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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form
10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission File Number 0-27084
CITRIX SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
    
Delaware  75-2275152
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer
Identification No.)
851 West Cypress Creek Road  
Fort Lauderdale
Florida
33309
(Address of principal executive offices)  (Zip Code)
Registrant’s Telephone Number, Including Area Code:
(954) 267-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $.001 per shareCTXSThe 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 filerSmaller reporting company
Emerging growth company
1


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of November 1, 2021, there were 124,722,872 shares of the registrant’s Common Stock, $.001 par value per share, outstanding.
2


CITRIX SYSTEMS, INC.
Form 10-Q
For the Quarterly Period Ended September 30, 2021
CONTENTS
  Page
Number
PART I:
Item 1.
Item 2.
Item 3.
Item 4.
PART II:
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

3


PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2021December 31, 2020
(Unaudited)(Derived from audited financial statements)
 (In thousands, except par value)
Assets
Current assets:
Cash and cash equivalents$428,569 $752,895 
Short-term investments, available-for-sale 21,096 124,113 
Accounts receivable, net of allowances of $22,788 and $25,868 at September 30, 2021 and December 31, 2020, respectively
532,002 858,009 
Inventories, net24,442 20,089 
Prepaid expenses and other current assets333,675 236,000 
Total current assets1,339,784 1,991,106 
Long-term investments, available-for-sale 14,328 14,365 
Property and equipment, net229,760 208,811 
Operating lease right-of-use assets, net191,856 187,129 
Goodwill3,455,772 1,798,408 
Other intangible assets, net816,909 81,491 
Deferred tax assets, net230,662 386,504 
Other assets257,173 222,533 
Total assets$6,536,244 $4,890,347 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable$127,161 $92,266 
Accrued expenses and other current liabilities367,630 507,185 
Income taxes payable57,783 42,760 
Current portion of deferred revenues1,464,176 1,510,216 
Total current liabilities2,016,750 2,152,427 
Long-term portion of deferred revenues314,272 392,360 
Long-term debt3,325,119 1,732,622 
Long-term income taxes payable204,782 232,086 
Operating lease liabilities184,490 195,767 
Other liabilities91,092 72,942 
Commitments and contingencies
Stockholders' equity:
Preferred stock at $.01 par value: 5,000 shares authorized, none issued and outstanding
  
Common stock at $.001 par value: 1,000,000 shares authorized; 324,825 and 321,964 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
325 322 
Additional paid-in capital6,942,847 6,608,018 
Retained earnings5,045,453 4,984,333 
Accumulated other comprehensive loss(6,862)(3,649)
11,981,763 11,589,024 
Less - common stock in treasury, at cost (200,204 and 199,443 shares at September 30, 2021 and December 31, 2020, respectively)
(11,582,024)(11,476,881)
Total stockholders' equity399,739 112,143 
Total liabilities and stockholders' equity$6,536,244 $4,890,347 
See accompanying notes.
4


CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
 (In thousands, except per share information)
Revenues:
Subscription$383,154 $262,604 $1,099,554 $774,290 
Product and license25,365 87,218 128,283 390,009 
Support and services369,926 417,348 1,138,485 1,262,745 
Total net revenues778,445 767,170 2,366,322 2,427,044 
Cost of net revenues:
Cost of subscription, support and services112,067 102,755 338,839 282,672 
Cost of product and license revenues14,360 16,238 61,235 57,554 
Amortization of product related intangible assets20,392 8,293 51,520 24,877 
Total cost of net revenues146,819 127,286 451,594 365,103 
Gross profit631,626 639,884 1,914,728 2,061,941 
Operating expenses:
Research and development145,811 130,628 436,148 406,827 
Sales, marketing and services290,240 298,659 890,444 916,801 
General and administrative91,462 81,591 280,046 262,693 
Amortization of other intangible assets19,648 701 46,615 2,097 
Total operating expenses547,161 511,579 1,653,253 1,588,418 
Income from operations84,465 128,305 261,475 473,523 
Interest income319 491 912 2,685 
Interest expense(22,809)(16,639)(70,074)(48,326)
Other (expense) income, net(2,050)3,841 17,481 7,850 
Income before income taxes59,925 115,998 209,794 435,732 
Income tax expense8,138 17,771 5,193 43,377 
Net income$51,787 $98,227 $204,601 $392,355 
Earnings per share:
Basic $0.42 $0.80 $1.65 $3.17 
Diluted$0.41 $0.78 $1.62 $3.10 
Weighted average shares outstanding:
Basic124,515 123,255 123,896 123,835 
Diluted126,321 125,863 126,140 126,407 

