorously defend itself; however, it is unable currently to determine the ultimate outcome of these or similar matters or the potential exposure to loss, if any. In addition, the Company is subject to various other legal proceedings, including suits, assessments, regulatory actions and investigations generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcomes of these matters, the

Company believes that outcomes that will materially and adversely affect its business, financial position, results of operations or cash flows are reasonably possible but not estimable at this time.

The Company was the victim of a previously disclosed cyber attack during which international cyber criminals gained intermittent access to Citrix’s internal network. The Company has conducted an investigation into this incident. The Company’s investigation confirmed that between October 13, 2018 and March 8, 2019, international cyber criminals gained intermittent access to Citrix’s internal network through “password spraying”, and over a limited number of days stole business documents and files from a shared network drive and a drive associated with a web-based tool used in the Company's consulting practice. The shared drive from which documents and files were stolen was used to store current and historical business documents and files, such as human resources and employee records, some of which contained sensitive and personal identification information of the Company's current and former employees and, in some cases, their beneficiaries, dependents and others; customer engagement documents, including consulting services project materials, statements of work and proofs of concept, some of which were also stored on the drive associated with a web-based tool used in the Company's consulting practice; marketing materials; sales and finance documents; contracts and other legal records; and a wide assortment of other company records. The cyber criminals also may have accessed the individual virtual drives of a very limited number of compromised users, accessed the company email accounts of the same very limited number of compromised users, and launched without further exploitation a limited number of internal applications. The Company is completing its review of documents and files that may have been accessed or were stolen in this incident, which include files stolen from the shared network drive and the drive associated with the web-based tool used in the Company's consulting practice, and the accessed documents and files on the individual virtual drives and the Company email accounts of the very limited number of compromised users. The Company’s investigation found no indication that the cyber criminals discovered and exploited any vulnerabilities in the Company’s products or customer cloud services to gain entry, and no indication that the security of any Citrix product or customer cloud service was compromised. The Company found no impact to its financial reporting systems from this cyberattack. Additionally, the Company has taken steps to enhance its internal controls over financial reporting and disclosure controls and procedures related to cyberattacks.

Further, the Company has a program of network-security (or cyber risk) insurance policies that, with standard exclusions, insure against the costs of detecting and mitigating cyber breaches, the cost of credit monitoring, and reasonable expenses for defending and settling privacy and network security lawsuits. These policies are subject to a $500,000 self-insured retention and a total insurance limit of $200.0 million. There can be no assurance, however, that this insurance coverage is sufficient to cover this or any other cyberattack. In addition to these insurance policies, the Company maintains customary business coverage under its crime, commercial general liability, and director and officer insurance policies.

Although it is difficult to predict the ultimate outcomes of this cyberattack, to date, three putative class action lawsuits have been filed against the Company in the United States District Court for the Southern District of Florida. These matters, Howard v. Citrix, Jackson and Sargent v. Citrix, and Ramus, Young and Charles v. Citrix, were filed on May 24, 2019, May 30, 2019, and June 23, 2019, respectively, and have been consolidated. The plaintiffs, who purport to represent various classes of current and former employees (and their dependents) of the Company, generally claim to have been harmed by the Company’s alleged actions and/or omissions in connection with this incident and their personal data. They assert a variety of common law and statutory claims seeking monetary damages or other related relief.

The Company is unable to currently determine the ultimate outcome of these legal proceedings or the potential exposure or loss, if any, because the legal proceedings remain in the early stages, there is uncertainty as to the likelihood of a class or classes being certified or the ultimate size of any class if certified, and there are significant factual and legal issues to be resolved.

Beyond the matters described above, the Company believes that it is reasonably possible that outcomes from potential unasserted claims related to this cyberattack could materially and adversely affect its business, financial position, results of operations or cash flows. However, it is not possible to estimate the amount or a range of potential loss, if any, at this time, and the Company will continue to evaluate information as it becomes known, and will record an accrual for estimated losses at the time or times it is determined that a loss is both probable and reasonably estimable.

On July 25, 2019, a class action lawsuit was filed against Citrix, LogMeIn, Inc. (“LogMeIn”) and certain of their directors and officers in the Circuit Court of the 15th Judicial Circuit, Palm Beach County, Florida. The complaint alleges that the defendants violated federal securities laws by making alleged misstatements and omissions in LogMeIn’s Registration Statement and Prospectus filed in connection with the 2017 spin-off of Citrix’s GoTo family of service offerings and subsequent merger of that business with LogMeIn. The complaint seeks among other things the recovery of monetary damages. The Company believes that Citrix and its directors have meritorious defenses to these allegations, however, the Company is unable to currently determine the ultimate outcome of this matter or the potential exposure or loss, if any.

Guarantees

The authoritative guidance requires certain guarantees to be recorded at fair value and requires a guarantor to make disclosures, even when the likelihood of making any payments under the guarantee is remote. For those guarantees and indemnifications that do not fall within the initial recognition and measurement requirements of the authoritative guidance, the Company must continue to monitor the conditions that are subject to the guarantees and indemnifications, as required under existing generally accepted accounting principles, to identify if a loss has been incurred. If the Company determines that it is probable that a loss has been incurred, any such estimable loss would be recognized. The initial recognition and measurement requirements do not apply to the provisions contained in the majority of the Company’s software license agreements that indemnify licensees of the Company’s software from damages and costs resulting from claims alleging that the Company’s software infringes the intellectual property rights of a third party. The Company has not made material payments pursuant to these provisions. The Company has not identified any losses that are probable under these provisions and, accordingly, the Company has not recorded a liability related to these indemnification provisions.

Other Purchase Commitments

In June 2019, the Company entered into an amended agreement with a third-party provider, in the ordinary course of business, for the Company's use of certain cloud services through June 2021. Under the amended agreement, the Company is committed to a purchase of $25.0 million in fiscal year 2020.

17. RESTRUCTURING

The Company has implemented multiple restructuring plans to reduce its cost structure, align resources with its product strategy and improve efficiency, which has resulted in workforce reductions and the consolidation of certain leased facilities.

For the three and nine months ended September 30, 2019 and 2018, restructuring charges were comprised of the following (in thousands):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019		2018
Employee severance and related costs	$	6,213	$	22		$	13,356	$	2,341
Consolidation of leased facilities	2,666		(508		)	2,666		10,797
Total Restructuring charges	$	8,879	$	(486	)	$	16,022	$	13,138

For the three and nine months ended September 30, 2019, the Company incurred costs related to initiatives intended to accelerate the transformation to a cloud-based subscription business, increase strategic focus, and improve operational efficiency. For the three months ended September 30, 2019, the Company incurred costs of $6.2 million related to employee severance and related costs and $2.7 million related to the consolidation of leased facilities. For the nine months ended September 30, 2019, the Company incurred costs of $13.4 million related to employee severance and related costs and $2.7 million related to the consolidation of leased facilities. Total costs incurred for the three months ended September 30, 2018 were not material. During the nine months ended September 30, 2018, the Company incurred costs of $2.3 million related to employee severance and related costs.

In connection with the Company's restructuring initiatives, the Company had previously vacated or consolidated properties and subsequently reassessed its obligations on non-cancelable leases. The fair value estimate of these non-cancelable leases was based on the contractual lease costs over the remaining term, partially offset by estimated future sublease rental income. During the three months ended September 30, 2018, the Company recorded a credit of $0.5 million as a reversal of the original estimated charge as a result of a reassessment, which decreased restructuring charges related to the lease exit costs. In addition, during the nine months ended September 30, 2018, the Company incurred costs of $10.8 million related to the consolidation of leased facilities.

Restructuring accruals

The activity in the Company’s restructuring accruals for the nine months ended September 30, 2019 is summarized as follows (in thousands):



	Total
Balance at January 1, 2019	$	45,095
Adjustment for ASC 842	(42,248		)
Employee severance and related costs	13,356
Payments	(10,507		)
Balance at September 30, 2019	$	5,696

As of September 30, 2019, the $5.7 million in outstanding restructuring accruals primarily relate to employee severance and related costs. As a result of the adoption of the new lease standard, the provision for lease losses was reclassified, resulting in a reduction to operating lease right-of-use assets as of January 1, 2019. Refer to Note 2 for additional information on adoption of the lease standard.

