Quarterly Report (10-q)

Date : 08/02/2019 @ 8:15PM
Source : Edgar (US Regulatory)
Stock : FireEye Inc (FEYE)
Quote : 17.07  0.07 (0.41%) @ 5:00AM
After Hours
Last Trade
Last $ 17.07 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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feye:day feye:claim feye:reporting_segment feye:vote_per_share
 
 
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 June 30, 2019

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 001-36067
 

FireEye, Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
20-1548921
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
601 McCarthy Blvd .
Milpitas , CA 95035
( 408 ) 321-6300
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 

  Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.0001 par value per share
FEYE
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No  
The number of shares of the registrant's common stock outstanding as of July 30, 2019 was 214,753,300 .


TABLE OF CONTENTS


 
 
 
 
Page  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 4.
 
 
Item 5.
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 



PART I — FINANCIAL INFORMATION
Item1.    Financial Statements
FIREEYE, INC.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
 
June 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
331,901

 
$
409,829

Short-term investments
655,841

 
706,691

Accounts receivable, net of allowance for doubtful accounts of $1,956 and $2,525 at June 30, 2019 and December 31, 2018, respectively
127,450

 
157,817

Inventories
6,100

 
6,548

Prepaid expenses and other current assets
98,708

 
100,295

Total current assets
1,220,000

 
1,381,180

Property and equipment, net
95,876

 
89,163

Operating lease right-of-use assets, net
62,870

 

Goodwill
1,204,674

 
999,804

Intangible assets, net
163,250

 
143,162

Deposits and other long-term assets
84,492

 
82,769

TOTAL ASSETS
$
2,831,162

 
$
2,696,078

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY

 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
27,246

 
$
26,944

Operating lease liabilities, current
17,434

 

Accrued and other current liabilities
24,004

 
29,797

Accrued compensation
55,104

 
63,808

Convertible senior notes, current, net
114,310

 

Deferred revenue, current
545,876

 
556,815

Total current liabilities
783,974


677,364

Convertible senior notes, non-current, net
871,967

 
962,577

Deferred revenue, non-current
366,873

 
378,013

Operating lease liabilities, non-current
75,920

 

Other long-term liabilities
3,658

 
27,730

Total liabilities
2,102,392


2,045,684

Commitments and contingencies (NOTE 10)

 

Stockholders' equity:
 
 
 
Common stock, par value of $0.0001 per share; 1,000,000 shares authorized, 214,606 shares and 199,612 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
21

 
20

Additional paid-in capital
3,369,963

 
3,152,159

Treasury stock, at cost; 3,333 shares as of June 30, 2019 and December 31, 2018
(150,000
)
 
(150,000
)
Accumulated other comprehensive income (loss)
970

 
(2,299
)
Accumulated deficit
(2,492,184
)
 
(2,349,486
)
Total stockholders’ equity
728,770


650,394

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,831,162


$
2,696,078


See accompanying notes to condensed consolidated financial statements.

1

FIREEYE, INC.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Product, subscription and support
$
174,102

 
$
167,429

 
$
344,005

 
$
332,902

Professional services
43,506

 
35,267

 
84,147

 
68,864

Total revenue
217,608


202,696


428,152


401,766

Cost of revenue:
 
 
 
 
 
 
 
Product, subscription and support
53,198

 
46,136

 
101,666

 
93,565

Professional services
24,195

 
21,146

 
47,295

 
41,646

Total cost of revenue
77,393


67,282


148,961


135,211

Total gross profit
140,215


135,414


279,191


266,555

Operating expenses:
 
 
 
 
 
 
 
Research and development
67,538

 
63,575

 
134,933

 
129,771

Sales and marketing
101,494

 
94,196

 
205,390

 
191,447

General and administrative
27,926

 
26,179

 
55,302

 
54,597

Restructuring charges

 

 
3,799

 

Total operating expenses
196,958


183,950


399,424


375,815

Operating loss
(56,743
)

(48,536
)

(120,233
)

(109,260
)
Interest income
6,137

 
3,383

 
11,985

 
6,323

Interest expense
(15,407
)
 
(13,605
)
 
(30,670
)
 
(26,322
)
Other expense, net
(770
)
 
(12,690
)
 
(1,058
)
 
(12,966
)
Loss before income taxes
(66,783
)

(71,448
)

(139,976
)

(142,225
)
Provision for income taxes
540

 
1,411

 
2,722

 
2,464

Net loss
$
(67,323
)
 
$
(72,859
)
 
$
(142,698
)
 
$
(144,689
)
Net loss per share, basic and diluted
$
(0.33
)
 
$
(0.38
)
 
$
(0.71
)
 
$
(0.77
)
Weighted average shares used in computing net loss per share, basic and diluted
204,109

 
189,696

 
201,001

 
188,085


See accompanying notes to condensed consolidated financial statements.

2

FIREEYE, INC.
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(67,323
)
 
$
(72,859
)
 
$
(142,698
)
 
$
(144,689
)
Change in net unrealized gain (loss) on available-for-sale investments, net of tax
1,172

 
981

 
3,269

 
(614
)
Comprehensive loss
$
(66,151
)

$
(71,878
)

$
(139,429
)

$
(145,303
)

See accompanying notes to condensed consolidated financial statements.

3

FIREEYE, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited, in thousands)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Total stockholders' equity, beginning balances
$
619,441

 
$
619,435

 
$
650,394

 
$
632,216

 
 
 
 
 
 
 
 
Common stock and additional paid-in-capital:

 
 
 
 
 
 
Balance, beginning of period
3,194,504

 
2,952,104

 
3,152,179

 
2,891,460

Issuance of common stock for equity awards, net of tax withholdings
651

 
1,469

 
1,494

 
4,579

Issuance of common stock related to employee stock purchase plan
12,315

 
10,993

 
12,315

 
10,993

Issuance of common stock related to X15 Software, Inc. acquisition

 

 

 
15,386

Issuance of common stock and assumption of options related to Verodin, Inc. acquisition
121,158

 

 
121,158

 

Stock-based compensation
41,356

 
40,577

 
82,838

 
82,725

Purchase of capped calls

 
(65,220
)
 

 
(65,220
)
Equity component of issuance of 2024 Notes, net

 
138,064

 

 
138,064

Equity component of partial repurchase of Series A Notes, net

 
(13,012
)
 

 
(13,012
)
Balance, end of period
3,369,984

 
3,064,975

 
3,369,984

 
3,064,975

 
 
 
 
 
 
 
 
Treasury Stock:
 
 
 
 
 
 
 
Balance, beginning of period
(150,000
)
 
(150,000
)
 
(150,000
)
 
(150,000
)
Balance, end of period
(150,000
)
 
(150,000
)
 
(150,000
)
 
(150,000
)
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
Balance, beginning of period
(202
)
 
(4,476
)
 
(2,299
)
 
(2,881
)
Unrealized gain (loss) on investments, net of tax
1,172

 
981

 
3,269

 
(614
)
Balance, end of period
970

 
(3,495
)
 
970

 
(3,495
)
 
 
 
 
 
 
 
 
Accumulated Deficit:
 
 
 
 
 
 
 
Balance, beginning of period
(2,424,861
)
 
(2,178,193
)
 
(2,349,486
)
 
(2,106,363
)
Net loss
(67,323
)
 
(72,859
)
 
(142,698
)
 
(144,689
)
Balance, end of period
(2,492,184
)
 
(2,251,052
)
 
(2,492,184
)
 
(2,251,052
)
 
 
 
 
 
 
 
 
Total stockholders' equity, ending balances
$
728,770

 
$
660,428

 
$
728,770

 
$
660,428


See accompanying notes to condensed consolidated financial statements








4

FIREEYE, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 
Six Months Ended June 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(142,698
)
 
