CITRIX SYSTEMS INC - Quarter Report: 2022 March (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 March 31, 2022
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 | ||||||||||
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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 April 27, 2022, there were 126,579,926 shares of the registrant’s Common Stock, $.001 par value per share, outstanding.
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CITRIX SYSTEMS, INC.
Form 10-Q
For the Quarterly Period Ended March 31, 2022
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. | ||||||||
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PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, 2022 | December 31, 2021 | ||||||||||
| (Unaudited) | (Derived from audited financial statements) | ||||||||||
| (In thousands, except par value) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 726,690 | $ | 513,993 | |||||||
| Short-term investments, available-for-sale | 12,428 | 13,186 | |||||||||
Accounts receivable, net of allowances of $40,338 and $33,279 at March 31, 2022 and December 31, 2021, respectively | 602,540 | 885,311 | |||||||||
| Inventories, net | 26,993 | 23,158 | |||||||||
| Prepaid expenses and other current assets | 304,288 | 283,337 | |||||||||
| Total current assets | 1,672,939 | 1,718,985 | |||||||||
| Long-term investments, available-for-sale | 11,874 | 14,754 | |||||||||
| Property and equipment, net | 209,480 | 219,031 | |||||||||
| Operating lease right-of-use assets, net | 140,632 | 154,685 | |||||||||
| Goodwill | 3,404,214 | 3,400,792 | |||||||||
| Other intangible assets, net | 726,087 | 760,293 | |||||||||
| Deferred tax assets, net | 413,365 | 417,016 | |||||||||
| Other assets | 287,885 | 289,961 | |||||||||
| Total assets | $ | 6,866,476 | $ | 6,975,517 | |||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 134,872 | $ | 165,250 | |||||||
| Accrued expenses and other current liabilities | 353,328 | 444,767 | |||||||||
| Income taxes payable | 43,313 | 35,996 | |||||||||
| Short-term debt | 99,952 | — | |||||||||
| Current portion of deferred revenues | 1,622,847 | 1,708,058 | |||||||||
| Total current liabilities | 2,254,312 | 2,354,071 | |||||||||
| Long-term portion of deferred revenues | 315,234 | 329,535 | |||||||||
| Long-term debt | 3,227,502 | 3,326,327 | |||||||||
| Long-term income taxes payable | 204,782 | 204,782 | |||||||||
| Operating lease liabilities | 152,057 | 166,014 | |||||||||
| Other liabilities | 48,030 | 47,531 | |||||||||
| 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; 326,701 and 325,174 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | 327 | 325 | |||||||||
| Additional paid-in capital | 7,142,363 | 7,041,576 | |||||||||
| Retained earnings | 5,161,470 | 5,100,624 | |||||||||
| Accumulated other comprehensive loss | (3,541) | (2,896) | |||||||||
| 12,300,619 | 12,139,629 | ||||||||||
Less - common stock in treasury, at cost (200,740 and 200,313 shares at March 31, 2022 and December 31, 2021, respectively) | (11,636,060) | (11,592,372) | |||||||||
| Total stockholders' equity | 664,559 | 547,257 | |||||||||
| Total liabilities and stockholders' equity | $ | 6,866,476 | $ | 6,975,517 | |||||||
See accompanying notes.
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CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands, except per share information) | |||||||||||
| Revenues: | |||||||||||
| Subscription | $ | 463,637 | $ | 342,129 | |||||||
| Product and license | 33,297 | 44,235 | |||||||||
| Support and services | 328,404 | 389,402 | |||||||||
| Total net revenues | 825,338 | 775,766 | |||||||||
| Cost of net revenues: | |||||||||||
| Cost of subscription, support and services | 107,026 | 110,745 | |||||||||
| Cost of product and license revenues | 17,527 | 21,715 | |||||||||
| Amortization of product related intangible assets | 17,343 | 11,009 | |||||||||
| Total cost of net revenues | 141,896 | 143,469 | |||||||||
| Gross profit | 683,442 | 632,297 | |||||||||
| Operating expenses: | |||||||||||
| Research and development | 147,905 | 144,158 | |||||||||
| Sales, marketing and services | 292,951 | 293,284 | |||||||||
| General and administrative | 109,059 | 94,990 | |||||||||
| Amortization of other intangible assets | 19,221 | 7,532 | |||||||||
| Restructuring | 18,078 | — | |||||||||
| Total operating expenses | 587,214 | 539,964 | |||||||||
| Income from operations | 96,228 | 92,333 | |||||||||
| Interest income | 442 | 321 | |||||||||
| Interest expense | (22,076) | (24,360) | |||||||||
| Other (expense) income, net | (1,077) | 12,896 | |||||||||
| Income before income taxes | 73,517 | 81,190 | |||||||||
| Income tax expense (benefit) | 13,285 | (8,858) | |||||||||
| Net income | $ | 60,232 | $ | 90,048 | |||||||
| Earnings per share: | |||||||||||
| Basic | $ | 0.48 | $ | 0.73 | |||||||
| Diluted | $ | 0.47 | $ | 0.71 | |||||||
| Weighted average shares outstanding: | |||||||||||
| Basic | 125,498 | 122,923 | |||||||||
| Diluted | 127,734 | 126,026 | |||||||||
See accompanying notes.
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CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Net income | $ | 60,232 | $ | 90,048 | |||||||
| Other comprehensive income: | |||||||||||
| Available for sale securities: | |||||||||||
| Change in net unrealized (losses) gains | (3) | 20 | |||||||||
| Less: reclassification adjustment for net gains included in net income | — | — | |||||||||
| Net change (net of tax effect) | (3) | 20 | |||||||||
| Gain on pension liability | — | 1,050 | |||||||||
| Cash flow hedges: | |||||||||||
| Change in unrealized losses | (1,028) | (863) | |||||||||
| Less: reclassification adjustment for net losses (gains) included in net income | 386 | (1,943) | |||||||||
| Net change (net of tax effect) | (642) | (2,806) | |||||||||
| Other comprehensive loss | (645) | (1,736) | |||||||||
| Comprehensive income | $ | 59,587 | $ | 88,312 | |||||||
See accompanying notes.
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CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Operating Activities | |||||||||||
| Net income | $ | 60,232 | $ | 90,048 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation, amortization and other | 85,755 | 70,206 | |||||||||
| Stock-based compensation expense | 79,408 | 86,862 | |||||||||
| Deferred income tax (benefit) expense | (5,510) | 6,929 | |||||||||
| Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies | 6,803 | 10,771 | |||||||||
| Other non-cash items | 15,124 | (13,118) | |||||||||
| Total adjustments to reconcile net income to net cash provided by operating activities | 181,580 | 161,650 | |||||||||
| Changes in operating assets and liabilities, net of the effects of acquisitions: | |||||||||||
| Accounts receivable | 274,586 | 302,824 | |||||||||
| Inventories | (4,047) | (1,357) | |||||||||
| Prepaid expenses and other current assets | (3,255) | (18,416) | |||||||||
| Other assets | (21,248) | (27,533) | |||||||||
| Income taxes, net | (771) | (38,020) | |||||||||
| Accounts payable | (29,860) | 24,856 | |||||||||
| Accrued expenses and other current liabilities | (82,915) | (190,809) | |||||||||
| Deferred revenues | (99,512) | (92,145) | |||||||||
| Other liabilities | 119 | 1,758 | |||||||||
| Total changes in operating assets and liabilities, net of the effects of acquisitions | 33,097 | (38,842) | |||||||||
| Net cash provided by operating activities | 274,909 | 212,856 | |||||||||
| Investing Activities | |||||||||||
| Purchases of available-for-sale investments | (2,034) | (2,561) | |||||||||
| Proceeds from maturities of available-for-sale investments | 5,669 | 108,761 | |||||||||
| Purchases of property and equipment | (18,839) | (23,894) | |||||||||
| Cash paid for acquisitions, net of cash acquired | — | (2,022,618) | |||||||||
| Cash paid for licensing agreements, patents and technology | (2,659) | (2,065) | |||||||||
| Other | 514 | 776 | |||||||||
| Net cash used in investing activities | (17,349) | (1,941,601) | |||||||||
| Financing Activities | |||||||||||
| Proceeds from issuance of common stock under stock-based compensation plan | 1,143 | — | |||||||||
| Proceeds from term loan credit agreement, net of issuance costs | — | 997,947 | |||||||||
| Proceeds from senior notes, net of issuance costs | — | 741,393 | |||||||||
| Repayment of acquired debt | — | (190,000) | |||||||||
| Cash paid for tax withholding on vested stock awards | (43,688) | (42,303) | |||||||||
| Cash paid for dividends | — | (45,522) | |||||||||
| Other | — | (5,438) | |||||||||
| Net cash (used in) provided by financing activities | (42,545) | 1,456,077 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (2,318) | (2,484) | |||||||||
| Change in cash and cash equivalents | 212,697 | (275,152) | |||||||||
| Cash and cash equivalents at beginning of period | 513,993 | 752,895 | |||||||||
| Cash and cash equivalents at end of period | $ | 726,690 | $ | 477,743 | |||||||
See accompanying notes.
