CITRIX SYSTEMS INC - Quarter Report: 2021 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, 2021
or
| ☐ | 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 | ||||||||||
1
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 November 1, 2021, there were 124,722,872 shares of the registrant’s Common Stock, $.001 par value per share, outstanding.
2
CITRIX SYSTEMS, INC.
Form 10-Q
For the Quarterly Period Ended September 30, 2021
CONTENTS
| Page Number | ||||||||
| PART I: | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II: | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
3
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2021 | December 31, 2020 | ||||||||||
| (Unaudited) | (Derived from audited financial statements) | ||||||||||
| (In thousands, except par value) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 428,569 | $ | 752,895 | |||||||
| Short-term investments, available-for-sale | 21,096 | 124,113 | |||||||||
Accounts receivable, net of allowances of $22,788 and $25,868 at September 30, 2021 and December 31, 2020, respectively | 532,002 | 858,009 | |||||||||
| Inventories, net | 24,442 | 20,089 | |||||||||
| Prepaid expenses and other current assets | 333,675 | 236,000 | |||||||||
| Total current assets | 1,339,784 | 1,991,106 | |||||||||
| Long-term investments, available-for-sale | 14,328 | 14,365 | |||||||||
| Property and equipment, net | 229,760 | 208,811 | |||||||||
| Operating lease right-of-use assets, net | 191,856 | 187,129 | |||||||||
| Goodwill | 3,455,772 | 1,798,408 | |||||||||
| Other intangible assets, net | 816,909 | 81,491 | |||||||||
| Deferred tax assets, net | 230,662 | 386,504 | |||||||||
| Other assets | 257,173 | 222,533 | |||||||||
| Total assets | $ | 6,536,244 | $ | 4,890,347 | |||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 127,161 | $ | 92,266 | |||||||
| Accrued expenses and other current liabilities | 367,630 | 507,185 | |||||||||
| Income taxes payable | 57,783 | 42,760 | |||||||||
| Current portion of deferred revenues | 1,464,176 | 1,510,216 | |||||||||
| Total current liabilities | 2,016,750 | 2,152,427 | |||||||||
| Long-term portion of deferred revenues | 314,272 | 392,360 | |||||||||
| Long-term debt | 3,325,119 | 1,732,622 | |||||||||
| Long-term income taxes payable | 204,782 | 232,086 | |||||||||
| Operating lease liabilities | 184,490 | 195,767 | |||||||||
| Other liabilities | 91,092 | 72,942 | |||||||||
| Commitments and contingencies | |||||||||||
| 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; 324,825 and 321,964 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively | 325 | 322 | |||||||||
| Additional paid-in capital | 6,942,847 | 6,608,018 | |||||||||
| Retained earnings | 5,045,453 | 4,984,333 | |||||||||
| Accumulated other comprehensive loss | (6,862) | (3,649) | |||||||||
| 11,981,763 | 11,589,024 | ||||||||||
Less - common stock in treasury, at cost (200,204 and 199,443 shares at September 30, 2021 and December 31, 2020, respectively) | (11,582,024) | (11,476,881) | |||||||||
| Total stockholders' equity | 399,739 | 112,143 | |||||||||
| Total liabilities and stockholders' equity | $ | 6,536,244 | $ | 4,890,347 | |||||||
See accompanying notes.
4
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (In thousands, except per share information) | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Subscription | $ | 383,154 | $ | 262,604 | $ | 1,099,554 | $ | 774,290 | |||||||||||||||
| Product and license | 25,365 | 87,218 | 128,283 | 390,009 | |||||||||||||||||||
| Support and services | 369,926 | 417,348 | 1,138,485 | 1,262,745 | |||||||||||||||||||
| Total net revenues | 778,445 | 767,170 | 2,366,322 | 2,427,044 | |||||||||||||||||||
| Cost of net revenues: | |||||||||||||||||||||||
| Cost of subscription, support and services | 112,067 | 102,755 | 338,839 | 282,672 | |||||||||||||||||||
| Cost of product and license revenues | 14,360 | 16,238 | 61,235 | 57,554 | |||||||||||||||||||
| Amortization of product related intangible assets | 20,392 | 8,293 | 51,520 | 24,877 | |||||||||||||||||||
| Total cost of net revenues | 146,819 | 127,286 | 451,594 | 365,103 | |||||||||||||||||||
| Gross profit | 631,626 | 639,884 | 1,914,728 | 2,061,941 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 145,811 | 130,628 | 436,148 | 406,827 | |||||||||||||||||||
| Sales, marketing and services | 290,240 | 298,659 | 890,444 | 916,801 | |||||||||||||||||||
| General and administrative | 91,462 | 81,591 | 280,046 | 262,693 | |||||||||||||||||||
| Amortization of other intangible assets | 19,648 | 701 | 46,615 | 2,097 | |||||||||||||||||||
| Total operating expenses | 547,161 | 511,579 | 1,653,253 | 1,588,418 | |||||||||||||||||||
| Income from operations | 84,465 | 128,305 | 261,475 | 473,523 | |||||||||||||||||||
| Interest income | 319 | 491 | 912 | 2,685 | |||||||||||||||||||
| Interest expense | (22,809) | (16,639) | (70,074) | (48,326) | |||||||||||||||||||
| Other (expense) income, net | (2,050) | 3,841 | 17,481 | 7,850 | |||||||||||||||||||
| Income before income taxes | 59,925 | 115,998 | 209,794 | 435,732 | |||||||||||||||||||
| Income tax expense | 8,138 | 17,771 | 5,193 | 43,377 | |||||||||||||||||||
| Net income | $ | 51,787 | $ | 98,227 | $ | 204,601 | $ | 392,355 | |||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | 0.42 | $ | 0.80 | $ | 1.65 | $ | 3.17 | |||||||||||||||
| Diluted | $ | 0.41 | $ | 0.78 | $ | 1.62 | $ | 3.10 | |||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic | 124,515 | 123,255 | 123,896 | 123,835 | |||||||||||||||||||
| Diluted | 126,321 | 125,863 | 126,140 | 126,407 | |||||||||||||||||||
See accompanying notes.
5
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Net income | $ | 51,787 | $ | 98,227 | $ | 204,601 | $ | 392,355 | |||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||
| Available for sale securities: | |||||||||||||||||||||||
| Change in net unrealized (losses) gains | (1) | 14 | 19 | 145 | |||||||||||||||||||
| Less: reclassification adjustment for net losses (gains) included in net income | — | 1 | — | (20) | |||||||||||||||||||
| Net change (net of tax effect) | (1) | 15 | 19 | 125 | |||||||||||||||||||
| Gain on pension liability | — | — | 1,050 | 8 | |||||||||||||||||||
| Cash flow hedges: | |||||||||||||||||||||||
| Change in unrealized (losses) gains | (554) | 1,733 | (1,288) | (394) | |||||||||||||||||||
| Less: reclassification adjustment for net (gains) losses included in net income | (292) | 390 | (2,994) | 1,061 | |||||||||||||||||||
| Net change (net of tax effect) | (846) | 2,123 | (4,282) | 667 | |||||||||||||||||||
| Other comprehensive (loss) income | (847) | 2,138 | (3,213) | 800 | |||||||||||||||||||
| Comprehensive income | $ | 50,940 | $ | 100,365 | $ | 201,388 | $ | 393,155 | |||||||||||||||
See accompanying notes.
6
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Operating Activities | |||||||||||
| Net income | $ | 204,601 | $ | 392,355 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation, amortization and other | 247,489 | 159,283 | |||||||||
| Stock-based compensation expense | 249,601 | 228,854 | |||||||||
| Deferred income tax benefit | (5,847) | (34,372) | |||||||||
| Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies | 13,878 | (9,225) | |||||||||
| Other non-cash items | (17,485) | 16,196 | |||||||||
| Total adjustments to reconcile net income to net cash provided by operating activities | 487,636 | 360,736 | |||||||||
| Changes in operating assets and liabilities, net of the effects of acquisitions: | |||||||||||
| Accounts receivable | 339,969 | 150,347 | |||||||||
| Inventories | (5,098) | (592) | |||||||||
| Prepaid expenses and other current assets | (54,686) | (39,049) | |||||||||
| Other assets | (79,733) | (67,139) | |||||||||
| Income taxes, net | (63,915) | 16,640 | |||||||||
| Accounts payable | 32,912 | 17,973 | |||||||||
| Accrued expenses and other current liabilities | (191,484) | 73,737 | |||||||||
| Deferred revenues | (157,372) | (103,487) | |||||||||
| Other liabilities | (45) | 14,252 | |||||||||
| Total changes in operating assets and liabilities, net of the effects of acquisitions | (179,452) | 62,682 | |||||||||
| Net cash provided by operating activities | 512,785 | 815,773 | |||||||||
| Investing Activities | |||||||||||
| Purchases of available-for-sale investments | (19,827) | (476,432) | |||||||||
| Proceeds from maturities of available-for-sale investments | 122,900 | 166,077 | |||||||||
| Purchases of property and equipment | (63,590) | (30,783) | |||||||||
| Cash paid for acquisitions, net of cash acquired | (2,022,304) | — | |||||||||
| Cash paid for licensing agreements, patents and technology | (8,656) | (5,581) | |||||||||
| Other | 7,050 | 923 | |||||||||
| Net cash used in investing activities | (1,984,427) | (345,796) | |||||||||
| Financing Activities | |||||||||||
| Proceeds from issuance of common stock under stock-based compensation plan | 233 | — | |||||||||
| Proceeds from term loan credit agreement, net of issuance costs | 997,947 | 998,846 | |||||||||
| Repayment of term loan credit agreement | (150,000) | (750,000) | |||||||||
| Proceeds from senior notes, net of issuance costs | 741,393 | 738,107 | |||||||||
| Repayment of acquired debt | (190,000) | — | |||||||||
| Stock repurchases, net | — | (1,199,903) | |||||||||
| Cash paid for tax withholding on vested stock awards | (105,143) | (104,848) | |||||||||
| Cash paid for dividends | (137,590) | (129,108) | |||||||||
| Other | (5,438) | — | |||||||||
| Net cash provided by (used in) financing activities | 1,151,402 | (446,906) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (4,086) | (8) | |||||||||
| Change in cash and cash equivalents | (324,326) | 23,063 | |||||||||
| Cash and cash equivalents at beginning of period | 752,895 | 545,761 | |||||||||
| Cash and cash equivalents at end of period | $ | 428,569 | $ | 568,824 | |||||||
See accompanying notes.
7
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, 2020.
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 Workspace solutions, App Delivery and Security 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
Recent Accounting Pronouncements
Income Taxes
In December 2019, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update on income taxes. The new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. The Company adopted this standard effective January 1, 2021. The adoption of this standard did not have a material impact on the Company's consolidated financial position, results of operations and cash flows.
Reclassifications
Certain reclassifications of the prior years' amounts have been made to conform to the current year's presentation.
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 estimation for reserves for legal contingencies, the standalone selling price of certain performance obligations related to revenue recognition, the provision for credit losses related to accounts receivable, contract assets, and available-for-sale debt securities, the provision to reduce obsolete or excess inventory to net realizable value, the provision for estimated returns, as well as sales allowances, the assumptions used in the valuation of stock-based awards and measurement of expense related to performance stock units, the assumptions used in the discounted cash flows to mark certain of its investments to market, the valuation of the Company’s goodwill, valuation of acquired intangible assets and liabilities, 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.
8
Available-for-sale Investments
Short-term and long-term available-for-sale investments in debt securities as of September 30, 2021 and December 31, 2020 primarily consist of agency securities, corporate 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 in the accompanying condensed consolidated balance sheets. 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 unrealized changes in the fair value of its available-for-sale debt securities in income unless a security is deemed to be impaired.
The allowance for credit losses on the Company's investments in available-for-sale debt securities is determined using a quantitative discounted cash flow analysis if impairment triggers exist after a qualitative screen is completed. Impairment on available-for-sale debt securities is determined on an individual security basis and the security is subject to impairment when its fair value declines below its amortized cost basis. If the fair value is less than the amortized cost basis, management must then determine whether it intends to sell the security or whether it is more likely than not that it will be required to sell the security before it recovers its value. If management intends to sell the security or will more-likely-than-not be required to sell the impaired security before it recovers its value, a credit loss is recorded to Other (expense) income, net in the accompanying condensed consolidated statements of income. If management does not intend to sell the security, nor will it more-likely-than-not be required to sell the security before the security recovers its value, management must then determine whether the loss is due to credit loss or other factors. For impairment indicators due to credit loss factors, management establishes an allowance for credit losses with a charge to Other (expense) income, net. For impairment indicators due to other factors, management records the loss with a charge to Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets.
See Note 7 for additional information regarding the Company’s investments.
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. 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. See Note 7 for additional information regarding the Company’s fair value measurements.
9
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. 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 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, on-premise subscription software licenses, and hybrid subscription offerings. 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 Workspace solutions and App Delivery and Security products.
Support and services
Support and services revenues include license updates, maintenance and professional services which are primarily related to the Company's perpetual offerings. License updates and maintenance revenues are primarily comprised of software and hardware maintenance, when and if-available updates and technical support. 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.
10
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) | ||||
| On-premise subscription license updates and maintenance | Ratably over the course of the service term (over 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 for perpetual software licenses | Ratably over the course of the service term (over time) | ||||
| Professional services | As the services are provided (over time) | ||||
Significant Judgments
The Company generates all of its revenues from contracts with customers. 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 the 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.
Sales tax
The Company records revenue net of sales tax.
11
Timing of revenue recognition
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Products and services transferred at a point in time | $ | 86,366 | $ | 155,087 | $ | 371,000 | $ | 630,193 | ||||||||||||||||||
| Products and services transferred over time | 692,079 | 612,083 | 1,995,322 | 1,796,851 | ||||||||||||||||||||||
| Total net revenues | $ | 778,445 | $ | 767,170 | $ | 2,366,322 | $ | 2,427,044 | ||||||||||||||||||
Contract balances
The Company's short-term and long-term contract assets, net of allowance for credit losses, were $51.9 million and $44.8 million, respectively, as of September 30, 2021, and $37.3 million and $41.7 million, respectively, as of December 31, 2020, and are included in Prepaid expenses and other current assets and Other assets, respectively, in the accompanying condensed consolidated balance sheets. The Current portion of deferred revenues and the Long-term portion of deferred revenues were $1.46 billion and $314.3 million, respectively, as of September 30, 2021 and $1.51 billion and $392.4 million, respectively, as of December 31, 2020. 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 Company's right to consideration or the customer’s payment. During the three and nine months ended September 30, 2021, the Company recognized $553.7 million and $1.26 billion, respectively, of revenue that was included in the deferred revenue balance as of June 30, 2021 and December 31, 2020, 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 differs from the timing of the Company's right to consideration or 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 material asset impairment charges related to contract assets for either the three and nine months ended September 30, 2021 and 2020, respectively.
For the Company’s perpetual offerings, the timing of payment is typically upfront. 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 amortized as these services are provided over time.
For contracts that have an original duration of one year or less, 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 | $ | 1,838,358 | $ | 62,940 | $ | 1,445 | $ | 1,902,743 | ||||||||||||||||||
| Support and services | 1,061,462 | 23,104 | 1,273 | 1,085,839 | ||||||||||||||||||||||
| Total net revenues | $ | 2,899,820 | $ | 86,044 | $ | 2,718 | $ | 2,988,582 | ||||||||||||||||||
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 over the expected period of benefit on a basis consistent with the pattern of transfer of the products or services to which the asset relates. The Company elects to apply a practical expedient to expense contract acquisition costs as incurred where the pattern of transfer is one year or less.