$
(144,689
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
48,102

 
44,601

Stock-based compensation
80,474

 
81,040

Non-cash interest expense related to convertible senior notes
23,700

 
20,144

Loss on repurchase of convertible senior notes

 
10,764

Deemed repayment of convertible senior notes attributable to accreted debt discount

 
(43,575
)
Deferred income taxes
(18
)
 
(60
)
Other
637

 
2,372

Changes in operating assets and liabilities, net of business acquisitions:
 
 
 
Accounts receivable
32,860

 
24,892

Inventories
(243
)
 
(2,266
)
Prepaid expenses and other assets
3,959

 
4,892

Accounts payable
4,415

 
(4,152
)
Accrued liabilities
(3,566
)
 
949

Accrued compensation
(8,704
)
 
(1,209
)
Deferred revenue
(24,830
)
 
(30,545
)
Other long-term liabilities
(4,564
)
 
1,742

Net cash provided by (used in) operating activities
9,524


(35,100
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment and demonstration units
(28,240
)
 
(26,645
)
Purchases of short-term investments
(258,104
)
 
(218,842
)
Proceeds from maturities of short-term investments
311,905

 
209,045

Business acquisitions, net of cash acquired
(127,249
)
 
(5,945
)
Lease deposits
426

 
26

Net cash used in investing activities
(101,262
)

(42,361
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of convertible senior notes, net of issuance costs

 
584,405

Purchase of capped calls

 
(65,220
)
Repurchase of convertible senior notes

 
(286,817
)
Proceeds from employee stock purchase plan
12,315

 
10,993

Proceeds from exercise of equity awards
1,495

 
4,579

Net cash provided by financing activities
13,810


247,940

Net change in cash and cash equivalents
(77,928
)
 
170,479

Cash and cash equivalents, beginning of period
409,829

 
180,891

Cash and cash equivalents, end of period
$
331,901


$
351,370



5

FIREEYE, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 
Six Months Ended June 30,
 
2019
 
2018
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid for income taxes
$
2,682

 
$
2,283

Cash paid for interest
$
6,962

 
$
5,791

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Common stock issued in connection with acquisitions
$
119,682

 
$
15,387

Convertible senior note issuance costs included in accounts payable and accrued expense
$

 
$
579

Purchases of property and equipment and demonstration units in accounts payable and accrued liabilities
$
6,531

 
$
14,129


See accompanying notes to condensed consolidated financial statements.

6

FIREEYE, INC.
Notes to Condensed Consolidated Financial Statements


1. Description of Business and Summary of Significant Accounting Policies
Description of Business
FireEye, Inc., with principal executive offices located in Milpitas, California, was incorporated as NetForts, Inc. on February 18, 2004, under the laws of the State of Delaware, and changed its name to FireEye, Inc. on September 7, 2005.
FireEye, Inc. and its wholly owned subsidiaries (collectively, the “Company”, “we”, “us” or “our”) provide comprehensive intelligence-based cybersecurity solutions that allow organizations to prepare for, prevent, investigate, respond to and remediate cyber attacks. Our portfolio of cyber security solutions and services is designed to minimize the risk of costly cyber security breaches by detecting and preventing advanced, targeted and other evasive attacks, as well as enabling more efficient management of security operations, including alert management, investigation and response when a breach occurs. We accomplish this through the integration of our core competitive advantages in solutions and services that adapt to changes in the threat environment through a cycle of intelligence-driven innovation. Our core competitive advantages include:
Our technologies, including our machine-learning, behavioral-based, and rules-based threat detection, analysis and correlation technologies, combined with our proprietary Multi-vector Virtual Execution ("MVX") engine;
Our intelligence on threats and threat actors, based on the continuous flow of machine-, attacker- and victim-based attack data from our global network of threat sensors and virtual machines, as well as intelligence gathered by our security analysts, consultants and incident responders; and
Our accumulated security expertise derived from responding to thousands of significant breaches over the past decade.
Our threat detection and prevention solutions encompass appliance-based, virtual and cloud solutions for web security, email security and endpoint security. These solutions are complemented by our cloud-based threat intelligence, security analytics and security automation and orchestration technologies, as well as our managed security services, cybersecurity consulting and incident response offerings including our recently launched Expertise-on-Demand offering. In combination, our solutions and services enable a proactive approach to cybersecurity that extends across the threat management lifecycle to minimize the risk of costly cybersecurity breaches.
We have organized our cybersecurity solutions in a hub and spokes model designed to integrate machine-generated threat data from our detection and prevention solutions with our analytics, response and orchestration technologies delivered through our Helix cybersecurity operations platform. Helix is designed to enable more efficient security operations by correlating security and event data across an organization’s environment to determine which threats present the greatest risk, automating repetitive security processes, and providing tools and workflows to investigate and respond to attacks. The Helix cloud-based interface presents a unified view of an organization’s attack surface, including on-premise and cloud environments, and provides the contextual threat intelligence and threat management tools to enable a rapid response.
In May 2019, we acquired Verodin, Inc. ("Verodin"), a security instrumentation platform company. As consideration for the acquisition, we paid $143.7 million in cash, issued 8,404,609 shares of our common stock with an estimated fair value of $119.7 million and recognized $1.5 million of the fair value of assumed stock options attributable to precombination services.
In the three months ended June 30, 2018, we issued $600 million aggregate principal amount of 0.875% Convertible Senior Notes due 2024 (the "2024 Notes"), in a private placement to qualified institutional purchasers pursuant to an exemption from registration provided by Section 4(a)(2) and Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). We recognized total net proceeds after the initial purchasers' discount and issuance costs of $584.4 million . In connection with the issuance of the 2024 Notes, we also entered into capped call transactions (the "Capped Calls") with certain parties affiliated with the initial purchasers of the 2024 Notes. We paid approximately $65.2 million for the Capped Calls, which have an initial strike price of $23.17 per share, which corresponds to the initial conversion price of the 2024 Notes. The Capped Calls have an initial cap price of $34.32 per share subject to certain adjustments as set forth in the confirmations for the Capped Calls.
In May 2018, in a separate transaction, we repurchased $340.2 million aggregate principal of existing 1.000% Convertible Senior Notes due 2035 (the "Series A Notes"). We used $330.4 million of the net proceeds from the 2024 Notes offering to repurchase such portion of the Series A Notes.
In January 2018, we completed the acquisition of privately-held X15 Software, Inc. ("X15"), a data management company. As consideration for the acquisition, we paid cash consideration of $5.3 million and issued 1,016,334 shares of our common stock with an estimated fair value of $15.4 million .
The majority of our products, subscriptions and services are sold to end-customers through distributors, resellers, and strategic partners, with a lesser percentage of sales directly to our end-customers.