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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, 2021.
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.
Pending Merger
On January 31, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Picard Parent, Inc. (“Parent”), Picard Merger Sub, Inc., a wholly owned subsidiary of Parent (“Merger Sub”) and, for certain limited purposes detailed in the Merger Agreement, TIBCO Software, Inc. (“TIBCO”), pursuant to which Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent. Parent and Merger Sub were formed by affiliates of Vista Equity Partners (“Vista”). Vista is partnering with Evergreen Coast Capital Corp. (“Evergreen”), an affiliate of Elliott Investment Management L.P. (“Elliott”), to acquire all of the Company’s outstanding shares of common stock (the “Company Common Stock”) for $104.00 per share in cash. At a Special Meeting of Stockholders held on April 21, 2022, the Company's stockholders approved the Merger Agreement. The Merger is expected to close mid-year 2022, subject to customary closing conditions, including receipt of regulatory approvals. See Note 18 for more information on the proposed merger transaction.
2. SIGNIFICANT ACCOUNTING POLICIES
Recent Accounting Pronouncements
Business Combinations
In October 2021, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update on business combinations. The new guidance requires companies to apply revenue guidance under Accounting Standards Codification Topic 606 to recognize and measure contract assets and contract liabilities acquired in a business combination on the acquisition date. This approach differs from the current requirement to measure contract assets and contract liabilities acquired in a business combination at fair value. The update will be effective for the Company beginning in the first quarter of 2023, though early adoption is permitted. The Company is currently evaluating the timing of adoption and impact of this new standard.
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
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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.
Available-for-sale Investments
Short-term and long-term available-for-sale investments in debt securities as of March 31, 2022 and December 31, 2021 primarily consist of corporate 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
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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.
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. The Company accounts for forfeitures as they occur. 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 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.
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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 | |||||
| Perpetual 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.
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Timing of revenue recognition
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Products and services transferred at a point in time | $ | 123,404 | $ | 141,799 | |||||||
| Products and services transferred over time | 701,934 | 633,967 | |||||||||
| Total net revenues | $ | 825,338 | $ | 775,766 | |||||||
Contract balances
The Company's short-term and long-term contract assets, net of allowance for credit losses, were $44.7 million and $43.9 million, respectively, as of March 31, 2022, and $46.6 million and $40.5 million, respectively, as of December 31, 2021, 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 $1.62 billion and $315.2 million, respectively, as of March 31, 2022 and $1.71 billion and $329.5 million, respectively, as of December 31, 2021. 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 months ended March 31, 2022, the Company recognized $595.8 million of revenue that was included in the deferred revenue balance as of December 31, 2021.
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 months ended March 31, 2022 and 2021, 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 | $ | 2,049,561 | $ | 88,997 | $ | 1,167 | $ | 2,139,725 | ||||||||||||||||||
| Support and services | 1,099,795 | 22,062 | 604 | 1,122,461 | ||||||||||||||||||||||
| Total net revenues | $ | 3,149,356 | $ | 111,059 | $ | 1,771 | $ | 3,262,186 | ||||||||||||||||||
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.
12
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 months ended March 31, 2022 and 2021, the Company recorded amortization of capitalized contract acquisition costs of $21.7 million and $18.3 million, respectively, which is recorded 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 $81.8 million and $144.6 million, respectively, as of March 31, 2022, and $82.4 million and $144.2 million, respectively, as of December 31, 2021, 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 months ended March 31, 2022 and 2021, 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 | |||||||||||
| March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Numerator: | |||||||||||
| Net income | $ | 60,232 | $ | 90,048 | |||||||
| Denominator: | |||||||||||
| Denominator for basic earnings per share - weighted-average shares outstanding | 125,498 | 122,923 | |||||||||
| Effect of dilutive employee stock awards | 2,236 | 3,103 | |||||||||
| Denominator for diluted earnings per share - weighted-average shares outstanding | 127,734 | 126,026 | |||||||||
| Basic earnings per share | $ | 0.48 | $ | 0.73 | |||||||
| Diluted earnings per share | $ | 0.47 | $ | 0.71 | |||||||
For the three months ended March 31, 2022, anti-dilutive stock-based awards excluded from the calculations of diluted earnings per share were 1.2 million shares. For the three months ended March 31, 2021, 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):
| March 31, 2022 | |||||
| Accounts receivable, gross | $ | 642,878 | |||
| Less: allowance for returns | (12,494) | ||||
| Less: allowance for credit losses | (27,844) | ||||
| Accounts receivable, net | $ | 602,540 | |||
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 three months ended March 31, 2022 is summarized as follows (in thousands):
| Total | |||||
| Balance of allowance for credit losses at January 1, 2022 | $ | 20,737 | |||
| Current period provision (reversal) for expected losses | 7,741 | ||||
| Write-offs charged against allowance | (634) | ||||
| Balance of allowance for credit losses at March 31, 2022 | $ | 27,844 | |||
As of March 31, 2022, 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 months ended March 31, 2022 and 2021, 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 consisted of a base purchase price of $2.25 billion and was subject to certain adjustments as provided for under the related Agreement and Plan of Merger dated January 16, 2021 (the “Wrike Agreement”). The addition of Wrike’s cloud-delivered capabilities was intended to expand the Company's collaborative work management capabilities. Under the Wrike Agreement, the Company acquired all of the issued and outstanding equity securities of Wrangler.
Under the terms of the Wrike 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 is being recognized as post-combination stock-based compensation expense over the service period. See Note 8 for detailed information on the assumed stock options.
14
The Company incurred $20.1 million of expenses related to the Wrike acquisition, of which $0.3 million and $15.5 million were expensed during the three months ended March 31, 2022 and 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 (i) to 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.
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 March 31, 2022 and December 31, 2021, 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 months ended March 31, 2022 and 2021, realized gains and losses on available-for-sale investments were not material.
The average remaining maturities of the Company’s short-term and long-term available-for-sale investments at March 31, 2022 were approximately six months and two years, respectively.
For the three months ended March 31, 2022 and 2021, 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 $19.9 million and $21.5 million as of March 31, 2022 and December 31, 2021, 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 unfunded commitments as of March 31, 2022.