18. STATEMENT OF CHANGES IN EQUITY

The following tables presents the changes in total stockholders' equity during the three and nine months ended September 30, 2019 (in thousands):



	Common Stock			Additional Paid In Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Common Stock in Treasury					Total Equity
	Shares	Amount		Additional Paid In Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Shares		Amount			Total Equity
Balance at June 30, 2019	316,969	$	317	$	6,078,960	$	4,277,586		$	(4,610	)	(186,486	)	$	(9,844,231	)	$	508,022
Shares issued under stock-based compensation plans	123	—		—		—			—			—		—			—
Stock-based compensation expense	—	—		68,969		—			—			—		—			68,969
Common stock issued under employee stock purchase plan	255	1		20,454		—			—			—		—			20,455
Stock repurchases, net	—	—		—		—			—			(1,130	)	(103,905		)	(103,905		)
Restricted shares turned in for tax withholding	—	—		—		—			—			(45	)	(4,242		)	(4,242		)
Cash dividends declared	—	—		—		(45,373		)	—			—		—			(45,373		)
Settlement of warrants	202	—		—		—			—			—		—			—
Other	—	—		2,194		(2,194		)	—			—		—			—
Other comprehensive loss, net of tax	—	—		—					(1,872		)	—		—			(1,872		)
Net income	—	—		—		270,857			—			—		—			270,857
Balance at September 30, 2019	317,549	$	318	$	6,170,577	$	4,500,876		$	(6,482	)	(187,661	)	(9,952,378		)	$	712,911



	Common Stock				Additional Paid In Capital			Retained Earnings			Accumulated Other Comprehensive loss			Common Stock in Treasury					Total Equity
	Shares		Amount		Additional Paid In Capital			Retained Earnings			Accumulated Other Comprehensive loss			Shares		Amount			Total Equity
Balance at December 31, 2018	309,761		$	310	$	5,404,500		$	4,169,019		$	(8,154	)	(178,327	)	$	(9,014,156	)	$	551,519
Shares issued under stock-based compensation plans	2,167		2		(2		)	—			—			—		—			—
Stock-based compensation expense	—		—		202,523			—			—			—		—			202,523
Temporary equity reclassification	—		—		8,110			—			—			—		—			8,110
Common stock issued under employee stock purchase plan	471		1		39,470			—			—			—		—			39,471
Stock repurchases, net	—		—		—			—			—			(3,641	)	(353,904		)	(353,904		)
Restricted shares turned in for tax withholding	—		—		—			—			—			(743	)	(74,794		)	(74,794		)
Cash dividends declared	—		—		—			(137,224		)	—			—		—			(137,224		)
Settlement of convertible notes and hedges	4,950		5		509,519			—			—			(4,950	)	(509,524		)	—
Settlement of warrants	202		—		—			—			—			—		—			—
Cumulative-effect adjustment from adoption of accounting standard	—		—		—			838			—			—		—			838
Other	(2	)	—		6,457			(6,457		)	—			—		—			—
Other comprehensive income, net of tax	—		—		—			—			1,672			—		—			1,672
Net income	—		—		—			474,700			—			—		—			474,700
Balance at September 30, 2019	317,549		$	318	$	6,170,577		$	4,500,876		$	(6,482	)	(187,661	)	$	(9,952,378	)	$	712,911

The following tables presents the changes in total stockholders' equity during the three and nine months ended September 30, 2018 (in thousands):



	Common Stock			Additional Paid In Capital		Retained Earnings		Accumulated Other Comprehensive loss			Common Stock in Treasury					Total Equity
	Shares	Amount		Additional Paid In Capital		Retained Earnings		Accumulated Other Comprehensive loss			Shares		Amount			Total Equity
Balance at June 30, 2018	307,662	$	308	$	5,116,339	$	3,893,354	$	(18,718	)	(172,244	)	$	(8,355,107	)	$	636,176
Shares issued under stock-based compensation plans	110	—		50		—		—			—		—			50
Stock-based compensation expense	—	—		52,739		—		—			—		—			52,739
Temporary equity reclassification	—	—		8,796		—		—			—		—			8,796
Common stock issued under employee stock purchase plan	209	—		16,004		—		—			—		—			16,004
Stock repurchases, net	—	—		—		—		—			(1,046	)	(116,175		)	(116,175		)
Restricted shares turned in for tax withholding	—	—		—		—		—			(32	)	(3,654		)	(3,654		)
Other comprehensive income, net of tax	—	—		—		—		427			—		—			427
Net income	—	—		—		158,857		—			—		—			158,857
Balance at September 30, 2018	307,981	$	308	$	5,193,928	$	4,052,211	$	(18,291	)	(173,322	)	$	(8,474,936	)	$	753,220



	Common Stock			Additional Paid In Capital			Retained Earnings		Accumulated Other Comprehensive loss			Common Stock in Treasury					Total Equity
	Shares	Amount		Additional Paid In Capital			Retained Earnings		Accumulated Other Comprehensive loss			Shares		Amount			Total Equity
Balance at December 31, 2017	305,751	$	306	$	4,883,670		$	3,509,484	$	(10,806	)	(162,044	)	$	(7,390,193	)	$	992,461
Shares issued under stock-based compensation plans	1,769	2		162			—		—			—		—			164
Stock-based compensation expense	—	—		145,920			—		—			—		—			145,920
Temporary equity reclassification	—	—		(19,286		)	—		—			—		—			(19,286		)
Common stock issued under employee stock purchase plan	461	—		33,462			—		—			—		—			33,462
Stock repurchases, net	—	—		150,000			—		—			(10,708	)	(1,031,154		)	(881,154		)
Restricted shares turned in for tax withholding	—	—		—			—		—			(570	)	(53,589		)	(53,589		)
Cumulative-effect adjustment from adoption of accounting standards	—	—		—			132,778		—			—		—			132,778
Other comprehensive loss, net of tax	—	—		—			—		(7,485		)	—		—			(7,485		)
Net income	—	—		—			409,949		—			—		—			409,949
Balance at September 30, 2018	307,981	$	308	$	5,193,928		$	4,052,211	$	(18,291	)	(173,322	)	$	(8,474,936	)	$	753,220

Cash Dividend

The following table provides information with respect to quarterly dividends on common stock during the nine months ended September 30, 2019.



Declaration Date	Dividends per Share		Record Date	Payable Date
January 23, 2019	$	0.35	March 8, 2019	March 22, 2019
April 24, 2019	$	0.35	June 7, 2019	June 21, 2019
July 24, 2019	$	0.35	September 6, 2019	September 20, 2019

Subsequent Event

On October 24, 2019 the Company announced that its Board of Directors approved a quarterly cash dividend of $0.35 per share which will be paid on December 20, 2019 to all shareholders of record as of the close of business on December 6, 2019.

19. LEASES

The Company leases certain office space and equipment under various leases. In addition to rent, the leases require the Company to pay for taxes, insurance, maintenance and other operating expenses. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, accrued expenses and other current liabilities, and operating lease liabilities in the Company’s condensed consolidated balance sheets. Finance leases are included in property and equipment, net, accrued expenses and other current liabilities and other long-term liabilities in the Company’s condensed consolidated balance sheets. Finance leases were not material to the condensed consolidated financial statements as of September 30, 2019.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the later of the adoption date of the new standard or the commencement date. The lease liability is based on the present value of lease payments over the lease term (or the remaining term in the case of existing leases at time the Company adopted ASC 842). The Company uses the implicit rate when readily determinable. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The operating lease ROU asset is based on the lease liability, subject to adjustment, such as for initial direct costs, and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. For most operating leases, expense for lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.

The Company has lease agreements with lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) and non-lease components (e.g., common-area maintenance costs), which are generally accounted for as a single lease component, such as for real estate leases. For certain equipment leases, such as colocation facilities, the Company accounts for the lease and non-lease components separately.

The components of lease expense were as follows (in thousands):



		Three Months Ended			Nine Months Ended
		September 30, 2019
	Classification
Operating lease cost	Operating expenses	$	12,599		$	37,376
Variable lease cost	Operating expenses	2,748			7,566
Sublease income	Other income (expense), net	(236		)	(667		)
Net lease cost		$	15,111		$	44,275

Supplemental cash flow information related to leases was as follows (in thousands):



	Nine Months Ended
	September 30,
	2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	41,199
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	52,179

Lease Term and Discount Rate



	September 30, 2019
Weighted-average remaining lease term (years)
Operating leases	6.2
Weighted-average discount rate
Operating leases	5.00	%

Maturities of lease liabilities as of September 30, 2019 were as follows (in thousands):



Year ending December 31,	Operating Leases
2019 (remaining three months)	$	11,907
2020	61,054
2021	52,483
2022	44,406
2023	40,931
After 2023	102,716
Total lease payments	$	313,497
Less: imputed interest	(45,136		)
Present value of lease liabilities	$	268,361

Supplemental balance sheet information related to leases was as follows (in thousands):



Operating Leases	September 30, 2019
Operating lease right-of-use assets	$	218,625

Accrued expenses and other current liabilities	$	47,329
Operating lease liabilities	221,032
Total operating lease liabilities	$	268,361


ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our operating results and financial condition have varied in the past and could in the future vary significantly depending on a number of factors. From time to time, information provided by us or statements made by our employees contain “forward-looking” information that involves risks and uncertainties. In particular, statements contained in this Quarterly Report on Form 10-Q that are not historical facts, including, but not limited to, statements concerning our strategy and operational and growth initiatives, our transition to a subscription-based business model, changes in our product and service offerings, financial information and results of operations for future periods, revenue trends, seasonal factors or ordering patterns, stock-based compensation, international operations, investment transactions and valuations of investments and derivative instruments, restructuring charges, reinvestment or repatriation of foreign earnings, fluctuations in foreign exchange rates, tax estimates and other tax matters, liquidity, stock repurchases and dividends, our debt, changes in accounting rules or guidance, acquisitions, litigation matters, the security of our network, products and services, and the impact of our recent cybersecurity incident on our business and results of operations constitute forward-looking statements and are made under the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are neither promises nor guarantees. Our actual results of operations and financial condition could vary materially from those stated in any forward-looking statements. The factors described in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2018, as updated by Part II, Item 1A in this Quarterly Report on Form 10-Q, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q or presented elsewhere by our management from time to time. Such factors, among others, could have a material adverse effect upon our business, results of operations and financial condition. We caution readers not to place undue reliance on any forward-looking statements, which only speak as of the date made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.