See accompanying notes.
5


    
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
 (In thousands)
Net income$51,787 $98,227 $204,601 $392,355 
Other comprehensive income:
Available for sale securities:
Change in net unrealized (losses) gains(1)14 19 145 
Less: reclassification adjustment for net losses (gains) included in net income 1  (20)
Net change (net of tax effect)(1)15 19 125 
Gain on pension liability  1,050 8 
Cash flow hedges:
Change in unrealized (losses) gains(554)1,733 (1,288)(394)
Less: reclassification adjustment for net (gains) losses included in net income(292)390 (2,994)1,061 
Net change (net of tax effect)(846)2,123 (4,282)667 
Other comprehensive (loss) income(847)2,138 (3,213)800 
Comprehensive income$50,940 $100,365 $201,388 $393,155 

See accompanying notes.



6


CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine Months Ended September 30,
 20212020
 (In thousands)
Operating Activities
Net income$204,601 $392,355 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other247,489 159,283 
Stock-based compensation expense249,601 228,854 
Deferred income tax benefit(5,847)(34,372)
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies13,878 (9,225)
Other non-cash items(17,485)16,196 
Total adjustments to reconcile net income to net cash provided by operating activities487,636 360,736 
Changes in operating assets and liabilities, net of the effects of acquisitions:
Accounts receivable339,969 150,347 
Inventories(5,098)(592)
Prepaid expenses and other current assets(54,686)(39,049)
Other assets(79,733)(67,139)
Income taxes, net(63,915)16,640 
Accounts payable32,912 17,973 
Accrued expenses and other current liabilities(191,484)73,737 
Deferred revenues(157,372)(103,487)
Other liabilities(45)14,252 
Total changes in operating assets and liabilities, net of the effects of acquisitions(179,452)62,682 
Net cash provided by operating activities512,785 815,773 
Investing Activities
Purchases of available-for-sale investments(19,827)(476,432)
Proceeds from maturities of available-for-sale investments122,900 166,077 
Purchases of property and equipment(63,590)(30,783)
Cash paid for acquisitions, net of cash acquired(2,022,304) 
Cash paid for licensing agreements, patents and technology(8,656)(5,581)
Other7,050 923 
Net cash used in investing activities(1,984,427)(345,796)
Financing Activities
Proceeds from issuance of common stock under stock-based compensation plan233  
Proceeds from term loan credit agreement, net of issuance costs997,947 998,846 
Repayment of term loan credit agreement(150,000)(750,000)
Proceeds from senior notes, net of issuance costs741,393 738,107 
Repayment of acquired debt(190,000) 
Stock repurchases, net (1,199,903)
Cash paid for tax withholding on vested stock awards(105,143)(104,848)
Cash paid for dividends(137,590)(129,108)
Other(5,438) 
Net cash provided by (used in) financing activities1,151,402 (446,906)
Effect of exchange rate changes on cash and cash equivalents(4,086)(8)
Change in cash and cash equivalents(324,326)23,063 
Cash and cash equivalents at beginning of period752,895 545,761 
Cash and cash equivalents at end of period$428,569 $568,824 
See accompanying notes.
7