Equity Securities without Readily Determinable Fair Values
The Company held direct investments in privately-held companies of $24.3 million and $24.4 million as of March 31, 2022 and December 31, 2021, 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 March 31, 2022 | 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 | $ | 614,758 | $ | 614,758 | $ | — | $ | — | |||||||||||||||
| Money market funds | 76,878 | 76,878 | — | — | |||||||||||||||||||
| Corporate securities | 16,978 | — | 16,978 | — | |||||||||||||||||||
| Government securities | 18,076 | — | 18,076 | — | |||||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||
| Corporate securities | 24,302 | — | 23,802 | 500 | |||||||||||||||||||
| Prepaid expenses and other current assets: | |||||||||||||||||||||||
| Foreign currency derivatives | 4,978 | — | 4,978 | — | |||||||||||||||||||
| Total assets | $ | 755,970 | $ | 691,636 | $ | 63,834 | $ | 500 | |||||||||||||||
| Accrued expenses and other current liabilities: | |||||||||||||||||||||||
| Foreign currency derivatives | 1,741 | — | 1,741 | — | |||||||||||||||||||
| Total liabilities | $ | 1,741 | $ | — | $ | 1,741 | $ | — | |||||||||||||||
| As of December 31, 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 | $ | 425,650 | $ | 425,650 | $ | — | $ | — | |||||||||||||||
| Money market funds | 70,893 | 70,893 | — | — | |||||||||||||||||||
| Corporate securities | 17,450 | — | 17,450 | — | |||||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||
| Corporate securities | 27,940 | — | 27,440 | 500 | |||||||||||||||||||
| Prepaid expenses and other current assets: | |||||||||||||||||||||||
| Foreign currency derivatives | 741 | — | 741 | — | |||||||||||||||||||
| Total assets | $ | 542,674 | $ | 496,543 | $ | 45,631 | $ | 500 | |||||||||||||||
| Accrued expenses and other current liabilities: | |||||||||||||||||||||||
| Foreign currency derivatives | 1,531 | — | 1,531 | — | |||||||||||||||||||
| Total liabilities | $ | 1,531 | $ | — | $ | 1,531 | $ | — | |||||||||||||||
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.
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.
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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 March 31, 2022, 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 March 31, 2022, the carrying value was as follows (in thousands):
| Fair Value | Carrying Value | ||||||||||
| 2030 Notes | $ | 744,210 | $ | 740,582 | |||||||
| 2027 Notes | $ | 769,485 | $ | 744,930 | |||||||
| 2026 Notes | $ | 727,965 | $ | 743,298 | |||||||
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 March 31, 2022. 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 March 31, 2022, 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 March 31, 2022, there were 14,645,049 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 10,923,231 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. As of March 31, 2022, there were 205,023 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 48,322 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 March 31, 2022, there were 673,160 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 288,687 shares of common stock. As of March 31, 2022, there were 131,091 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 March 31, | |||||||||||
| Income Statement Classifications | 2022 | 2021 | |||||||||
| Cost of subscription, support and services | $ | 3,540 | $ | 4,406 | |||||||
| Research and development | 33,528 | 31,127 | |||||||||
| Sales, marketing and services | 22,764 | 28,342 | |||||||||
| General and administrative | 19,576 | 22,987 | |||||||||
| Total | $ | 79,408 | $ | 86,862 | |||||||
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 primarily 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 March 31, 2022, the total number of non-vested stock units outstanding, including company performance awards and service-based awards was 3,960,195. As of March 31, 2022, there was $309.2 million of total unrecognized compensation cost related to non-vested stock units. The unrecognized cost of the awards legally granted through March 31, 2022 is expected to be recognized over a weighted-average period of 1.41 years.
Company Performance Stock Units
The Company recorded stock-based compensation costs related to its company performance stock units of $12.0 million and $13.2 million for the three months ended March 31, 2022 and 2021 respectively.
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. 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.
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 months ended March 31, 2022 and 2021, the Company recorded stock-based compensation costs related to unvested assumed stock options of $2.5 million and $2.0 million, respectively. As of March 31, 2022, there was $6.8 million of total unrecognized compensation costs related to unvested assumed stock options to be recognized over a weighted-average period of 0.64 years. See Note 6 for detailed information on the Wrike acquisition.
Subsequent Event
On April 1, 2022, the Company awarded certain non-executive senior level employees and certain other employees, 581,341 non-vested stock units granted under the 2014 Plan that vest based on service and 23,165 non-vested stock units granted under the Wrangler Plan that also vest based on service. These non-vested stock unit awards vest 100% on the first anniversary of the grant date of the award, subject to continued employment through such date.
The April 1, 2022 awards were accounted for as stock-settled debt as of March 31, 2022 as the dollar value of the awards was approved before the grant date and constitutes a fixed dollar value of awards that will be settled in a variable number of non-vested stock units on their respective grant dates. Total unrecognized cost related to these awards as of March 31, 2022 was $59.9 million.
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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 2021. 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 2021.
The following table presents the change in goodwill during the three months ended March 31, 2022 (in thousands):
| Balance at January 1, 2022 | Additions | Other | Balance at March 31, 2022 | ||||||||||||||||||||
| Goodwill | $ | 3,400,792 | $ | — | $ | 3,422 | (1) | $ | 3,404,214 | ||||||||||||||
(1) Amount relates to adjustments to the purchase price allocation associated with 2021 acquisition.
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.
Intangible assets consist of the following (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||
| Product related intangible assets | $ | 1,051,764 | $ | 721,533 | $ | 1,049,406 | $ | 704,190 | |||||||||||||||
| Other | 664,791 | 268,935 | 664,791 | 249,714 | |||||||||||||||||||
| Total | $ | 1,716,555 | $ | 990,468 | $ | 1,714,197 | $ | 953,904 | |||||||||||||||
Amortization of product related intangible assets, which consists primarily of product related technologies and patents, was $17.3 million and $11.0 million for the three months ended March 31, 2022 and 2021, respectively, and is classified as a component of Cost of net revenues in the accompanying condensed consolidated statements of income. Amortization of other intangible assets, which consist primarily of customer relationships, trade names and backlog was $19.2 million and $7.5 million for the three months ended March 31, 2022 and 2021, 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 March 31, 2022 is as follows (in thousands):
| Year ending December 31, | |||||
| 2022 (remaining nine months) | $ | 110,890 | |||
| 2023 | 138,997 | ||||
| 2024 | 131,135 | ||||
| 2025 | 128,650 | ||||
| 2026 | 127,079 | ||||
| Thereafter | 89,336 | ||||
| Total | $ | 726,087 | |||
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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 | |||||||||||
| March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net revenues: | |||||||||||
Workspace (1) | $ | 634,558 | $ | 580,962 | |||||||
App Delivery and Security (2) | 169,486 | 169,987 | |||||||||
Professional services (3) | 21,294 | 24,817 | |||||||||
| Total net revenues | $ | 825,338 | $ | 775,766 | |||||||
(1)Workspace revenues are primarily comprised of sales from the Company’s application virtualization solutions, which include Citrix Workspace, Citrix Virtual Apps and Desktops, Citrix Content Collaboration, and Collaborative Work Management.
(2)App Delivery and Security revenues primarily include Citrix ADC.
(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 | |||||||||||
| March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net revenues: | |||||||||||
| Americas | $ | 463,225 | $ | 426,683 | |||||||
| EMEA | 287,459 | 277,799 | |||||||||
| APJ | 74,654 | 71,284 | |||||||||
| Total net revenues | $ | 825,338 | $ | 775,766 | |||||||
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 | |||||||||||
| March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Subscription: | |||||||||||
| SaaS | $ | 271,507 | $ | 171,081 | |||||||
| Non-SaaS | 192,130 | 171,048 | |||||||||
| Total Subscription revenue | $ | 463,637 | $ | 342,129 | |||||||
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11. DEBT
The components of the Company's debt were as follows (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| 2021 Term Loan Credit Agreement | $ | 1,000,000 | $ | 1,000,000 | |||||||
| Term Loan Credit Agreement | 100,000 | 100,000 | |||||||||
| 2026 Notes | 750,000 | 750,000 | |||||||||
| 2027 Notes | 750,000 | 750,000 | |||||||||
| 2030 Notes | 750,000 | 750,000 | |||||||||
| Total face value | 3,350,000 | 3,350,000 | |||||||||
| Less: unamortized discount | (6,035) | (6,276) | |||||||||
| Less: unamortized issuance costs | (16,511) | (17,397) | |||||||||
| Total debt | $ | 3,327,454 | $ | 3,326,327 | |||||||
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 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 March 31, 2022.
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
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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.
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 March 31, 2022.
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 to be repurchased 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
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total debt to the Company’s consolidated EBITDA or long-term credit rating. As of March 31, 2022 and December 31, 2021, 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 March 31, 2022.
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 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 Interest expense in the accompanying condensed statements of income.
12. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives Designated as Hedging Instruments
As of March 31, 2022, 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 $1.2 million as of March 31, 2022. The total cumulative unrealized loss on cash flow derivative instruments was $0.6 million as of December 31, 2021. 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 March 31, 2022 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) | |||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
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 | $400 | Prepaid expenses and other current assets | $694 | Accrued expenses and other current liabilities | $1,714 | Accrued expenses and other current liabilities | $1,358 | |||||||||||||||||||||||||||||||||||||||
| Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
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 | $4,578 | Prepaid expenses and other current assets | $47 | Accrued expenses and other current liabilities | $27 | Accrued expenses and other current liabilities | $173 | |||||||||||||||||||||||||||||||||||||||
The Effect of Derivative Instruments on Financial Performance
| For the Three Months Ended March 31, | |||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
Derivatives in Cash Flow Hedging Relationships | Amount of Loss Recognized in Other Comprehensive Loss | Location of (Loss) Gain Reclassified from Accumulated Other Comprehensive Loss into Income | Amount of (Loss) Gain Reclassified from Accumulated Other Comprehensive Loss | ||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||
| Foreign currency forward contracts | $ | (642) | $ | (2,806) | Operating expenses | $ | (386) | $ | 1,943 | ||||||||||||||||||||
There was no material ineffectiveness in the Company’s foreign currency hedging program in the periods presented.
| For the Three Months Ended March 31, | |||||||||||||||||
| (In thousands) | |||||||||||||||||
| Derivatives Not Designated as Hedging Instruments | Location of Gain Recognized in Income on Derivative | Amount of Gain Recognized in Income on Derivative | |||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| Foreign currency forward contracts | Other (expense) income, net | $ | 5,365 | $ | 13,096 | ||||||||||||
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Outstanding Foreign Currency Forward Contracts
As of March 31, 2022, the Company had the following net notional foreign currency forward contracts outstanding (in thousands):
| Foreign Currency | Currency Denomination | ||||
| Australian Dollar | AUD 12,700 | ||||
| British Pound Sterling | GBP 13,000 | ||||
| Canadian Dollar | CAD 3,450 | ||||
| Chinese Yuan Renminbi | CNY 19,000 | ||||
| Czech Koruna | CZK 17,300 | ||||
| Euro | EUR 6,636 | ||||
| Hong Kong Dollar | HKD 8,550 | ||||
| Indian Rupee | INR 337,000 | ||||
| Japanese Yen | JPY 1,234,000 | ||||
| Korean Won | KRW 357,000 | ||||
| Singapore Dollar | SGD 13,400 | ||||
| Swedish Krona | SEK 3,000 | ||||
| Swiss Franc | CHF 298,150 | ||||
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 18.1% and (10.9)% for the three months ended March 31, 2022 and 2021, respectively. The increase in the effective tax rate when comparing the three months ended March 31, 2022 to the three months ended March 31, 2021 was primarily due to tax items unique to the period ended March 31, 2021. These amounts included stock-based compensation deductions and a tax benefit related to a favorable foreign tax ruling in the period ended March 31, 2021.
The Company’s net unrecognized tax benefits totaled $104.4 million and $103.5 million as of March 31, 2022 and December 31, 2021, respectively. At March 31, 2022, $90.2 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 March 31, 2022, the Company has accrued $1.7 million for the payment of interest.
At March 31, 2022, the Company had $406.3 million in net deferred tax assets. The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company reviews deferred tax assets periodically for recoverability and makes estimates and judgments regarding the expected geographic sources of taxable income and gains from investments, as well as tax planning strategies in assessing the need for a valuation allowance. If the estimates and assumptions used in the Company's determination change in the future, the Company could be required to revise its estimates of the valuation allowances against its deferred tax assets and adjust its provisions for additional income taxes.
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 2017 through 2020 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
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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. The objective of the Company’s stock repurchase program was to improve stockholders’ returns and mitigate earnings per share dilution posed by the issuance of shares related to employee equity compensation awards. At March 31, 2022, $625.6 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased were 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. While the Merger Agreement is in effect, the Company is prohibited from repurchasing shares of its common stock, including under the stock repurchase program. See Note 18 for detailed information on the Merger Agreement.
During the three months ended March 31, 2022 and 2021, the Company made no open market purchases under the stock repurchase program.
Shares for Tax Withholding
During the three months ended March 31, 2022 and 2021, the Company withheld 427,382 and 335,347 shares respectively, from equity awards that vested. Amounts withheld to satisfy minimum tax withholding obligations that arose on the vesting of equity awards was $43.7 million and $46.7 million, respectively. These shares are reflected as treasury stock in the Company’s condensed consolidated balance sheets.
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.
On November 19, 2021, a putative securities class action complaint was filed in the United States District Court for the Southern District of Florida, naming the Company and certain of its current and former officers and directors as defendants. On April 22, 2022, an amended complaint was filed, naming the same defendants and alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, promulgated thereunder, based on allegedly false or misleading statements made between January 22, 2020, and October 6, 2021, regarding the Company’s transition from selling on-premise, perpetual licenses to cloud-based subscriptions. The amended complaint seeks, among other things, an award of compensatory damages and the plaintiffs’ reasonable costs and expenses, including attorneys’ fees, experts’ fees, and other costs and disbursements. The Company believes that it and the other defendants have meritorious defenses to these allegations; however, the Company is unable to currently determine the ultimate outcome of this matter or the potential exposure or loss, if any.
On January 22, 2022, a putative shareholder derivative complaint was filed in the United States District Court for the Southern District of Florida, naming the Company as a nominal defendant and certain of its current and former officers and directors as defendants. The complaint asserts claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross
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mismanagement, waste of corporate assets, and violations of Sections 10(b), 14(a), 20(a), and 21D of the Securities Exchange Act of 1934, and Rule 10b-5, promulgated thereunder. The complaint, which references the securities class action filed November 19, 2021, alleges that the defendants made or caused the Company to make false or misleading statements that failed to disclose that the Company was struggling to transition customers from an on-premise offering to a cloud-based subscription offering and that the Company failed to maintain adequate internal controls. The complaint also alleges that the defendants caused the Company to repurchase shares at inflated stock prices. The complaint seeks an award of damages and restitution to the Company as a result of the alleged violations, plaintiff's costs and disbursements, including reasonable attorneys' and experts' fees, costs and other expenses, as well as corporate governance enhancements. On March 10, 2022, the plaintiff filed a notice of voluntary dismissal of the complaint without prejudice as to all of the defendants. On March 11, 2022, the Court entered an order dismissing the putative shareholder derivative action without prejudice.
Merger Actions
In connection with the Merger Agreement, eleven complaints have been filed as individual actions in United States District Courts. Six complaints have been filed in the United States District Court for the Southern District of New York and are captioned Stein v. Citrix Systems, Inc., et al., 22-cv-1864 (filed March 4, 2022), O’Dell v. Citrix Systems, Inc., et al., 22-cv-1892 (filed March 4, 2022), Bell v. Citrix Systems, Inc., et al., 22-cv-1925 (filed March 7, 2022) (the “Bell Complaint”), Messiha v. Citrix Systems, Inc., et al., 22-cv-2094 (filed March 14, 2022), Rodriguez v. Citrix Systems, Inc., et al., 22-cv-2925 (filed April 8, 2022), and Finger v. Citrix Systems, Inc., et al., 22-cv-2976 (filed April 11, 2022). Three complaints have been filed in the United States District Court for the Eastern District of New York and are captioned Whitfield v. Citrix Systems, Inc., et al., 22-cv-01317 (filed March 10, 2022), Shumacher v. Citrix Systems, Inc., et al., 22-cv-1453 (filed March 16, 2022), and Lee v. Citrix Systems, Inc., et al., 22-cv-1504 (filed March 18, 2022). One complaint has been filed in the United States District Court for the Eastern District of Pennsylvania and is captioned Waterman v. Citrix Systems, Inc., et al., 22-cv-917 (filed March 10, 2022). One complaint has been filed in the United States District Court for the District of Delaware and is captioned Gould v. Citrix Systems, Inc., et al., 22-cv-359 (filed March 21, 2022) (the “Gould Complaint”). The foregoing complaints are referred to as the “Merger Actions.”