Overview

Management’s discussion and analysis of financial condition and results of operations is intended to help the reader understand our financial condition and results of operations. This section is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2019. The results of operations for the periods presented in this report are not necessarily indicative of the results expected for the full year or for any future period, due in part to the seasonality of our business. Historically, our revenue for the fourth quarter of any year is typically higher than our revenue for the first quarter of the subsequent year.

Citrix is powering a better way to work with unified workspace, networking, and analytics solutions that help organizations unlock innovation, engage customers, and boost productivity, without sacrificing security. With Citrix, users get a seamless work experience and IT has a unified platform to secure, manage, and monitor diverse technologies in complex cloud environments.

We market and license our solutions through multiple channels worldwide, including selling through resellers and direct over the Web. Our partner community comprises thousands of value-added resellers, or VARs, known as Citrix Solution Advisors, value-added distributors, or VADs, systems integrators, or SIs, independent software vendors, or ISVs, original equipment manufacturers, or OEMs, and Citrix Service Providers, or CSPs.

We are a Delaware corporation incorporated on April 17, 1989.

Executive Summary

During the three months ended September 30, 2019, demand for Digital Workspace product and subscription was strong, achieving its highest level of subscription bookings mix, which we believe reflects the confidence of our customers in Citrix’s vision and ability to execute. Additionally, in Networking, demand from our SSPs improved and subscription bookings as a percentage of Networking product bookings increased from the prior year.

Our subscription bookings mix acceleration is expected to result in more sustainable, recurring revenue growth over time as less revenue comes from one-time product and licensing streams and more revenue comes from predictable, recurring streams that will be recognized in future periods. We believe that this dynamic is best captured in our Subscription and SaaS Annualized Recurring Revenue, or ARR. This operating metric represents the contracted recurring value of all termed subscriptions normalized to a one-year period. It is calculated at the end of a reporting period by taking each contract’s recurring total contract value and dividing by the length of the contract. ARR includes only active contractually committed, fixed subscription fees. All contracts are annualized, including 30 day offerings where we take monthly recurring revenue

multiplied by 12 to annualize. ARR may be influenced by seasonality within the year. ARR should be viewed independently of U.S. GAAP revenue, deferred revenue and unbilled revenue and is not intended to be combined with or to replace those items. ARR is not a forecast of future revenue. As we continue through this business model transition, we believe ARR is a key indicator of the overall health and trajectory of our business.

On October 24, 2019, we announced that our Board of Directors declared a $0.35 per share dividend payable December 20, 2019 to all shareholders of record as of the close of business on December 6, 2019. Additionally, we announced that our Board of Directors increased our share repurchase authorization by $600.0 million, bringing the total authorization to over $1.0 billion. Our Board of Directors will continue to review our capital allocation strategy for potential modifications and will determine whether to repurchase shares of our common stock and/or declare future dividends based on our financial performance, business outlook and other considerations.

On August 19, 2019, we announced the appointment of Arlen R. Shenkman as our Executive Vice President and Chief Financial Officer, effective September 9, 2019.

On March 6, 2019, the FBI informed us that international cyber criminals had gained access to Citrix’s internal network through a “password spraying” attack, a technique that exploits weak passwords. Immediately, we engaged outside forensics and security experts, took actions to expel the cyber criminals from our internal systems, and adopted additional security measures. Additionally, we launched a comprehensive forensic investigation led by a leading, independent cybersecurity firm. From our investigation, we learned that the cyberattack commenced on October 13, 2018, and encompassed a cyber incident that we became aware of in late 2018 and took certain steps to remediate based on our assessment at the time. Further, we received a notification from the Department of Homeland Security in late February 2019 concerning a network compromise that may have been part of this same cyberattack. While waiting for clarification from the Department of Homeland Security, we were contacted by the FBI on March 6, 2019.

We conducted an investigation, which confirmed that between October 13, 2018 and March 8, 2019, cyber criminals intermittently accessed Citrix's internal network and over a limited number of days stole business documents and files from a shared network drive and a drive associated with a web-based tool used in our consulting practice. The shared drive, from which documents and files were stolen, was used to store current and historical business documents and files, such as human resources and employee records, some of which contained sensitive and personal identification information of our current and former employees and, in some cases, their beneficiaries, dependents and others; customer engagement documents, including consulting services project materials, statements of work and proofs of concept, some of which were also stored on the drive associated with a web-based tool used in our consulting practice; marketing materials; sales and finance documents; contracts and other legal records; and a wide assortment of other company records. The cyber criminals also may have accessed the individual virtual drives of a very limited number of compromised users, accessed the company email accounts of the same very limited number of compromised users, and launched without further exploitation a limited number of internal applications. We are completing our review of documents and files that may have been accessed or were stolen in this incident, which include files stolen from the shared network drive and the drive associated with the web-based tool used in our consulting practice, and the accessed documents and files on the individual virtual drives and the Company email accounts of the very limited number of compromised users. Our investigation found no indication that the cyber criminals discovered and exploited any vulnerabilities in our products or customer cloud services to gain entry, and no indication that the security of any Citrix product or customer cloud service was compromised. We found no impact to our financial reporting systems from this cyberattack. Additionally, we have taken steps to enhance our internal controls over financial reporting and disclosure controls and procedures related to cyberattacks.

Further, we have a program of network-security (or cyber risk) insurance policies that, with standard exclusions, insure against the costs of detecting and mitigating cyber breaches, the cost of credit monitoring, and reasonable expenses for defending and settling privacy and network security lawsuits. These policies are subject to a $500,000 self-insured retention and a total insurance limit of $200.0 million. There can be no assurance, however, that this insurance coverage is sufficient to cover this or any other cyberattack. In addition to these insurance policies, we maintain customary business coverage under our crime, commercial general liability, and director and officer insurance policies. The costs associated with this incident, to the extent not covered by insurance, are not material to the quarter ended September 30, 2019.

Summary of Results

For the three months ended September 30, 2019 compared to the three months ended September 30, 2018, a summary of our results included:


•	Subscription revenue increased 43.3% to $159.9 million;


•	Product and license revenue decreased 23.3% to $131.1 million;


•	Support and services revenue decreased 1.8% to $442.0 million;


•	Gross margin as a percentage of revenue decreased 3.1% to 82.7%;


•	Operating income decreased 32.7% to $110.8 million;


•	Diluted net income per share increased 88.9% to $2.04;


•	Unbilled revenue increased $316.2 million to $559.4 million;


•	Subscription ARR increased $190.9 million to $672.3 million; and


•	SaaS ARR increased $157.9 million to $462.7 million.

Our Subscription revenue increased primarily due to increased customer adoption of our cloud-based solutions from our Digital Workspace offerings delivered via the cloud and an increase in on-premise licensing of our Networking offerings. Our Product and license revenue decreased primarily due to lower sales of our perpetual Digital Workspace offerings and Networking products. The decrease in Support and services revenue was primarily due to decreased sales of maintenance services across our Digital Workspace perpetual offerings, partially offset by increased sales of consulting services related to the implementation of our solutions. We currently expect total revenue to increase slightly when comparing the 2019 fiscal year to the 2018 fiscal year. The decrease in gross margin as a percentage of revenue was primarily due to the impairment of certain acquired intangible assets and an increase in costs related to providing our subscription offerings. The decrease in operating income was primarily due to a decrease in gross margin and an increase in operating expenses, as we have realigned the organization to better support our subscription model transition and have made more intentional investments in product and engineering as well as customer facing resources. The increase in diluted net income per share was primarily due to a decrease in income tax expense as a result of a benefit related to Swiss tax reform and a decrease in the number of weighted average shares outstanding due to share repurchases, partially offset by a decrease in operating income. Both Subscription and SaaS ARR increased due to the acceleration of subscription bookings.

2018 Business Combinations

Sapho, Inc.