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The Company’s typical contracts include performance obligations related to subscription, product and licenses, and support and services. Contract acquisition costs are allocated to performance obligations using a portfolio approach. The Company assesses its sales compensation plans at least annually to evaluate whether contract acquisition costs for renewals and extensions are commensurate with those related to initial contracts. If concluded to be commensurate, the contract acquisition costs are amortized over the contractual term on a basis consistent with the pattern of transfer of the products or services to which the asset relates. If concluded not to be commensurate, the contract acquisition costs are amortized over the greater of the contractual term or estimated customer life on a basis consistent with the pattern of transfer of the products or services to which the asset relates. The Company 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.
For the three and nine months ended September 30, 2021, the Company recorded amortization of capitalized contract acquisition costs of $19.3 million and $56.5 million, respectively, and for the three and nine months ended September 30, 2020, the Company recorded amortization of capitalized contract acquisition costs of $14.7 million and $41.6 million, respectively, which are included in Sales, marketing and services expense in the accompanying condensed consolidated statements of income. The Company's short-term and long-term contract acquisition costs were $76.0 million and $131.6 million, respectively, as of September 30, 2021, and $71.5 million and $124.7 million, respectively, as of December 31, 2020, and are included in Prepaid expenses and other current assets and Other assets, respectively, in the accompanying condensed consolidated balance sheets. There were no impairment losses in relation to costs capitalized during the three and nine months ended September 30, 2021 and 2020, respectively.
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.
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, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income | $ | 51,787 | $ | 98,227 | $ | 204,601 | $ | 392,355 | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Denominator for basic earnings per share - weighted-average shares outstanding | 124,515 | 123,255 | 123,896 | 123,835 | |||||||||||||||||||
| Effect of dilutive employee stock awards | 1,806 | 2,608 | 2,244 | 2,572 | |||||||||||||||||||
| Denominator for diluted earnings per share - weighted-average shares outstanding | 126,321 | 125,863 | 126,140 | 126,407 | |||||||||||||||||||
| Basic earnings per share | $ | 0.42 | $ | 0.80 | $ | 1.65 | $ | 3.17 | |||||||||||||||
| Diluted earnings per share | $ | 0.41 | $ | 0.78 | $ | 1.62 | $ | 3.10 | |||||||||||||||
For the three and nine months ended September 30, 2021, anti-dilutive stock-based awards excluded from the calculations of diluted earnings per share were 3.3 million shares and 1.7 million shares, respectively. For the three and nine months ended September 30, 2020, stock-based awards excluded from the calculations of diluted earnings per share were not material.
5. CREDIT LOSSES
The Company is exposed to credit losses primarily through its accounts receivable, investments in available-for-sale debt securities, and contract assets. See Note 3 for additional information related to the Company's contract assets.
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Accounts receivable, net
The Company's accounts receivable consist of the following (in thousands):
| September 30, 2021 | |||||
| Accounts receivable, gross | $ | 554,790 | |||
| Less: allowance for returns | (10,851) | ||||
| Less: allowance for credit losses | (11,937) | ||||
| Accounts receivable, net | $ | 532,002 | |||
The allowance for credit losses on accounts receivable is determined using a combination of specific reserves for accounts that are deemed to exhibit credit loss indicators and general reserves that are judgmentally determined using loss rates based on historical write-offs by geography and customer accounts subject to credit check versus non-credit check status and consideration of recent forecasted information, including underlying economic expectations. The credit loss reserves are updated quarterly for most recent write-offs and collections information and underlying economic expectations. The Company will compare its current estimate of expected credit losses with the estimate of credit losses from the prior period and will report in net income the amount necessary to adjust the allowance for current expected credit losses. Credit loss expense is included within General and administrative expenses in the accompanying condensed consolidated statements of income.
The activity in the Company's allowance for credit losses for the nine months ended September 30, 2021 is summarized as follows (in thousands):
| Total | |||||
| Balance of allowance for credit losses at January 1, 2021 | $ | 15,419 | |||
| Current period provision (reversal) for expected losses | (1,447) | ||||
| Write-offs charged against allowance | (3,030) | ||||
| Recoveries of any amounts previously written off | 110 | ||||
Other (1) | 885 | ||||
| Balance of allowance for credit losses at September 30, 2021 | $ | 11,937 | |||
(1) Includes amounts established in connection with acquisitions.
As of September 30, 2021, one distributor accounted for 14% of the Company's total gross accounts receivable.
Available-for-sale Investments
The Company did not have any credit loss expense recorded related to available-for-sale debt securities for the three and nine months ended September 30, 2021 and 2020, respectively.
The Company has available-for-sale debt securities that have fair values below amortized cost; however, the Company does not consider a credit allowance necessary as (i) the Company does not intend to sell the securities, (ii) it is not more-likely-than-not that the Company will be required to sell the investments before recovery of the amortized cost basis, and (iii) the unrealized losses are due to market factors rather than credit loss factors. See Note 7 for more information on available-for-sale debt securities.
6. ACQUISITIONS
2021 Business Combination
On February 26, 2021 (the “Closing Date”), the Company completed the acquisition of Wrangler Topco, LLC (“Wrangler”), the parent entity of Wrike, Inc. (“Wrike”), a leader in the SaaS collaborative work management space, for approximately $2.07 billion (the “Purchase Consideration”). The Purchase Consideration consists of a base purchase price of $2.25 billion and is subject to certain adjustments as provided for under the related Agreement and Plan of Merger dated January 16, 2021 (the “Merger Agreement”). The Company expects that the addition of Wrike’s cloud-delivered capabilities will expand its collaborative work management capabilities. Under the Merger Agreement, the Company acquired all of the issued and outstanding equity securities of Wrangler.
On the Closing Date, $35.0 million of the Purchase Consideration was deposited into a third-party escrow fund, to be held for up to one year following the Closing Date, to fund (i) potential payment obligations of Wrangler equityholders with respect
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to post-closing adjustments to the Purchase Consideration and (ii) potential post-closing indemnification obligations of Wrangler equityholders, in each case in accordance with the terms of the Merger Agreement.
Under the terms of the Merger Agreement, certain unvested stock options held by Wrike employees were assumed by the Company and converted into options to purchase 526,113 shares of the Company's common stock that were valued at $54.3 million using the Black-Scholes option-pricing model. The portion of the fair value of the assumed stock options associated with pre-combination service of Wrike employees was valued at $28.9 million and represented a component of the Purchase Consideration. The remaining fair value of $25.4 million will be recognized as post-combination stock-based compensation expense over the service period. Of these assumed awards, 180,003 options continued with the same monthly vesting conditions under which they were originally granted. The majority of the remaining assumed options were reset to primarily cliff vest on December 31, 2021 or annually over two years. See Note 8 for detailed information on the assumed stock options.
The Merger Agreement contains representations, warranties and covenants believed to be customary for a transaction of this nature, including covenants as to indemnification for breaches of certain representations, warranties and covenants, subject to certain exclusions and caps. The Company has obtained a representation and warranty insurance policy under which it may seek coverage for breaches of certain of Wrangler’s representations, warranties, and covenants in the Merger Agreement.
The Company incurred $19.4 million of expenses related to the Wrike acquisition, of which $0.3 million and $16.1 million were expensed during the three and nine months ended September 30, 2021, respectively, and are included in General and administrative expense in the accompanying condensed consolidated statements of income.
In February 2021, the Company entered into a three-year term loan credit agreement providing for a $1.00 billion senior unsecured term loan (the “2021 Term Loan”) and issued $750.0 million of unsecured senior notes due March 1, 2026 (the “2026 Notes”). The proceeds of the 2021 Term Loan and the 2026 Notes were used to (i) fund a portion of the purchase price of the acquisition and (ii) to pay fees and expenses incurred in connection with the acquisition. The Company incurred $9.1 million of issuance costs that were netted against Long-term debt in the accompanying condensed consolidated balance sheets. See Note 11 for detailed information on the debt financing.
The Company has included the effect of the acquisition in its results of operations prospectively from the date of acquisition. Net revenues of Wrike included in the Company’s condensed consolidated statements of income for the three months ended September 30, 2021 and from the Closing Date through September 30, 2021 were $33.8 million and $68.7 million, respectively. Loss from operations of Wrike included in the Company's condensed consolidated statements of income for the three months ended September 30, 2021 and from the Closing Date through September 30, 2021 were $57.6 million and $134.5 million, respectively, primarily as a result of amortization of intangible assets acquired and stock-based compensation associated with the assumed options and the 2021 Inducement Plan. See Note 8 for detailed information on the 2021 Inducement Plan.
Purchase Accounting for Wrike
The purchase price for Wrike was allocated to the acquired net tangible and intangible assets based on estimated fair values as of the date of acquisition. The allocation of the total purchase price is summarized below (in thousands):
| Wrike | ||||||||||||||
| Purchase Price Allocation | Asset Life | |||||||||||||
| Current assets | $ | 32,008 | ||||||||||||
| Intangible assets | 824,900 | 2 - 7 years | ||||||||||||
| Goodwill | 1,657,364 | Indefinite | ||||||||||||
| Other assets | 17,681 | |||||||||||||
| Assets acquired | 2,531,953 | |||||||||||||
| Current liabilities assumed | 85,368 | |||||||||||||
| Long-term liabilities assumed | 202,511 | |||||||||||||
| Deferred tax liabilities, non-current | 177,382 | |||||||||||||
| Net assets acquired | $ | 2,066,692 | ||||||||||||
The fair values of Wrike's intangible assets were determined using the income approach with significant inputs that are not observable in the market. Key assumptions include, but are not limited to, the expected future cash flows, the timing of the expected future cash flows, royalty rates, customer churn, technology obsolescence and the discount rates consistent with the level of risk.
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Current assets acquired in connection with the acquisition consisted primarily of cash, accounts receivable and other short term assets. Current liabilities assumed in connection with the acquisition consisted primarily of the current portion of deferred revenues, accounts payable and other accrued expenses, such as transaction expenses. The accrued transaction expenses were paid in full subsequent to the acquisition date. Long-term liabilities assumed in connection with the acquisition consisted of the long-term portion of deferred revenue, other long-term liabilities, and long-term debt, which was paid in full subsequent to the acquisition date. The Company continues to evaluate certain assets and liabilities, which encompass primarily deferred taxes related to the Wrike acquisition. Additional information, which existed as of the acquisition date but was at that time unknown to the Company, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date.
The Company estimated its obligation related to deferred revenue using the cost build-up approach. The cost build-up approach determines fair value by estimating the costs relating to supporting the obligation plus an assumed profit. The sum of the costs and assumed profit approximates the amount that the Company would be required to pay a third party to assume the obligation. The estimated costs to fulfill the obligation were based on the near-term projected cost structure for various revenue contracts, resulting in an adjustment to reduce Wrike's carrying value of deferred revenue. The acquired deferred revenue of $33.2 million represents the Company's estimate of the fair value of the contractual obligations assumed.
The goodwill related to the acquisition is not deductible for tax purposes and is comprised primarily of expected synergies from combining operations and other intangible assets that do not qualify for separate recognition.
Identifiable intangible assets acquired in connection with the Wrike acquisition (in thousands) and the weighted-average lives are as follows:
| Wrike | Asset Life | |||||||||||||
| Core and product technologies | $ | 347,900 | 6 years | |||||||||||
| Customer relationships | 446,400 | 7 years | ||||||||||||
| Backlog | 13,500 | 2 years | ||||||||||||
| Trade names | 17,100 | 3 years | ||||||||||||
| Total | $ | 824,900 | ||||||||||||
The following unaudited pro-forma information combines the consolidated results of the operations of the Company and Wrike as if the acquisition had occurred on January 1, 2020, the first day of the Company's fiscal year 2020 (in thousands, except per share data):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Revenues | $ | 778,445 | $ | 795,767 | $ | 2,388,576 | $ | 2,498,441 | ||||||||||||||||||
| Income from operations | $ | 84,465 | $ | 83,436 | $ | 232,796 | $ | 315,863 | ||||||||||||||||||
| Net income | $ | 51,787 | $ | 54,622 | $ | 176,713 | $ | 240,743 | ||||||||||||||||||
| Earnings per share - basic | $ | 0.42 | $ | 0.44 | $ | 1.43 | $ | 1.94 | ||||||||||||||||||
| Earnings per share - diluted | $ | 0.41 | $ | 0.43 | $ | 1.40 | $ | 1.90 | ||||||||||||||||||
7. INVESTMENTS AND FAIR VALUE MEASUREMENTS
Investments
Available-for-sale Investments
The Company's short-term available-for-sale debt investments are measured to fair value on a recurring basis. Unrealized gains and losses related to the Company’s short-term investments are recorded in Other comprehensive loss and are generally due to interest rate fluctuations. The securities that are in an unrealized loss position are reviewed on an individual basis in order to evaluate if all or a portion of the unrealized loss is a result of a credit loss. For impairment indicators due to credit loss factors, the Company establishes an allowance for credit losses with a charge to current period net income. See Note 5 for additional information regarding the credit losses for available-for-sale investments. As of September 30, 2021 and December 31, 2020, unrealized gains and losses from the Company’s available-for-sale investments were not material and the amortized cost approximated their fair value. For the three and nine months ended September 30, 2021 and 2020, realized gains and losses on available-for-sale investments were not material.
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The average remaining maturities of the Company’s short-term and long-term available-for-sale investments at September 30, 2021 were approximately three months and two years, respectively.
For the three and nine months ended September 30, 2021 and 2020, the Company did not receive any proceeds from the sales of available-for-sale investments.
Equity Securities Accounted for at Net Asset Value
The Company held equity interests in certain private equity funds of $19.2 million and $11.3 million as of September 30, 2021 and December 31, 2020, 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 had no material unfunded commitments as of September 30, 2021.
Equity Securities without Readily Determinable Fair Values
The Company held direct investments in privately-held companies of $24.4 million and $22.5 million as of September 30, 2021 and December 31, 2020, 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.
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Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
| As of September 30, 2021 | 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 | $ | 291,396 | $ | 291,396 | $ | — | $ | — | |||||||||||||||
| Money market funds | 105,259 | 105,259 | — | — | |||||||||||||||||||
| Corporate securities | 11,016 | — | 11,016 | — | |||||||||||||||||||
| Government securities | 20,898 | — | 20,898 | — | |||||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||
| Corporate securities | 35,424 | — | 34,924 | 500 | |||||||||||||||||||
| Prepaid expenses and other current assets: | |||||||||||||||||||||||
| Foreign currency derivatives | 12,075 | — | 12,075 | — | |||||||||||||||||||
| Total assets | $ | 476,068 | $ | 396,655 | $ | 78,913 | $ | 500 | |||||||||||||||
| Accrued expenses and other current liabilities: | |||||||||||||||||||||||
| Foreign currency derivatives | 1,469 | — | 1,469 | — | |||||||||||||||||||
| Total liabilities | $ | 1,469 | $ | — | $ | 1,469 | $ | — | |||||||||||||||
| As of December 31, 2020 | 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 | $ | 375,874 | $ | 375,874 | $ | — | $ | — | |||||||||||||||
| Money market funds | 23,089 | 23,089 | — | — | |||||||||||||||||||
| Corporate securities | 166,436 | — | 166,436 | — | |||||||||||||||||||
| Government securities | 187,496 | — | 187,496 | — | |||||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||
| Agency securities | 3,300 | — | 3,300 | — | |||||||||||||||||||
| Corporate securities | 70,684 | — | 70,184 | 500 | |||||||||||||||||||
| Government securities | 64,494 | — | 64,494 | — | |||||||||||||||||||
| Prepaid expenses and other current assets: | |||||||||||||||||||||||
| Foreign currency derivatives | 4,012 | — | 4,012 | — | |||||||||||||||||||
| Total assets | $ | 895,385 | $ | 398,963 | $ | 495,922 | $ | 500 | |||||||||||||||
| Accrued expenses and other current liabilities: | |||||||||||||||||||||||
| Foreign currency derivatives | 1,447 | — | 1,447 | — | |||||||||||||||||||
| Total liabilities | $ | 1,447 | $ | — | $ | 1,447 | $ | — | |||||||||||||||
The Company’s investment policy is designed to limit exposure to any one issuer depending on credit quality. 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.