The Merger Actions generally allege that the definitive proxy statement filed by the Company on March 16, 2022 with respect to the special meeting of Citrix’s stockholders held on April 21, 2022 (the “Definitive Proxy Statement”) or the preliminary proxy statement filed by the Company with the SEC on March 3, 2022 misrepresent and/or omit certain purportedly material information relating to the Company’s financial projections, the analyses performed by the financial advisor to the Citrix Board of Directors in connection with the Merger, potential conflicts of interest of the Company’s officers and directors, and the events that led to the signing of the Merger Agreement. The Merger Actions assert violations of Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 14a-9 promulgated thereunder against all defendants (the Company, its Board of Directors and certain officers) and violations of Section 20(a) of the Exchange Act against Citrix’s directors and officers. The Bell Complaint also asserts a breach of fiduciary duty against the individual defendants. The Merger Actions seek, among other things, an injunction enjoining the consummation of the Merger, costs of the action, including plaintiffs’ attorneys’ fees and experts’ fees, and other relief the court may deem just and proper.
On April 25, 2022, the Bell Complaint was voluntarily dismissed and on April 28, 2022, the Gould Complaint was voluntarily dismissed. The Company cannot predict the outcome of the remaining Merger Actions. The Company believes that the remaining Merger Actions are without merit, and Citrix and the individual defendants intend to vigorously defend against the remaining Merger Actions and any subsequently filed similar actions. If additional similar complaints are filed, absent new or significantly different allegations, the Company will not necessarily disclose such additional filings.
While the Company believes that the disclosures set forth in the Definitive Proxy Statement comply fully with all applicable law and denies the allegations in the pending Merger Actions described above, in order to moot plaintiffs’ disclosure claims, avoid nuisance and possible expense and business delays, and provide additional information to its stockholders, the Company made certain disclosures that supplement and revise those contained in the Definitive Proxy Statement (the “Supplemental Disclosures”). These Supplemental Disclosures were filed with the SEC in a Current Report on Form 8-K and under Schedule 14A. Nothing in the Supplemental Disclosures shall be deemed an admission of the legal merit, necessity or materiality under applicable laws of any of the disclosures set forth therein. To the contrary, the Company specifically denies all allegations in the Merger Actions described above that any additional disclosure was or is required or material.
Books and Records Demands
The Company has received demand letters pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”) from stockholders seeking disclosure of certain of the Company's records relating to the Merger. The Company has responded to those demands, stating its belief that the demand letters fail to fully comply with the requirements of Section 220 of the DGCL. On April 20, 2022, two stockholders filed a complaint in the Delaware Chancery Court captioned Liebenthal, et al. v.
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Citrix Systems, Inc., C.A. No. 2022-0349, seeking to compel inspection of books and records pursuant to Section 220 of the DGCL. The Company believes the claims are without merit and intends to vigorously defend against them.
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 March 31, 2022, the Company had $825.8 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 beginning 2021, $24.0 million in fiscal year beginning 2022, $24.0 million in fiscal year beginning 2023 and $20.0 million at any time over the three-year term. As of March 31, 2022, the Company had $46.1 million of remaining obligations under the purchase agreement.
16. RESTRUCTURING
2021 Restructuring Program
On November 15, 2021, the Company announced the implementation of a restructuring program (the “2021 Restructuring Program”) intended to improve operational efficiency. The 2021 Restructuring Program includes, among other things, the elimination of full-time positions, termination of certain contracts, and asset impairments, primarily related to facilities consolidations. The Company currently expects to record in the aggregate approximately $153.0 million to $240.0 million in pre-tax restructuring and asset impairment charges associated with the 2021 Restructuring Program. Included in these pre-tax charges are approximately $67.0 million to $90.0 million related to employee severance arrangements, approximately $40.0 million to $75.0 million related to the impairment of ROU and other assets from the consolidation of facilities, approximately $20.0 million to $35.0 million in contract termination costs and approximately $26.0 million to $40.0 million related to the impairment of certain acquired intangible assets. See Note 9 for detailed information on intangible assets. The program is expected to be substantially completed over an estimated eighteen-month period.
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Restructuring Charges
For the three months ended March 31, 2022, restructuring charges were comprised of the following (in thousands):
| Three Months Ended | |||||
| March 31, | |||||
| 2022 | |||||
2021 Restructuring Program | |||||
| Employee severance and related costs | $ | 11,581 | |||
| ROU asset impairment | 3,397 | ||||
| Other asset impairment | 3,100 | ||||
| Total 2021 Restructuring Program charges | $ | 18,078 | |||
As of March 31, 2022, total charges incurred related to the 2021 Restructuring Program were $121.4 million.
The Company reviews for impairment of its long-lived assets, including ROU assets, whenever events or changes in circumstances indicate that the carrying amount of such assets may be impaired. Measurement of an impairment loss is based on the fair value of the asset compared to its carrying value. The fair value of the ROU assets is determined by utilizing the present value of the estimated future cash flows attributable to the assets.
In connection with the 2021 Restructuring Program the Company re-evaluated its real estate needs, resulting in a reduction of owned space and leased space, and the impairment of the associated ROU assets and property and equipment. During the three months ended March 31, 2022, these actions resulted in a restructuring charge of $6.5 million, comprised of noncash charges of $3.4 million related to the impairment of operating lease ROU assets, and property and equipment of $3.1 million. Due to the actions taken above, the Company tested the operating lease ROU assets and certain property and equipment for recoverability by comparing the carrying value of the asset group to an estimate of the future undiscounted cash flows expected to result from the use and eventual disposition of the asset group. Based on the results of the recoverability test, the Company determined that the undiscounted cash flows of the asset groups were below the carrying values, indicating impairment. The Company then determined the fair value of the asset groups by utilizing the present value of the estimated future cash flows attributable to the assets.
Restructuring accruals
The activity in the Company’s restructuring accruals for the three months ended March 31, 2022 is summarized as follows (in thousands):
| 2021 Restructuring Program | |||||
| Balance at January 1, 2022 | $ | 28,102 | |||
| Employee severance and related costs | 11,581 | ||||
| Payments | (23,479) | ||||
| Balance at March 31, 2022 | $ | 16,204 | |||
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17. STATEMENT OF CHANGES IN EQUITY
The following tables present the changes in total stockholders' equity during the three months ended March 31, 2022 and 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 December 31, 2021 | 325,174 | $ | 325 | $ | 7,041,576 | $ | 5,100,624 | $ | (2,896) | (200,313) | $ | (11,592,372) | $ | 547,257 | |||||||||||||||||||||||||||||||||
| Shares issued under stock-based compensation plans | 1,272 | 2 | 1,141 | — | — | — | — | 1,143 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 78,098 | — | — | — | — | 78,098 | |||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee stock purchase plan | 255 | — | 22,162 | — | — | — | — | 22,162 | |||||||||||||||||||||||||||||||||||||||
| Restricted shares turned in for tax withholding | — | — | — | — | — | (427) | (43,688) | (43,688) | |||||||||||||||||||||||||||||||||||||||
| Other | — | — | (614) | 614 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (645) | — | — | (645) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 60,232 | — | — | — | 60,232 | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | 326,701 | $ | 327 | $ | 7,142,363 | $ | 5,161,470 | $ | (3,541) | (200,740) | $ | (11,636,060) | $ | 664,559 | |||||||||||||||||||||||||||||||||
| 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 | 962 | 1 | (1) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 86,862 | — | — | — | — | 86,862 | |||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee stock purchase plan | 228 | — | 25,757 | — | — | — | — | 25,757 | |||||||||||||||||||||||||||||||||||||||
| Restricted shares turned in for tax withholding | — | — | — | — | — | (335) | (46,745) | (46,745) | |||||||||||||||||||||||||||||||||||||||
| Cash dividends declared and paid | — | — | — | (45,522) | — | — | — | (45,522) | |||||||||||||||||||||||||||||||||||||||
| Value of assumed equity awards related to pre-combination service | — | — | 28,885 | — | — | — | — | 28,885 | |||||||||||||||||||||||||||||||||||||||
| Other | — | — | 2,537 | (2,537) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (1,736) | — | — | (1,736) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 90,048 | — | — | — | 90,048 | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | 323,154 | $ | 323 | $ | 6,752,058 | $ | 5,026,322 | $ | (5,385) | (199,778) | $ | (11,523,626) | $ | 249,692 | |||||||||||||||||||||||||||||||||
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18. PROPOSED MERGER TRANSACTION
On January 31, 2022, the Company entered into a Merger Agreement with Parent, Merger Sub and, for certain limited purposes detailed in the Merger Agreement, TIBCO, pursuant to which Merger Sub will merge with and into the Company, or the Merger, with the Company surviving the Merger as a wholly-owned subsidiary of Parent. Parent and Merger Sub were formed by an affiliate of Vista. Vista is partnering with Evergreen Coast Capital Corp., an affiliate of Elliott Investment Management L.P., to acquire all of the Company Common Stock for $104.00 per share in cash.