On November 13, 2018, we acquired all of the issued and outstanding securities of Sapho, Inc. (“Sapho”), whose technology is intended to advance our development of the intelligent workspace. The acquired technology enables efficient workstyles by creating a unified and customizable notification experience for business applications. The total cash consideration for this transaction was $182.7 million, net of $3.7 million cash acquired. Transaction costs associated with the acquisition were not significant.

Cedexis, Inc.

On February 6, 2018, we acquired all of the issued and outstanding securities of Cedexis, Inc. (“Cedexis”), whose solution is a real-time data driven service for dynamically optimizing the flow of traffic across public clouds and data centers that provides a dynamic and reliable way to route and manage Internet performance for customers moving towards hybrid and multi-cloud deployments. The total cash consideration for this transaction was $66.0 million, net of $6.0 million cash acquired. Transaction costs associated with the acquisition were not significant. During the third quarter of 2019, we tested certain intangible assets for recoverability due to changes in facts and circumstances associated with the shift in strategic focus and reduced profitability expectations. As a result, we impaired a portion of the carrying value of the intangible assets related to this acquisition in the third quarter of 2019. See Note 9 for more information on the impairment.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base these estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted.

For more information regarding our critical accounting policies and estimates, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” contained in our Annual Report on Form 10-K for the year ended December 31, 2018, or the Annual Report, and Note 2 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. There have been no material changes to the critical accounting policies disclosed in the Annual Report.

Results of Operations

The following table sets forth our unaudited condensed consolidated statements of income data and presentation of that data as a percentage of change from period-to-period (in thousands):



	Three Months Ended						Nine Months Ended						Three Months Ended		Nine Months Ended
	September 30,						September 30,						September 30, 2019		September 30, 2019
	2019			2018			2019			2018			vs. September 30, 2018		vs. September 30, 2018
Revenues:
Subscription	$	159,873		$	111,539		$	457,312		$	325,493		43.3	%	40.5	%
Product and license	131,057			170,952			406,733			523,707			(23.3	)	(22.3	)
Support and services	441,971			449,985			1,336,696			1,322,833			(1.8	)	1.0
Total net revenues	732,901			732,476			2,200,741			2,172,033			0.1		1.3
Cost of net revenues:
Cost of subscription, support and services	76,885			64,717			227,130			195,625			18.8		16.1
Cost of product and license revenues	27,411			27,571			75,033			91,150			(0.6	)	(17.7	)
Amortization and impairment of product related intangible assets	22,622			11,629			42,707			34,177			94.5		25.0
Total cost of net revenues	126,918			103,917			344,870			320,952			22.1		7.5
Gross margin	605,983			628,559			1,855,871			1,851,081			(3.6	)	0.3
Operating expenses:
Research and development	126,420			111,557			390,712			323,050			13.3		20.9
Sales, marketing and services	274,874			262,562			847,958			800,505			4.7		5.9
General and administrative	80,042			86,084			238,751			227,151			(7.0	)	5.1
Amortization of other intangible assets	4,937			4,063			11,671			11,748			21.5		(0.7	)
Restructuring	8,879			(486		)	16,022			13,138			*		22.0
Total operating expenses	495,152			463,780			1,505,114			1,375,592			6.8		9.4
Income from operations	110,831			164,779			350,757			475,489			(32.7	)	(26.2	)
Interest income	2,649			10,896			16,193			29,029			(75.7	)	(44.2	)
Interest expense	(8,822		)	(19,962		)	(37,144		)	(60,840		)	(55.8	)	(38.9	)
Other income (expense), net	3,456			3,702			3,735			(1,847		)	(6.6	)	*
Income before income taxes	108,114			159,415			333,541			441,831			(32.2	)	(24.5	)
Income tax (benefit) expense	(162,743		)	558			(141,159		)	31,882			*		*
Net income	$	270,857		$	158,857		$	474,700		$	409,949		70.5	%	15.8	%
* Not meaningful

Revenues

Net revenues include Subscription, Product and license and Support and services revenues.

Subscription revenue relates to fees which are generally recognized ratably over the contractual term. Our subscription revenue includes SaaS, which primarily consists of subscriptions delivered via a cloud hosted service whereby the customer does not take possession of the software and hybrid subscription offerings; and non-SaaS, which consists primarily of on-premise licensing, hybrid subscription offerings, CSP services and the related support. Our hybrid subscription offerings are allocated between SaaS and non-SaaS, which are generally recognized at a point in time. For our on-premise and hybrid subscription offerings, a portion of the revenue is recognized at a point in time. In addition, our CSP program provides subscription-based services in which the CSP partners host software services to their end users. The fees from the CSP program are recognized based on usage and as the CSP services are provided to their end users.

Product and license revenue primarily represents fees related to the perpetual licensing of the following major solutions:


•	Digital Workspace is primarily comprised of our Application Virtualization solutions which include Citrix Virtual Apps and Desktops, our unified endpoint management solutions, which include Citrix Endpoint Management, Citrix Content Collaboration, and Citrix Workspace; and


•	Networking products, which primarily include Citrix ADC and Citrix SD-WAN.

We offer incentive programs to our VADs and VARs to stimulate demand for our solutions. Product and license revenues associated with these programs are partially offset by these incentives to our VADs and VARs.

Support and services revenue consists of maintenance and support fees related to the following offerings:


•	Customer Success Services, which gives customers a choice of tiered support offerings that combine the elements of product version upgrades, guidance, enablement, support and proactive monitoring to help our customers and our partners fully realize their business goals. Fees associated with this offering are recognized ratably over the term of the contract; and


•	Hardware Maintenance fees for our perpetual Networking products, which include technical support and hardware and software maintenance, are recognized ratably over the contract term; and


•	Fees from consulting services related to the implementation of our solutions, which are recognized as the services are provided; and


•	Fees from product training and certification, which are recognized as the services are provided.



	Three Months Ended				Nine Months Ended				Three Months Ended			Nine Months Ended
	September 30,				September 30,				September 30, 2019			September 30, 2019
	2019		2018		2019		2018		vs. September 30, 2018			vs. September 30, 2018
	(in thousands)
Subscription	$	159,873	$	111,539	$	457,312	$	325,493	$	48,334		$	131,819
Product and license	131,057		170,952		406,733		523,707		(39,895		)	(116,974		)
Support and services	441,971		449,985		1,336,696		1,322,833		(8,014		)	13,863
Total net revenues	$	732,901	$	732,476	$	2,200,741	$	2,172,033	$	425		$	28,708

Subscription

Subscription revenue increased for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to increased customer adoption of our cloud-based solutions from our Digital Workspace offerings delivered via the cloud of $29.1 million and an increase in on-premise licensing of our Networking offerings of $10.2 million. Subscription revenue increased for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to increased customer adoption of our cloud-based solutions from our Digital Workspace offerings delivered via the cloud of $80.1 million and an increase in on-premise licensing of our Networking offerings of $18.2 million. We currently expect our Subscription revenue to increase when comparing the fiscal year 2019 to the fiscal year 2018 as customers continue to shift to our cloud-based solutions.

Product and license

Product and license revenue decreased when comparing the three months ended September 30, 2019 to the three months ended September 30, 2018 primarily due to lower sales of our perpetual Digital Workspace offerings of $22.5 million and lower sales of our Networking products of $17.4 million, as customers continue to shift to our cloud-based solutions. Product and license revenue decreased when comparing the nine months ended September 30, 2019 to the nine months ended September 30, 2018 primarily due to lower sales of our perpetual Networking products due to cyclical ordering patterns at large hyperscale providers and our customers continuing to shift to the cloud. We currently expect Product and license revenue to decrease when comparing the fiscal year 2019 to the fiscal year 2018 as customers continue to shift to our cloud-based solutions and away from our Networking hardware products. During fiscal year 2019, we continued to implement our transition to a subscription-based business model, and in October 2019, we announced our intent to phase out new perpetual licensing for our Digital Workspace offerings in 2020 while continuing to provide customers the option of an on-premise term subscription offering.

Support and services

Support and services revenue decreased for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to decreased sales of maintenance services across our Digital Workspace perpetual offerings of $10.5 million, partially offset by increased sales of consulting services related to the implementation of our solutions of $4.9 million. Support and services revenue increased for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily driven by increased sales of consulting services related to the implementation of our solutions of $9.8 million and increased sales of maintenance services across our Digital Workspace perpetual offerings of $6.1 million. We currently expect Support and services revenue to decrease slightly when comparing the fiscal year 2019 to the fiscal year 2018 as customers continue to shift to our cloud-based solutions.

Deferred Revenue, Unbilled Revenue and Backlog

Deferred revenues are primarily comprised of Support and services revenue from maintenance fees, which include software and hardware maintenance, technical support related to our perpetual offerings and services revenue related to our consulting contracts. Deferred revenues also include Subscription revenue from our Content Collaboration and cloud-based subscription offerings.