CITRIX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Citrix Systems, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. All adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown, are of a normal recurring nature and have been reflected in the condensed consolidated financial statements and accompanying notes. The results of operations for the periods presented are not necessarily indicative of the results expected for the full year or for any future period partially because of the seasonality of the Company’s business. Historically, the Company’s revenue for the fourth quarter of any year is typically higher than the revenue for the first quarter of the subsequent year. The information included in these condensed consolidated financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report and the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
The condensed consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries in the Americas; Europe, the Middle East and Africa (“EMEA”); and Asia-Pacific and Japan (“APJ”). All significant transactions and balances between the Company and its subsidiaries have been eliminated in consolidation.
The Company's revenues are derived from sales of its Workspace solutions, App Delivery and Security products and related Support and services. The Company operates under one reportable segment. See Note 10 for more information on the Company's segment.
2. SIGNIFICANT ACCOUNTING POLICIES
Recent Accounting Pronouncements
Income Taxes
In December 2019, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update on income taxes. The new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. The Company adopted this standard effective January 1, 2021. The adoption of this standard did not have a material impact on the Company's consolidated financial position, results of operations and cash flows.
Reclassifications
Certain reclassifications of the prior years' amounts have been made to conform to the current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant estimates made by management include estimation for reserves for legal contingencies, the standalone selling price of certain performance obligations related to revenue recognition, the provision for credit losses related to accounts receivable, contract assets, and available-for-sale debt securities, the provision to reduce obsolete or excess inventory to net realizable value, the provision for estimated returns, as well as sales allowances, the assumptions used in the valuation of stock-based awards and measurement of expense related to performance stock units, the assumptions used in the discounted cash flows to mark certain of its investments to market, the valuation of the Company’s goodwill, valuation of acquired intangible assets and liabilities, net realizable value of product related and other intangible assets, the provision for income taxes, valuation allowance for deferred tax assets, uncertain tax positions, and the amortization and depreciation periods for contract acquisition costs, intangible and long-lived assets. While the Company believes that such estimates are fair when considered in conjunction with the condensed consolidated financial position and results of operations taken as a whole, the actual amounts of such items, when known, will vary from these estimates.
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Available-for-sale Investments
Short-term and long-term available-for-sale investments in debt securities as of September 30, 2021 and December 31, 2020 primarily consist of agency securities, corporate securities and government securities. Investments classified as available-for-sale debt securities are stated at fair value, with unrealized gains and losses, net of taxes, reported in Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. The Company classifies its available-for-sale investments as current and non-current based on their actual remaining time to maturity. The Company does not recognize unrealized changes in the fair value of its available-for-sale debt securities in income unless a security is deemed to be impaired.
The allowance for credit losses on the Company's investments in available-for-sale debt securities is determined using a quantitative discounted cash flow analysis if impairment triggers exist after a qualitative screen is completed. Impairment on available-for-sale debt securities is determined on an individual security basis and the security is subject to impairment when its fair value declines below its amortized cost basis. If the fair value is less than the amortized cost basis, management must then determine whether it intends to sell the security or whether it is more likely than not that it will be required to sell the security before it recovers its value. If management intends to sell the security or will more-likely-than-not be required to sell the impaired security before it recovers its value, a credit loss is recorded to Other (expense) income, net in the accompanying condensed consolidated statements of income. If management does not intend to sell the security, nor will it more-likely-than-not be required to sell the security before the security recovers its value, management must then determine whether the loss is due to credit loss or other factors. For impairment indicators due to credit loss factors, management establishes an allowance for credit losses with a charge to Other (expense) income, net. For impairment indicators due to other factors, management records the loss with a charge to Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets.
See Note 7 for additional information regarding the Company’s investments.
Fair Value Measurements
The authoritative guidance defines fair value as an exit price, representing the amount that would either be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Available-for-sale securities included in Level 2 are valued utilizing inputs obtained from an independent pricing service (the “Service”) which uses quoted market prices for identical or comparable instruments rather than direct observations of quoted prices in active markets. The Service applies a four-level hierarchical pricing methodology to all of the Company’s fixed income securities based on the circumstances. The hierarchy starts with the highest priority pricing source, then subsequently uses inputs obtained from other third-party sources and large custodial institutions. The Service’s providers utilize a variety of inputs to determine their quoted prices. These inputs may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. Substantially all of the Company’s available-for-sale investments are valued utilizing inputs obtained from the Service and accordingly are categorized as Level 2. The Company periodically independently assesses the pricing obtained from the Service and historically has not adjusted the Service's pricing as a result of this assessment. Available-for-sale securities are included in Level 3 when relevant observable inputs for a security are not available.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and liabilities within the fair value hierarchy. In certain instances, the inputs used to measure fair value may meet the definition of more than one level of the fair value hierarchy. The input with the lowest level priority is used to determine the applicable level in the fair value hierarchy. See Note 7 for additional information regarding the Company’s fair value measurements.