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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). See Note 12 for further information regarding the Company's derivatives.
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, 2021, the fair values of the $750.0 million unsecured senior notes due March 1, 2030 (the “2030 Notes”), $750.0 million unsecured senior notes due December 1, 2027 (the “2027 Notes”), and $750.0 million 2026 Notes were 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, 2021, the carrying value was as follows (in thousands):
| Fair Value | Carrying Value | ||||||||||
| 2030 Notes | $ | 769,643 | $ | 739,991 | |||||||
| 2027 Notes | $ | 829,515 | $ | 744,484 | |||||||
| 2026 Notes | $ | 738,083 | $ | 742,447 | |||||||
The Company also has variable debt instruments indexed to 1-Month LIBOR that resets monthly and the fair values of these instruments approximate the carrying value as of September 30, 2021. See Note 11 for more information on the Company's debt instruments.
8. STOCK-BASED COMPENSATION
Plans
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, 2021, the Company had three stock-based compensation plans with shares available for grant.
The Company is currently granting stock-based awards from its Second Amended and Restated 2014 Equity Incentive Plan (the “2014 Plan”), which was amended at the Company's Annual Meeting of Stockholders on June 3, 2020. Pursuant to the June 2020 amendment, the maximum number of shares of common stock available for issuance under the 2014 Plan was increased to 51,300,000. In addition, the amendment extended the term of the 2014 Plan to June 3, 2030 and updated the vesting provisions from monthly to annual vesting for annual director awards, consistent with the Company's current compensation program for non-employee directors. As of September 30, 2021, there were 16,011,026 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 11,006,789 shares of common stock.
In connection with the Wrike acquisition, on February 26, 2021, the Company's Board of Directors adopted the 2021 Inducement Plan (the “2021 Inducement Plan”). The 2021 Inducement Plan provides for the grant of equity awards to induce highly-qualified prospective officers and employees to accept employment and to provide them with a proprietary interest in the Company. The Company is authorized to issue 320,000 shares of common stock for inducement awards under the 2021 Inducement Plan. During the nine months ended September 30, 2021, the Company granted 270,681 non-vested stock units to Wrike employees who joined the Company which vest based on service over a three-year term. As of September 30, 2021, there were 308,469 shares of common stock reserved for issuance pursuant to the 2021 Inducement Plan, including authorization under the 2021 Inducement Plan to grant stock-based awards covering 49,319 shares of common stock.
Effective February 26, 2021, the Company assumed the Wrangler Topco, LLC Second Amended and Restated 2018 Equity Incentive Plan (the “Wrangler Plan”) and the Wrike, Inc, Amended and Restated 2013 Stock Plan (the “Wrike Plan”). As of September 30, 2021, there were 695,009 shares of the Company’s common stock reserved and authorized for issuance under the terms of the Wrangler Plan, including authorization under the Wrangler Plan to grant stock-based awards covering 327,209 shares of common stock. As of September 30, 2021, there were 152,553 shares of the Company's common stock reserved and authorized for issuance under the terms of the Wrike Plan. All of the Wrike Plan awards are currently outstanding with no new shares available for issuance.
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Stock-Based Compensation
The detail of the total stock-based compensation recognized by income statement classification is as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| Income Statement Classifications | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Cost of subscription, support and services | $ | 4,948 | $ | 3,542 | $ | 13,900 | $ | 9,708 | |||||||||||||||
| Research and development | 30,222 | 28,803 | 87,141 | 81,386 | |||||||||||||||||||
| Sales, marketing and services | 24,175 | 28,411 | 81,166 | 76,640 | |||||||||||||||||||
| General and administrative | 21,463 | 24,413 | 67,394 | 61,120 | |||||||||||||||||||
| Total | $ | 80,808 | $ | 85,169 | $ | 249,601 | $ | 228,854 | |||||||||||||||
Non-vested Stock Units
Service-Based Stock Units
The Company awards senior level employees and certain other employees non-vested stock units granted under the 2014 Plan that vest based on service. These non-vested stock unit awards vest 33.33% on each of the first, second and third anniversary subsequent to the grant 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, which represent the right to receive one share of the Company's common stock upon vesting. Awards granted to non-employee directors vest in full in one installment on the earlier of: (i) the first anniversary of the award date; or (ii) the day immediately prior to the Company’s next annual meeting of stockholders following the award date.
Unrecognized Compensation Related to Stock Units
As of September 30, 2021, the total number of non-vested stock units outstanding, including company performance awards and service-based awards was 5,290,782. As of September 30, 2021, there was $459.6 million of total unrecognized compensation cost related to non-vested stock units. The unrecognized cost of the awards legally granted through September 30, 2021 is expected to be recognized over a weighted-average period of 1.69 years.
Company Performance Stock Units
On March 1, 2021, the Company awarded senior level employees 305,229 non-vested performance stock unit awards granted under the 2014 Plan. The number of non-vested performance stock units that ultimately vest will be determined within sixty days following completion of the performance period ending December 31, 2023 and will be based on the achievement of specific corporate financial performance goals related to the Company’s Software as a Service (SaaS) annualized recurring revenue (ARR) growth measured during the period from January 1, 2021 to December 31, 2023. 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. Additionally, the awards have an explicit adjustment mechanism to prevent the attainment rates from being distorted should a material acquisition other than Wrike occur during the performance period. 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, 2023 if it is deemed probable that the performance goals will be met. If the performance goals are not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed.
The Company recorded stock-based compensation costs related to its company performance stock units of $6.6 million and $26.2 million for the three and nine months ended September 30, 2021, respectively, and $18.0 million and $35.7 million for the three and nine months ended September 30, 2020, respectively.
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Assumed stock options
In connection with the acquisition of Wrike, the Company assumed 526,113 outstanding stock options which expire ten years from the date of grant and which were valued using the Black-Scholes option-pricing model. The fair value of the assumed stock options were estimated using the following assumptions:
| Nine Months Ended | |||||
| September 30, 2021 | |||||
| Expected volatility factor | 0.51 - 0.75 | ||||
| Risk free interest rate | 0.04% - 0.14% | ||||
| Expected dividend yield | 1.11% | ||||
| Expected life (in years) | 0.08 - 1.00 | ||||
The Company determined the expected volatility factor by considering the implied volatility in various 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 current dividend yield has been updated for expected dividend yield payout. The expected term was based on the average period the stock options are expected to remain outstanding, generally calculated as the midpoint of the stock options’ remaining vesting term and contractual expiration period, as the Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.
The estimated weighted-average grant date fair value for the assumed stock options was $103.22 per share and total fair value of $54.3 million. For the three and nine months ended September 30, 2021, the Company recorded stock-based compensation costs related to unvested assumed stock options of $4.0 million and $10.5 million, respectively. As of September 30, 2021, there was $14.5 million of total unrecognized compensation costs related to unvested assumed stock options to be recognized over a weighted-average period of 1.02 years. See Note 6 for detailed information on the Wrike acquisition.
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 2020. 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 2020.
The following table presents the change in goodwill during the nine months ended September 30, 2021 (in thousands):
| Balance at January 1, 2021 | Additions | Balance at September 30, 2021 | |||||||||||||||
| Goodwill | $ | 1,798,408 | $ | 1,657,364 | (1) | $ | 3,455,772 | ||||||||||
(1) Amount relates to the Wrike acquisition. See Note 6 for more information.
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 to seven years, except for patents, which are amortized over the lesser of their remaining life or to ten years.
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Intangible assets consist of the following (in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||
| Product related intangible assets | $ | 1,099,501 | $ | 717,317 | $ | 742,949 | $ | 665,798 | |||||||||||||||
| Other | 664,791 | 230,066 | 187,791 | 183,451 | |||||||||||||||||||
| Total | $ | 1,764,292 | $ | 947,383 | $ | 930,740 | $ | 849,249 | |||||||||||||||
Amortization of product related intangible assets, which consists primarily of product related technologies and patents, was $20.4 million and $8.3 million for the three months ended September 30, 2021 and 2020, respectively, and $51.5 million and $24.9 million for the nine months ended September 30, 2021 and 2020, 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, backlog and covenants not to compete was $19.6 million and $0.7 million for the three months ended September 30, 2021 and 2020, respectively, and $46.6 million and $2.1 million for the nine months ended September 30, 2021 and 2020, respectively, and is classified as a component of Operating expenses in the accompanying condensed consolidated statements of income.
The Company monitors its intangible assets for indicators of impairment. If the Company determines impairment has occurred, it will write-down the intangible asset to its fair value. For certain intangible assets where the unamortized balances exceeded the undiscounted future net cash flows, the Company measures the amount of the impairment by calculating the amount by which the carrying values exceed the estimated fair values, which are based on projected discounted future net cash flows.
Estimated future amortization expense of intangible assets with finite lives as of September 30, 2021 is as follows (in thousands):
| Year ending December 31, | |||||
| 2021 (remaining three months) | $ | 40,109 | |||
| 2022 | 157,261 | ||||
| 2023 | 147,279 | ||||
| 2024 | 130,384 | ||||
| 2025 | 127,858 | ||||
| Thereafter | 214,018 | ||||
| Total | $ | 816,909 | |||
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, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net revenues: | |||||||||||||||||||||||
Workspace (1) | $ | 600,036 | $ | 573,342 | $ | 1,780,403 | $ | 1,811,936 | |||||||||||||||
App Delivery and Security (2) | 155,090 | 166,166 | 511,273 | 532,169 | |||||||||||||||||||
Professional services (3) | 23,319 | 27,662 | 74,646 | 82,939 | |||||||||||||||||||
| Total net revenues | $ | 778,445 | $ | 767,170 | $ | 2,366,322 | $ | 2,427,044 | |||||||||||||||
(1)Workspace revenues are primarily comprised of sales from the Company’s application virtualization solutions, which include Citrix Workspace, Citrix Virtual Apps and Desktops, the Company's unified endpoint management solutions, which include Citrix Endpoint Management, Citrix Content Collaboration, and Collaborative Work Management.
(2)App Delivery and Security revenues primarily include Citrix ADC and Citrix SD-WAN.
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(3)Professional services revenues are comprised of revenues from consulting services primarily related to the Company's perpetual offerings 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, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net revenues: | |||||||||||||||||||||||
| Americas | $ | 427,978 | $ | 414,341 | $ | 1,312,053 | $ | 1,330,666 | |||||||||||||||
| EMEA | 268,700 | 276,494 | 821,895 | 847,454 | |||||||||||||||||||
| APJ | 81,767 | 76,335 | 232,374 | 248,924 | |||||||||||||||||||
| Total net revenues | $ | 778,445 | $ | 767,170 | $ | 2,366,322 | $ | 2,427,044 | |||||||||||||||
Subscription Revenue
The Company's subscription revenue relates to fees for SaaS, which are generally recognized ratably over the contractual term and non-SaaS, which are generally recognized at a point in time, other than the related support which is recognized over the contractual term. SaaS 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 the related support. Non-SaaS 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. 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, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Subscription: | |||||||||||||||||||||||
| SaaS | $ | 228,515 | $ | 137,831 | $ | 609,230 | $ | 391,019 | |||||||||||||||
| Non-SaaS | 154,639 | 124,773 | 490,324 | 383,271 | |||||||||||||||||||
| Total Subscription revenue | $ | 383,154 | $ | 262,604 | $ | 1,099,554 | $ | 774,290 | |||||||||||||||
11. DEBT
The components of the Company's long-term debt were as follows (in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||
| 2021 Term Loan Credit Agreement | $ | 1,000,000 | $ | — | |||||||
| Term Loan Credit Agreement | 100,000 | 250,000 | |||||||||
| 2026 Notes | 750,000 | — | |||||||||
| 2027 Notes | 750,000 | 750,000 | |||||||||
| 2030 Notes | 750,000 | 750,000 | |||||||||
| Total face value | 3,350,000 | 1,750,000 | |||||||||
| Less: unamortized discount | (6,518) | (5,594) | |||||||||
| Less: unamortized issuance costs | (18,363) | (11,784) | |||||||||
| Total long-term debt | $ | 3,325,119 | $ | 1,732,622 | |||||||
2021 Term Loan Credit Agreement
On February 5, 2021, the Company entered into a term loan credit agreement (the “2021 Term Loan Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto from time to time (collectively, the “2021 Lenders”). The 2021 Term Loan Credit Agreement provided the Company with a facility to borrow a term loan on an unsecured basis in an aggregate principal amount of up to $1.00 billion (the “2021 Term Loan”). The Company borrowed $1.00 billion on February 26, 2021 under the 2021 Term Loan, and the loan matures on February 26, 2024. The proceeds of
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borrowings under the 2021 Term Loan Credit Agreement were used to finance a portion of the purchase price for the Wrike acquisition. See Note 6 for detailed information on the Wrike acquisition.
Borrowings under the 2021 Term Loan Credit Agreement bear interest at a rate equal to (a) either (i) a customary LIBOR formula or, upon a phase-out of LIBOR, an alternative benchmark rate as provided in the 2021 Term Loan Credit Agreement, or (ii) a customary base rate formula, plus (b) the applicable margin with respect thereto, which initially was determined based on the Company’s consolidated leverage ratio. The Company made an election to base the applicable margin on the Company’s non-credit enhanced, senior unsecured long-term debt rating as determined by Moody’s Investors Service, Inc., Standard & Poor’s Financial Services, LLC and Fitch Ratings Inc., in each case as set forth in the 2021 Term Loan Credit Agreement effective in the third quarter of 2021.
The 2021 Term Loan Credit Agreement includes a covenant limiting the Company’s consolidated leverage ratio to not more than 4.0:1.0, subject to a mandatory step-down after the fiscal quarter ending March 31, 2022 to 3.75:1.0, and further subject to, upon the occurrence of a qualified acquisition in any quarter on or after the fiscal quarter ending March 31, 2022, if so elected by the Company, a step-up to 4.25:1.0 for the four fiscal quarters following such qualified acquisition. The 2021 Term Loan Credit Agreement also includes a covenant limiting the Company’s consolidated interest coverage ratio to not less than 3.0:1.0. The 2021 Term Loan 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 of the Company and bankruptcy-related defaults. The 2021 Lenders are entitled to accelerate repayment of the loans under the 2021 Term Loan Credit Agreement upon the occurrence of any of the events of default. In addition, the 2021 Term Loan Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the ability of the Company to grant liens, merge or consolidate, dispose of all or substantially all of its assets, change its business and incur subsidiary indebtedness, in each case subject to customary exceptions. The 2021 Term Loan Credit Agreement also contains representations and warranties customary for an unsecured financing of this type. The Company was in compliance with these covenants as of September 30, 2021.