Deferred revenue primarily consists of billings or payments received in advance of revenue recognition and is recognized in our condensed consolidated balance sheets and statements of income as the revenue recognition criteria are met. Unbilled revenue primarily represents future billings under our subscription agreements that have not been invoiced and, accordingly, are not recorded in accounts receivable or deferred revenue within our condensed consolidated financial statements. Deferred revenue and unbilled revenue are influenced by several factors, including new business seasonality within the year, the specific timing, size and duration of customer subscription agreements, annual billing cycles of subscription agreements, and invoice timing. Fluctuations in unbilled revenue may not be a reliable indicator of future performance and the related revenue associated with these contractual commitments.

The following table presents the amounts of deferred revenue and unbilled revenue (in thousands):



	September 30, 2019		December 31, 2018		2019 compared to 2018
Deferred revenue	$	1,615,572	$	1,834,572	$	(219,000	)
Unbilled revenue	559,433		338,463		220,970

Deferred revenue decreased $219.0 million as of September 30, 2019 compared to December 31, 2018 primarily due to a decrease in maintenance and support of $277.5 million, mostly due to Digital Workspace perpetual software maintenance of $175.1 million and Networking perpetual hardware maintenance of $60.5 million, primarily due to seasonality. This decrease is partially offset by an increase in subscription of $69.0 million. Unbilled revenue as of September 30, 2019 increased $221.0 million from December 31, 2018 primarily due to an increase in multi-year subscription agreements as a result of an increase in customer adoption of our cloud-based subscription offerings.

While it is generally our practice to promptly ship our products upon receipt of properly finalized orders, at any given time, we have confirmed product license orders that have not shipped and are unfulfilled. We refer to those unfulfilled product license orders at the end of a given period as “product and license backlog.” As of September 30, 2019 and September 30, 2018, the amount of product and license backlog was not material. We do not believe that backlog, as of any particular date, is a reliable indicator of future performance.

International Revenues

International revenues (sales outside the United States) accounted for 47.7% and 47.9% of our net revenues for the three and nine months ended September 30, 2019, respectively, and 45.6% and 45.7% of our net revenues for the three and nine months ended September 30, 2018, respectively. The increase in our international revenues as a percentage of our net revenues for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was primarily driven by an increase in revenue in our EMEA region of $7.8 million, consisting primarily of increases in Subscription of $14.5 million and Support and services of $2.7 million, partially offset by a decrease in Product and license of $9.4 million, and an increase in our APJ region of $7.0 million, consisting primarily of increases in Subscription of $9.8 million, partially offset by a decrease in Support and services of $2.1 million. The increase in our international revenues as a percentage of our net revenues for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily driven by an increase in revenue in our EMEA region of $36.3 million, consisting primarily of increases in Subscription of $38.8 million and Support and services of $18.2 million, partially offset by a decrease in Product and license of $20.6 million, and an increase in revenue in our APJ region of $17.5 million, consisting primarily of increases in Subscription. See Note 10 to our condensed consolidated financial statements for detailed information on net revenues by geography.

Cost of Net Revenues



	Three Months Ended				Nine Months Ended				Three Months Ended			Nine Months Ended
	September 30,				September 30,				September 30, 2019			September 30, 2019
	2019		2018		2019		2018		vs. September 30, 2018			vs. September 30, 2018
	(In thousands)
Cost of subscription, support and services revenues	$	76,885	$	64,717	$	227,130	$	195,625	$	12,168		$	31,505
Cost of product and license revenues	27,411		27,571		75,033		91,150		(160		)	(16,117		)
Amortization and impairment of product related intangible assets	22,622		11,629		42,707		34,177		10,993			8,530
Total cost of net revenues	$	126,918	$	103,917	$	344,870	$	320,952	$	23,001		$	23,918

Cost of subscription, support and services revenues consists primarily of compensation and other personnel-related costs of providing technical support, consulting and cloud capacity costs, as well as the costs related to providing our offerings delivered via the cloud. Cost of product and license revenues consists primarily of hardware, shipping expense, royalties, product media and duplication, manuals and packaging materials. Also included in Cost of net revenues is amortization of product related intangible assets.

Cost of subscription, support and services revenues increased for the three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018 primarily due to an increase in costs related to providing our subscription offerings. We currently expect Cost of subscription, support and services revenues to increase when comparing the fiscal year 2019 to the fiscal year 2018, consistent with the expected increase in Subscription revenue as discussed above.

Cost of product and license revenues decreased for the three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018 primarily due to lower overall sales of our perpetual Networking products, which contain hardware components that have a higher cost than our software products. We currently expect Cost of product and license revenues to decrease when comparing the fiscal year 2019 to the fiscal year 2018, consistent with the expected decrease in Product and license revenue.

Amortization and impairment of product related intangible assets increased for the three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018 primarily due to the impairment of certain acquired intangible assets, primarily developed technology, in the third quarter of 2019.

Gross Margin

Gross margin as a percentage of revenue was 82.7% and 84.3% for the three and nine months ended September 30, 2019, respectively, and 85.8% and 85.2% for the three and nine months ended September 30, 2018, respectively. The decrease in gross margin when comparing the three and nine months ended September 30, 2019 to September 30, 2018 was primarily due to the impairment of certain acquired intangible assets and an increase in costs related to providing our subscription offerings.

Operating Expenses

Foreign Currency Impact on Operating Expenses

The functional currency for all of our wholly-owned foreign subsidiaries is the U.S. dollar. A substantial majority of our overseas operating expenses and capital purchasing activities are transacted in local currencies and are therefore subject to fluctuations in foreign currency exchange rates. In order to minimize the impact on our operating results, we generally initiate our hedging of currency exchange risks up to 12 months in advance of anticipated foreign currency expenses. Generally, when the dollar is weak, foreign currency denominated expenses will be higher, and these higher expenses will be partially offset by the gains realized from our hedging contracts. Conversely, if the dollar is strong, foreign currency denominated expenses will be lower. These lower expenses will in turn be partially offset by the losses incurred from our hedging contracts. There is a risk that there will be fluctuations in foreign currency exchange rates beyond the timeframe for which we hedge our risk.

Research and Development Expenses



	Three Months Ended				Nine Months Ended				Three Months Ended		Nine Months Ended
	September 30,				September 30,				September 30, 2019		September 30, 2018
	2019		2018		2019		2018		vs. September 30, 2018		vs. September 30, 2018
	(In thousands)
Research and development	$	126,420	$	111,557	$	390,712	$	323,050	$	14,863	$	67,662

Research and development expenses consist primarily of personnel related costs and facility and equipment costs directly related to our research and development activities. We expensed substantially all development costs included in the research and development of our products.

Research and development expenses increased during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to stock-based compensation of $8.5 million and compensation and other employee-related costs of $3.7 million related to a net increase in headcount. Research and development expenses increased during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to stock-based compensation of $33.2 million and compensation and other employee-related costs of $24.3 million related to a net increase in headcount.

Sales, Marketing and Services Expenses



	Three Months Ended				Nine Months Ended				Three Months Ended		Nine Months Ended
	September 30,				September 30,				September 30, 2019		September 30, 2019
	2019		2018		2019		2018		vs. September 30, 2018		vs. September 30, 2018
	(In thousands)
Sales, marketing and services	$	274,874	$	262,562	$	847,958	$	800,505	$	12,312	$	47,453

Sales, marketing and services expenses consist primarily of personnel related costs, including sales commissions, pre-sales support, the costs of marketing programs aimed at increasing revenue, such as brand development, advertising, trade shows, public relations and other market development programs and costs related to our facilities, equipment, information systems and pre-sale demonstration related cloud capacity costs that are directly related to our sales, marketing and services activities.

Sales, marketing and services expenses increased during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to variable compensation from a net increase in sales and services headcount. Sales, marketing and services expenses increased during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to stock-based compensation of $16.2 million, variable compensation of $14.6 million and compensation and other employee-related costs of $9.8 million due to a net increase in sales and services headcount.

General and Administrative Expenses



	Three Months Ended				Nine Months Ended				Three Months Ended			Nine Months Ended
	September 30,				September 30,				September 30, 2019			September 30, 2019
	2019		2018		2019		2018		vs. September 30, 2018			vs. September 30, 2018
	(In thousands)
General and administrative	$	80,042	$	86,084	$	238,751	$	227,151	$	(6,042	)	$	11,600

General and administrative expenses consist primarily of personnel related costs and expenses related to outside consultants assisting with information systems, as well as accounting and legal fees.

General and administrative expenses decreased during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to a decrease in compensation and other employee-related costs of $2.9 million and facilities costs of $2.0 million. General and administrative expenses increased during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to professional fees of $7.2 million and stock-based compensation of $6.6 million, partially offset by a decrease in facilities costs of $3.2 million.

2019 Operating Expense Outlook

When comparing fiscal year 2019 to fiscal year 2018, we currently expect Operating expenses to increase with respect to research and development expenses as we continue to invest in product and engineering.