The Merger is conditioned upon, among other things, the approval of the Merger Agreement by the affirmative vote of holders of at least a majority of all outstanding shares of Company Common Stock (which was obtained at a Special Meeting of Stockholders held on April 21, 2022), the expiration of the applicable waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (which occurred on March 16, 2022), certain other approvals, clearances or expirations of waiting periods under other antitrust laws and foreign investment screening laws, and other customary closing conditions. Subject to the satisfaction (or if applicable, waiver) of such conditions, the Merger is expected to close mid-year 2022.
Under the terms of the Merger Agreement, the Company may be required to pay Parent a termination fee of $409.0 million if the Merger Agreement is terminated under certain specified circumstances. The Merger Agreement additionally provides that Parent pay the Company a termination fee of $818.0 million under certain specified circumstances.
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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 pending acquisition by affiliates of Vista Equity Partners and Evergreen Coast Capital Corp., our strategy and operational and growth initiatives, our expansion of cloud-based solutions (as opposed to traditional on-premise delivery of our products) and our efforts to transition our customers from on-premise to the cloud, including the pace of the transition, our transition to a subscription-based business model, changes in our product and service offerings and features, financial information and results of operations for future periods, revenue trends, the impacts of the novel coronavirus (COVID-19) pandemic and related market and economic conditions on our business, results of operations and financial condition, expectations regarding remote work, customer demand, seasonal factors or ordering patterns, stock-based compensation, international operations, investment transactions and valuations of investments and derivative instruments, restructuring charges, reinvestment or repatriation of foreign earnings, fluctuations in foreign exchange rates, tax estimates and other tax matters, liquidity, our debt, changes in accounting rules or guidance, acquisitions (including our acquisition of Wrike, Inc.), 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, 2021, 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.
Pending Merger
On January 31, 2022, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Picard Parent, Inc. (“Parent”), Picard Merger Sub, Inc., a wholly owned subsidiary of Parent (“Merger Sub”) and, for certain limited purposes detailed in the Merger Agreement, TIBCO Software, Inc. (“TIBCO”), pursuant to which Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent. Parent and Merger Sub were formed by affiliates of Vista Equity Partners (“Vista”). Vista is partnering with Evergreen Coast Capital Corp. (“Evergreen”), an affiliate of Elliott Investment Management L.P. (“Elliott”), to acquire all of the Company’s outstanding shares of common stock (the “Company Common Stock”) for $104.00 per share in cash. At a Special Meeting of Stockholders held on April 21, 2022, the Company's stockholders approved the Merger Agreement. The Merger is expected to close mid-year 2022, subject to customary closing conditions, including receipt of regulatory approvals.
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 months ended March 31, 2022. 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 provides unified, reliable and secure access to all work resources (apps, content, etc.) and simplifies work execution and collaboration across every work channel, device, and location. Our Workspace solutions are complemented by our general work solutions, such as content collaboration and collaborative work management solutions, and our App Delivery and Security solutions, which deliver the applications and data employees need across any network with security, reliability and speed.
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
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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
As described above, on January 31, 2022, we entered into a definitive Merger Agreement under which affiliates of Vista, a leading global investment firm focused exclusively on enterprise software, data and technology-enabled businesses, and Evergreen, an affiliate of Elliott that focuses on making investments exclusively in technology and technology-enabled services businesses, have agreed to acquire Citrix in an all-cash transaction valued at approximately $16.5 billion, including the assumption of Citrix debt.
Impact of COVID-19 Pandemic
The COVID-19 pandemic did not have a significant impact on our results of operations for the three months ended March 31, 2022. 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 remain 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, 2021. 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.
Summary of Results
For the three months ended March 31, 2022 compared to the three months ended March 31, 2021, a summary of our results included:
•Total net revenue increased 6.4% to $825.3 million;
•Subscription revenue increased 35.5% to $463.6 million;
•SaaS revenue increased 58.7% to $271.5 million;
•Product and license revenue decreased 24.7% to $33.3 million;
•Support and services revenue decreased 15.7% to $328.4 million;
•Gross margin as a percentage of revenue increased from 81.5% to 82.8%;
•Operating income increased 4.2% to $96.2 million;
•Diluted net income per share decreased from $0.71 to $0.47;
•Deferred and unbilled revenue increased $222.0 million to $3.26 billion;
Also, operating cash flows increased $62.1 million to $274.9 million when comparing the three months ended March 31, 2022 to the three months ended March 31, 2021.
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 App Delivery and Security offerings. Our Product and license revenue decreased primarily due to lower sales of our perpetual App Delivery and Security solutions as well as our perpetual Workspace solutions, as customers continue to shift toward our subscription offerings. 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. The increase in gross margin as a percentage of revenue was not significant. The increase in operating income was
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primarily due to an increase in gross margin. The decrease in diluted net income per share was primarily due to an increase in income taxes due to the first quarter of 2021 including a tax benefit, as well as a decrease in recognized gains on our strategic investments.
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 was subject to certain adjustments as provided for under the related Agreement and Plan of Merger dated January 16, 2021 (the “Wrike Agreement”). The addition of Wrike’s cloud-delivered capabilities was intended to expand our collaborative work management capabilities. Under the Wrike Agreement, we acquired all of the issued and outstanding equity securities of Wrangler. Wrike revenue is included in our Workspace product grouping.
We incurred $20.1 million of expenses related to the Wrike acquisition, of which $0.3 million and $15.5 million were expensed during the three months ended March 31, 2022 and 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.
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, 2021, 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 other than percentages):
| Three Months Ended | Three Months Ended March 31, | ||||||||||||||||
| March 31, | |||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| Revenues: | |||||||||||||||||
| Subscription | $ | 463,637 | $ | 342,129 | 35.5 | % | |||||||||||
| Product and license | 33,297 | 44,235 | (24.7) | ||||||||||||||
| Support and services | 328,404 | 389,402 | (15.7) | ||||||||||||||
| Total net revenues | 825,338 | 775,766 | 6.4 | ||||||||||||||
| Cost of net revenues: | |||||||||||||||||
| Cost of subscription, support and services | 107,026 | 110,745 | (3.4) | ||||||||||||||
| Cost of product and license revenues | 17,527 | 21,715 | (19.3) | ||||||||||||||
| Amortization of product related intangible assets | 17,343 | 11,009 | 57.5 | ||||||||||||||
| Total cost of net revenues | 141,896 | 143,469 | (1.1) | ||||||||||||||
| Gross profit | 683,442 | 632,297 | 8.1 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | 147,905 | 144,158 | 2.6 | ||||||||||||||
| Sales, marketing and services | 292,951 | 293,284 | (0.1) | ||||||||||||||
| General and administrative | 109,059 | 94,990 | 14.8 | ||||||||||||||
| Amortization of other intangible assets | 19,221 | 7,532 | 155.2 | ||||||||||||||
| Restructuring | 18,078 | — | * | ||||||||||||||
| Total operating expenses | 587,214 | 539,964 | 8.8 | ||||||||||||||
| Income from operations | 96,228 | 92,333 | 4.2 | ||||||||||||||
| Interest income | 442 | 321 | 37.7 | ||||||||||||||
| Interest expense | (22,076) | (24,360) | (9.4) | ||||||||||||||
| Other (expense) income, net | (1,077) | 12,896 | (108.4) | ||||||||||||||
| Income before income taxes | 73,517 | 81,190 | (9.5) | ||||||||||||||
| Income tax expense (benefit) | 13,285 | (8,858) | (250.0) | ||||||||||||||
| Net income | $ | 60,232 | $ | 90,048 | (33.1) | % | |||||||||||
*Not meaningful
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Revenues
We generate revenue from sales of our Subscription, Product and license and Support and services offerings.