Certain 2021 Lenders and/or their affiliates have provided and may continue to provide commercial banking, investment management and other services to the Company, its affiliates and employees, for which they receive customary fees and commissions.
Term Loan Credit Agreement
On January 21, 2020, the Company entered into a term loan credit agreement with Bank of America, N.A., as administrative agent, and other lenders party thereto from time to time (the “Term Loan Credit Agreement”) that provides the Company with facilities to borrow term loans on an unsecured basis in an aggregate principal amount of up to $1.00 billion, consisting of (i) a $500.0 million 364-day term loan facility (the “364-day Term Loan”), and (ii) a $500.0 million 3-year term loan (the “3-year Term Loan”), in each case in a single borrowing, subject to satisfaction of certain conditions set forth in the Term Loan Credit Agreement. On January 30, 2020, the Company borrowed $1.00 billion under the term loans and used the proceeds to enter into accelerated share repurchase transactions for an aggregate of $1.00 billion. During the first quarter of 2020, the Company used the net proceeds from the 2030 Notes and cash to repay $750.0 million under the Term Loan Credit Agreement. In the third quarter of 2021, the Company repaid $150.0 million under the 3-year Term Loan. See Note 14 for detailed information on the accelerated share repurchase.
Borrowings under the Term Loan Credit Agreement bear interest at a rate equal to (a) either (i) LIBOR or, upon a phase-out of LIBOR, an alternative benchmark rate as provided in the Term Loan Credit Agreement, or (ii) a customary base rate formula, plus (b) the applicable margin with respect thereto, which initially was determined based on the Company’s consolidated leverage ratio. The Company made an election to base the applicable margin on the Company’s non-credit enhanced, senior unsecured long-term debt rating as set forth in the Term Loan Credit Agreement effective in the second quarter of 2021.
On February 5, 2021, the Company entered into the first amendment to the Term Loan Credit Agreement, which amends, among other things, the covenant limiting the Company’s consolidated leverage ratio. After giving effect to the amendment, the covenant limiting the Company’s consolidated leverage ratio will be consistent with the covenant limiting the Company’s consolidated leverage ratio in the 2021 Term Loan Credit Agreement, and will be limited to not more than 4.0:1.0, subject to a mandatory step-down after the fiscal quarter ending March 31, 2022 under the 2021 Term Loan Credit Agreement (the “Leverage Ratio Step-Down”) to 3.75:1.0, and further subject to, upon the occurrence of a qualified acquisition in any quarter on or after the fifth fiscal quarter ending after the Leverage Ratio Step-Down, if so elected by the Company, a step-up to 4.25:1.0 for the four fiscal quarters following such qualified acquisition. The Company was in compliance with all covenants as of September 30, 2021.
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Senior Notes
On February 18, 2021, the Company issued $750.0 million of unsecured senior notes due March 1, 2026. The 2026 Notes accrue interest at a rate of 1.250% per annum. Interest on the 2026 Notes is due semi-annually on March 1 and September 1 of each year, beginning on September 1, 2021. The net proceeds from this offering were $741.4 million, after deducting the underwriting discount and offering expenses payable by the Company. Net proceeds from this offering were used to fund a portion of the purchase price for the Wrike acquisition. The 2026 Notes will mature on March 1, 2026, unless earlier redeemed in accordance with their terms prior to such date.
On February 25, 2020, the Company issued $750.0 million of unsecured senior notes due March 1, 2030. The 2030 Notes accrue interest at a rate of 3.300% per annum. Interest on the 2030 Notes is due semi-annually on March 1 and September 1 of each year. The 2030 Notes will mature on March 1, 2030, unless earlier redeemed in accordance with their terms prior to such date.
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. The 2027 Notes will mature on December 1, 2027, unless earlier redeemed in accordance with their terms prior to such date.
Each of the 2026 Notes, 2030 Notes and 2027 Notes are individually redeemable in whole or from time to time in part at the Company’s option, subject to a make-whole premium. In addition, upon the occurrence of certain change of control triggering events prior to maturity, holders of the notes may require the Company to repurchase the notes for cash at a repurchase price of 101% of the principal amount of the notes plus accrued and unpaid interest to, but excluding, the repurchase date.
Credit Facility
On November 26, 2019, the Company entered into an amended and restated credit agreement (the "Credit Agreement") with a group of financial institutions, which amends and restates the Company’s Credit Agreement, dated January 7, 2015. The Credit Agreement provides for a five year unsecured revolving credit facility 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 a rate equal to (a) either (i) LIBOR or, upon a phase-out of LIBOR, an alternative benchmark rate as provided in the Credit Agreement, or (ii) a customary base rate formula, plus (b) the applicable margin with respect thereto, which initially was determined based on the Company’s consolidated leverage ratio. The Company made an election to base the applicable margin on the Company’s long-term debt rating as set forth in the Credit Agreement effective in the second quarter of 2021. In addition, the Company is required to pay a quarterly facility fee ranging from 0.11% 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 or long-term credit rating. As of September 30, 2021 and December 31, 2020, no amounts were outstanding under the credit facility.
On February 5, 2021, the Company entered into the first amendment to the Credit Agreement, which amends, among other things, the covenant limiting the Company’s consolidated leverage ratio. After giving effect to the amendment, the covenant limiting the Company’s consolidated leverage ratio will be consistent with the covenant limiting the Company’s consolidated leverage ratio in the 2021 Term Loan Credit Agreement, and will be limited to not more than 4.0:1.0, subject to a mandatory step-down after the fiscal quarter ending March 31, 2022 (or such earlier date as the Company may elect by written notice to Bank of America, N.A., in its capacity as administrative agent) under the 2021 Term Loan Credit Agreement (the “Leverage Ratio Step-Down”) to 3.75:1.0, and further subject to, upon the occurrence of a qualified acquisition in any quarter on or after the fifth fiscal quarter ending after the Leverage Ratio Step-Down, if so elected by the Company, a step-up to 4.25:1.0 for the four fiscal quarters following such qualified acquisition. The Company was in compliance with all covenants as of September 30, 2021.
Bridge Facility and Take-Out Facility Commitment Letter
On January 16, 2021, the Company entered into a bridge facility and take-out facility commitment letter (the “Commitment Letter”) pursuant to which JPMorgan Chase Bank, N.A. (1) committed to provide a senior unsecured 364-day term loan facility in an aggregate principal amount of $1.45 billion to finance the cash consideration for the Wrike acquisition in the event that the permanent debt financing was not available on or prior to the Closing Date and (2) agreed to use commercially reasonable efforts to assemble a syndicate of lenders to provide the necessary commitments for the senior term
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loan facility. The commitments under the Commitment Letter were permanently reduced to zero on February 18, 2021, as a result of (i) the effectiveness of the 2021 Term Loan Credit Agreement and (ii) the completion of the issuance of the 2026 Notes. In connection with the Commitment Letter, the Company incurred $5.4 million in issuance costs that were expensed in the first quarter of 2021 and are included in Other (expense) income, net in the accompanying condensed statements of income.
12. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives Designated as Hedging Instruments
As of September 30, 2021, 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 (expense) income, net.
The total cumulative unrealized loss on cash flow derivative instruments was $0.7 million as of September 30, 2021. The total cumulative unrealized gain on cash flow derivative instruments was $3.6 million as of December 31, 2020. Unrealized gains and losses on cash flow derivatives are included in Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. The net unrealized loss as of September 30, 2021 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, the Company utilizes foreign exchange forward contracts to hedge its exposure to this potential volatility. These contracts are not designated for hedge accounting treatment under the authoritative guidance. Accordingly, changes in the fair value of these contracts are recorded in Other (expense) income, net.
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Fair Values of Derivative Instruments
| Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||
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 | $550 | Prepaid expenses and other current assets | $3,945 | Accrued expenses and other current liabilities | $1,337 | Accrued expenses and other current liabilities | $75 | |||||||||||||||||||||||||||||||||||||||
| Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||
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 | $11,525 | Prepaid expenses and other current assets | $67 | Accrued expenses and other current liabilities | $132 | Accrued expenses and other current liabilities | $1,372 | |||||||||||||||||||||||||||||||||||||||
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) Gain Recognized in Other Comprehensive Loss | Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss | ||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||
| Foreign currency forward contracts | $ | (846) | $ | 2,123 | Operating expenses | $ | 292 | $ | (390) | ||||||||||||||||||||
| For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
Derivatives in Cash Flow Hedging Relationships | Amount of (Loss) Gain Recognized in Other Comprehensive Loss | Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss | ||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||
| Foreign currency forward contracts | $ | (4,282) | $ | 667 | Operating expenses | $ | 2,994 | $ | (1,061) | ||||||||||||||||||||
There was no material ineffectiveness in the Company’s foreign currency hedging program in the periods presented.
| For the Three Months Ended September 30, | |||||||||||||||||
| (In thousands) | |||||||||||||||||
| Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income on Derivative | Amount of Gain (Loss) Recognized in Income on Derivative | |||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| Foreign currency forward contracts | Other (expense) income, net | $ | 3,560 | $ | (7,407) | ||||||||||||
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| For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income on Derivative | Amount of Gain (Loss) Recognized in Income on Derivative | |||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||
| Foreign currency forward contracts | Other (expense) income, net | $ | 11,844 | $ | (4,878) | ||||||||||||||||||||||||
Outstanding Foreign Currency Forward Contracts
As of September 30, 2021, the Company had the following net notional foreign currency forward contracts outstanding (in thousands):
| Foreign Currency | Currency Denomination | ||||
| Australian Dollar | AUD 19,000 | ||||
| Brazilian Real | BRL 2,000 | ||||
| British Pound Sterling | GBP 24,800 | ||||
| Canadian Dollar | CAD 5,950 | ||||
| Chinese Yuan Renminbi | CNY 36,400 | ||||
| Czech Koruna | CZK 71,000 | ||||
| Danish Krone | DKK 16,300 | ||||
| Euro | EUR 31,098 | ||||
| Hong Kong Dollar | HKD 30,975 | ||||
| Indian Rupee | INR 256,000 | ||||
| Japanese Yen | JPY 992,000 | ||||
| Korean Won | KRW 458,000 | ||||
| Singapore Dollar | SGD 12,200 | ||||
| Swedish Krona | SEK 6,800 | ||||
| Swiss Franc | CHF 192,650 | ||||
13. 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 tax credits and 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 13.6% and 15.3% for the three months ended September 30, 2021 and 2020, respectively. The decrease in the effective tax rate when comparing the three months ended September 30, 2021 to the three months ended September 30, 2020 was primarily due to tax benefits arising from combining the Wrike business with Citrix and the relative impact to the tax rate of tax benefits unique to the period ended September 30, 2021, such as stock based compensation deductions.
The Company’s effective tax rate was 2.5% and 10.0% for the nine months ended September 30, 2021 and 2020, respectively. The decrease in the effective tax rate when comparing the nine months ended September 30, 2021 to the nine months ended September 30, 2020, was primarily due to tax benefits arising from combining the Wrike business with Citrix and the relative impact to the tax rate of tax benefits unique to the period ended September 30, 2021, such as stock based compensation deductions.
The Company’s net unrecognized tax benefits totaled $97.0 million and $74.7 million as of September 30, 2021 and December 31, 2020, respectively. At September 30, 2021, $83.4 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, 2021, the Company has accrued $1.4 million for the payment of interest.
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At September 30, 2021, the Company had $192.5 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 March 11, 2021, the United States enacted the American Rescue Plan Act of 2021 (“American Rescue Plan Act”). The American Rescue Plan Act includes a wide variety of tax and non-tax provisions aimed to provide relief to individuals and businesses adversely affected by the COVID-19 pandemic. The American Rescue Plan Act also expands the limitation on deductions publicly-held companies may take with respect to certain employee compensation effective for tax years beginning after December 31, 2026. Although the Company is evaluating the impact of global COVID-19-related proposed and enacted legislation, as of the end of the current period no material impact to the Company's financial results is expected. The Company will continue to review and evaluate any future guidance, developments, or legislation issued by applicable tax authorities.
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 currently under examination by the United States Internal Revenue Service for the 2017 and 2018 tax years. 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 2017.
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.
14. TREASURY STOCK
Stock Repurchase Program
The Company’s Board of Directors has authorized an ongoing stock repurchase program, of which $1.00 billion was approved in January 2020. 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 and mitigate earnings per share dilution posed by the issuance of shares related to employee equity compensation awards. At September 30, 2021, $625.6 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 debt, 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.
During the three and nine months ended September 30, 2021, the Company made no open market purchases under the stock repurchase program.
On January 30, 2020, the Company used the proceeds from its Term Loan Credit Agreement and entered into accelerated share repurchase (“ASR”) transactions with a group of dealers for an aggregate of $1.00 billion. Under the ASR transactions, the Company received an initial share delivery of 6.5 million shares of its common stock, with the remainder delivered upon completion of the ASR transactions. The total number of shares of common stock that the Company repurchased under each ASR agreement was based on the average of the daily volume-weighted average prices of its common stock during the term of the applicable ASR agreement, less a discount. The Company received delivery of 0.8 million shares of its common stock in August 2020 in final settlement of the ASR Agreement. See Note 11 for detailed information on the Term Loan Credit Agreement.
In addition to the ASR, during the three months ended September 30, 2020, the Company made no open market purchases under the stock repurchase program. During the nine months ended September 30, 2020, the Company expended $199.9 million on open market purchases under the stock repurchase program, repurchasing 1,731,500 shares of common stock at an average price of $115.45.
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Shares for Tax Withholding
During the three and nine months ended September 30, 2021, the Company withheld 32,312 and 761,496 shares, respectively, from equity awards that vested, totaling $3.4 million and $105.1 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, 2020, the Company withheld 25,826 and 765,426 shares, respectively, from equity awards that vested, totaling $3.7 million and $104.8 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.
15. 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, or a range 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.
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 May 2020, the Company entered into an amended agreement with a third-party provider, in the ordinary course of business, for the use of certain cloud services through June 2029. Under the amended agreement, the Company is committed to a purchase of $1.00 billion throughout the term of the agreement. As of September 30, 2021, the Company had $879.0 million of remaining obligations under the purchase agreement.
In May 2021, the Company entered into an amended agreement with a third-party provider, in the ordinary course of business, for the use of certain cloud services through May 2024. Under the amended agreement, the Company is committed to purchase services under this agreement totaling $100.0 million over the term, with commitments of $32.0 million in fiscal year 2021, $24.0 million in fiscal year 2022, $24.0 million in fiscal year 2023 and $20.0 million at any time over the three-year term. As of September 30, 2021, the Company had $64.2 million of remaining obligations under the purchase agreement.