Interest Income



	Three Months Ended				Nine Months Ended				Three Months Ended			Nine Months Ended
	September 30,				September 30,				September 30, 2019			September 30, 2019
	2019		2018		2019		2018		vs. September 30, 2018			vs. September 30, 2018
	(In thousands)
Interest income	$	2,649	$	10,896	$	16,193	$	29,029	$	(8,247	)	$	(12,836	)

Interest income primarily consists of interest earned on our cash, cash equivalents and investment balances. Interest income decreased for the three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018 primarily due to lower cash, cash equivalents and investment balances as a result of the repayment of the outstanding principal balance of our Convertible Notes on April 15, 2019. See Note 6 to our condensed consolidated financial statements for additional details regarding our investments.

Interest Expense



	Three Months Ended						Nine Months Ended						Three Months Ended		Nine Months Ended
	September 30,						September 30,						September 30, 2019		September 30, 2019
	2019			2018			2019			2018			vs. September 30, 2018		vs. September 30, 2018
	(In thousands)
Interest expense	$	(8,822	)	$	(19,962	)	$	(37,144	)	$	(60,840	)	$	11,140	$	23,696

Interest expense primarily consists of interest paid on our Convertible Notes, 2027 Notes and our credit facility. Interest expense decreased for the three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018 due to the repayment of the outstanding principal balance of our Convertible Notes on April 15, 2019. See Note 11 to our condensed consolidated financial statements for additional details regarding our debt.

Other income (expense), net



	Three Months Ended				Nine Months Ended					Three Months Ended			Nine Months Ended
	September 30,				September 30,					September 30, 2019			September 30, 2019
	2019		2018		2019		2018			vs. September 30, 2018			vs. September 30, 2018
	(In thousands)
Other income (expense), net	$	3,456	$	3,702	$	3,735	$	(1,847	)	$	(246	)	$	5,582

Other income (expense), net is primarily comprised of gains (losses) from remeasurement of foreign currency transactions, sublease income, realized losses related to changes in the fair value of our investments that have a decline in fair value considered other-than-temporary and recognized gains (losses) related to our investments, which was not material for all periods presented.

The change in Other income (expense), net during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was not significant. The change in Other income (expense), net during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily driven by realized gains on our available-for-sale investments of $1.9 million, gains from the remeasurement of foreign currency transactions of $1.4 million and an increase in sublease income of $0.7 million.

Income Taxes

We are required to estimate our income taxes in each of the jurisdictions in which we operate as part of the process of preparing our condensed consolidated financial statements. We maintain certain strategic management and operational activities in overseas subsidiaries and our foreign earnings are taxed at rates that are generally lower than in the United States.

Our effective tax rate generally differs from the U.S. federal statutory rate primarily due to lower tax rates on earnings generated by our foreign operations that are taxed primarily in Switzerland.

Our effective tax rate was (150.5)% and 0.4% for the three months ended September 30, 2019 and 2018, respectively. The decrease in the effective tax rate when comparing the three months ended September 30, 2019 to the three months ended September 30, 2018 was primarily due to tax items unique to the period ended September 30, 2019. These amounts include an estimated income tax benefit of $157.7 million due to the recognition of Swiss deferred tax assets related to the enactment of Switzerland’s TRAF, as well as a $17.3 million tax benefit attributable to the 2015 U.S. federal income tax return statute of limitations closing during the three months ended September 30, 2019.

Our effective tax rate was (42.3)% and 7.2% for the nine months ended September 30, 2019 and 2018, respectively. The decrease in the effective tax rate when comparing the nine months ended September 30, 2019 to the nine months ended September 30, 2018 was primarily due to tax items unique to the period ended September 30, 2019. These amounts include an estimated income tax benefit of $157.7 million due to the recognition of Swiss deferred tax assets related to the enactment of Switzerland’s TRAF, as well as a $17.3 million tax benefit attributable to the 2015 U.S. federal income tax return statute of limitations closing during the three months ended September 30, 2019.

We consider the income tax impact of the TRAF to be an estimate based on our current interpretation of the TRAF and is subject to change upon valuation, further legislative guidance and the Swiss tax authority review of the federal tax filing. We will review any further issued guidance and continue to evaluate the federal and cantonal income tax impact of tax reform in Switzerland. We currently estimate we will complete the accounting for the tax effects of the federal and cantonal Swiss tax reform no later than the period ended March 31, 2020.

Our net unrecognized tax benefits totaled $84.3 million and $89.9 million as of September 30, 2019 and December 31, 2018, respectively. At September 30, 2019, $57.3 million included in the balance for tax positions would affect the annual effective tax rate if recognized. We have $4.0 million accrued for the payment of interest as of September 30, 2019.

Court's holding in Altera v. Commissioner and upheld a 2003 regulation that requires participants in a cost-sharing arrangement to share stock-based compensation costs. The Ninth Circuit panel concluded that the 2003 regulations were valid under the Administrative Procedure Act. Since we previously accrued amounts for this uncertain tax position, there were no changes to our position or treatment of our cost-sharing arrangements in the current period. On July 22, 2019, Altera Corp. filed an appeal with the Ninth Circuit to rehear this case, which is ongoing. Therefore, the case's final disposition may result in a benefit for us in the future if the case is reversed.

We and one or more of our subsidiaries are subject to U.S. federal income taxes in the United States, as well as income taxes of multiple state and foreign jurisdictions. We are not currently under examination by the United States Internal Revenue Service. With few exceptions, we are generally not subject to examination for state and local income tax, or in non-U.S. jurisdictions, by tax authorities for years prior to 2016.

Our U.S. liquidity needs are currently satisfied using cash flows generated from our U.S. operations, borrowings, or both. We also utilize a variety of tax planning strategies in an effort to ensure that our worldwide cash is available in locations in which it is needed. We expect to repatriate a substantial portion of our foreign earnings over time, to the extent that the foreign earnings are not restricted by local laws or result in significant incremental costs associated with repatriating the foreign earnings.

At September 30, 2019, we had $300.3 million in net deferred tax assets. The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We review deferred tax assets periodically for recoverability and make estimates and judgments regarding the expected geographic sources of taxable income and gains from investments, as well as tax planning strategies in assessing the need for a valuation allowance. If the estimates and assumptions used in our determination change in the future, we could be required to revise our estimates of the valuation allowances against our deferred tax assets and adjust our provisions for additional income taxes.

Liquidity and Capital Resources

During the nine months ended September 30, 2019, we generated operating cash flows of $577.0 million. These operating cash flows related primarily to net income of $474.7 million, adjusted for, among other things, non-cash charges, stock-based compensation expense of $202.5 million and depreciation and amortization expenses of $178.6 million. Partially offsetting these cash inflows was a deferred income tax benefit of $184.6 million and a change in operating assets and liabilities of $114.7 million. The change in our net operating assets and liabilities was primarily a result of an outflow in deferred revenue of $219.0 million, an outflow in other assets of $50.1 million, primarily due to an increase in capitalized contract acquisition costs of $34.5 million and long-term contract assets of $13.9 million, an outflow in accrued expenses and other current liabilities of $48.5 million, primarily due to decreases in employee-related accruals, and an outflow in income taxes, net of $42.1 million, primarily due to decreases in income taxes payable of $24.6 million and an increase in prepaid taxes of $17.6 million. These outflows are partially offset by an inflow in accounts receivable of $256.6 million driven by an increase in collections. Our investing activities provided $1.03 billion of cash consisting primarily of cash received from the net proceeds from the sale of investments of $1.08 billion, partially offset by cash paid for the purchase of property and equipment of $50.5 million. Our financing activities used cash of $1.73 billion primarily for the cash repayment of the outstanding principal balance of our Convertible Notes of $1.16 billion, stock repurchases of $353.9 million, repayment of borrowings under our credit facility of $200.0 million, cash dividends on our common stock of $137.2 million and cash paid for tax withholding on vested stock awards of $74.8 million. These outflows are partially offset by borrowings from our credit facility of $200.0 million.

During the nine months ended September 30, 2018, we generated operating cash flows of $828.9 million. These operating cash flows related primarily to net income of $409.9 million, adjusted for, among other things, non-cash charges, stock-based compensation expense of $144.3 million, depreciation and amortization expenses of $131.5 million, and the effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies of $7.2 million. Also contributing to these cash inflows was a change in operating assets and liabilities of $97.8 million, net of effect of our acquisitions. The change in our net operating assets and liabilities was primarily a result of an inflow in accounts receivable of $296.3 million driven by an increase in collections from higher prior period bookings. This inflow is partially offset by changes in deferred revenue of $85.1 million primarily due to the upfront recognition of term licenses per the new revenue standard as well as seasonality, and by an outflow in income taxes, net of $83.3 million due to a decrease in income taxes payable and an increase in prepaid taxes. Our investing activities provided $205.7 million of cash consisting primarily of cash received from the net proceeds from the sale of investments of $328.1 million, partially offset by cash paid for acquisitions of $66.0 million and cash paid for the purchase of property and equipment of $54.3 million. Our financing activities used cash of $940.3 million primarily due to cash paid for stock repurchases of $881.2 million and cash paid for tax withholding on vested stock awards of $53.6 million.