7


Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of FireEye, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and following the requirements of the Securities and Exchange Commission (“SEC”), for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These unaudited condensed consolidated financial statements have been prepared on the same basis as our annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair statement of our financial information. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other interim period or for any other future year. The balance sheet as of December 31, 2018 has been derived from audited consolidated financial statements at that date but does not include all information required by U.S. GAAP for annual consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2018 included in our Annual Report on Form 10-K for the year ended December 31, 2018 .
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such management estimates include, but are not limited to, determining the nature and timing of satisfaction of performance obligations, useful life of our security appliances that are dependent on intelligence and assessing the material rights associated with it, determining the standalone selling price ("SSP") of performance obligations and professional services, determining incremental borrowing rate, commissions expense including the period of benefit of customer acquisition cost, bonus expense, future taxable income, contract manufacturer liabilities, litigation and settlement costs and other loss contingencies, fair value of our equity awards, achievement of targets for performance stock units, fair value of the liability and equity components of the Convertible Senior Notes (as defined in Note 9) and the purchase price allocation of acquired businesses. We base our estimates on historical experience and on assumptions that we believe are reasonable. Changes in facts or circumstances may cause us to change our assumptions and estimates in future periods, and it is possible that actual results could differ from current or revised future estimates.
Summary of Significant Accounting Policies
Except for the accounting policies for leases, updated as a result of adopting Accounting Standard Update ("ASU") No. 2016-02, Leases or Accounting Standard Codification ("ASC") 842, there have been no significant changes to our significant accounting policies as of and for the three and six months ended June 30, 2019 , as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2018 .
Leases
We determine if an arrangement is a lease and classification of that lease, if applicable, at inception based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefits from the use of the asset throughout the period, and (3) whether we have a right to direct the use of the asset. We currently do not have any finance leases. We have elected to not recognize a lease liability or right-of-use ("ROU") asset for short-term leases (leases with a term of twelve months or less and do not include an option to purchase the underlying asset).
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make minimum lease payments arising from the lease. ROU assets are initially measured at amounts, which represents the present value of the lease payments over the lease, plus any initial direct costs incurred and less any lease incentives received. Annually, all ROU assets are reviewed for impairment. The lease liability is initially measured at lease commencement date based on the present value of minimum lease payments over the lease term. As the rates implicit in the leases are not readily available, we use our Incremental Borrowing Rate ("IBR") based on the information available at commencement date in determining the present value of lease payments. The determination of our IBR requires judgment. We took into consideration our recent debt offerings as well as external credit rating factors when determining our current IBR. Our lease terms may include options to extend or terminate the lease. We do not include these options in our minimum lease terms unless we believe they are reasonably certain to be exercised. We have lease agreements with lease and non-lease components, which are generally accounted for separately. Non-lease components (i.e. common area maintenance) are separate from the lease components and are paid on actual usage. Therefore, the non-lease components are not included in the determination of the ROU asset or lease liability and are reflected as an expense in the period incurred. Our operating lease costs for operating lease payments are recognized on a straight-line basis over the lease term.

8


We also sublease certain office space to third-parties. Our subleases consist of office space which was vacated as part of restructuring activities in 2016. We do not recognize ROU assets or lease liabilities associated with subleased office spaces in which we are the sublessor. Sublease income is recognized ratably over the term of the agreement.
Recently Adopted Accounting Pronouncements
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842). This standard is intended to increase transparency and comparability among organizations by recognizing right-of-use assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This standard provides for a modified retrospective transition approach to recognize and measure leases at the beginning of the earliest period presented. In July 2018, the FASB issued ASU 2018-11,  Leases (ASC 842): Targeted Improvements . The update provides an optional transition method that allows entities to apply the standard prospectively, versus recasting the prior periods presented. We adopted the standard effective January 1, 2019, using a modified retrospective transition method. As a result, the consolidated balance sheet as of December 31, 2018 was not restated, continues to be reported under ASC 840, which did not require recognition of operating lease assets and liabilities on the balance sheet, and is not comparative. We have also elected the practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs which existed and expired prior to January 1, 2019. The standard had a material impact on our consolidated balance sheets, but did not have an impact on our consolidated income statements. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. We recognized ROU assets and lease liabilities of $60.7 million and $88.4 million , respectively, on our consolidated balance sheets on January 1, 2019, which included reclassifying lease incentives and deferred rent as a component of the ROU assets. See Summary of Significant Accounting Policies - Leases and Note 7 Leases for further details.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU 2018-02: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("AOCI"). This standard provides companies with an option to reclassify stranded tax effects resulting from the enactment of the Tax Cuts and Jobs Act ("TCJA") from accumulated other comprehensive income to retained earnings. We adopted the standard effective January 1, 2019. The Company has no net stranded tax effect recorded in AOCI due to its full U.S. valuation allowance therefore, the adoption of ASU 2018-02 resulted in no amount reclassified from AOCI to retained earnings on our condensed consolidated statement of stockholders' equity.
Improvements to Non-employee Share-Based Payment Accounting
In June 2018, the FASB issued ASU 2018-07 (Topic 718): Improvements to Non-employee Share-Based Payment Accounting ("Topic 718"). This standard expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. FASB clarified that Topic 718 does not apply to share-based payments used to effectively provide financing to the issuer or awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. We adopted the standard effective January 1, 2019. The standard did not have a significant impact on our condensed consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard requires capitalization of the implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Further, the standard also requires the Company to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. This standard is effective for the Company beginning in the first quarter of 2020. Early adoption is permitted. The adoption of this standard is not expected to have a significant impact on our consolidated financial statements.
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This standard eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (i.e. Step 2 of the current guidance), instead measuring the impairment charge as the excess of the reporting unit's carrying amount over its fair value (i.e. Step 1 of the current guidance). The guidance is effective for the Company beginning in the first quarter of 2020, and should be applied prospectively. Early adoption is permitted for impairment testing dates after January 1, 2017. The adoption of this standard is not expected to have a significant impact on our consolidated financial statements.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard changes the impairment model for most financial assets and certain other instruments by introducing

9


a current expected credit loss ("CECL") model. The CECL model is a more forward-looking approach based on expected losses rather than incurred losses, requiring entities to estimate and record losses expected over the remaining contractual life of an asset. The guidance is effective for the Company beginning in the first quarter of 2020. Early adoption beginning January 1, 2019 is permitted. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements and related disclosures.
2. Fair Value Measurements
The accounting guidance for fair value measurements provides a framework for measuring fair value on either a recurring or nonrecurring basis, whereby the inputs used in our valuation techniques are assigned a hierarchical level. The following are the three levels of inputs to measure fair value:
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Inputs that reflect quoted prices for identical assets or liabilities in less active markets; quoted prices for similar assets or liabilities in active markets; benchmark yields, reported trades, broker/dealer quotes, inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3: Unobservable inputs that reflect our own assumptions incorporated in valuation techniques used to measure fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
We consider an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, our own or the counterparty’s non-performance risk is considered in measuring the fair values of assets.
The following table presents our assets and liabilities measured at fair value on a recurring basis using the above input categories (in thousands):
 
As of June 30, 2019
 
As of December 31, 2018
Description
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
65,090

 
$

 
$

 
$
65,090

 
$
25,748

 
$

 
$

 
$
25,748

Total cash equivalents
65,090

 

 

 
65,090

 
25,748

 

 

 
25,748

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit

 
3,149

 

 
3,149

 

 

 

 

Corporate notes and bonds

 
407,635

 

 
407,635

 

 
448,323

 

 
448,323

U.S. Treasuries

 
93,172

 

 
93,172

 

 
112,700

 

 
112,700

U.S. Government agencies

 
151,885

 

 
151,885

 

 
145,668

 

 
145,668

Total short-term investments

 
655,841

 

 
655,841

 

 
706,691

 

 
706,691

Total assets measured at fair value
$
65,090

 
$
655,841

 
$

 
$
720,931

 
$
25,748

 
$
706,691

 
$

 
$
732,439


Additionally, we have a restructuring liability related to certain real estate facilities that was calculated based on the present value of future non-lease payments, discounted at a rate commensurate with our current cost of financing as well as external ratings. This non-recurring fair value measurement is considered to be a Level 3 measurement due to the use of significant unobservable inputs. See Note 6 Restructuring Charges for a reconciliation of this liability.
We measure certain assets, including goodwill, intangible assets and our equity-method investment in a private company at fair value on a nonrecurring basis when there are identifiable events or changes in circumstances that may have a significant adverse impact on the fair value of these assets. No such events or changes occurred during the six months ended June 30, 2019 .
The estimated fair value of the Convertible Senior Notes each as of June 30, 2019 and December 31, 2018 was determined to be $1.1 billion . The fair value was determined based on the closing trading prices per $100 principal amount of the respective Convertible Senior Notes as of the last day of trading for the period. We consider the fair value of the Convertible Senior Notes to be a Level 2 measurement as they are not actively traded.