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Foreign Currency
The functional currency for all of the Company’s wholly-owned foreign subsidiaries is the U.S. dollar. Monetary assets and liabilities of such subsidiaries are remeasured into U.S. dollars at exchange rates in effect at the balance sheet date, and revenues and expenses are remeasured at average rates prevailing during the year. Foreign currency transaction gains and losses are the result of exchange rate changes on transactions denominated in currencies other than the functional currency. The remeasurement of those foreign currency transactions is included in determining net income or loss for the period of exchange.
Accounting for Stock-Based Compensation Plans
The Company has various stock-based compensation plans for its employees and outside directors and accounts for stock-based compensation arrangements in accordance with the authoritative guidance, which requires the Company to measure and record compensation expense in its condensed consolidated financial statements using a fair value method. See Note 8 for further information regarding the Company’s stock-based compensation plans.
3. REVENUE
The following is a description of the principal activities from which the Company generates revenue.
Subscription
Subscription revenues primarily consist of cloud-hosted offerings, which provide customers a right to access one or more of the Company’s cloud-hosted subscription offerings, with routine customer support, as well as revenues from the Citrix Service Provider (“CSP”) program, on-premise subscription software licenses, and hybrid subscription offerings. The CSP program provides subscription-based services in which the CSP partners host software services to their end users.
Product and license
Product and license revenues are primarily derived from perpetual offerings related to the Company’s Workspace solutions and App Delivery and Security products.
Support and services
Support and services revenues include license updates, maintenance and professional services which are primarily related to the Company's perpetual offerings. License updates and maintenance revenues are primarily comprised of software and hardware maintenance, when and if-available updates and technical support. Services revenues are comprised of fees from consulting services primarily related to the implementation of the Company’s products and fees from product training and certification.
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The Company’s typical performance obligations include the following:
Performance Obligation
When Performance Obligation
is Typically Satisfied
Subscription
Cloud-hosted offeringsOver the contract term, beginning on the date that service is made available to the customer (over time)
CSPAs the usage occurs (over time)
On-premise subscription software licensesWhen software activation keys have been made available for download (point in time)
On-premise subscription license updates and maintenanceRatably over the course of the service term (over time)
Product and license
Software licensesWhen software activation keys have been made available for download (point in time)
HardwareWhen control of the product passes to the customer; typically upon shipment (point in time)
Support and services
License updates and maintenance for perpetual software licensesRatably over the course of the service term (over time)
Professional servicesAs 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 September 30,Nine Months Ended September 30,
2021202020212020
(In thousands)
Products and services transferred at a point in time$86,366 $155,087 $371,000 $630,193 
Products and services transferred over time692,079 612,083 1,995,322 1,796,851 
Total net revenues$778,445 $767,170 $2,366,322 $2,427,044 
Contract balances
The Company's short-term and long-term contract assets, net of allowance for credit losses, were $51.9 million and $44.8 million, respectively, as of September 30, 2021, and $37.3 million and $41.7 million, respectively, as of December 31, 2020, and are included in Prepaid expenses and other current assets and Other assets, respectively, in the accompanying condensed consolidated balance sheets. The Current portion of deferred revenues and the Long-term portion of deferred revenues were $1.46 billion and $314.3 million, respectively, as of September 30, 2021 and $1.51 billion and $392.4 million, respectively, as of December 31, 2020. The difference in the opening and closing balances of the Company’s contract assets and liabilities primarily results from the timing difference between the Company’s performance, and the Company's right to consideration or the customer’s payment. During the three and nine months ended September 30, 2021, the Company recognized $553.7 million and $1.26 billion, respectively, of revenue that was included in the deferred revenue balance as of June 30, 2021 and December 31, 2020, respectively.
The Company performs its obligations under a contract with a customer by transferring solutions and services in exchange for consideration from the customer. Accounts receivable are recorded when the right to consideration becomes unconditional. The timing of the Company’s performance differs from the timing of the Company's right to consideration or the customer’s payment, which results in the recognition of a contract asset or a contract liability. The Company recognizes a contract asset when the Company transfers products or services to a customer and the right to consideration is conditional on something other than the passage of time. The Company recognizes a contract liability when it has received consideration or an amount of consideration is due from the customer and the Company has a future obligation to transfer products or services. The Company had no material asset impairment charges related to contract assets for either the three and nine months ended September 30, 2021 and 2020, respectively. 
For the Company’s perpetual offerings, the timing of payment is typically upfront. Therefore, deferred revenue is created when a contract includes performance obligations such as license updates and maintenance or certain professional services that are satisfied over time. For subscription contracts, the timing of payment is typically in advance of services, and deferred revenue is amortized as these services are provided over time.
For contracts that have an original duration of one year or less, the Company applies a practical expedient to determine whether a significant financing component exists and does not consider the effects of the time value of money. For multi-year contracts, the Company bills annually.
Transaction price allocated to the remaining performance obligations
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period (in thousands):
<1-3 years3-5 years5 years or moreTotal
Subscription$1,838,358 $62,940 $1,445 $1,902,743 
Support and services1,061,462 23,104 1,273 1,085,839 
Total net revenues$2,899,820 $86,044 $2,718 $2,988,582 
Contract acquisition costs
The Company is required to capitalize certain contract acquisition costs consisting primarily of commissions paid and related payroll taxes when contracts are signed. The asset recognized from capitalized incremental and recoverable acquisition costs is amortized over the expected period of benefit on a basis consistent with the pattern of transfer of the products or services to which the asset relates. The Company elects to apply a practical expedient to expense contract acquisition costs as incurred where the pattern of transfer is one year or less.