Senior Notes

On November 15, 2017, we issued $750.0 million of the 2027 Notes. The 2027 Notes accrue interest at a rate of 4.5% per annum. Interest on the 2027 Notes is due semi-annually on June 1 and December 1 of each year, beginning on June 1, 2018. The net proceeds from this offering were approximately $741.0 million, after deducting the underwriting discount and estimated offering expenses payable by us. Net proceeds from this offering were used to repurchase shares of our common stock through an ASR transaction which we entered into with the ASR Counterparty on November 13, 2017. The 2027 Notes will mature on December 1, 2027, unless earlier redeemed or repurchased in accordance with their terms prior to such date. We may redeem the 2027 Notes at our option at any time in whole or from time to time in part prior to September 1, 2027 at a redemption price equal to the greater of (a) 100% of the aggregate principal amount of the 2027 Notes to be redeemed and (b) the sum of the present values of the remaining scheduled payments under such 2027 Notes, plus in each case, accrued and unpaid interest to, but excluding, the redemption date. Among other terms, under certain circumstances, holders of the 2027 Notes may require us to repurchase their 2027 Notes upon the occurrence of a change of control prior to maturity for cash at a repurchase price equal to 101% of the principal amount of the 2027 Notes to be repurchased plus accrued and unpaid interest to, but excluding, the repurchase date. See Note 11 to our condensed consolidated financial statements for additional details on the 2027 Notes.

Credit Facility

On January 7, 2015, we entered into a credit agreement with Bank of America, N.A., as Administrative Agent, and the other lenders party thereto from time to time collectively, the Lenders. The Credit Agreement provides for a $250.0 million unsecured revolving credit facility for a term of five years. We may elect to increase the revolving credit facility by up to $250.0 million if existing or new lenders provide additional revolving commitments in accordance with the terms of the Credit Agreement. The proceeds of borrowings under the Credit Agreement may be used for working capital and general corporate purposes, including acquisitions. Borrowings under the Credit Agreement will bear interest at a rate equal to either (a) a customary London interbank offered rate formula or (b) a customary base rate formula, plus the applicable margin with respect thereto, in each case as set forth in the Credit Agreement. During the three months ended September 30, 2019, we borrowed and repaid $200.0 million under the credit facility. As of September 30, 2019, there was no amount outstanding under the credit facility.

The Credit Agreement contains certain financial covenants that require us to maintain a consolidated leverage ratio of not more than 3.5:1.0 and a consolidated interest coverage ratio of not less than 3.0:1.0. The Credit Agreement includes customary events of default, with corresponding grace periods in certain circumstances, including, without limitation, payment defaults, cross-defaults, the occurrence of a change of control and bankruptcy-related defaults. The Lenders are entitled to accelerate repayment of the loans under the Credit Agreement upon the occurrence of any of the events of default. In addition, the Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to grant liens, merge or consolidate, dispose of all or substantially all of our assets, change our business and incur subsidiary indebtedness, in each case subject to customary exceptions for a credit facility of this size and type. We were in compliance with these covenants as of September 30, 2019. In addition, the Credit Agreement contains customary representations and warranties. Please see Note 11 to our condensed consolidated financial statements for additional details on our Credit Agreement.

Convertible Notes

During 2014, we completed a private placement of approximately $1.44 billion principal amount of 0.500% Convertible Notes due 2019. As of October 15, 2018, we had received conversion notices from noteholders with respect to $273.0 million in aggregate principal amount of Convertible Notes requesting conversion as a result of the sales price condition having been met during the second and third quarter of 2018. In accordance with the terms of the Convertible Notes, in the fourth quarter of 2018, we made cash payments of this aggregate principal amount and delivered 1.3 million newly issued shares of our common stock in respect of the remainder of our conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted, in full satisfaction of such converted notes. We received shares of our common stock under the Bond Hedges that offset the issuance of shares of common stock upon conversion of the Convertible Notes. In addition, on or after October 15, 2018 until the close of business on the second scheduled trading day immediately preceding the April 15, 2019 maturity date, holders of the Convertible Notes had the right to convert their notes at any time, regardless of whether the sales price condition was met. All Convertible Notes were converted by their beneficial owners prior to their maturity on April 15, 2019. In accordance with the terms of the indenture governing the Convertible Notes, on April 15, 2019 we paid $1.16 billion in the outstanding aggregate principal amount of the Convertible Notes and delivered 4.9 million newly issued shares of our common stock in respect of the remainder of our conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted, in full satisfaction of such converted notes. We received shares of our common stock under

the Bond Hedges that offset the issuance of shares of common stock upon conversion of the Convertible Notes. Please see Note 11 to our condensed consolidated financial statements for additional details on our Convertible Notes and Bond Hedges.

Historically, significant portions of our cash inflows were generated by our operations. We currently expect this trend to continue throughout 2019. We believe that our existing cash and investments together with cash flows expected from operations will be sufficient to meet expected operating and capital expenditure requirements and service our debt obligations for the next 12 months. We continue to search for suitable acquisition candidates and could acquire or make investments in companies we believe are related to our strategic objectives. We could from time to time continue to seek to raise additional funds through the issuance of debt or equity securities for larger acquisitions and for general corporate purposes.

Cash, Cash Equivalents and Investments



	September 30, 2019		December 31, 2018		2019 Compared to 2018
	(In thousands)
Cash, cash equivalents and investments	$	570,580	$	1,776,700	$	(1,206,120	)

The decrease in Cash, cash equivalents and investments when comparing September 30, 2019 to December 31, 2018, is primarily due to the cash repayment of the outstanding principal amount of our Convertible Notes of $1.16 billion, cash paid for stock repurchases of $353.9 million, repayment of borrowings under our credit facility of $200.0 million, cash dividends on our common stock of $137.2 million, cash paid for tax withholding on vested stock awards of $74.8 million, and cash paid for property and equipment of $50.5 million, partially offset by cash provided by operating activities of $577.0 million and borrowings from our credit facility of $200.0 million.

As of September 30, 2019, $305.4 million of the $570.6 million of Cash, cash equivalents and investments was held by our foreign subsidiaries. As a result of the Tax Cuts and Jobs Act, which became effective January 1, 2018, the cash, cash equivalents and investments held by our foreign subsidiaries can be repatriated without incurring any additional U.S. federal tax. Upon repatriation of these funds, we could be subject to foreign and U.S. state income taxes. The amount of taxes due is dependent on the amount and manner of the repatriation, as well as the locations from which the funds are repatriated and received. We generally invest our cash and cash equivalents in investment grade, highly liquid securities to allow for flexibility in the event of immediate cash needs. Our short-term and long-term investments primarily consist of interest-bearing securities.

Stock Repurchase Programs

Our Board of Directors authorized an ongoing stock repurchase program, of which $750.0 million was approved in October 2018 and an additional $600.0 million was approved in October 2019. We may use the approved dollar authority to repurchase stock at any time until the approved amount is exhausted. The objective of the stock repurchase program is to improve stockholders’ returns. At September 30, 2019, $414.0 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock. A portion of the funds used to repurchase stock over the course of the program was provided by net proceeds from the Convertible Notes and 2027 Notes offerings, as well as proceeds from employee stock awards and the related tax benefit. We are authorized to make purchases of our common stock using general corporate funds through open market purchases, pursuant to a Rule 10b5-1 plan or in privately negotiated transactions.

In February 2018, we entered into an ASR transaction with a counterparty to pay an aggregate of $750.0 million in exchange for the delivery of approximately 6.5 million shares of our common stock based on current market prices. The purchase price per share under the ASR was based on the volume-weighted average price of our common stock during the term of the ASR, less a discount. The ASR was entered into pursuant to our existing share repurchase program. Final settlement of the ASR agreement was completed in April 2018 and we received delivery of an additional 1.6 million shares of our common stock.

During the three months ended September 30, 2019, we expended approximately $103.9 million on open market purchases under the stock repurchase program, repurchasing 1,130,100 shares of common stock at an average price of $91.94. During the nine months ended September 30, 2019, we expended approximately $353.9 million on open market purchases under the stock repurchase program, repurchasing 3,640,982 shares of common stock at an average price of $97.20.

During the three months ended September 30, 2018, we expended approximately $116.2 million on open market purchases under the stock repurchase program, repurchasing 1.0 million shares of common stock at an average price of $111.11. During the nine months ended September 30, 2018, we expended approximately $131.2 million on open market purchases under the stock repurchase program, repurchasing 1.2 million shares of common stock at an average price of $110.60.