10


3. Investments
Our investments consisted of the following (in thousands):
 
As of June 30, 2019
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Certificates of deposit
$
3,140

 
$
9

 
$

 
$
3,149

Corporate notes and bonds
406,137

 
1,622

 
(124
)
 
407,635

U.S. Treasuries
93,181

 
49

 
(58
)
 
93,172

U.S. Government agencies
151,974

 
16

 
(105
)
 
151,885

Total
$
654,432


$
1,696


$
(287
)

$
655,841


 
As of December 31, 2018
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Corporate notes and bonds
$
450,097

 
$
44

 
$
(1,818
)
 
$
448,323

U.S. Treasuries
112,783

 
2

 
(85
)
 
112,700

U.S. Government agencies
146,110

 

 
(442
)
 
145,668

Total
$
708,990

 
$
46

 
$
(2,345
)

$
706,691


The following tables present the gross unrealized losses and related fair values of our investments that have been in a continuous unrealized loss position (in thousands):
 
As of June 30, 2019
 
Less Than 12 Months
 
Greater Than 12 Months
 
Total
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Corporate notes and bonds
$
20,118

 
$
(14
)
 
$
139,918

 
$
(110
)
 
$
160,036

 
$
(124
)
U.S. Treasuries
7,066

 
(4
)
 
33,973

 
(54
)
 
41,039

 
(58
)
U.S. Government agencies
43,177

 
(37
)
 
81,677

 
(68
)
 
124,854

 
(105
)
Total
$
70,361


$
(55
)

$
255,568


$
(232
)

$
325,929


$
(287
)

 
As of December 31, 2018
 
Less Than 12 Months
 
Greater Than 12 Months
 
Total
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Corporate notes and bonds
$
420,548

 
$
(1,817
)
 
$
1,526

 
$
(2
)
 
$
422,074

 
$
(1,819
)
U.S. Treasuries
105,525

 
(85
)
 

 

 
105,525

 
(85
)
U.S. Government agencies
137,416

 
(441
)
 

 

 
137,416

 
(441
)
Total
$
663,489


$
(2,343
)

$
1,526


$
(2
)

$
665,015


$
(2,345
)

Unrealized losses related to these investments are due to interest rate fluctuations as opposed to credit quality. In addition, we do not intend to sell, and it is not more likely than not that we would be required to sell, these investments before recovery of their cost basis. As a result, there is no other-than-temporary impairment for these investments as of June 30, 2019 and December 31, 2018 .
The following table summarizes the contractual maturities of our investments at June 30, 2019 (in thousands):
 
Amortized Cost
 
Fair Value
Due within one year
$
418,165

 
$
418,263

Due within one to three years
236,267

 
237,578

Total
$
654,432

 
$
655,841


All available-for-sale securities have been classified as current, based on management's ability to use the funds in current operations.

11


As of June 30, 2019 , we held a 10.0% ownership interest in a private company, which is accounted for under the equity method based on our ability to exercise significant influence over operating and financial policies of the private company. This investment is classified within deposits and other long-term assets on our condensed consolidated balance sheets. The carrying value of this investment was  zero as of June 30, 2019 and $0.5 million  as of December 31, 2018 .
4. Property and Equipment
Property and equipment, net consisted of the following (in thousands):
 
As of June 30, 2019
 
As of December 31, 2018
Computer equipment and software
$
190,103

 
$
171,078

Leasehold improvements
66,556

 
62,832

Furniture and fixtures
14,799

 
13,835

Machinery and equipment
465

 
447

Total property and equipment
271,923

 
248,192

Less: accumulated depreciation
(176,047
)
 
(159,029
)
Total property and equipment, net
$
95,876

 
$
89,163


Depreciation and amortization expense related to property, equipment and demonstration units during the three months ended June 30, 2019 and 2018 was $9.4 million and $9.2 million , respectively. Depreciation and amortization expense related to property, equipment and demonstration units during the six months ended June 30, 2019 and 2018 was $18.5 million and $18.6 million , respectively.
During the three months ended June 30, 2019 and 2018 , we capitalized $6.1 million and $6.8 million , respectively, of software development costs primarily related to our platform and cloud subscription offerings. Amortization expense related to capitalized software development costs during the three months ended June 30, 2019 and 2018 were $4.0 million and $2.3 million , respectively.
During the six months ended June 30, 2019 and 2018 , we capitalized $11.6 million and $11.7 million , respectively, of software development costs primarily related to our platform and cloud subscription offerings. Amortization expense related to capitalized software development costs during the six months ended June 30, 2019 and 2018 were $7.5 million and $4.2 million , respectively.
5. Business Combinations
Acquisition of Verodin
On May 28, 2019, we acquired all outstanding shares of privately held Verodin, a security instrumentation platform company. We expect that the Verodin technology will be incorporated into our platform and analytics capabilities going forward. In connection with this acquisition, we paid cash consideration of $143.7 million and issued 8,404,609 shares of our common stock with an estimated fair value of $119.7 million. We also assumed unvested stock options, which are now exercisable for our common stock, of which $1.5 million of the fair value has been accounted for as consideration for assumed awards pertaining to precombination service prior to acquisition, resulting in total purchase consideration of $264.9 million.
The acquisition of Verodin was accounted for in accordance with the acquisition method of accounting for business combinations with FireEye as the accounting acquirer. We expensed the related acquisition costs of $0.6 million in general and administrative expenses. Under the acquisition method of accounting, the total purchase consideration is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The total purchase price of $264.9 million was allocated using information currently available to us. As a result, we may continue to adjust the preliminary purchase price allocation after obtaining more information regarding asset valuations, liabilities assumed, and revisions of preliminary estimates. Pro forma financial information has not been presented for this acquisition as the impact to our consolidated financial statements was not material. Allocation of the preliminary purchase price is as follows (in thousands):
 
Amount
Net tangible assets assumed
$
15,036

Intangible assets
45,200

Deferred tax liability
(224
)
Goodwill
$
204,870

Total preliminary purchase price allocation
$
264,882


The preliminary purchase price exceeded the fair value of the net tangible assets and identifiable intangible assets acquired, resulting in the recognition of goodwill. Goodwill is primarily attributable to expected synergies in our subscription offerings and cross-selling opportunities. None of the goodwill is expected to be deductible for U.S. federal income tax purposes.