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. 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 | Three Months Ended March 31, | ||||||||||||||||
| March 31, | |||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Subscription | $ | 463,637 | $ | 342,129 | $ | 121,508 | |||||||||||
| Product and license | 33,297 | 44,235 | (10,938) | ||||||||||||||
| Support and services | 328,404 | 389,402 | (60,998) | ||||||||||||||
| Total net revenues | $ | 825,338 | $ | 775,766 | $ | 49,572 | |||||||||||
Subscription
Subscription revenue increased during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to continued customer adoption of our solutions delivered via the cloud of $100.4 million, primarily from our Workspace offerings, which includes the Wrike acquisition. There was also an increase in on-premise subscription license revenue of $21.1 million, primarily from our App Delivery and Security offerings, mainly from pooled capacity.
Product and license
Product and license revenue decreased when comparing the three months ended March 31, 2022 to the three months ended March 31, 2021 primarily from lower sales of our perpetual App Delivery and Security solutions of $6.2 million and perpetual Workspace offerings of $4.8 million, as customers continue to shift toward our subscription offerings.
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Support and services
Support and services revenue decreased during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 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.
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):
| March 31, 2022 | December 31, 2021 | March 31, 2022 compared to December 31, 2021 | |||||||||||||||
| Deferred revenue | $ | 1,938,081 | $ | 2,037,593 | $ | (99,512) | |||||||||||
| Unbilled revenue | 1,324,105 | 1,300,048 | 24,057 | ||||||||||||||
Deferred revenues decreased $99.5 million as of March 31, 2022 compared to December 31, 2021 primarily due to decreases in deferred maintenance and support revenue of $63.6 million, mostly from Workspace perpetual software maintenance, and deferred subscription revenue of $35.9 million. Unbilled revenue remained consistent when comparing March 31, 2022 to December 31, 2021.
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 March 31, 2022, 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 48.7% and 50.4% of our net revenues for the three months ended March 31, 2022 and 2021, respectively. The decrease in our international revenues as a percentage of our net revenues for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily due to a decrease in the EMEA region as it shifts away from perpetual licenses and related support offerings toward subscription offerings. See Note 10 to our condensed consolidated financial statements for detailed information on net revenues by geography.
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Cost of Net Revenues
| Three Months Ended | Three Months Ended March 31, | ||||||||||||||||
| March 31, | |||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Cost of subscription, support and services revenues | $ | 107,026 | $ | 110,745 | $ | (3,719) | |||||||||||
| Cost of product and license revenues | 17,527 | 21,715 | (4,188) | ||||||||||||||
| Amortization of product related intangible assets | 17,343 | 11,009 | 6,334 | ||||||||||||||
| Total cost of net revenues | $ | 141,896 | $ | 143,469 | $ | (1,573) | |||||||||||
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 and impairment of product related intangible assets.
Cost of subscription, support and services revenues decreased during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to a decrease in the cost of providing our support and services offerings of $6.7 million, consistent with the related revenues, partially offset by an increase in the cost of providing our subscription offerings of $3.0 million, in line with related revenues.
Cost of product and license revenues decreased for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 consistent with the decrease in related revenues.
Amortization of product related intangible assets increased for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to acquired intangible assets in connection with the Wrike acquisition.
Gross Margin
Gross margin as a percentage of revenue was 82.8% for the three months ended March 31, 2022, and 81.5% for the three months ended March 31, 2021. The change in gross margin as a percentage of revenue was not significant.
Operating Expenses
Foreign Currency Impact on Operating Expenses
The functional currency for all of our wholly-owned foreign subsidiaries is the U.S. dollar. A substantial majority of our overseas operating expenses and capital purchasing activities are transacted in local currencies and are therefore subject to fluctuations in foreign currency exchange rates. In order to minimize the impact on our operating results, we generally initiate our hedging of currency exchange risks up to 12 months in advance of anticipated foreign currency expenses. Generally, when the dollar is weak, foreign currency denominated expenses will be higher, and these higher expenses will be partially offset by the gains realized from our hedging contracts. Conversely, if the dollar is strong, foreign currency denominated expenses will be lower. These lower expenses will in turn be partially offset by the losses incurred from our hedging contracts. There is a risk that there will be fluctuations in foreign currency exchange rates beyond the time frame for which we hedge our risk.
Research and Development Expenses
| Three Months Ended | Three Months Ended March 31, | ||||||||||||||||
| March 31, | |||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Research and development | $ | 147,905 | $ | 144,158 | $ | 3,747 | |||||||||||
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 March 31, 2022 compared to the three months ended March 31, 2021 primarily due to increases in stock-based compensation of $2.4 million and compensation and
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other employee-related costs of $2.2 million as a result of higher headcount, in part due to the Wrike acquisition, partially offset by decreases in professional fees of $1.1 million.
Sales, Marketing and Services Expenses
| Three Months Ended | Three Months Ended March 31, | ||||||||||||||||
| March 31, | |||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Sales, marketing and services | $ | 292,951 | $ | 293,284 | $ | (333) | |||||||||||
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.
The decrease in Sales, marketing and services expenses during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily due to decreases in stock-based compensation of $5.6 million and compensation and other employee-related costs of $4.8 million. These decreases were partially offset by increases in variable compensation of $7.3 million and marketing programs of $5.9 million, primarily demand generation.
General and Administrative Expenses
| Three Months Ended | Three Months Ended March 31, | ||||||||||||||||
| March 31, | |||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| General and administrative | $ | 109,059 | $ | 94,990 | $ | 14,069 | |||||||||||
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 March 31, 2022 compared to the three months ended March 31, 2021 primarily due to increases in professional fees of $15.6 million, primarily for the pending merger transaction, credit loss expense of $11.3 million and compensation and other employee-related costs of $3.0 million. These increases were partially offset by a decrease of $15.5 million due to Wrike acquisition costs incurred in the first quarter of 2021.
Amortization of Other Intangible Assets
| Three Months Ended | Three Months Ended March 31, | ||||||||||||||||
| March 31, | |||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Amortization of other intangible assets | $ | 19,221 | $ | 7,532 | $ | 11,689 | |||||||||||
Amortization of other intangible assets consists of amortization of customer relationships, trade names and covenants not to compete primarily related to our acquisitions.
Amortization of other intangible assets increased for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to acquired intangible assets in connection with the Wrike acquisition.
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Restructuring Expenses
| Three Months Ended | Three Months Ended March 31, | ||||||||||||||||
| March 31, | |||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Restructuring | $ | 18,078 | $ | — | $ | 18,078 | |||||||||||
Restructuring expenses increased for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to the 2021 Restructuring Program, which resulted in increases in employee severance and related costs of $11.6 million, right-of-use asset impairments of $3.4 million, and other asset impairments of $3.1 million.
See Note 16 to our condensed consolidated financial statements for additional details regarding our restructuring programs.
Interest Expense
| Three Months Ended | Three Months Ended March 31, | ||||||||||||||||
| March 31, | |||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Interest expense | $ | (22,076) | $ | (24,360) | $ | 2,284 | |||||||||||
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 decreased for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to financing costs incurred in the first quarter of 2021 in connection with 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 | Three Months Ended March 31, | ||||||||||||||||
| March 31, | |||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Other (expense) income, net | $ | (1,077) | $ | 12,896 | $ | (13,973) | |||||||||||
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 March 31, 2022 compared to the three months ended March 31, 2021 is primarily attributable to decreases in gains recognized on our strategic investment activities of $10.6 million and losses from the remeasurement of foreign currency transactions of $3.8 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 18.1% and (10.9)% for the three months ended March 31, 2022 and 2021, respectively. The increase in the effective tax rate when comparing the three months ended March 31, 2022 to the three months ended March 31, 2021, was primarily due to tax items unique to the period ended March 31, 2021. These amounts included stock-based compensation deductions and a tax benefit related to a favorable foreign tax ruling in the period ended March 31, 2021.
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
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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.