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16. STATEMENT OF CHANGES IN EQUITY
The following tables present the changes in total stockholders' equity during the three and nine months ended September 30, 2021 (in thousands):
| Common Stock | Additional Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Common Stock in Treasury | Total Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | 324,387 | $ | 324 | $ | 6,835,867 | $ | 5,041,270 | $ | (6,015) | (200,172) | $ | (11,578,599) | $ | 292,847 | |||||||||||||||||||||||||||||||||
| Shares issued under stock-based compensation plans | 152 | — | 212 | — | — | — | — | 212 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 80,808 | — | — | — | — | 80,808 | |||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee stock purchase plan | 286 | 1 | 24,465 | — | — | — | — | 24,466 | |||||||||||||||||||||||||||||||||||||||
| Restricted shares turned in for tax withholding | — | — | — | — | — | (32) | (3,425) | (3,425) | |||||||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.37 per share) | — | — | — | (46,109) | — | — | — | (46,109) | |||||||||||||||||||||||||||||||||||||||
| Other | — | — | 1,495 | (1,495) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (847) | — | — | (847) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 51,787 | — | — | — | 51,787 | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | 324,825 | $ | 325 | $ | 6,942,847 | $ | 5,045,453 | $ | (6,862) | (200,204) | $ | (11,582,024) | $ | 399,739 | |||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Common Stock in Treasury | Total Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 321,964 | $ | 322 | $ | 6,608,018 | $ | 4,984,333 | $ | (3,649) | (199,443) | $ | (11,476,881) | $ | 112,143 | |||||||||||||||||||||||||||||||||
| Shares issued under stock-based compensation plans | 2,347 | 2 | 231 | — | — | — | — | 233 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 249,601 | — | — | — | — | 249,601 | |||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee stock purchase plan | 514 | 1 | 50,221 | — | — | — | — | 50,222 | |||||||||||||||||||||||||||||||||||||||
| Restricted shares turned in for tax withholding | — | — | — | — | — | (761) | (105,143) | (105,143) | |||||||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.37 per share) | — | — | — | (137,590) | — | — | — | (137,590) | |||||||||||||||||||||||||||||||||||||||
| Value of assumed equity awards related to pre-combination service | — | — | 28,885 | — | — | — | — | 28,885 | |||||||||||||||||||||||||||||||||||||||
| Other | — | — | 5,891 | (5,891) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (3,213) | — | — | (3,213) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 204,601 | — | — | — | 204,601 | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | 324,825 | $ | 325 | $ | 6,942,847 | $ | 5,045,453 | $ | (6,862) | (200,204) | $ | (11,582,024) | $ | 399,739 | |||||||||||||||||||||||||||||||||
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The following tables present the changes in total stockholders' (deficit) equity during the three and nine months ended September 30, 2020 (in thousands):
| Common Stock | Additional Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Common Stock in Treasury | Total (Deficit) Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | 321,210 | $ | 321 | $ | 6,216,838 | $ | 4,863,515 | $ | (6,465) | (197,693) | $ | (11,167,805) | $ | (93,596) | |||||||||||||||||||||||||||||||||
| Shares issued under stock-based compensation plans | 109 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 85,169 | — | — | — | — | 85,169 | |||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee stock purchase plan | 238 | 1 | 23,599 | — | — | — | — | 23,600 | |||||||||||||||||||||||||||||||||||||||
| Restricted shares turned in for tax withholding | — | — | — | — | — | (26) | (3,692) | (3,692) | |||||||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.35 per share) | — | — | — | (43,046) | — | — | — | (43,046) | |||||||||||||||||||||||||||||||||||||||
| Accelerated stock repurchase program | — | — | 200,000 | — | — | (849) | (200,000) | — | |||||||||||||||||||||||||||||||||||||||
| Other | — | — | 1,756 | (1,756) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 2,138 | — | — | 2,138 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 98,227 | — | — | — | 98,227 | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | 321,557 | $ | 322 | $ | 6,527,362 | $ | 4,916,940 | $ | (4,327) | (198,568) | $ | (11,371,497) | $ | 68,800 | |||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Common Stock in Treasury | Total Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 318,760 | $ | 319 | $ | 6,249,065 | $ | 4,660,145 | $ | (5,127) | (188,693) | $ | (10,066,746) | $ | 837,656 | |||||||||||||||||||||||||||||||||
| Shares issued under stock-based compensation plans | 2,314 | 2 | (2) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 228,854 | — | — | — | — | 228,854 | |||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee stock purchase plan | 483 | 1 | 44,634 | — | — | — | — | 44,635 | |||||||||||||||||||||||||||||||||||||||
| Stock repurchases, net | — | — | — | — | — | (1,732) | (199,903) | (199,903) | |||||||||||||||||||||||||||||||||||||||
| Restricted shares turned in for tax withholding | — | — | — | — | — | (765) | (104,848) | (104,848) | |||||||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.35 per share) | — | — | — | (129,108) | — | — | — | (129,108) | |||||||||||||||||||||||||||||||||||||||
| Accelerated stock repurchase program | — | — | — | — | — | (7,378) | (1,000,000) | (1,000,000) | |||||||||||||||||||||||||||||||||||||||
| Cumulative-effect adjustment from adoption of accounting standard | — | — | — | (1,641) | — | — | — | (1,641) | |||||||||||||||||||||||||||||||||||||||
| Other | — | — | 4,811 | (4,811) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 800 | — | — | 800 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 392,355 | — | — | — | 392,355 | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | 321,557 | $ | 322 | $ | 6,527,362 | $ | 4,916,940 | $ | (4,327) | (198,568) | $ | (11,371,497) | $ | 68,800 | |||||||||||||||||||||||||||||||||
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Cash Dividend
The following table provides information with respect to quarterly dividends on common stock during the nine months ended September 30, 2021:
| Declaration Date | Dividends per Share | Record Date | Payable Date | ||||||||||||||
| January 19, 2021 | $ | 0.37 | March 12, 2021 | March 26, 2021 | |||||||||||||
| April 29, 2021 | $ | 0.37 | June 11, 2021 | June 25, 2021 | |||||||||||||
| July 29, 2021 | $ | 0.37 | September 10, 2021 | September 24, 2021 | |||||||||||||
Subsequent Event
On November 4, 2021, the Company announced that its Board of Directors approved a quarterly cash dividend of $0.37 per share which will be paid on December 21, 2021 to all shareholders of record as of the close of business on December 7, 2021.
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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, investments and operational and growth plans and initiatives, our expansion of cloud-based solutions (as opposed to traditional on-premises delivery of our products) and our efforts to transition our customers from on-premises to the cloud (including the pace of the transition and expected benefits), our transition to a subscription-based business model (including the pace of the transition and expected benefits), challenges with respect to, and plans to evolve, our go-to-market strategy and our channel and sales organization, our focus on SaaS and the de-emphasis of sales of Workspace on-premise subscription licenses, operational and organizational changes (including the impact and timing of the impact of those changes), changes in our product and service offerings and features, financial information and results of operations for future periods, revenue and operating metrics trends, potential margin improvement and restructuring actions and related charges and benefits, the impacts of the novel coronavirus (COVID-19) pandemic and related market and economic conditions on our business, results of operations and financial condition, business continuity, expectations regarding remote and hybrid work and distributed teams, supply disruptions and delays, customer demand, seasonal factors or ordering patterns, stock-based compensation, investment transactions and valuations of investments and derivative instruments, 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 (including our acquisition of Wrike, Inc. (“Wrike”) and the expected benefits of that acquisition), changes to our executive officers and other key personnel, litigation matters, and the security of our network, products and services, constitute forward-looking statements and are made under the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are neither promises nor guarantees. Readers are directed to the risks and uncertainties identified in Part I, Item 1A, “Risk Factors”, in our Annual Report on Form 10-K for the year ended December 31, 2020, as updated by Part II, Item 1A in this Quarterly Report on Form 10-Q for additional detail regarding factors that may cause actual results to be different than those expressed in our forward-looking statements. Such factors, 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, 2021. 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 an enterprise software company focused on helping organizations deliver a consistent and secure work experience no matter where work needs to get done — in the office, at home, or in the field. We do this by delivering a digital workspace solution that gives each employee the resources and space they need to do their best work. Our App Delivery and Security solutions, which can be consumed via hardware or software, complement our Workspace solutions by delivering the applications and data employees need across any network with security, reliability and speed.
On January 16, 2021, we entered into a definitive agreement to acquire Wrike, a leader in the SaaS collaborative work management space, for $2.25 billion in cash, subject to certain adjustments as set forth in the related agreement. The transaction, which was unanimously approved by the board of directors of both Citrix and Wrike, closed on February 26, 2021.
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.
Executive Summary
During the third quarter of fiscal year 2021, we continued to make progress in our transition to the cloud, with Total ARR, or annualized recurring revenue, growing faster year-over-year than in the third quarter of fiscal year 2020, despite the prior year including strong demand associated with pandemic-related purchases to address the business continuity needs of our
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customers. We believe we are still in the early stages of our cloud transition and that this represents an opportunity to support our SaaS ARR growth in the future. As SaaS ARR grows in scale, we expect growth rates to moderate. Customers are also realizing the benefit of a lower total cost of ownership as they shift to our cloud services from our traditional perpetual license offerings. Finally, we believe that the headwind to reported revenue growth, from our decision to end broad availability of perpetual Citrix Workspace licenses beginning on October 1, 2020, is now largely behind us as we reach the anniversary of the end of broad availability of perpetual Citrix Workspace licenses.
Looking back on the last few quarters, we have underperformed our expectations as we faced execution challenges, which have overshadowed the performance in our ARR metrics and cloud transition. Looking ahead, we are reviewing all aspects of our operations to determine what actions are necessary to improve performance. First, however, we plan to sharpen our focus in terms of innovation and go-to-market investments to drive further growth and improve our margins and cash flow. Focusing our investments is expected to free up the resources to invest more in the fastest-growing segments of our core markets. In addition, we are working to put in place the right incentive systems for our salespeople, reinvesting in our channel partners so they are incentivized to share in our SaaS transformation success, and better focusing our sales investments on direct front line sellers.
On February 5, 2021, we entered into a term loan credit agreement (the “2021 Term Loan Credit Agreement”) that provided us with a facility to borrow a term loan (the “2021 Term Loan”) on an unsecured basis in an aggregate principal amount of up to $1.00 billion. We borrowed $1.00 billion on February 26, 2021 under the 2021 Term Loan, and the loan matures on February 26, 2024. The proceeds under the 2021 Term Loan were used to finance a portion of the aggregate cash consideration for the Wrike acquisition.
On February 18, 2021, we issued $750.0 million of unsecured senior notes due March 1, 2026 (the “2026 Notes”). The net proceeds from this offering were $741.4 million, after deducting the underwriting discount and estimated offering expenses payable by us. Net proceeds from this offering were used to fund a portion of the aggregate cash consideration for the Wrike acquisition.
On October 6, 2021, we announced that David J. Henshall stepped down as our Chief Executive Officer and President and as a member of the Board of Directors, and that Robert M. Calderoni, our Chairman, was appointed interim Chief Executive Officer and President. Robert M. Calderoni will continue serving as Chairman of our Board of Directors.
On November 4, 2021, we announced that our Board of Directors declared a $0.37 per share dividend payable December 21, 2021 to all shareholders of record as of the close of business on December 7, 2021. Additionally, on November 4, 2021, we announced that we expect to implement a margin improvement program during the fourth quarter of 2021, which could result in incremental cash and non-cash charges.
Impact of COVID-19 Pandemic
Other than as described above under the subheading “Executive Summary”, the COVID-19 pandemic did not have a significant impact on our results of operations for the three and nine months ended September 30, 2021. However, we continue to monitor our supply chain for disruptions and evaluate steps to avoid future impacts that may arise from delays.
The ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic, the severity of the disease and outbreak, the impact of new strains of the virus, the effectiveness and availability of existing or new vaccines, future and ongoing actions that may be taken by governmental authorities, including the implementation of vaccine mandates, the impact on the businesses of our customers and partners, and the length of its impact on the global economy, which are uncertain and are difficult to predict at this time. We are conducting business with substantial modifications to employee travel, employee work locations, and virtualization or cancellation of certain sales and marketing events, among other modifications. We will continue to actively monitor the situation and may take further actions that alter our business operations as required by federal, state or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers and stockholders. The potential effects of any such alterations or modifications could have an impact on our business, including our customers and prospects, or on our financial results.
Cash from operations, accounts receivable and revenues could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and other risks detailed in Part 1, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as updated by Part II, Item 1A in this Quarterly Report on Form 10-Q. However, based on our current revenue outlook, we believe that existing cash balances, together with funds generated from operations and amounts available under our revolving credit facility, will be sufficient to finance our operations and meet our foreseeable cash requirements through at least the next twelve months. While the pandemic has not materially impacted our liquidity and capital resources to date, it has led to increased disruption and volatility in capital markets and credit markets which could adversely affect our liquidity and capital resources in the future.
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Metrics
We use certain operating metrics in assessing the health and trajectory of our business, including annualized recurring revenue (“ARR”), Citrix Cloud Paid Subscriber count and SaaS bookings as a percentage of subscription bookings. These operating metrics do not have any standardized definition within our industry and therefore may not be comparable to similarly titled measures reported by other companies.
ARR
Total ARR is an operating metric that represents the contracted recurring value of all termed subscriptions and perpetual maintenance agreements normalized to a one-year period. Total ARR includes only active contractually committed, fixed fees and consists of the following components: Subscription ARR and Maintenance ARR. Subscription ARR represents ARR related to our Subscription offerings, including SaaS ARR, and 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. In the normal course of business, all contracts are annualized, including 30 day subscription offerings where we take monthly recurring revenue multiplied by 12 to annualize. Maintenance ARR is the contracted recurring value of all termed perpetual maintenance agreements normalized to a one-year period. SaaS ARR represents the contracted recurring value of all cloud subscriptions normalized to a one-year period. Our definitions of ARR include contracts expected to recur and therefore exclude contracts with durations of 12 months or less where licenses were issued to address extraordinary business continuity events for our customers. 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. We believe ARR is a key indicator of the overall trajectory of our business and that certain investors and financial analysts may find this information helpful. Management uses ARR to monitor the performance underlying our operations while the business model is in transition. We introduced Total ARR (including the Maintenance ARR component) in the first quarter of 2021 as we believe Total ARR provides further clarity on the holistic performance of the business and is intended to complement our existing Subscription ARR and SaaS ARR disclosures. Over the course of time, consistent with Support and services reported revenue, we expect the perpetual license maintenance component of Total ARR to decline, which is netted against growth in Subscription ARR.
Citrix Cloud Paid Subscribers
Citrix Cloud Paid Subscribers is defined as the count of users (or devices in the case of named device licensing) on a paid cloud-hosted subscription as of the end of the reporting period. It is not inclusive of all Citrix paid SaaS subscribers and excludes cloud services not delivered or accessed via the Citrix Cloud platform, cloud services not billed on a per subscriber basis, and CSP. Management uses Citrix Cloud Paid Subscriber count as a key measure of our ability to retain and expand revenue from our cloud-based solutions over time. We believe this metric might be useful to certain investors and analysts to monitor the health of our cloud business.
SaaS Bookings as a Percentage of Subscription Bookings
In the first quarter of 2021, we introduced SaaS bookings as a percentage of subscription bookings as an operating metric given that a large majority of our business has already transitioned to the subscription model. We believe this metric provides further transparency on our business model transition. We calculate this metric by dividing the SaaS bookings annualized contract value (“ACV”) by total subscription bookings ACV. We define ACV as the total value of a contract divided by the term of the contract (in days), multiplied by 365. A booking is defined as the full monetary value sold to a customer for product or services in a given period. If the term of the contract is less than a year, then the booking is equal to the total contract value. Management uses SaaS bookings as a percentage of subscription bookings as a key measure of the progress we are making on our business model transition to the cloud. We believe this metric might be useful to certain investors and analysts in assessing the performance and trajectory of our cloud business.