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The Company’s typical contracts include performance obligations related to subscription, product and licenses, and support and services. Contract acquisition costs are allocated to performance obligations using a portfolio approach. The Company assesses its sales compensation plans at least annually to evaluate whether contract acquisition costs for renewals and extensions are commensurate with those related to initial contracts. If concluded to be commensurate, the contract acquisition costs are amortized over the contractual term on a basis consistent with the pattern of transfer of the products or services to which the asset relates. If concluded not to be commensurate, the contract acquisition costs are amortized over the greater of the contractual term or estimated customer life on a basis consistent with the pattern of transfer of the products or services to which the asset relates. The Company estimates an average customer life of three years to five years, which it believes is appropriate based on consideration of the historical average customer life and the estimated useful life of the underlying product and license sold as part of the transaction.
For the three and nine months ended September 30, 2021, the Company recorded amortization of capitalized contract acquisition costs of $19.3 million and $56.5 million, respectively, and for the three and nine months ended September 30, 2020, the Company recorded amortization of capitalized contract acquisition costs of $14.7 million and $41.6 million, respectively, which are included in Sales, marketing and services expense in the accompanying condensed consolidated statements of income. The Company's short-term and long-term contract acquisition costs were $76.0 million and $131.6 million, respectively, as of September 30, 2021, and $71.5 million and $124.7 million, respectively, as of December 31, 2020, and are included in Prepaid expenses and other current assets and Other assets, respectively, in the accompanying condensed consolidated balance sheets. There were no impairment losses in relation to costs capitalized during the three and nine months ended September 30, 2021 and 2020, respectively.
4. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted-average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise or settlement of stock awards and shares issuable under the employee stock purchase plan (calculated using the treasury stock method) during the period they were outstanding.
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share information):
Three Months EndedNine Months Ended
 September 30,September 30,
 2021202020212020
Numerator:
Net income$51,787 $98,227 $204,601 $392,355 
Denominator:
Denominator for basic earnings per share - weighted-average shares outstanding124,515 123,255 123,896 123,835 
Effect of dilutive employee stock awards1,806 2,608 2,244 2,572 
Denominator for diluted earnings per share - weighted-average shares outstanding126,321 125,863 126,140 126,407 
Basic earnings per share$0.42 $0.80 $1.65 $3.17 
Diluted earnings per share$0.41 $0.78 $1.62 $3.10 
For the three and nine months ended September 30, 2021, anti-dilutive stock-based awards excluded from the calculations of diluted earnings per share were 3.3 million shares and 1.7 million shares, respectively. For the three and nine months ended September 30, 2020, stock-based awards excluded from the calculations of diluted earnings per share were not material.
5. CREDIT LOSSES
The Company is exposed to credit losses primarily through its accounts receivable, investments in available-for-sale debt securities, and contract assets. See Note 3 for additional information related to the Company's contract assets.
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Accounts receivable, net
The Company's accounts receivable consist of the following (in thousands):
September 30, 2021
Accounts receivable, gross$554,790 
Less: allowance for returns(10,851)
Less: allowance for credit losses(11,937)
Accounts receivable, net$532,002 
The allowance for credit losses on accounts receivable is determined using a combination of specific reserves for accounts that are deemed to exhibit credit loss indicators and general reserves that are judgmentally determined using loss rates based on historical write-offs by geography and customer accounts subject to credit check versus non-credit check status and consideration of recent forecasted information, including underlying economic expectations. The credit loss reserves are updated quarterly for most recent write-offs and collections information and underlying economic expectations. The Company will compare its current estimate of expected credit losses with the estimate of credit losses from the prior period and will report in net income the amount necessary to adjust the allowance for current expected credit losses. Credit loss expense is included within General and administrative expenses in the accompanying condensed consolidated statements of income.
The activity in the Company's allowance for credit losses for the nine months ended September 30, 2021 is summarized as follows (in thousands):
Total
Balance of allowance for credit losses at January 1, 2021$15,419 
Current period provision (reversal) for expected losses(1,447)
Write-offs charged against allowance(3,030)
Recoveries of any amounts previously written off110 
Other (1)
885 
Balance of allowance for credit losses at September 30, 2021$11,937 
(1) Includes amounts established in connection with acquisitions.
As of September 30, 2021, one distributor accounted for 14% of the Company's total gross accounts receivable.
Available-for-sale Investments
The Company did not have any credit loss expense recorded related to available-for-sale debt securities for the three and nine months ended September 30, 2021 and 2020, respectively.
The Company has available-for-sale debt securities that have fair values below amortized cost; however, the Company does not consider a credit allowance necessary as (i) the Company does not intend to sell the securities, (ii) it is not more-likely-than-not that the Company will be required to sell the investments before recovery of the amortized cost basis, and (iii) the unrealized losses are due to market factors rather than credit loss factors. See Note 7 for more information on available-for-sale debt securities.
6. ACQUISITIONS
2021 Business Combination
On February 26, 2021 (the “Closing Date”), the Company completed the acquisition of Wrangler Topco, LLC (“Wrangler”), the parent entity of Wrike, Inc. (“Wrike”), a leader in the SaaS collaborative work management space, for approximately $2.07 billion (the “Purchase Consideration”). The Purchase Consideration consists of a base purchase price of $2.25 billion and is subject to certain adjustments as provided for under the related Agreement and Plan of Merger dated January 16, 2021 (the “Merger Agreement”). The Company expects that the addition of Wrike’s cloud-delivered capabilities will expand its collaborative work management capabilities. Under the Merger Agreement, the Company acquired all of the issued and outstanding equity securities of Wrangler.
On the Closing Date, $35.0 million of the Purchase Consideration was deposited into a third-party escrow fund, to be held for up to one year following the Closing Date, to fund (i) potential payment obligations of Wrangler equityholders with respect
14