12


Intangible assets consist primarily of developed technology, customer relationships, trade name and contract backlog. Intangible assets attributable to developed technology include a combination of patented and unpatented technology, trade secrets, computer software and research processes that represent the foundation for the existing and planned new products to facilitate the generation of new content. Customer relationship intangibles relate to Verodin's ability to sell current and future content, as well as products built around this content, to its existing customers. Trade name is attributable to marketing goods and services under the Verodin brand. Contract backlog pertains to unbilled and unrecognized contracts yet to be fulfilled.
The estimated useful life and fair values of the identifiable intangible assets are as follows (in thousands):
 
Preliminary Estimated Useful Life (in years)
 
Amount
Developed technology
5
 
$
38,300

Customer relationships
5
 
4,600

Trade name
5
 
1,600

Contract backlog
2
 
700

Total identifiable intangible assets
 
 
$
45,200


The value of developed technology was estimated using the excess earnings method, an income approach (Level 3), which converts projected revenues and costs into cash flows. To reflect the fact that certain other assets contribute to the cash flows generated, the returns for these contributory assets were removed to arrive at estimated cash flows solely attributable to the acquired technology, which were discounted at a rate of 12% to determine the fair value.
The value of customer relationships was estimated using the cost savings method, an income level approach (Level 3), which estimates the value of an asset based upon costs avoided through ownership of the asset. Estimated costs on projected revenues, excluding acquired contract backlog, were made using historical data pertaining to sales to new and existing customers. The cash flow impact of projected cost savings, primarily avoidance of legal costs pertaining to new customers and lower commission rates applicable to existing customers than new customers, were discounted at a rate of 11% to determine the fair value.
The value of the trade name was estimated using the relief-from-royalty method, an income approach (Level 3), which estimates the cost savings that accrue to the owner of the intangibles asset that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. A royalty rate was applied to the projected revenues associated with the intangible asset to determine the amount of savings, which was at a rate of 12% to determine the fair value.
The value of the contract backlog was estimated by discounting estimated cash flows from existing orders, an income level approach (Level 3). Using expected timing of backlog revenue realization by quarter, the cash flow estimates resulting therefrom were reduced by estimated fulfillment costs associated with completing the backlog obligations, and the net cash flows were then discounted at a rate of 8% to determine fair value.
Discount rates for each respective intangible asset were determined by accounting for the risk associated with each asset, including required technology development and customer acquisition required to support respective projections, the uncertainty of market success and the risk inherent with projected financial results. The estimated useful lives were determined by evaluating the expected economic and useful lives of the assets and of similar intangible assets from previous business combinations and adjusting accordingly after taking into account circumstances that may be unique to Verodin.
Acquisition of X15
On January 11, 2018, we acquired all outstanding shares of privately held X15, a data management company. We expect that the X15 technology will be incorporated into our platform and analytics capabilities going forward. In connection with this acquisition, we paid cash consideration of $5.3 million and issued 1,016,334 shares of our common stock with an estimated fair value of $15.4 million , resulting in total purchase consideration of $20.7 million . The purchase price was allocated to intangible assets of $6.1 million , goodwill of $15.1 million and net tangible liabilities of $0.5 million . The intangible asset relates to developed technology with an estimated weighted average useful life of 3 years. The goodwill is primarily attributable to the know-how of the workforce and is not expected to be deductible for U.S. federal income tax purposes. The results of operations of X15 have been included in our consolidated statements of operations from the acquisition date. Pro forma financial information has not been presented for this acquisition as the impact to our consolidated financial statements was not material.
Goodwill and Purchased Intangible Assets
Goodwill increased by approximately $204.9 million for the six months ended June 30, 2019 due to acquisition of Verodin. There were no other changes in the carrying amount of goodwill.

13


Purchased intangible assets consisted of the following (in thousands):
 
As of June 30, 2019
 
As of December 31, 2018
Developed technology
$
148,303

 
$
110,003

Content
158,700

 
158,700

Customer relationships
115,690

 
111,090

Contract backlog
13,200

 
12,500

Trade names
17,160

 
15,560

Non-competition agreements
1,400

 
1,400

Total intangible assets
454,453

 
409,253

Less: accumulated amortization
(291,203
)
 
(266,091
)
Total net intangible assets
$
163,250

 
$
143,162


Amortization expense of intangible assets during the three months ended June 30, 2019 and 2018 was $13.0 million and $12.7 million , respectively. Amortization expense of intangible assets during the six months ended June 30, 2019 and 2018 was $25.1 million and $25.3 million , respectively.
The expected future annual amortization expense of intangible assets as of June 30, 2019 is presented below (in thousands):
Years Ending December 31,
Amount
2019 (remaining six months)
$
28,831

2020
43,147

2021
38,379

2022
27,109

2023
22,005

2024
3,692

 and thereafter
87

Total
$
163,250


6. Restructuring Charges
In January 2019, we implemented a restructuring plan designed to align our resources with the strategic growth initiatives of the business. This restructuring plan resulted in a reduction of less than 2% of our total workforce as of March 31, 2019 as well as exiting and downsizing of certain real estate facilities.
The following table sets forth the restructuring balance as of December 31, 2018 related to previous restructuring activities and a summary of restructuring activities during the six months ended June 30, 2019 (in thousands):
 
Severance and related costs
 
Facilities costs
 
Total costs
Balance, December 31, 2018
$

 
$
1,150

 
$
1,150

Provision for restructuring charges
2,287

 
650

 
2,937

Cash payments
(2,197
)
 
(41
)
 
(2,238
)
Other adjustments
(90
)
 
(1,167
)
 
(1,257
)
Balance, June 30, 2019
$

 
$
592

 
$
592


The total provision for restructuring charges during the six months ended June 30, 2019 of $3.8 million includes $2.9 million of cash charges shown above in addition to non-cash charges of $0.9 million related to right-of-use asset and fixed asset write-offs.
Other adjustments of facilities costs primarily represent a reclassification of relief of unused benefits from a previous restructuring to reduce ROU assets as part of the transition to ASC 842.
The remainder of the restructuring balance of $0.6 million at June 30, 2019 is composed of $0.6 million of non-cancelable non-lease costs which we expect to pay over the terms of the related obligations through the third quarter of 2021.

14


7. Leases
We have operating leases primarily for corporate offices. Our leases have remaining lease terms of one to eleven years , some of which include options to extend the leases for up to five years , and some of which include options to terminate the leases within one year.
The components of lease expenses were as follows (in thousands):
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Operating lease costs
$
3,656

 
$
8,418

Short-term lease costs
754

 
1,691

Sublease income
(272
)
 
(544
)
Total net lease costs
$
4,138

 
$
9,565


Supplemental balance sheet information related to leases is as follows (in thousands, except lease term and discount rate):
 
 
 
As of June 30, 2019
Operating leases:
 
Operating lease right-of-use assets, net
$
62,870

 
 
Operating lease liabilities, current
$
17,434

Operating lease liabilities, non-current
75,920

Total operating lease liabilities
$
93,354

 
 
Weighted average remaining lease term (in years):
7.4

Weighted average discount rate:
6.8
%

Supplemental cash flow and other information related to leases is as follows (in thousands):
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows from operating leases
$
4,129

 
$
6,714

 
 
 
 
Lease liabilities arising from obtaining right-of-use assets:
 
 
 
Operating leases
$
5,194

 
$
7,769


Undiscounted cash flows of operating lease liabilities are as follows (in thousands):
Years Ending December 31,  
Amount  
2019 (remaining six months)
$
8,879

2020
18,400

2021
17,307

2022
14,746

2023
12,836

2024
11,402

2025 and thereafter
37,788

Total lease payments
121,358

Less: Imputed interest
(28,004
)
Total lease obligation
93,354

Less: Current lease obligations
(17,434
)
Long-term lease obligations
$
75,920



15


As of June 30, 2019 , we have an additional operating lease commitment of $1.8 million for an office lease that has not yet commenced. The operating lease commitment will commence in the third quarter of 2019 with a lease term of two years .
As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018 and under the previous lease accounting standard ASC 840, the aggregate future non-cancelable minimum rental payments on our operating leases, as of December 31, 2018 , are as follows (in thousands):
Years Ending December 31,  
Amount  
2019
$
15,530