Summary of Results
For the three months ended September 30, 2021 compared to the three months ended September 30, 2020, a summary of our results included:
•Total net revenue increased 1.5% to $778.4 million;
•Subscription revenue increased 45.9% to $383.2 million;
•SaaS revenue increased 65.8% to $228.5 million;
•Product and license revenue decreased 70.9% to $25.4 million;
•Support and services revenue decreased 11.4% to $369.9 million;
•Gross margin as a percentage of revenue decreased 2.3% to 81.1%;
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•Operating income decreased 34.2% to $84.5 million;
•Diluted net income per share decreased 47.4% to $0.41;
•Deferred and unbilled revenue increased $380.2 million to $2.99 billion;
•Citrix Cloud Paid Subscriber count increased 47.0% from 8.3 million to 12.2 million;
•Total ARR increased 19.9%, or $510.7 million, from $2.57 billion to $3.08 billion;
•Subscription ARR increased 71.1%, or $730.2 million, to $1.76 billion;
•SaaS ARR increased 74.5%, or $469.7 million, to $1.10 billion; and
•SaaS bookings as percentage of subscription bookings increased from 53% to 64%.
Also, operating cash flows decreased $303.0 million to $512.8 million when comparing the nine months ended September 30, 2021 to the nine months ended September 30, 2020.
Our Subscription revenue increased primarily due to continued customer cloud adoption of our solutions delivered via the cloud and an increase in on-premise license demand, mostly from our Workspace offerings. Our Product and license revenue decreased primarily due to decreased sales of our perpetual Workspace solutions due to the decision to discontinue the broad availability of new perpetual licenses as of October 1, 2020. The decrease in Support and services revenue was primarily due to decreased sales of maintenance services, primarily across our Workspace perpetual offerings, as more of the revenue is reported in the Subscription revenue line commensurate with our subscription model transition. We currently expect total revenue to decrease when comparing the fiscal year 2021 to the fiscal year 2020. The decrease in gross margin as a percentage of revenue was primarily driven by the end of sale of Workspace perpetual licenses that have historically had a higher gross margin than our Subscription and Application Delivery and Security offerings, as well as the Wrike acquisition. The decrease in operating income was primarily due to a decrease in gross margin and an in increase in operating expenses, primarily due to the Wrike acquisition. The decrease in diluted net income per share was primarily due to lower operating income and higher interest expense, partially offset by a decrease in income taxes. Citrix Cloud Paid Subscriber count increased due to continued adoption of our cloud-based offerings. Total ARR, Subscription ARR and SaaS ARR increased primarily driven by strength in Subscription ARR, partially offset by a decrease in Maintenance ARR, in line with the decline in Support and services reported revenue. The increases in SaaS ARR and SaaS bookings as percentage of subscription bookings demonstrates our focus on transitioning our installed base to the cloud, and also reflects the Wrike acquisition.
2021 Business Combination
On February 26, 2021 (the “Closing Date”), we completed the acquisition of Wrangler Topco, LLC (“Wrangler”), the parent entity of Wrike, a leader in the SaaS collaborative work management space, for approximately $2.07 billion (the “Purchase Consideration”). The Purchase Consideration consists of a base purchase price of $2.25 billion and is subject to certain adjustments as provided for under the related Agreement and Plan of Merger dated January 16, 2021 (the “Merger Agreement”). We expect that the addition of Wrike’s cloud-delivered capabilities will expand our collaborative work management capabilities. Under the Merger Agreement, we acquired all of the issued and outstanding equity securities of Wrangler. Wrike revenue is included in our Workspace product grouping.
Under the terms of the Merger Agreement, we assumed certain unvested stock options held by Wrike employees and converted them into options to purchase 526,113 shares of our common stock. Of these assumed awards, 180,003 options continued with the same monthly vesting conditions under which they were originally granted. The majority of the remaining assumed options were reset to primarily cliff vest on December 31, 2021 or annually over two years.
We incurred $19.4 million of expenses related to the Wrike acquisition, of which $0.3 million and $16.1 million were expensed during the three and nine months ended September 30, 2021, respectively, and are included in General and administrative expense in the accompanying condensed consolidated statements of income.
See Note 6 to our condensed consolidated financial statements for additional details regarding our acquisition of Wrike.
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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, 2020, 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.
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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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 vs. 2020 | 2021 vs. 2020 | ||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||
| Subscription | $ | 383,154 | $ | 262,604 | $ | 1,099,554 | $ | 774,290 | 45.9 | % | 42.0 | % | |||||||||||||||||||||||
| Product and license | 25,365 | 87,218 | 128,283 | 390,009 | (70.9) | (67.1) | |||||||||||||||||||||||||||||
| Support and services | 369,926 | 417,348 | 1,138,485 | 1,262,745 | (11.4) | (9.8) | |||||||||||||||||||||||||||||
| Total net revenues | 778,445 | 767,170 | 2,366,322 | 2,427,044 | 1.5 | (2.5) | |||||||||||||||||||||||||||||
| Cost of net revenues: | |||||||||||||||||||||||||||||||||||
| Cost of subscription, support and services | 112,067 | 102,755 | 338,839 | 282,672 | 9.1 | 19.9 | |||||||||||||||||||||||||||||
| Cost of product and license revenues | 14,360 | 16,238 | 61,235 | 57,554 | (11.6) | 6.4 | |||||||||||||||||||||||||||||
| Amortization of product related intangible assets | 20,392 | 8,293 | 51,520 | 24,877 | 145.9 | 107.1 | |||||||||||||||||||||||||||||
| Total cost of net revenues | 146,819 | 127,286 | 451,594 | 365,103 | 15.3 | 23.7 | |||||||||||||||||||||||||||||
| Gross profit | 631,626 | 639,884 | 1,914,728 | 2,061,941 | (1.3) | (7.1) | |||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||
| Research and development | 145,811 | 130,628 | 436,148 | 406,827 | 11.6 | 7.2 | |||||||||||||||||||||||||||||
| Sales, marketing and services | 290,240 | 298,659 | 890,444 | 916,801 | (2.8) | (2.9) | |||||||||||||||||||||||||||||
| General and administrative | 91,462 | 81,591 | 280,046 | 262,693 | 12.1 | 6.6 | |||||||||||||||||||||||||||||
| Amortization of other intangible assets | 19,648 | 701 | 46,615 | 2,097 | * | * | |||||||||||||||||||||||||||||
| Total operating expenses | 547,161 | 511,579 | 1,653,253 | 1,588,418 | 7.0 | 4.1 | |||||||||||||||||||||||||||||
| Income from operations | 84,465 | 128,305 | 261,475 | 473,523 | (34.2) | (44.8) | |||||||||||||||||||||||||||||
| Interest income | 319 | 491 | 912 | 2,685 | (35.0) | (66.0) | |||||||||||||||||||||||||||||
| Interest expense | (22,809) | (16,639) | (70,074) | (48,326) | 37.1 | 45.0 | |||||||||||||||||||||||||||||
| Other (expense) income, net | (2,050) | 3,841 | 17,481 | 7,850 | (153.4) | 122.7 | |||||||||||||||||||||||||||||
| Income before income taxes | 59,925 | 115,998 | 209,794 | 435,732 | (48.3) | (51.9) | |||||||||||||||||||||||||||||
| Income tax expense | 8,138 | 17,771 | 5,193 | 43,377 | (54.2) | (88.0) | |||||||||||||||||||||||||||||
| Net income | $ | 51,787 | $ | 98,227 | $ | 204,601 | $ | 392,355 | (47.3) | % | (47.9) | % | |||||||||||||||||||||||
*Not meaningful | |||||||||||||||||||||||||||||||||||
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Revenues
We generate revenue from sales of our Subscription, Product and license and Support and services offerings, which are categorized into the following major solutions:
•Workspace, which is primarily comprised of our Application Virtualization solutions, including Citrix Virtual Apps and Desktops, our unified endpoint management solutions, which include Citrix Endpoint Management, Citrix Content Collaboration, Citrix Workspace and Collaborative Work Management; and
•App Delivery and Security products, which primarily include Citrix ADC and Citrix SD-WAN. Our App Delivery and Security products can be consumed via perpetual license or under pooled licensing agreements that give customers flexibility to consume in either a hardware form factor or as a software, over the contract term.
Subscription revenue relates to fees for SaaS, which are generally recognized ratably over the contractual term and non-SaaS, which are generally recognized at a point in time, other than the related support which is recognized over the contractual term. SaaS primarily consists of subscriptions delivered via a cloud-hosted service whereby the customer does not take possession of the software, hybrid subscription offerings and the related support. Non-SaaS 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. 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 represents fees related to the perpetual licensing of our solutions, primarily our App Delivery and Security products, which are recognized at a point in time. In October 2020, we discontinued broad availability of perpetual licenses for Citrix Workspace.
We offer incentive programs to our VADs and VARs to stimulate demand for our solutions. Product and license and Subscription 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 primarily related to our perpetual offerings and include the following:
•Customer Success Services, which gives customers a choice of tiered support offerings that combine the elements of technical support, product version upgrades, guidance, enablement 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 App Delivery and Security 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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 vs. 2020 | 2021 vs. 2020 | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Subscription | $ | 383,154 | $ | 262,604 | $ | 1,099,554 | $ | 774,290 | $ | 120,550 | $ | 325,264 | |||||||||||||||||||||||
| Product and license | 25,365 | 87,218 | 128,283 | 390,009 | (61,853) | (261,726) | |||||||||||||||||||||||||||||
| Support and services | 369,926 | 417,348 | 1,138,485 | 1,262,745 | (47,422) | (124,260) | |||||||||||||||||||||||||||||
| Total net revenues | $ | 778,445 | $ | 767,170 | $ | 2,366,322 | $ | 2,427,044 | $ | 11,275 | $ | (60,722) | |||||||||||||||||||||||
Subscription
Subscription revenue increased during the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to continued customer adoption of our solutions delivered via the cloud of $90.7 million, primarily from our Workspace offerings, which includes the Wrike acquisition. There was also an increase in on-premise subscription license revenue of $29.9 million, primarily from our Workspace offerings.
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Subscription revenue increased during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to continued customer adoption of our solutions delivered via the cloud of $218.2 million, primarily from our Workspace offerings, which include the Wrike acquisition. There was also an increase in on-premise subscription license revenue of $107.1 million, comprised of increases in revenue from our Workspace offerings of $62.1 million, and our App Delivery and Security offerings of $45.0 million.
We currently expect our Subscription revenue to increase when comparing the fiscal year 2021 to the fiscal year 2020 due to our continued transition to a subscription-based business model, as well as the Wrike acquisition.
Product and license
Product and license revenue decreased when comparing the three and nine months ended September 30, 2021 to the three and nine months ended September 30, 2020 primarily from a decrease in sales of our perpetual Workspace solutions due to the decision to discontinue offering new perpetual licenses as of October 1, 2020.
We currently expect our Product and license revenue to decrease when comparing the fiscal year 2021 to the fiscal year 2020 as customers continue to shift to our subscription offerings and away from our App Delivery and Security hardware products, as well as our decision to discontinue the broad availability of new perpetual licenses for Citrix Workspace beginning on October 1, 2020.
Support and services
Support and services revenue decreased during the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to a decrease in sales of maintenance services across our Workspace perpetual offerings, as more of the revenue is reported in the Subscription revenue line commensurate with our subscription model transition.
Support and services revenue decreased during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to a decrease in sales of maintenance services across our Workspace perpetual offerings of $86.1 million and App Delivery and Security perpetual offerings of $29.8 million, as more of the revenue is reported in the Subscription revenue line commensurate with our subscription model transition.
We currently expect Support and services revenue to decrease when comparing the fiscal year 2021 to the fiscal year 2020 as customers continue to shift to our subscription offerings.
Deferred Revenue, Unbilled Revenue and Backlog
Deferred revenue is 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 revenue also includes Subscription revenue from our cloud-based subscription offerings and our on-premise subscription offerings.
Deferred revenue 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 and unbilled revenue (in thousands):
| September 30, 2021 | December 31, 2020 | September 30, 2021 compared to December 31, 2020 | |||||||||||||||
| Deferred revenue | $ | 1,778,448 | $ | 1,902,576 | $ | (124,128) | |||||||||||
| Unbilled revenue | 1,210,134 | 1,036,072 | 174,062 | ||||||||||||||
Deferred revenues decreased $124.1 million as of September 30, 2021 compared to December 31, 2020 primarily due to a decrease in deferred maintenance and support revenue of $316.1 million, mostly from Workspace perpetual software maintenance, partially offset by an increase from deferred subscription revenue of $193.8 million, which includes the Wrike
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acquisition. Unbilled revenue as of September 30, 2021 increased $174.1 million from December 31, 2020 primarily due to increased customer adoption of multi-year cloud-based subscription agreements.
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. Backlog includes the aggregate amounts we expect to recognize as point-in-time revenue in the following quarter associated with contractually committed amounts for on-premise subscription software licenses, as well as confirmed product license orders that have not shipped and are wholly unfulfilled. As of September 30, 2021, the amount of backlog was not material. We do not believe that backlog, as of any particular date, is a reliable indicator of future performance.
International Revenues
International revenues (sales outside the United States) accounted for 49.7% and 51.0% of our net revenues for the three months ended September 30, 2021 and 2020, respectively. The decrease in our international revenues as a percentage of our net revenues for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily due to a decrease in the EMEA region as it shifts away from perpetual licenses and related support offerings toward subscription offerings.
International revenues (sales outside the United States) accounted for 49.4% and 50.2% of our net revenues for the nine months ended September 30, 2021 and 2020, respectively. The change in our international revenues as a percentage of our net revenues when comparing the nine months ended September 30, 2021 to the nine months ended September 30, 2020 was not significant. 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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 vs. 2020 | 2021 vs. 2020 | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Cost of subscription, support and services revenues | $ | 112,067 | $ | 102,755 | $ | 338,839 | $ | 282,672 | $ | 9,312 | $ | 56,167 | |||||||||||||||||||||||
| Cost of product and license revenues | 14,360 | 16,238 | 61,235 | 57,554 | (1,878) | 3,681 | |||||||||||||||||||||||||||||
| Amortization of product related intangible assets | 20,392 | 8,293 | 51,520 | 24,877 | 12,099 | 26,643 | |||||||||||||||||||||||||||||
| Total cost of net revenues | $ | 146,819 | $ | 127,286 | $ | 451,594 | $ | 365,103 | $ | 19,533 | $ | 86,491 | |||||||||||||||||||||||
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 and hardware costs related to certain on-premise subscription offerings. 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 during the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to higher costs of providing our subscription offerings, mainly from the Wrike acquisition.
Cost of subscription, support and services revenues increased during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to higher costs of providing our subscription offerings, which were mostly cloud capacity costs and costs related to the Wrike acquisition, as well as hardware costs related to our on-premise subscriptions offerings. We currently expect cost of subscription, support and services revenues to increase when comparing the fiscal year 2021 to the fiscal year 2020, consistent with the expected increases in Subscription revenue as discussed above.
The decrease in Cost of product and license revenues for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was not significant. The increase in Cost of product and license revenues during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to our App Delivery and Security perpetual products, which contain hardware components that have a higher cost than our software products. We currently expect cost of product and license revenues to increase slightly when comparing the fiscal year 2021 to the fiscal year 2020.
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Amortization of product related intangible assets increased for the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 primarily due to acquired intangible assets in connection with the Wrike acquisition. We currently expect amortization of product related intangible assets to increase when comparing the fiscal year 2021 to the fiscal year 2020, due to product related intangible assets acquired in connection with the Wrike acquisition.
Gross Margin
Gross margin as a percentage of revenue was 81.1% for the three months ended September 30, 2021, and 83.4% for the three months ended September 30, 2020, respectively, and 80.9% for the nine months ended September 30, 2021 and 85.0% for the nine months ended September 30, 2020, respectively. The change in gross margin as a percentage of revenue was primarily driven by the end of sale of Workspace perpetual licenses as of October 1, 2020 that have historically had a higher gross margin than our Subscription and Application Delivery and Security offerings, as well as the Wrike acquisition.