to post-closing adjustments to the Purchase Consideration and (ii) potential post-closing indemnification obligations of Wrangler equityholders, in each case in accordance with the terms of the Merger Agreement.
Under the terms of the Merger Agreement, certain unvested stock options held by Wrike employees were assumed by the Company and converted into options to purchase 526,113 shares of the Company's common stock that were valued at $54.3 million using the Black-Scholes option-pricing model. The portion of the fair value of the assumed stock options associated with pre-combination service of Wrike employees was valued at $28.9 million and represented a component of the Purchase Consideration. The remaining fair value of $25.4 million will be recognized as post-combination stock-based compensation expense over the service period. Of these assumed awards, 180,003 options continued with the same monthly vesting conditions under which they were originally granted. The majority of the remaining assumed options were reset to primarily cliff vest on December 31, 2021 or annually over two years. See Note 8 for detailed information on the assumed stock options.
The Merger Agreement contains representations, warranties and covenants believed to be customary for a transaction of this nature, including covenants as to indemnification for breaches of certain representations, warranties and covenants, subject to certain exclusions and caps. The Company has obtained a representation and warranty insurance policy under which it may seek coverage for breaches of certain of Wrangler’s representations, warranties, and covenants in the Merger Agreement.
The Company incurred $19.4 million of expenses related to the Wrike acquisition, of which $0.3 million and $16.1 million were expensed during the three and nine months ended September 30, 2021, respectively, and are included in General and administrative expense in the accompanying condensed consolidated statements of income.
In February 2021, the Company entered into a three-year term loan credit agreement providing for a $1.00 billion senior unsecured term loan (the “2021 Term Loan”) and issued $750.0 million of unsecured senior notes due March 1, 2026 (the “2026 Notes”). The proceeds of the 2021 Term Loan and the 2026 Notes were used to (i) fund a portion of the purchase price of the acquisition and (ii) to pay fees and expenses incurred in connection with the acquisition. The Company incurred $9.1 million of issuance costs that were netted against Long-term debt in the accompanying condensed consolidated balance sheets. See Note 11 for detailed information on the debt financing.
The Company has included the effect of the acquisition in its results of operations prospectively from the date of acquisition. Net revenues of Wrike included in the Company’s condensed consolidated statements of income for the three months ended September 30, 2021 and from the Closing Date through September 30, 2021 were $33.8 million and $68.7 million, respectively. Loss from operations of Wrike included in the Company's condensed consolidated statements of income for the three months ended September 30, 2021 and from the Closing Date through September 30, 2021 were $57.6 million and $134.5 million, respectively, primarily as a result of amortization of intangible assets acquired and stock-based compensation associated with the assumed options and the 2021 Inducement Plan. See Note 8 for detailed information on the 2021 Inducement Plan.
Purchase Accounting for Wrike
The purchase price for Wrike was allocated to the acquired net tangible and intangible assets based on estimated fair values as of the date of acquisition. The allocation of the total purchase price is summarized below (in thousands):
Wrike
Purchase Price AllocationAsset Life
Current assets$32,008 
Intangible assets824,900 
2 - 7 years
Goodwill1,657,364 Indefinite
Other assets17,681 
Assets acquired2,531,953 
Current liabilities assumed85,368 
Long-term liabilities assumed202,511 
Deferred tax liabilities, non-current177,382 
Net assets acquired$2,066,692 
The fair values of Wrike's intangible assets were determined using the income approach with significant inputs that are not observable in the market. Key assumptions include, but are not limited to, the expected future cash flows, the timing of the expected future cash flows, royalty rates, customer churn, technology obsolescence and the discount rates consistent with the level of risk.
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Current assets acquired in connection with the acquisition consisted primarily of cash, accounts receivable and other short term assets. Current liabilities assumed in connection with the acquisition consisted primarily of the current portion of deferred revenues, accounts payable and other accrued expenses, such as transaction expenses. The accrued transaction expenses were paid in full subsequent to the acquisition date. Long-term liabilities assumed in connection with the acquisition consisted of the long-term portion of deferred revenue, other long-term liabilities, and long-term debt, which was paid in full subsequent to the acquisition date. The Company continues to evaluate certain assets and liabilities, which encompass primarily deferred taxes related to the Wrike acquisition. Additional information, which existed as of the acquisition date but was at that time unknown to the Company, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date.