2020
16,325

2021
14,976

2022
12,766

2023
11,926

2024 and thereafter
47,409

Total
$
118,932


8. Deferred Revenue
Deferred revenue consisted of the following (in thousands):
 
As of June 30, 2019
 
As of December 31, 2018
Product, subscription and support, current
$
479,871

 
$
492,109

Professional services, current
66,005

 
64,706

Total deferred revenue, current
545,876

 
556,815

Product, subscription and support, non-current
365,942

 
375,915

Professional services, non-current
931

 
2,098

Total deferred revenue, non-current
366,873

 
378,013

Total deferred revenue
$
912,749

 
$
934,828


Changes in the balance of deferred revenue for the periods presented are as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Deferred revenue, beginning of period
$
906,190

 
$
886,136

 
$
934,828

 
$
910,100

Billings for the period
221,417

 
196,116

 
403,323

 
371,222

Revenue recognized
(217,608
)
 
(202,696
)
 
(428,152
)
 
(401,766
)
Assumed in connection with acquisitions
2,750

 

 
2,750

 

Deferred revenue, end of period
$
912,749

 
$
879,556

 
$
912,749

 
$
879,556


Remaining Performance Obligations
Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and non-cancelable contracts that will be invoiced and recognized as revenue in future periods ("backlog"). While deferred revenue is recorded on our balance sheet as a liability, backlog is not recorded in revenue, deferred revenue or elsewhere in our consolidated financial statements until we establish a contractual right to invoice, at which point it is recorded as revenue or deferred revenue as appropriate. As of June 30, 2019 , the aggregate amount of the transaction price allocated to remaining performance obligations was $912.7 million in deferred revenue and $24.7 million in backlog.

16


We expect that the amount of backlog relative to the total value of our contracts will change from year to year due to several factors, including the amount invoiced early in the contract term, the timing and duration of customer agreements, varying invoicing cycles of agreements and changes in customer financial circumstances. Accordingly, we believe that fluctuations in backlog are not always a reliable indicator of future revenues and we do not utilize backlog internally as a key management metric.
We expect to recognize these remaining performance obligations as follows (in percentages):
 
Total
 
Less than 1 year
 
1-2 years
 
2-3 years
 
More than 3 years
Deferred revenue
100%
 
60%
 
25%
 
11%
 
4%
Backlog
100%
 
52%
 
31%
 
13%
 
4%



17


9. Convertible Senior Notes
Convertible Senior Notes due 2024
On May 24, 2018, we issued $525.0 million aggregate principal amount of the 2024 Notes in a private placement to qualified institutional purchasers pursuant to an exemption from registration provided by Section 4(a)(2) and Rule 144A under the Securities Act. In addition, on June 5, 2018, we issued an additional $75.0 million aggregate principal amount of the 2024 Notes pursuant to the full exercise of the initial purchasers' option to purchase additional 2024 Notes, in a private placement exempt from the registration requirements of the Securities Act. The net proceeds from the offerings, after deducting the initial purchasers' discount of approximately $15.0 million and the issuance costs of approximately $0.6 million , were $584.4 million . We used (i) approximately $330.4 million of the net proceeds to repurchase approximately $340.2 million in aggregate principal amount outstanding of the Series A Notes in negotiated transactions with institutional investors and (ii) approximately $65.2 million of the net proceeds from the offering of the 2024 Notes to enter into the Capped Calls.
The 2024 Notes are unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2024 Notes. They rank equally in right of payment with all of our existing and future liabilities that are not expressly subordinated to the 2024 Notes including the Series A Notes and the Series B Notes (as defined below); and effectively rank junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness. The 2024 Notes are structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
The 2024 Notes do not contain any financial covenants and do not restrict us from paying dividends or issuing or repurchasing other securities.
The 2024 Notes bear interest at 0.875% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2018. The 2024 Notes mature on June 1, 2024, unless earlier repurchased, redeemed or converted.
The initial conversion rate of the 2024 Notes is 43.1667 shares of our common stock per $1,000 of principal amount of the 2024 Notes, which is equivalent to an initial conversion price of approximately $23.17 per share of common stock. The conversion rate of the 2024 Notes may be adjusted pursuant to the terms of the indenture governing the 2024 Notes upon the occurrence of certain specified events, but not for accrued and unpaid interest.
Holders may convert the 2024 Notes at their option in multiples of $1,000 principal amount prior to the business day preceding March 1, 2024, only under the following circumstances:
during any calendar quarter commencing after the calendar quarter ended on September 30, 2018 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price of the 2024 Notes on each applicable trading day;
during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of the 2024 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the notes on each such trading day;
if we call any or all of the 2024 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the relevant redemption date; or
upon the occurrence of specified corporate events, as specified in each indenture governing the 2024 Notes.
Regardless of the foregoing conditions, holders may convert their 2024 Notes at their option in multiples of $1,000 principal amount during the period from, and including, March 1, 2024 to the close of business on the second scheduled trading day immediately preceding the maturity date. Upon conversion, the 2024 Notes can be settled in cash, shares of our common stock or any combination of cash and shares of common stock at our option.
Holders may also require us to repurchase the 2024 Notes if we undergo a "fundamental change," as defined in each indenture governing the 2024 Notes, at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Additionally, we may redeem for cash all or any portion of the 2024 Notes on or after June 5, 2021, if the last reported sale price of our common stock has been at least 130% of the conversion price of the 2024 Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date.
As of June 30, 2019 , none of the conditions permitting holders to convert their 2024 Notes had been satisfied and no shares of our common stock had been issued in connection with any conversions of the 2024 Notes. Based on the closing price of our common stock of $14.81 per share on June 28, 2019, the conversion value of the 2024 Notes was less than the principal amount of the 2024 Notes outstanding on a per 2024 Note basis.

18


In accordance with accounting for debt with conversions and other options, we bifurcated the principal amount of the 2024 Notes into liability and equity components. The initial liability component of the 2024 Notes was valued at $458.3 million based on the contractual cash flows discounted at an appropriate comparable market non-convertible debt borrowing rate at the date of issuance of 5.5% with the equity component representing the residual amount of the proceeds of $141.7 million , which was recorded as a debt discount. Issuance costs were allocated pro rata based on the relative initial carrying amounts of the liability and equity components. As a result, transaction costs of $0.5 million and $0.1 million and initial purchasers' discount of $11.5 million and $3.5 million were attributable to the liability component and equity component of the 2024 Notes, respectively. The debt discount and the issuance costs allocated to the liability component are amortized as additional interest expense over the term of the 2024 Notes using the effective interest method as noted in the table below.
The liability and equity components of the 2024 Notes consisted of the following (in thousands):
 
As of June 30, 2019
 
As of December 31, 2018
 
2024 Notes
 
2024 Notes
Liability component:
 
 
 
Principal
$
600,000

 
$
600,000

Less: 2024 Notes discounts and issuance costs, net of amortization
(128,801
)
 
(140,239
)
Net carrying amount
$
471,199

 
$
459,761

 
 
 
 
Equity component, net of issuance costs
$
138,064

 
$
138,064


The unamortized issuance costs as of June 30, 2019 will be amortized over a weighted-average remaining period of approximately 4.9 years.
Interest expense related to the 2024 Notes consisted of the following (dollars in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
2024 Notes
 
2024 Notes
 
2024 Notes
 
2024 Notes
Coupon interest
$
1,313

 
$
520

 
$
2,625

 
$
520

Amortization of 2024 Notes discounts and issuance costs
5,754

 
2,259

 
11,438

 
2,259

Total interest expense recognized
$
7,067

 
$
2,779

 
$
14,063

 
$
2,779

 
 
 
 
 
 
 
 