Shares for Tax Withholding

During the three and nine months ended September 30, 2019, we withheld 44,829 shares and 742,946 shares, respectively, from equity awards that vested, totaling $4.2 million and $74.8 million, respectively, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. During the three and nine months ended September 30, 2018, we withheld 32,813 shares and 570,589 shares, respectively, from equity awards that vested, totaling $3.7 million and $53.6 million, respectively, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. These shares are reflected as treasury stock in our condensed consolidated balance sheets and the related cash outlays do not reduce our total stock repurchase authority.

Contractual Obligations

Other Purchase Commitments

In June 2019, we entered into an amended agreement, in the ordinary course of business, with a third-party provider for our use of certain cloud services through June 2021. Under the amended agreement, we are committed to a purchase of $25.0 million in fiscal year 2020.

Off-Balance Sheet Arrangements

We do not have any special purpose entities or off-balance sheet financing arrangements.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes during the quarter ended September 30, 2019 with respect to the information appearing in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year ended December 31, 2018.


ITEM 4.	CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of September 30, 2019, our management, with the participation of our principal executive and principal financial officers, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our principal executive officer and our principal financial officer concluded that, as of September 30, 2019, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated by and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

During the three months ended September 30, 2019, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

We are subject to various legal proceedings, including suits, assessments, regulatory actions and investigations. We believe that we have meritorious defenses in these matters; however, we are unable currently to determine the ultimate outcome of these or similar matters or the potential exposure to loss, if any. In addition, due to the nature of our business, we are subject to various litigation matters, including patent infringement claims alleging infringement by various Citrix products and services. We believe that we have meritorious defenses to the allegations made in our pending cases and intend to vigorously defend these lawsuits; however, we are unable currently to determine the ultimate outcome of these or similar matters or the potential exposure to loss, if any. Although it is difficult to predict the ultimate outcomes of these cases, we believe that outcomes that will materially and adversely affect our business, financial position, results of operations or cash flows are reasonably possible, but not estimable at this time.

We were the victim of a cyberattack, in which international cyber criminals gained intermittent access to our internal network through “password spraying”, and over a limited number of days stole business documents and files from a shared network drive and a drive associated with a web-based tool used in our consulting practice. We recently conducted an investigation, and we are completing our review of documents and files that may have been accessed or were stolen in this incident. Please also see Management’s Discussion and Analysis - Executive Summary.

Although it is difficult to predict the ultimate outcomes of this cyberattack, to date, three putative class action lawsuits have been filed against us in the United States District Court for the Southern District of Florida. These matters, Howard v. Citrix, Jackson and Sargent v. Citrix, and Ramus, Young and Charles v. Citrix, were filed on May 24, 2019, May 30, 2019, and June 23, 2019, respectively, and have been consolidated. The plaintiffs, who purport to represent various classes of our current and former employees (and their dependents), generally claim to have been harmed by our alleged actions and/or omissions in connection with this incident and their personal data. They assert a variety of common law and statutory claims seeking monetary damages or other related relief.

We are unable to currently determine the ultimate outcome of these proceedings or the potential exposure or loss, if any, because the legal proceedings remain in the early stages, there is uncertainty as to the likelihood of a class or classes being certified or the ultimate size of any class if certified, and there are significant factual and legal issues to be resolved.

Beyond the matters described above, we believe that it is reasonably possible that outcomes from potential unasserted claims related to this cyberattack could materially and adversely affect our business, financial position, results of operations or cash flows. However, it is not possible to estimate the amount or a range of potential loss, if any, at this time, and we will continue to evaluate information as it becomes known and will record an accrual for estimated losses at the time or times it is determined that a loss is both probable and reasonably estimable.

On July 25, 2019, a class action lawsuit was filed against Citrix, LogMeIn and certain of their directors and officers in the Circuit Court of the 15th Judicial Circuit, Palm Beach County, Florida. The complaint alleges that the defendants violated federal securities laws by making alleged misstatements and omissions in LogMeIn’s Registration Statement and Prospectus filed in connection with the 2017 spin-off of Citrix’s GoTo family of service offerings and subsequent merger of that business with LogMeIn. The complaint seeks among other things the recovery of monetary damages. We believe that Citrix and our directors have meritorious defenses to these allegations; however, we are unable to currently determine the ultimate outcome of this matter or the potential exposure or loss, if any.


ITEM 1A.	RISK FACTORS

The following information updates, and should be read in conjunction with, the information disclosed in Part 1, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which was filed with the Securities and Exchange Commission on February 15, 2019.

We may not be able to forecast the rate at which our customers’ purchases trend away from perpetual licenses to subscriptions, which may impact our forecasted and actual revenue and operating results.

We are undergoing a business model transition and as our customers’ purchases trend away from perpetual licenses to subscriptions, our subscription bookings as a percentage of total product bookings increases. We forecast our future revenue and operating results and provide financial projections based on a number of assumptions, including a forecasted rate at which our subscription bookings as a percentage of total product bookings will increase throughout our business model transition. If any of our assumptions about our business model transition or the estimated rate at which our subscription bookings as a percentage of total product bookings will increase and in which periods are incorrect, our forecasted revenue and operating results may be impacted and could vary materially from those we provide as guidance or from those anticipated by investors and analysts. For example, in the second quarter of fiscal year 2019, our subscription bookings as a percentage of total product bookings was higher than anticipated, which impacted our operating results for that period and our guidance for the full fiscal year 2019.

The cyberattack involving our internal network that we announced on March 8, 2019 could have a material adverse impact on our business, results of operations and financial condition.

This cyberattack has resulted in three class action complaints related to the loss of personal data of current and former employees, and could result in (among other consequences):


•	lost sales, including from disruption of customer relationships;


•	disruptions in the operation of our business;


•	harm to our reputation or brand;


•	negative publicity;


•	lost trust from our customers, partners and employees;


•	regulatory enforcement action or other legal authority, which could result in significant fines and/or penalties or injunctive remedies;


•	individual and/or class action lawsuits, due to, among other things, the compromise of sensitive employee or customer information, which could result in financial judgments against us or the payment of settlement amounts, which would cause us to incur legal fees and costs;


•	costs associated with responding to, and mitigating, the incident in excess of insurance policy limits, or that may not be covered by insurance;


•	disputes with our insurance carriers concerning coverage for the costs associated with responding to, and mitigating, the incident; and


•	longer-term remediation and security enhancement expenses.

Consequently, this cyberattack could have a material adverse impact on our business, results of operations and financial condition.


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by the Issuer

The Company's Board of Directors authorized an ongoing stock repurchase program, of which $750.0 million was approved in October 2018 and an additional $600.0 million was approved in October 2019. The objective of the stock repurchase program is to improve stockholders’ returns. As of September 30, 2019, $414.0 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock. The following table shows the monthly activity related to our stock repurchase program for the quarter ended September 30, 2019:



	Total Number of Shares (or Units) Purchased (1)	Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (In thousands) (2)
July 1, 2019 through July 31, 2019	7,934	$	99.48	—	$	517,896
August 1, 2019 through August 31, 2019	1,116,480	$	91.95	1,087,100	$	417,984
September 1, 2019 through September 30, 2019	50,515	$	92.99	43,000	$	413,992
Total	1,174,929	$	92.05	1,130,100	$	413,992


(1)	Includes approximately 44,829 shares withheld from restricted stock units that vested in the third quarter of 2019 to satisfy minimum tax withholding obligations that arose on the vesting of restricted stock units.


(2)	Shares withheld from restricted stock units that vested to satisfy minimum tax withholding obligations that arose on the vesting of awards do not deplete the dollar amount available for purchases under the repurchase program.


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5.	OTHER INFORMATION

Our policy governing transactions in Citrix securities by our directors, officers and employees permits our directors, officers and certain other persons to enter into trading plans complying with Rule 10b5-1 under the Exchange Act. We have been advised that Peter J. Sacripanti, a member of our Board of Directors, and Mark J. Ferrer, our Executive Vice President and Chief Revenue Officer, each entered into a new trading plan in the third quarter of 2019 in accordance with Rule 10b5-1 and our policy governing transactions in our securities. We undertake no obligation to update or revise the information provided herein, including for revision or termination of an established trading plan.


ITEM 6.	EXHIBITS


(a)	List of exhibits



Exhibit No.		Description

31.1†		Rule 13a-14(a) / 15d-14(a) Certification of Principal Executive Officer

31.2†		Rule 13a-14(a) / 15d-14(a) Certification of Principal Financial Officer

32.1††		Section 1350 Certification of Principal Executive Officer and Principal Financial Officer

101.SCH†		Inline XBRL Taxonomy Extension Schema Document

101.CAL†		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF†		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB†		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE†		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104†		Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.*)



†	Filed herewith.
††	Furnished herewith.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on this 1st day of November, 2019.




	CITRIX SYSTEMS, INC.

	By:	/s/ ARLEN R. SHENKMAN
		Arlen R. Shenkman
		Chief Financial Officer
		(Authorized Officer and Principal Financial Officer)