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 time frame for which we hedge our risk.
Research and Development Expenses
| Three Months Ended | Nine Months Ended | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 vs. 2020 | 2021 vs. 2020 | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Research and development | $ | 145,811 | $ | 130,628 | $ | 436,148 | $ | 406,827 | $ | 15,183 | $ | 29,321 | |||||||||||||||||||||||
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, 2021 compared to the three months ended September 30, 2020 primarily due to increases in compensation and other employee-related costs of $8.6 million as a result of higher headcount, in part due to the Wrike acquisition, as well as increases in cloud capacity costs of $2.4 million and stock-based compensation of $1.4 million.
Research and development expenses increased during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to compensation and other employee-related costs of $17.2 million as a result of higher headcount, in part due to the Wrike acquisition, as well as an increase in stock-based compensation of $5.7 million.
Sales, Marketing and Services Expenses
| Three Months Ended | Nine Months Ended | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 vs. 2020 | 2021 vs. 2020 | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Sales, marketing and services | $ | 290,240 | $ | 298,659 | $ | 890,444 | $ | 916,801 | $ | (8,419) | $ | (26,357) | |||||||||||||||||||||||
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.
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Sales, marketing and services expenses decreased during the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to a decrease in variable compensation expense of $19.0 million, as the comparative period included higher amounts driven by ongoing business continuity sales, partially offset by increases in compensation and other employee-related costs of $9.4 million, primarily due to higher headcount from the Wrike acquisition.
Sales, marketing and services expenses decreased during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to a decrease in variable compensation of $52.8 million, as the comparative period included higher amounts driven by demand of limited-use licenses, partially offset by increases in marketing programs of $9.4 million, related to higher demand generation costs, compensation and other employee-related costs of $9.0 million and professional services of $7.5 million.
General and Administrative Expenses
| Three Months Ended | Nine Months Ended | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 vs. 2020 | 2021 vs. 2020 | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| General and administrative | $ | 91,462 | $ | 81,591 | $ | 280,046 | $ | 262,693 | $ | 9,871 | $ | 17,353 | |||||||||||||||||||||||
General and administrative expenses consist primarily of personnel related costs and expenses related to outside consultants assisting with information systems, as well as accounting and legal fees.
General and administrative expenses increased during the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to increases in professional fees of $5.6 million and credit loss expenses of $4.2 million. General and administrative expenses increased during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to increases in professional fees of $23.8 million, mainly for Wrike acquisition-related costs, stock-based compensation of $6.2 million and compensation and other employee-related costs of $6.0 million. These increases were partially offset by decreases in credit loss expense of $9.7 million and impairment of right-of-use assets of $7.6 million.
Amortization of Other Intangible Assets
| Three Months Ended | Nine Months Ended | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 vs. 2020 | 2021 vs. 2020 | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Amortization of other intangible assets | $ | 19,648 | $ | 701 | $ | 46,615 | $ | 2,097 | $ | 18,947 | $ | 44,518 | |||||||||||||||||||||||
Amortization of other intangible assets consists of amortization of customer relationships, trade names, backlog and covenants not to compete.
Amortization of other intangible assets increased for the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 primarily due to acquired intangible assets in connection with the Wrike acquisition.
2021 Operating Expense Outlook
When comparing the fiscal year 2021 to the fiscal year 2020, we currently expect Operating expenses to increase primarily due to the Wrike acquisition. Additionally, on November 4, 2021, we announced that we expect to implement a margin improvement program during the fourth quarter of 2021, which could result in incremental cash and non-cash charges.
Interest Expense
| Three Months Ended | Nine Months Ended | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 vs. 2020 | 2021 vs. 2020 | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Interest expense | $ | (22,809) | $ | (16,639) | $ | (70,074) | $ | (48,326) | $ | (6,170) | $ | (21,748) | |||||||||||||||||||||||
Interest expense primarily consists of interest paid on our 2026 Notes, 2027 Notes and 2030 Notes, 2021 Term Loan Credit Agreement, Term Loan Credit Agreement and our credit facility. Interest expense increased for the three months ended
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September 30, 2021 compared to the three months ended September 30, 2020 primarily due to the 2026 Notes and 2021 Term Loan Credit Agreement. Interest expense increased for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to the 2026 Notes and 2021 Term Loan Credit Agreement of $16.3 million and financing costs related to the Wrike acquisition of $5.4 million. When comparing the fiscal year 2021 to the fiscal year 2020, we currently expect interest expense to increase primarily due to debt incurred to partially fund the Wrike acquisition. See Note 11 to our condensed consolidated financial statements for additional details regarding our debt.
Other (expense) income, net
| Three Months Ended | Nine Months Ended | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 vs. 2020 | 2021 vs. 2020 | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Other (expense) income, net | $ | (2,050) | $ | 3,841 | $ | 17,481 | $ | 7,850 | $ | (5,891) | $ | 9,631 | |||||||||||||||||||||||
Other (expense) income, net is primarily comprised of gains (losses) from remeasurement of foreign currency transactions and non-designated hedges, sublease income, realized losses related to changes in the fair value of our investments that have a decline in fair value and recognized gains (losses) related to our investments.
The change in Other (expense) income, net during the three months ended September 30, 2021 compared to the three months ended September 30, 2020 is primarily attributable to losses from the remeasurement of foreign currency transactions. The change in Other (expense) income, net during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 is primarily due to recognized gains on our strategic investments of $14.7 million, partially offset by losses from remeasurement of foreign currency transactions of $6.2 million.
Income Taxes
We are required to estimate our income taxes in each of the jurisdictions in which we operate as part of the process of preparing our condensed consolidated financial statements. We maintain certain strategic management and operational activities in overseas subsidiaries and our foreign earnings are taxed at rates that are generally lower than in the United States.
Our effective tax rate generally differs from the U.S. federal statutory rate primarily due to tax credits and lower tax rates on earnings generated by our foreign operations that are taxed primarily in Switzerland.
Our effective tax rate was 13.6% and 15.3% for the three months ended September 30, 2021 and 2020, respectively. The decrease in the effective tax rate when comparing the three months ended September 30, 2021 to the three months ended September 30, 2020, was primarily due to tax benefits arising from combining the Wrike business with Citrix and the relative impact to the tax rate of tax benefits unique to the period ended September 30, 2021, such as stock based compensation deductions.
Our effective tax rate was 2.5% and 10.0% for the nine months ended September 30, 2021 and 2020, respectively. The decrease in the effective tax rate when comparing the nine months ended September 30, 2021 to the nine months ended September 30, 2020, was primarily due to tax benefits arising from combining the Wrike business with Citrix and the relative impact to the tax rate of tax benefits unique to the period ended September 30, 2021, such as stock based compensation deductions.
We are subject to tax in the U.S. and in multiple foreign tax jurisdictions. 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. See Note 13 to our condensed consolidated financial statements for additional details regarding our income taxes.
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Liquidity and Capital Resources
During the nine months ended September 30, 2021, we generated operating cash flows of $512.8 million. These operating cash flows related primarily to net income of $204.6 million, adjusted for, among other things, non-cash charges, including stock-based compensation expense of $249.6 million, depreciation and amortization expenses of $238.8 million and a change in operating assets and liabilities, net of acquisitions of $179.5 million. The change in our operating assets and liabilities, net of acquisitions was primarily the result of outflows from accrued expenses and other current liabilities of $191.5 million, mostly from decreases in employee-related accruals of $95.6 million and other accruals of $50.3 million, primarily Wrike acquisition-related costs. Also contributing to the change in operating assets and liabilities, net of acquisitions were outflows from deferred revenue of $157.4 million, other assets of $79.7 million primarily due to an increase in capitalized commissions, and income taxes, net of $63.9 million, primarily due to an increase in prepaid taxes of $43.9 million and an increase in income taxes payable of $11.4 million. These outflows were partially offset by an inflow from accounts receivable of $340.0 million, primarily due to collections from prior period sales. Our investing activities used $1.98 billion of cash consisting primarily of cash paid for the Wrike acquisition, net of cash acquired of $2.02 billion and cash paid for the purchase of property and equipment of $63.6 million, partially offset by net proceeds from investments of $110.1 million. Our financing activities provided cash of $1.15 billion, primarily net proceeds from the 2021 Term Loan of $997.9 million and 2026 Notes of $741.4 million, partially offset by repayment of Wrike acquired debt of $190.0 million, repayment on the Term Loan Credit Agreement of $150.0 million, cash dividends on our common stock of $137.6 million and cash paid for tax withholding on vested stock awards of $105.1 million.
During the nine months ended September 30, 2020, we generated operating cash flows of $815.8 million. These operating cash flows related primarily to net income of $392.4 million, adjusted for, among other things, non-cash charges, including stock-based compensation expense of $228.9 million, depreciation and amortization expenses of $157.0 million and a change in operating assets and liabilities, net of acquisitions of $62.7 million. The change in our operating assets and liabilities, net of acquisitions was mostly the result of an inflow from accounts receivable of $150.3 million, primarily due to an increase in collections from prior period sales and an inflow from accrued expenses and other current liabilities of $73.7 million, primarily due to an increase in employee-related accruals. These inflows were partially offset by an outflow in deferred revenue of $103.5 million and an outflow in other assets of $67.1 million, primarily due to an increase in capitalized commissions from higher subscription sales. Our investing activities used $345.8 million of cash consisting primarily of net purchases of investments of $309.4 million and cash paid for the purchase of property and equipment of $30.8 million. Our financing activities used cash of $446.9 million primarily for stock repurchases of $1.20 billion, cash dividends on our common stock of $129.1 million and cash paid for tax withholding on vested stock awards of $104.8 million. These outflows are partially offset by net proceeds from our 2030 Notes of $738.1 million and net borrowings from our Term Loan Credit Agreement of $248.8 million.
Term Loan Credit Agreements
On February 5, 2021, we entered into the 2021 Term Loan Credit Agreement, consisting of a $1.00 billion 2021 Term Loan. We borrowed $1.00 billion on February 26, 2021 under the 2021 Term Loan, and the loan matures on February 25, 2024. The proceeds under the 2021 Term Loan were used to finance a portion of the purchase price for the Wrike acquisition.
On January 21, 2020, we entered into a $1.00 billion Term Loan Credit Agreement, consisting of a $500.0 million 364-day Term Loan facility (the “364-day Term Loan”), and a $500.0 million 3-year Term Loan facility (the “3-year Term Loan”). During the nine months ended September 30, 2020, we used borrowings from the Term Loan Credit Agreement to enter into an aggregate $1.00 billion accelerated share repurchase program. During the nine months ended September 30, 2021, we repaid $150.0 million under the 3-year Term Loan. As of September 30, 2021, $100.0 million was outstanding under the 3-year Term Loan.
Senior Notes
On February 18, 2021, we issued $750.0 million of unsecured senior notes due March 1, 2026 (the “2026 Notes”). The 2026 Notes accrue interest at a rate of 1.250% per annum, which is due semi-annually on March 1 and September 1 of each year beginning on September 1, 2021. The net proceeds from this offering were $741.4 million. During the nine months ended September 30, 2021, we used the net proceeds from the 2026 Notes to fund a portion of the purchase price for the Wrike acquisition.
On February 25, 2020, we issued $750.0 million of unsecured senior notes due March 1, 2030 (the "2030 Notes"). The 2030 Notes accrue interest at a rate of 3.300% per annum, which is due semi-annually on March 1 and September 1 of each year. The net proceeds from this offering were $738.1 million. During the nine months ended September 30, 2020, we used the net proceeds from the 2030 Notes and cash to repay $500.0 million under the 364-day Term Loan and $250.0 million under the 3-year Term Loan.
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On November 15, 2017, we issued $750.0 million of unsecured senior notes due December 1, 2027 (the "2027 Notes"). The 2027 Notes accrue interest at a rate of 4.500% per annum, which is due semi-annually on June 1 and December 1 of each year.
Credit Facility
On November 26, 2019, we entered into a $250.0 million five-year unsecured revolving credit facility under an amended and restated credit agreement (the "Credit Agreement"). 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. As of September 30, 2021, no amounts were outstanding under the credit facility.
Bridge Facility and Take-Out Facility Commitment Letter
On January 16, 2021, we entered into a bridge facility and take-out facility commitment letter (the “Commitment Letter”) pursuant to which JPMorgan Chase Bank, N.A. (1) committed to provide a senior unsecured 364-day term loan facility in an aggregate principal amount of $1.45 billion to finance the cash consideration for the Wrike acquisition in the event that the permanent debt financing was not available on or prior to the Closing Date and (2) agreed to use commercially reasonable efforts to assemble a syndicate of lenders to provide the necessary commitments for the senior term loan facility. The commitments under the Commitment Letter were permanently reduced to zero on February 18, 2021, as a result of (i) the effectiveness of the 2021 Term Loan Credit Agreement and (ii) the completion of the issuance of the 2026 Notes.
See Note 11 to our condensed consolidated financial statements for additional details regarding our debt.
Historically, significant portions of our cash inflows were generated by our operations, a trend which we currently expect to continue for the remainder of 2021. We expect our operating cash flows to be lower in fiscal year 2021 as compared to fiscal year 2020. Our operating cash flows could also be impacted due to incremental cash outlays related to the margin improvement program expected to be implemented in the fourth quarter of 2021. 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. For additional information, see section titled Impact of COVID-19 Pandemic above. 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, 2021 | December 31, 2020 | 2021 Compared to 2020 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Cash, cash equivalents and investments | $ | 463,993 | $ | 891,373 | $ | (427,380) | |||||||||||
The decrease in Cash, cash equivalents and investments when comparing September 30, 2021 to December 31, 2020, is primarily due to cash paid for the Wrike acquisition, net of cash acquired of $2.02 billion, repayment of Wrike acquired debt of $190.0 million, repayment on the Term Loan Credit Agreement of $150.0 million, cash dividends on our common stock of $137.6 million and cash paid for tax withholding on vested stock awards of $105.1 million, partially offset by cash received from debt offerings of $1.74 billion and cash provided by operating activities of $512.8 million.
As of September 30, 2021, $240.8 million of the $464.0 million of Cash, cash equivalents and investments was held by our foreign subsidiaries. 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 $1.00 billion was approved in January 2020. 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 and mitigate earnings per share dilution posed by the issuance of shares related to employee equity compensation awards. At September 30, 2021, $625.6 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock.
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During the three and nine months ended September 30, 2021, we did not have any open market purchases under the stock repurchase program.
Shares for Tax Withholding
During the three and nine months ended September 30, 2021, we withheld 32,312 and 761,496 shares, respectively, from equity awards that vested, totaling $3.4 million and $105.1 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
With the exception of the $1.00 billion 2021 Term Loan drawn on February 26, 2021 and the $750.0 million 2026 Notes issued on February 18, 2021, as discussed above under the subheading “Liquidity and Capital Resources”, and the purchase commitment entered into in May 2021 discussed below, there have been no material changes, outside the ordinary course of business, to our contractual obligations since December 31, 2020. For further information, see “Contractual Obligations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Other Purchase Commitments
In May 2020, we entered into an amended agreement with a third-party provider, in the ordinary course of business, for the use of certain cloud services through June 2029. Under the amended agreement, we are committed to a purchase of $1.00 billion throughout the term of the agreement. As of September 30, 2021, we had $879.0 million of remaining obligations under the purchase agreement.