Effective interest rate on the liability component
6.1
%
 
6.1
%
 
6.1
%
 
6.1
%

In connection with the 2024 Notes offering, the Company entered into the Capped Calls with certain counterparties affiliated with the initial purchasers of the 2024 Notes. The Capped Calls are expected to reduce potential dilution of earnings per share upon conversion of the 2024 Notes, and have an initial strike price of $23.17 per share, which corresponds to the initial conversion price of the 2024 Notes and which have a cap price of $34.32 per share. The Capped Calls do not meet the criteria for separate accounting as a derivative as they are indexed to our own stock and are accounted for as freestanding financial instruments. The premiums paid for the purchase of the Capped Calls in the amount of $65.2 million have been recorded as a reduction of the Company's additional paid-in capital in stockholder's equity in the accompanying Condensed Consolidated Financial Statements and fair values of the Capped Calls are not re-measured at each reporting period.
Convertible Senior Notes due 2035
In June 2015, we issued $460.0 million principal amount of Series A Notes and $460.0 million principal amount of 1.625% Convertible Senior Notes due 2035 (the “Series B Notes” and together with the Series A Notes, the "2035 Notes", and the 2035 Notes, together with the 2024 Notes, the "Convertible Senior Notes"), including the full exercise of the initial purchasers' over-allotment option, in a private placement to qualified institutional purchasers pursuant to an exemption from registration provided by Section 4(a)(2) and Rule 144A under the Securities Act. The net proceeds after the initial purchasers' discount of $23.0 million and issuance costs of $0.5 million from the 2035 Notes were $896.5 million . The Series A Notes and Series B Notes bear interest at 1.000% per year and 1.625% per year, respectively, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2015. The 2035 Notes mature on June 1, 2035, unless earlier repurchased, redeemed or converted.
The 2035 Notes are unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2035 Notes. They rank equally in right of payment with all of our existing and future liabilities that are not

19


expressly subordinated to the 2035 Notes and effectively rank junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness. They are structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
The 2035 Notes do not contain any financial covenants and do not restrict us from paying dividends or issuing or repurchasing our other securities.
The initial conversion rate on each series of 2035 Notes is 16.4572 shares of our common stock per $1,000 principal amount of 2035 Notes, which is equivalent to an initial conversion price of approximately $60.76 per share of common stock. The conversion rate of each series of 2035 Notes may be adjusted upon the occurrence of certain specified events, but not for accrued and unpaid interest.
Holders may convert the 2035 Notes at their option in multiples of $1,000 principal amount prior to March 1, 2035, excluding the period from March 1, 2020 to June 1, 2020 in the case of the Series A Notes and March 1, 2022 to June 1, 2022 in the case of the Series B Notes, only under the following circumstances:
during any calendar quarter commencing after the calendar quarter ended on September 30, 2015 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the 2035 Notes of the relevant series on each applicable trading day;
during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of Series A Notes or Series B Notes, as applicable, for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the notes of the relevant series on each such trading day;
if we call any or all of the 2035 Notes of a series for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the relevant redemption date; or
upon the occurrence of specified corporate events, as specified in each indenture governing the 2035 Notes.
Regardless of the foregoing conditions, holders may convert their 2035 Notes at their option in multiples of $1,000 principal amount at any time during the period from March 1, 2020 to June 1, 2020 in the case of the Series A Notes and during the period from March 1, 2022 to June 1, 2022 in the case of the Series B Notes, or after March 1, 2035 until maturity for either series of 2035 Notes. Upon conversion, the 2035 Notes can be settled in cash, shares of our common stock or any combination thereof at our option.
We may be required by holders of the 2035 Notes to repurchase all or any portion of their 2035 Notes at 100% of the principal amount plus accrued and unpaid interest, on each of June 1, 2020, June 1, 2025 and June 1, 2030, in the case of the Series A Notes, and each of June 1, 2022, June 1, 2025 and June 1, 2030 in the case of the Series B Notes. Holders may also require us to repurchase the 2035 Notes if we undergo a "fundamental change," as defined in each indenture governing the 2035 Notes, at a purchase price equal to 100% of the principal amount, plus accrued and unpaid interest.
Additionally, we may redeem for cash all or any portion of the Series B Notes on or after June 1, 2020 until June 1, 2022 if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending not more than three trading days immediately preceding the date we provide notice of redemption. We also may redeem for cash all or any portion of the Series A Notes on or after June 1, 2020 until maturity and all or any portion of the Series B Notes on or after June 1, 2022 until maturity, regardless of the foregoing sale price condition.
In accordance with accounting for debt with conversions and other options, we allocated the principal amount of the 2035 Notes into liability and equity components. We also allocated the total amount of initial purchasers' discount and transaction costs incurred to the liability and equity components using the same proportions as the proceeds from the 2035 Notes. Transaction costs of $0.4 million and $0.1 million and initial purchasers' discount of $17.6 million and $5.4 million were attributable to the liability component and equity component of the 2035 Notes, respectively.
Repurchase of a portion of the Series A Notes
In May 2018, we used approximately $330.4 million of the net proceeds from the offering of the 2024 Notes to repurchase $340.2 million aggregate principal amount of the Series A Notes. The repurchase was accounted for as a partial extinguishment of the Series A Notes. The consideration of approximately $330.4 million used to repurchase the Series A Notes was allocated between the liability and equity components of the amount extinguished by determining the fair value of the liability component immediately prior to the debt extinguishment and allocating that portion of the repurchase price to the liability component in the amount of $317.4 million . The residual of the repurchase price of $13.0 million was allocated to the equity component of the Series A Notes as a reduction of additional paid-in capital. The fair value of the debt extinguished was calculated using a discount rate of 4.5% , representing an estimate of the Company's borrowing rate at the date of repurchase with a remaining expected life of two years. As part of the repurchase, we wrote-off a portion of the unamortized debt issuance cost apportioned to the principal amount of Series A Notes repurchased. We also recorded a loss on partial extinguishment of the Series A Notes of $10.8 million in Other Expense, net, representing the difference between the consideration

20


attributed to the liability component and the sum of the net carrying amount of the liability component and unamortized costs. As of June 30, 2019 , $119.8 million aggregate principal amount of the Series A Notes remained outstanding.
The liability and equity components of the remaining portion of 2035 Notes consisted of the following (in thousands):
 
As of June 30, 2019
 
As of December 31, 2018
 
Series A Notes
 
Series B Notes
 
Series A Notes
 
Series B Notes
Liability component:
 
 
 
 
 
 
 
Principal
$
119,828

 
$
460,000

 
$
119,828

 
$
460,000

Less: 2035 Notes discount and issuance costs, net of amortization
(5,518
)
 
(59,233
)
 
(8,420
)
 
(68,592
)
Net carrying amount
$
114,310


$
400,767

 
$
111,408

 
$
391,408

 
 
 
 
 
 
 
 
Equity component, net of issuance costs
$
79,555

 
$
117,834

 
$
79,555

 
$
117,834


The unamortized discounts and issuance costs as of June 30, 2019 will be amortized over a weighted-average remaining period of approximately 2.7 years.
Interest expense for the three and six months ended June 30, 2019 related to the 2035 Notes consisted of the following (dollars in thousands):
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
 
Series A Notes
 
Series B Notes
 
Series A Notes
 
Series B Notes
Coupon interest
$
300

 
$
1,869

 
$
599

 
$
3,717

Amortization of 2035 Notes discount and issuance costs
1,460

 
4,707

 
2,902

 
9,359

Total interest expense recognized
$
1,760


$
6,576

 
$
3,501

 
$
13,076

 
 
 
 
 
 
 
 
Effective interest rate on the liability component
6.2
%
 
6.6
%
 
6.3
%
 
6.7
%

Interest expense for the three and six months ended June 30, 2018 related to the 2035 Notes consisted of the following (dollars in thousands):
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
Series A Notes
 