The Company estimated its obligation related to deferred revenue using the cost build-up approach. The cost build-up approach determines fair value by estimating the costs relating to supporting the obligation plus an assumed profit. The sum of the costs and assumed profit approximates the amount that the Company would be required to pay a third party to assume the obligation. The estimated costs to fulfill the obligation were based on the near-term projected cost structure for various revenue contracts, resulting in an adjustment to reduce Wrike's carrying value of deferred revenue. The acquired deferred revenue of $33.2 million represents the Company's estimate of the fair value of the contractual obligations assumed.
The goodwill related to the acquisition is not deductible for tax purposes and is comprised primarily of expected synergies from combining operations and other intangible assets that do not qualify for separate recognition.
Identifiable intangible assets acquired in connection with the Wrike acquisition (in thousands) and the weighted-average lives are as follows:
WrikeAsset Life
Core and product technologies$347,900 
6 years
Customer relationships446,400 
7 years
Backlog13,500 
2 years
Trade names17,100 
3 years
Total$824,900 
The following unaudited pro-forma information combines the consolidated results of the operations of the Company and Wrike as if the acquisition had occurred on January 1, 2020, the first day of the Company's fiscal year 2020 (in thousands, except per share data):
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Revenues$778,445 $795,767 $2,388,576 $2,498,441 
Income from operations$84,465 $83,436 $232,796 $315,863 
Net income$51,787 $54,622 $176,713 $240,743 
Earnings per share - basic$0.42 $0.44 $1.43 $1.94 
Earnings per share - diluted$0.41 $0.43 $1.40 $1.90 
7. INVESTMENTS AND FAIR VALUE MEASUREMENTS
Investments
Available-for-sale Investments
The Company's short-term available-for-sale debt investments are measured to fair value on a recurring basis. Unrealized gains and losses related to the Company’s short-term investments are recorded in Other comprehensive loss and are generally due to interest rate fluctuations. The securities that are in an unrealized loss position are reviewed on an individual basis in order to evaluate if all or a portion of the unrealized loss is a result of a credit loss. For impairment indicators due to credit loss factors, the Company establishes an allowance for credit losses with a charge to current period net income. See Note 5 for additional information regarding the credit losses for available-for-sale investments. As of September 30, 2021 and December 31, 2020, unrealized gains and losses from the Company’s available-for-sale investments were not material and the amortized cost approximated their fair value. For the three and nine months ended September 30, 2021 and 2020, realized gains and losses on available-for-sale investments were not material.
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The average remaining maturities of the Company’s short-term and long-term available-for-sale investments at September 30, 2021 were approximately three months and two years, respectively.
For the three and nine months ended September 30, 2021 and 2020, the Company did not receive any proceeds from the sales of available-for-sale investments.
Equity Securities Accounted for at Net Asset Value
The Company held equity interests in certain private equity funds of $19.2 million and $11.3 million as of September 30, 2021 and December 31, 2020, respectively, which are accounted for under the net asset value practical expedient. These investments are included in Other assets in the accompanying condensed consolidated balance sheets. The net asset value of these investments is determined using quarterly capital statements from the funds, which are based on the Company’s contributions to the funds, allocation of profit and loss and changes in fair value of the underlying fund investments. These private equity funds focus on making venture capital investments, principally by investing in equity securities of early and late stage privately-held corporations. The funds’ general partner shall determine the amount, timing and form (whether cash or in kind) of all distributions made by the funds. The Company may only transfer its investments in private equity fund interests subject to the general partner’s written consent and cannot trade its fund interests in established securities markets, secondary markets or equivalents thereof. The Company had no material unfunded commitments as of September 30, 2021.
Equity Securities without Readily Determinable Fair Values
The Company held direct investments in privately-held companies of $24.4 million and $22.5 million as of September 30, 2021 and December 31, 2020, respectively, which are accounted for at cost, less impairment plus or minus adjustments resulting from observable price changes in orderly transactions for an identical or a similar investment of the same issuer. These investments are included in Other assets in the accompanying condensed consolidated balance sheets. The Company periodically reviews these investments for impairment and observable price changes on a quarterly basis, and adjusts the carrying value accordingly.
17


Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of September 30, 2021Quoted
Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
 (In thousands)
Assets:
Cash and cash equivalents:
Cash$291,396 $291,396 $ $ 
Money market funds105,259 105,259   
Corporate securities11,016  11,016  
Government securities20,898  20,898  
Available-for-sale securities:
Corporate securities35,424  34,924 500 
Prepaid expenses and other current assets:
Foreign currency derivatives12,075  12,075  
Total assets$476,068 $396,655 $78,913 $500 
Accrued expenses and other current liabilities:
Foreign currency derivatives1,469  1,469  
Total liabilities$1,469 $ $1,469 $ 
As of December 31, 2020Quoted
Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
 (In thousands)
Assets:
Cash and cash equivalents:
Cash$375,874 $375,874 $ $ 
Money market funds23,089 23,089   
Corporate securities166,436  166,436  
Government securities187,496  187,496  
Available-for-sale securities:
Agency securities3,300  3,300  
Corporate securities70,684  70,184 500 
Government securities64,494  64,494  
Prepaid expenses and other current assets:
Foreign currency derivatives4,012  4,012  
Total assets$895,385 $398,963 $495,922 $500 
Accrued expenses and other current liabilities:
Foreign currency derivatives1,447  1,447  
Total liabilities$1,447 $ $1,447 $ 
The Company’s investment policy is designed to limit exposure to any one issuer depending on credit quality. The Company’s fixed income available-for-sale security portfolio generally consists of investment grade securities from diverse issuers with a minimum credit rating of A-/A3 and a weighted-average credit rating of AA-/Aa3. The Company values these securities based on pricing from the Service, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value, and accordingly, the Company classifies the majority of its fixed income available-for-sale securities as Level 2.
18


The Company measures its cash flow hedges, which are classified as Prepaid expenses and other current assets and Accrued expenses and other current liabilities, at fair value based on indicative prices in active markets (Level 2 inputs). See Note 12 for further information regarding the Company's derivatives.
Additional Disclosures Regarding Fair Value Measureme