Liquidity and Capital Resources
Cash, Cash Equivalents and Investments
| March 31, 2022 | December 31, 2021 | March 31, 2022 compared to December 31, 2021 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Cash, cash equivalents and investments | $ | 750,992 | $ | 541,933 | $ | 209,059 | |||||||||||
Our principal sources of liquidity are our cash, cash equivalents and investments. The increase in Cash, cash equivalents and investments when comparing March 31, 2022 to December 31, 2021, is primarily due to cash provided by operating activities of $274.9 million, partially offset by cash paid for tax withholding on vested stock awards of $43.7 million and purchases of property and equipment of $18.8 million.
As of March 31, 2022, $544.7 million of the $751.0 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.
Cash Flow Activities
During the three months ended March 31, 2022, we generated operating cash flows of $274.9 million. These operating cash flows related primarily to net income of $60.2 million, adjusted for, among other things, non-cash charges, including depreciation and amortization expenses of $84.6 million, stock-based compensation expense of $79.4 million, and a change in operating assets and liabilities, net of acquisitions of $33.1 million. The change in our operating assets and liabilities, net of acquisitions was primarily the result of inflows from accounts receivable of $274.6 million, primarily due to collections from prior period sales. These inflows were partially offset by outflows from deferred revenue of $99.5 million, outflows from accrued expenses and other current liabilities of $82.9 million, mostly from decreases in employee-related accruals. Also contributing to the change in operating assets and liabilities, net of acquisitions were outflows from accounts payable of $29.9 million, primarily due to the timing of payments, and outflows from other assets of $21.2 million, primarily due to an increase in capitalized commissions. Our investing activities used $17.3 million of cash consisting primarily of cash paid for the purchase of property and equipment of $18.8 million, partially offset by net proceeds from investments of $4.1 million. Our financing activities used cash of $42.5 million, primarily due to cash paid for tax withholding on vested stock awards.
During the three months ended March 31, 2021, we generated operating cash flows of $212.9 million. These operating cash flows related primarily to net income of $90.0 million, adjusted for, among other things, non-cash charges, including stock-based compensation expense of $86.9 million, depreciation and amortization expenses of $63.9 million and a change in operating assets and liabilities, net of acquisitions of $38.8 million. The change in our operating assets and liabilities, net of acquisitions, was mostly the result of an inflow from accounts receivable of $302.8 million primarily due to collections from prior period sales. These inflows were partially offset by outflows in accrued expenses and other current liabilities of $190.8 million, mostly from employee-related accruals of $133.6 million and payments on other accruals of $27.1 million, primarily from acquisition-related costs. Also contributing to operating outflows were changes in deferred revenue of $92.1 million, income taxes, net of $38.0 million, primarily due to an increase in prepaid taxes, and other assets of $27.5 million, primarily due to an increase in capitalized commissions. Our investing activities used $1.94 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 $23.9 million, partially offset by net proceeds from investments of $107.0 million. Our financing activities provided cash of $1.46 billion, primarily net proceeds from the 2021 Term Loan of $997.9 million and 2026 Notes of $741.4 million, partially offset by the repayment of Wrike acquired debt of $190.0 million, cash dividends on our common stock of $45.5 million and cash paid for tax withholding on vested stock awards of $42.3 million.
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Historically, significant portions of our cash inflows were generated by our operations. We currently expect this trend to continue for the remainder of 2022. Our 2022 operating cash flows could be impacted due to incremental cash outlays related to the 2021 Restructuring Program and expected transaction costs related to the pending Merger. 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.
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 26, 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”). As of March 31, 2022, $100.0 million was outstanding under the 3-year Term Loan. These amounts are due in January 2023 and included in Short-term debt in the accompanying condensed consolidated balance sheet.
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. The net proceeds from the 2026 Notes were used to fund a portion of the purchase price for the Wrike acquisition.
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 March 31, 2022, no amounts were outstanding under the credit facility.
See Note 11 to our condensed consolidated financial statements for additional details regarding our debt.
Stock Repurchase Program
Our Board of Directors authorized an ongoing stock repurchase program. The objective of the stock repurchase program was to improve stockholders’ returns and mitigate earnings per share dilution posed by the issuance of shares related to employee equity compensation awards. At March 31, 2022, $625.6 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased were recorded as treasury stock. While the Merger Agreement is in effect, we are prohibited from repurchasing shares of our common stock, including under the stock repurchase program.
During the three months ended March 31, 2022, we did not have any open market purchases under the stock repurchase program.
See Note 14 to our condensed consolidated financial statements for additional details on our share repurchase program.
Shares for Tax Withholding
During the three months ended March 31, 2022, we withheld 427,382 shares from equity awards that vested, totaling $43.7 million 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.
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 March 31, 2022, we had $825.8 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 year beginning 2021,
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$24.0 million in fiscal year beginning 2022, $24.0 million in fiscal year beginning 2023 and $20.0 million at any time over the three-year term. As of March 31, 2022, we had $46.1 million of remaining obligations under the purchase agreement.
Contractual Obligations
There have been no material changes, outside the ordinary course of business, to our contractual obligations since December 31, 2021. 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, 2021.
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 March 31, 2022 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, 2021.
ITEM 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of March 31, 2022, 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 March 31, 2022, 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 March 31, 2022, 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.
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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
There have been no material changes in our risk factors from those disclosed in Part 1, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which was filed with the Securities and Exchange Commission on February 16, 2022.
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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 authorized a stock repurchase program. The objective of our stock repurchase program was to improve stockholders’ returns and mitigate earnings per share dilution posed by the issuance of shares related to employee equity compensation awards. At March 31, 2022, $625.6 million was available to repurchase common stock pursuant to the stock repurchase program. While the Merger Agreement is in effect, we are prohibited from repurchasing shares of our common stock, including under the stock repurchase program. All shares repurchased were recorded as treasury stock.
The following table shows the monthly activity related to our repurchases of common stock for the quarter ended March 31, 2022:
| 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) | ||||||||||||||||||||
| January 1, 2022 through January 31, 2022 | 14,824 | $ | 96.93 | — | $ | 625,561 | |||||||||||||||||
| February 1, 2022 through February 28, 2022 | 190,886 | $ | 102.36 | — | $ | 625,561 | |||||||||||||||||
| March 1, 2022 through March 31, 2022 | 221,672 | $ | 102.46 | — | $ | 625,561 | |||||||||||||||||
| Total | 427,382 | $ | 102.22 | — | $ | 625,561 | |||||||||||||||||
(1)The total number of shares purchased are shares withheld from restricted stock units that vested in the first quarter of 2022 to satisfy minimum tax withholding obligations that arose on the vesting of restricted stock units.
(2)Shares withheld from restricted stock units that vested to satisfy minimum tax withholding obligations that arose on the vesting of awards do not deplete the dollar amount available for purchases under the repurchase program.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.OTHER INFORMATION
As previously reported in a Current Report on Form 8-K filed by the Company with the SEC on February 23, 2022, Jason Smith was appointed as Executive Vice President and Chief Financial Officer of the Company, effective February 21, 2022. On May 5, 2022, the Company entered into an Amended and Restated Executive Agreement with Mr. Smith (the “Agreement”). The amendments to the Agreement include (i) an increase in Mr. Smith’s annual base salary to $600,000, (ii) an increase in his target annual variable cash compensation opportunity to 100% of his base salary, (iii) the amount of his cash severance in the event of a termination of his employment under certain circumstances described in the Agreement being set at $750,000, (iv) the accelerated vesting of his outstanding equity awards upon a change in control, and (v) certain limitations on his ability to terminate his employment for “good reason” prior to December 31, 2022. The foregoing description of the Agreement does purport to be complete and is qualified in its entirety by reference to the Agreement which is filed as Exhibit 10.3 to this Quarterly Report on Form 10-Q.
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ITEM 6.EXHIBITS
(a)List of exhibits
| Exhibit No. | Description | |||||||
| 2.1 | ||||||||
| 10.1† | ||||||||
10.2† | ||||||||
10.3† | ||||||||
| 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 5th day of May, 2022.
| CITRIX SYSTEMS, INC. | ||||||||
| By: | /s/ JASON A. SMITH | |||||||
| Jason A. Smith | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| (Authorized Officer and Principal Financial Officer) | ||||||||
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