Series B Notes
 
Series A Notes
 
Series B Notes
Coupon interest
$
788

 
$
1,848

 
$
1,938

 
$
3,717

Amortization of 2035 Notes discount and issuance costs
3,700

 
4,490

 
8,957

 
8,927

Total interest expense recognized
$
4,488

 
$
6,338

 
$
10,895

 
$
12,644

 
 
 
 
 
 
 
 
Effective interest rate on the liability component
6.3
%
 
6.7
%
 
6.3
%
 
6.8
%

Prepaid Forward Stock Purchase
In connection with the issuance of the 2035 Notes, we also entered into privately negotiated prepaid forward transactions (the "Prepaid Forwards") with one of the initial purchasers of the 2035 Notes (the "Forward Counterparty"), pursuant to which we paid approximately $150.0 million . The amount of the prepaid is equivalent to approximately 3.3 million shares which are to be settled on or around June 1, 2020 and June 1, 2022, respectively, subject to any early settlement, in whole or in part, of each Prepaid Forward. The Prepaid Forwards are intended to facilitate privately negotiated derivative transactions by which investors in the 2035 Notes will be able to hedge their investment in the 2035 Notes. In the event we pay any cash dividends on our common stock, the Forward Counterparty will pay an equivalent amount back to us.
The related shares were accounted for as a repurchase of common stock, and are presented as Treasury Stock in the unaudited condensed consolidated balance sheets. The 3.3 million shares of common stock purchased under the Prepaid Forwards are excluded from weighted-average shares outstanding for basic and diluted EPS purposes although they remain legally outstanding.

21


10. Commitments and Contingencies
Letters of Credit
We are party to letters of credit totaling $3.5 million and $3.8 million as of June 30, 2019 and December 31, 2018 , respectively, issued primarily in support of operating leases for several of our facilities. These letters of credit are collateralized by a line with our bank. No amounts have been drawn against these letters of credit.
Contract Manufacturer Commitments
Our independent contract manufacturers procure components and assemble our products based on our forecasts. These forecasts are based on estimates of future demand for our products, which are in turn based on historical trends and an analysis from our sales and product marketing organizations, adjusted for overall market conditions. In order to reduce manufacturing lead times and plan for adequate supply, we may issue forecasts and orders for components and products that are non-cancelable. As of June 30, 2019 and December 31, 2018 , we had non-cancelable open orders of $6.2 million and $8.6 million , respectively. We are required to record a liability for firm, non-cancelable and unconditional purchase commitments with contract manufacturers and suppliers for quantities in excess of our future demand forecasts.  As of June 30, 2019 , we have not incurred nor accrued any significant liabilities for such non-cancelable commitments.
Purchase Obligations
As of June 30, 2019 , we had approximately $7.3 million of non-cancelable firm purchase commitments primarily for purchases of software and services. In situations where we have received delivery of the goods or services as of June 30, 2019 under purchase orders outstanding as of the same date, such amounts are reflected in the condensed consolidated balance sheet as accounts payable or accrued liabilities, and are excluded from the  $7.3 million .
Litigation
From time to time, we are involved in claims and legal proceedings that arise in the ordinary course of business. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources, or require us to enter into agreements which may not be available on terms favorable to us or at all.

To the extent there is a reasonable possibility that a loss exceeding amounts already recognized may be incurred, and the amount of such additional loss would be material, we will either disclose the estimated additional loss or state that such an estimate cannot be made. We do not currently believe that it is reasonably possible that additional losses in connection with litigation arising in the ordinary course of business would be material.
Indemnification
Under the indemnification provisions of our standard sales related contracts, we agree to defend our customers against third-party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks, or trade secrets, and to pay judgments entered on such claims. Our exposure under these indemnification provisions is generally limited to the total amount paid by our customer under the agreement. However, certain agreements include indemnification provisions that could potentially expose us to losses in excess of the amount received under the agreement. In addition, we indemnify our officers, directors, and certain key employees for actions taken while they are or were serving in good faith in such capacities. Through June 30, 2019 , there have been no claims under any indemnification provisions.
11. Common Shares Reserved for Issuance
Under our amended and restated certificate of incorporation, we are authorized to issue 100,000,000 shares of convertible preferred stock with a par value of $0.0001 per share, no ne of which were issued and outstanding as of June 30, 2019 or December 31, 2018 .
Under our amended and restated certificate of incorporation, we are authorized to issue 1,000,000,000 shares of common stock with a par value of $0.0001 per share as of June 30, 2019 and December 31, 2018 . Each share of common stock outstanding is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by our Board of Directors, subject to the prior rights of holders of all classes of convertible preferred stock outstanding.

22


We had reserved shares of common stock for issuance as follows (in thousands):
 
As of June 30, 2019
 
As of December 31, 2018
Reserved under stock award plans
42,052

 
35,743

Convertible Senior Notes
35,442

 
35,442

Employee Stock Purchase Plan (ESPP)
4,018

 
3,015

Total
81,512

 
74,200


12. Equity Award Plans
We have operated under our 2013 Equity Incentive Plan ("2013 Plan") since our initial public offering ("IPO") in September 2013. Our 2013 Plan provides for the issuance of restricted stock and the granting of options, stock appreciation rights, performance shares, performance units and restricted stock units to our employees, officers, directors and consultants. Our 2013 Plan provides for annual increases in the number of shares available for issuance on the first day of each fiscal year. Awards granted under the 2013 Plan vest over the periods determined by our Board of Directors or compensation committee of our Board of Directors, generally four years , and stock options granted under the 2013 Plan expire no more than ten years after the date of grant. In the case of an incentive stock option granted to an employee who at the time of grant owns stock representing more than 10% of the total combined voting power of all classes of stock, the exercise price shall be no less than 110% of the fair value per share on the date of grant, and the award shall expire five years from the date of grant. For options granted to any other employee, the per share exercise price shall be no less than 100% of the fair value per share on the date of grant. In the case of non-statutory stock options and options granted to consultants, the per share exercise price shall be no less than 100% of the fair value per share on the date of grant. Stock that is purchased prior to vesting is subject to our right of repurchase at any time following termination of the participant's service for so long as such stock remains unvested. Approximatel y 12.9 million sha res and 12.2 million shares of our common stock were reserved for future grants as of June 30, 2019 and December 31, 2018 , respectively, under the 2013 Plan .
Our 2013 Employee Stock Purchase Plan ("ESPP") allows eligible employees to acquire shares of our common stock at 85% of the lower of the fair market value of our common stock on the first trading day of each offering period or on the exercise date. Our ESPP provides for annual increases in the number of shares available for issuance on the first day of each fiscal year. An aggregate of approximately 4.0 million shares and 3.0 million shares of common stock were available for future issuance as of June 30, 2019 and December 31, 2018 , respectively, under our ESPP.
From time to time, we also grant restricted common stock or restricted stock awards outside of our equity incentive plans to certain employees in connection with acquisitions.
Stock Option Activity
A summary of the activity for our stock option changes during the reporting period and a summary of information related to options outstanding and options exercisable are presented below (in thousands, except per share amounts and contractual life years):
 
Options Outstanding
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
(per share)
 
Weighted-
Average
Contractual
Life (years)
 
Aggregate
Intrinsic
Value
Balance — December 31, 2018
3,309

 
$
12.49

 
4.1
 
$
27,300

Exercised
(192
)
 
7.79

 
 
 
1,644

Cancelled
(52
)
 
30.08

 
 
 
 
Assumed in connection with acquisition
1,953

 
3.00

 
 
 
 
Balance — June 30, 2019
5,018

 
$
8.79

 
5.6
 
$
44,769

Options exercisable — June 30, 2019
3,163

 
$
12.16

 
3.5