In May 2021, we entered into an amended agreement with a third-party provider, in the ordinary course of business, for the use of certain cloud services through May 2024. Under the amended agreement, we are committed to purchase services under this agreement totaling $100.0 million over the term, with commitments of $32.0 million in fiscal 2021, $24.0 million in fiscal year 2022, $24.0 million in fiscal year 2023 and $20.0 million at any time over the three-year term. As of September 30, 2021, we had $64.2 million of remaining obligations under the purchase agreement.
Off-Balance Sheet Arrangements
We do not have any special purpose entities or off-balance sheet financing arrangements.
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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes during the quarter ended September 30, 2021 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, 2020.
ITEM 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of September 30, 2021, 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, 2021, 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, 2021, except for the acquisition of Wrike described below, 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.
On February 26, 2021, we completed the acquisition of Wrike. We are currently integrating Wrike into our operations and internal control processes and, pursuant to the Securities and Exchange Commission's guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment for a period not to exceed one year from the date of acquisition, the scope of our assessment of our internal controls over financial reporting at September 30, 2021 does not include Wrike.
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PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
Information with respect to this item may be found in Note 15, "Commitments and Contingencies-Legal Matters", to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
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, 2020, which was filed with the Securities and Exchange Commission on February 8, 2021.
In order to be successful, we must attract, engage, retain and integrate key employees and have adequate succession plans in place, and failure to do so could have an adverse effect on our ability to manage our business.
Our success depends, in large part, on our ability to attract, engage, retain, and integrate qualified executives and other key employees throughout all areas of our business. Identifying, developing internally or hiring externally, training and retaining a diverse, global population of highly-skilled engineering, technical and security professionals, and managerial, sales and services, finance and marketing personnel are critical to our future, and global competition for experienced and diverse employees can be intense. In order to attract and retain executives and other key employees in a competitive marketplace, we must provide a competitive compensation package, including cash and equity-based compensation. If we do not obtain the stockholder approval needed to continue granting equity compensation in a competitive manner, our ability to attract, retain, and motivate executives and key employees could be weakened or we would otherwise need to increase our use of cash-based compensation and awards to achieve the same attraction, retention and motivation benefits. In order to attract and retain executives and other key employees in a competitive marketplace, we must also provide a diverse and inclusive environment, and offer benefits to support our employees’ physical and mental health. Our inability to do so may limit our effectiveness in attracting, retaining and motivating our executives and key employees. Failure to successfully hire executives and key employees or the loss of any executives and key employees could have a significant impact on our operations. Competition for qualified personnel in our industry is intense because of the limited number of people available with the necessary technical skills and understanding of solutions in our industry. The loss of services of any key personnel, the inability to retain and attract qualified personnel in the future or delays in hiring may harm our business and results of operations.
Effective succession planning is also important to our long-term success. We have experienced significant changes in our senior management team over the past several years, including the appointments of Mark Schmitz as our Executive Vice President and Chief Operating Officer in 2019, Arlen R. Shenkman as our Executive Vice President and Chief Financial Officer in 2019, Sridhar Mullapudi as our Executive Vice President, Product Management in 2020, Hector Lima as our Executive Vice President, Customer Experience in 2020, and Woong Joseph Kim as our Executive Vice President and Chief Technology Officer in 2020, as well as the retirements of Mark Ferrer as Chief Revenue Officer in 2021 and Jeroen Van Rotterdam as Executive Vice President of Engineering in 2021. Most recently, on October 6, 2021, David J. Henshall stepped down as President and Chief Executive Officer and our Board appointed Robert M. Calderoni, our Chairman of the Board, as Interim Chief Executive Officer and President.
Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution. Further, changes in our management team may be disruptive to our business, and any failure to successfully integrate key new hires or promoted employees could adversely affect our business and results of operations.
We expect to announce a margin improvement program in the fourth quarter of 2021, which we cannot guarantee will achieve its intended result.
We expect to announce a margin improvement program and related charges in the fourth quarter of 2021. We cannot guarantee that our margin improvement program will be implemented as expected, or will achieve or sustain the targeted benefits, or that the benefits, even if achieved, will be adequate to meet our long-term profitability expectations. Risks associated with this expected margin improvement program also include additional unexpected costs, negative impacts on our cash flows from operations and liquidity, employee attrition and adverse effects on employee morale and our potential failure to meet operational and growth targets due to the loss of employees, any of which may impair our ability to achieve anticipated results from operations or otherwise harm our business.
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Our recent acquisition of Wrike involves a number of risks that could adversely affect our business, financial condition and operating results, and we may not realize the financial and strategic goals we anticipate.
On February 26, 2021, we completed our previously announced acquisition of Wrike, Inc., a leading provider of SaaS collaborative work management solutions, pursuant to the terms of the Agreement and Plan of Merger dated January 16, 2021 (the “Merger Agreement”). The acquisition of Wrike involves certain risks, including:
•Our failure to realize the expected benefits or synergies of the Wrike acquisition;
•An uncertain revenue and earnings stream from Wrike, which could dilute our earnings;
•Difficulties and delays integrating Wrike’s personnel, operations, technologies, solutions and systems;
•Difficulties operating Wrike to further our objectives and strategy;
•Undetected errors or unauthorized use of a third-party’s code in Wrike’s solutions;
•Our ongoing business may be disrupted and our management’s attention may be diverted by transition or integration activities involving Wrike, which may delay innovation, among other things;
•Challenges with implementing adequate and appropriate controls, procedures and policies in Wrike’s business;
•Potential difficulties in completing projects associated with Wrike’s in-process research and development;
•Difficulty providing complementary solutions that are purchased by our or Wrike’s customers, reaching new users and expanding our customer base, or competing effectively in markets in which we have no or limited direct prior experience and where competitors have stronger market positions and which are highly competitive;
•The potential loss of Wrike’s key employees;
•Potential difficulties integrating Wrike’s solutions and services into our sales channel or challenges selling Wrike’s products;
•The assumption of pre-existing contractual relationships of Wrike that we would not have otherwise entered into, the termination or modification of which may be costly or disruptive to our business;
•Being subject to unfavorable revenue recognition or other accounting treatment as a result of Wrike’s practices;
•Incurring a significant amount of debt to finance the Wrike acquisition, which increased our debt service requirements, expense and leverage;
•Issuing equity awards to, and assuming existing equity awards of, Wrike’s employees, which may more rapidly deplete share reserves available under our shareholder-approved equity incentive plans;
•Increased exposure to risks related to foreign operations due to the increase in our employee presence in Russia, which could result in the unavailability of key technical talent, cyber security risks, disruption resulting from the transfer of employees moving from current Russia offices to alternative locations, difficulty and expenses associated with identifying alternative and adequate technical talent pools, and other risks related to the political, security and policy uncertainty between the United States and Russia;
•Litigation arising from the transaction; and
•Other factors described in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K filed with the SEC on February 8, 2021.
Our failure to successfully integrate Wrike, or realize the expected benefits of the acquisition, due to these or other factors could have a material adverse effect on our business, results of operations and financial condition. In addition, we may not be able to accelerate our strategy and cloud transition, enhance our growth or accelerate Wrike’s growth expectations, provide complementary solutions that are purchased by our or Wrike’s customers, reach new users and expand our customer base, compete effectively in Wrike’s markets, or realize other expected benefits of the merger if we are unable to successfully integrate and operate Wrike. Specifically, we have and may continue to experience slower than expected post-acquisition bookings synergy, as well as higher levels of attrition, which has negatively impacted and may continue to negatively impact, Wrike ARR growth and overall business performance.
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Servicing the debt we incurred in connection with the Wrike acquisition will require a significant amount of cash, which could adversely affect our business, financial condition and results of operations.
The consideration we paid for the Wrike acquisition consisted of a $2.25 billion base purchase price, subject to certain adjustments as set forth in the Merger Agreement. We funded the consideration with proceeds from a term loan credit agreement, dated February 5, 2021, with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto from time to time (the “2021 Term Loan Credit Agreement”), and the completion of the issuance of 1.250% Senior Notes due 2026 (the “2026 Notes”) pursuant to an Underwriting Agreement, dated February 9, 2021, with J.P. Morgan Securities LLC, BofA Securities, Inc. and Deutsche Bank Securities Inc., as representatives of the several underwriters named therein.
Taking on additional indebtedness in connection with the Wrike acquisition, as a result of the 2021 Term Loan Credit Agreement, the 2026 Notes and/or other alternative financing in the future, increased the risks that we face with our existing indebtedness. For example, in January 2021, we committed to a goal of maintaining our investment grade credit rating and indicated that we plan to return to historical leverage levels within 24 months. If we are unable to achieve these commitments, our ability to obtain additional financing or to re-finance our existing indebtedness in the future, and the terms of any such financing, could be adversely affected.
Our aggregate indebtedness, combined with our other financial obligations and contractual commitments, could have other important consequences. For example, it could:
•Make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry and competitive conditions and adverse changes in government regulation;
•Limit our flexibility in planning for, or reacting to, changes in our business and our industry;
•Place us at a disadvantage compared to our competitors who have less debt; and
•Limit our ability to borrow additional amounts to fund acquisitions, for working capital and for other general corporate purposes.
Any of these factors could materially and adversely affect our business, financial condition and results of operations.
Our App Delivery and Security business has encountered challenges meeting demand for certain products, and may continue to encounter challenges meeting demand for certain products, if there are any interruptions or delays in the supply of hardware or hardware components from our third-party sources.
We rely on a concentrated number of third-party suppliers, who provide hardware or hardware components for our App Delivery and Security products, and contract manufacturers. Our suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, or the need to implement costly or time-consuming protocols to comply with applicable regulations (including regulations related to conflict minerals), equipment malfunction, natural disasters and environmental factors, any of which could delay or impede their ability to meet our demand. We also may experience disruptions or delays to our supply chain or fulfillment and delivery operations, including as a result of the COVID-19 pandemic from, among other things, the temporary closure of third-party supplier and manufacturer facilities, spikes in demand for manufacturing services, interruptions in product supply or insufficient supply of components, restrictions on export or shipment or disruptions in product fulfillment due to closure or delays of our delivery vendors. For example, in the first quarter of 2021, due in part to increased customer demand, we experienced challenges in procuring hardware components for certain of our Application Delivery and Security products, which led to hardware shipment delays and lower than expected recognized revenue during the quarter. We expect that these challenges may continue and could increase. If we are unable to procure hardware and hardware components in a timely manner from our existing suppliers or are required to change suppliers, there could be a delay in the supply of our hardware or hardware components and our ability to meet the demands of our customers could be adversely affected, which could cause the loss of App Delivery and Security sales and existing or potential customers and delayed revenue recognition, all of which could adversely affect our results of operations.
If our customers choose on-premises subscription licenses with short-term durations, our operating results may be adversely affected.
The amount of our recognized revenue depends on several factors, including the average duration of on-premises subscription licenses. If our customers choose licenses with short subscription term durations, operating results may be adversely affected and not meet our investors’ expectations. For example, in the first quarter of 2021, we sought to convert into longer-term subscriptions the expiring limited-use non-renewable, on-premises term licenses issued in 2020 at the onset of the
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pandemic. However, in the first quarter of 2021, a number of these customers chose to convert the expiring limited-use on-premises term licenses into short-term duration agreements for on-premises licenses. If customers were to choose short-term duration for other on-premises subscription licenses in future periods, we would expect our results of operations to be adversely affected in those periods.
The reorganization of our sales leadership, customer-facing organization and sales processes to better align with our business strategy may be disruptive to our operations, will require increasing the number of direct quota carrying sales personnel, and may not yield the short or long-term benefits that we expect.
While our business model transition is continuing to progress, we are facing challenges in evolving our go-to-market strategy and driving new business SaaS subscription bookings. In an effort to address these challenges, in July 2021, we announced plans to reorganize our sales leadership, re-align our customer-facing organization, and enhance our focus on indirect channels, new product adoption and SaaS migration, and to de-emphasize sales of on-premises term subscription licenses, embracing a faster pace of cloud adoption. We also are taking actions intended to re-align channel incentives to focus on landing and growing new business activities. These changes are significant, and may cause short-term disruption. Moreover, we anticipate that it will take time to realize any of the expected benefits from these changes.
We also may be unsuccessful in recruiting and retaining sales personnel with the knowledge and skills required to market our products and services effectively as part of our go-to-market strategy. As a result, there may be periods of time when our sales force is not at its desired headcount, which may result in fewer sales of our products and services. For example, as we began the third quarter of 2021, the size of our direct quota carrying sales force was below the headcount that we had planned earlier in the year to support our growth strategy.
This sales reorganization, and the evolution of our go-to-market strategy, may not result in the short or long-term benefits that we expect in a timely manner or at all. Moreover, these changes, or other similar changes that we may choose to make, may cause disruptions in our business that may negatively impact sales over one or more future quarters. Risks related to these activities include:
•Challenges in reorganizing sales operations and personnel;
•Inability to recruit and retain a sufficient number of qualified direct quota carrying sales personnel;
•Reduced productivity among new sales team members or while members of the sales team adjust to their new roles and responsibilities and our new sales priorities;
•Loss of key employees;
•Inability to re-engage distributors, resellers and other channel partners due to changing market demands or competitive offerings;
•Higher sales, marketing and services costs;
•Lengthening of sales cycles as customers evaluate their cloud strategy and competitive offerings; and
•Continued difficulties in accurately forecasting bookings and revenue and the estimated mix within subscription of on-premises versus cloud.
If the disruptions caused by these operational and organizational changes are greater or longer than anticipated, we are unable to increase our direct quota carrying sales personnel or we are unable to achieve the expected benefits of these activities, our business, financial condition, and results of operations may be adversely affected.
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ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer
Our Board of Directors has authorized an ongoing stock repurchase program, of which $1.00 billion was approved in January 2020. 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 and mitigate earnings per share dilution posed by the issuance of shares related to employee equity compensation awards. At September 30, 2021, $625.6 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock. 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.
The following table shows the monthly activity related to stock repurchases for the quarter ended September 30, 2021:
| Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate dollar value of Shares that may yet be Purchased under the Plans or Programs (in thousands) (2) | ||||||||||||||||||||
| July 1, 2021 through July 31, 2021 | 14,764 | $ | 110.36 | — | $ | 625,561 | |||||||||||||||||
| August 1, 2021 through August 31, 2021 | 10,167 | $ | 101.96 | — | $ | 625,561 | |||||||||||||||||
| September 1, 2021 through September 30, 2021 | 7,381 | $ | 102.73 | — | $ | 625,561 | |||||||||||||||||
| Total | 32,312 | $ | 105.98 | — | $ | 625,561 | |||||||||||||||||
(1)The total number of shares purchased are shares withheld from restricted stock units that vested in the third quarter of 2021 to satisfy minimum tax withholding obligations that arose on the vesting of restricted stock units.
(2)Shares withheld from restricted stock units that vested to satisfy minimum tax withholding obligations that arose on the vesting of awards do not deplete the dollar amount available for purchases under the repurchase program.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5.OTHER INFORMATION
None.
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ITEM 6.EXHIBITS
(a)List of exhibits
| Exhibit No. | Description | |||||||
| 31.1† | ||||||||
| 31.2† | ||||||||
| 32.1†† | ||||||||
| 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. | ||||
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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 8th day of November, 2021.
| CITRIX SYSTEMS, INC. | ||||||||
| By: | /s/ ARLEN R. SHENKMAN | |||||||
| Arlen R. Shenkman | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| (Authorized Officer and Principal Financial Officer) | ||||||||
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