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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 

FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019

or
o
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)
 

 
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  x 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  x    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
x
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   x
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
The number of shares of the registrant's common stock outstanding as of April 30, 2019 was 203,204,338.


Table of Contents
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)
 
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
406,057

 
$
409,829

Short-term investments
723,972

 
706,691

Accounts receivable, net of allowance for doubtful accounts of $2,333 and $2,525 at March 31, 2019 and December 31, 2018, respectively
111,071

 
157,817

Inventories
6,635

 
6,548

Prepaid expenses and other current assets
96,977

 
100,295

Total current assets
1,344,712

 
1,381,180

Property and equipment, net
91,898

 
89,163

Operating lease right-of-use assets, net
59,108

 

Goodwill
999,804

 
999,804

Intangible assets, net
131,036

 
143,162

Deposits and other long-term assets
80,984

 
82,769

TOTAL ASSETS
$
2,707,542

 
$
2,696,078

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY

 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
31,113

 
$
26,944

Operating lease liabilities, current
15,387

 

Accrued and other current liabilities
26,497

 
29,797

Accrued compensation
56,196

 
63,808

Deferred revenue, current
541,563

 
556,815

Total current liabilities
670,756


677,364

Convertible senior notes, net
974,355

 
962,577

Deferred revenue, non-current
364,627

 
378,013

Operating lease liabilities, non-current
74,370

 

Other long-term liabilities
3,993

 
27,730

Total liabilities
2,088,101


2,045,684

Commitments and contingencies (NOTE 10)

 

Stockholders' equity:
 
 
 
Common stock, par value of $0.0001 per share; 1,000,000 shares authorized, 203,167 shares and 199,612 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
20

 
20

Additional paid-in capital
3,194,484

 
3,152,159

Treasury stock, at cost; 3,333 shares as of March 31, 2019 and December 31, 2018
(150,000
)
 
(150,000
)
Accumulated other comprehensive loss
(202
)
 
(2,299
)
Accumulated deficit
(2,424,861
)
 
(2,349,486
)
Total stockholders’ equity
619,441


650,394

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,707,542


$
2,696,078



1


See accompanying notes to condensed consolidated financial statements.


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

 
Three Months Ended March 31,
 
2019
 
2018
Revenue:
 
 
 
Product, subscription and support
$
169,903

 
$
165,473

Professional services
40,641

 
33,597

Total revenue
210,544


199,070

Cost of revenue:
 
 
 
Product, subscription and support
48,468

 
47,429

Professional services
23,100

 
20,500

Total cost of revenue
71,568


67,929

Total gross profit
138,976


131,141

Operating expenses:
 
 
 
Research and development
67,395

 
66,196

Sales and marketing
103,896

 
97,251

General and administrative
27,376

 
28,418

Restructuring charges
3,799

 

Total operating expenses
202,466


191,865

Operating loss
(63,490
)

(60,724
)
Interest income
5,848

 
2,940

Interest expense
(15,263
)
 
(12,717
)
Other expense, net
(288
)
 
(276
)
Loss before income taxes
(73,193
)

(70,777
)
Provision for income taxes
2,182

 
1,053

Net loss attributable to common stockholders
$
(75,375
)

$
(71,830
)
Net loss per share attributable to common stockholders, basic and diluted
$
(0.38
)
 
$
(0.39
)
Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted
197,819

 
186,456


See accompanying notes to condensed consolidated financial statements.

3

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

 
Three Months Ended March 31,
 
2019
 
2018
Net loss
$
(75,375
)
 
$
(71,830
)
Change in net unrealized gain (loss) on available-for-sale investments, net of tax
2,097

 
(1,595
)
Comprehensive loss
$
(73,278
)

$
(73,425
)

See accompanying notes to condensed consolidated financial statements.

4

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

 
Three Months Ended March 31,
 
2019
 
2018
Total stockholders' equity, beginning balances
$
650,394

 
$
632,216

 
 
 
 
Common stock and additional paid-in-capital:

 
 
Balance, beginning of period
3,152,179

 
2,891,460

Issuance of common stock for equity awards, net of tax withholdings
843

 
3,110

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

 
15,386

Stock-based compensation
41,482

 
42,148

Balance, end of period
3,194,504

 
2,952,104

 
 
 
 
Treasury Stock:
 
 
 
Balance, beginning of period
(150,000
)
 
(150,000
)
Balance, end of period
(150,000
)
 
(150,000
)
 
 
 
 
Accumulated Other Comprehensive Loss:
 
 
 
Balance, beginning of period
(2,299
)
 
(2,881
)
Unrealized gain (loss) on investments, net of tax
2,097

 
(1,595
)
Balance, end of period
(202
)
 
(4,476
)
 
 
 
 
Accumulated Deficit:
 
 
 
Balance, beginning of period
(2,349,486
)
 
(2,106,363
)
Net loss
(75,375
)
 
(71,830
)
Balance, end of period
(2,424,861
)
 
(2,178,193
)
 
 
 
 
Total stockholders' equity, ending balances
$
619,441

 
$
619,435


See accompanying notes to condensed consolidated financial statements

5

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

 
Three Months Ended March 31,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(75,375
)
 
$
(71,830
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
23,833

 
22,389

Stock-based compensation
40,323

 
42,148

Non-cash interest expense related to convertible senior notes
11,778

 
9,694

Deferred income taxes
475

 
(60
)
Other
1,101

 
1,342

Changes in operating assets and liabilities, net of business acquisitions:
 
 
 
Accounts receivable
46,479

 
42,986

Inventories
(395
)
 
(1,373
)
Prepaid expenses and other assets
6,975

 
(6,330
)
Accounts payable
6,802

 
(5,354
)
Accrued liabilities
758

 
4,254

Accrued compensation
(7,611
)
 
(5,568
)
Deferred revenue
(28,639
)
 
(23,965
)
Other long-term liabilities
(2,051
)
 
854

Net cash provided by operating activities
24,453


9,187

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment and demonstration units
(13,503
)
 
(14,487
)
Purchases of short-term investments
(156,533
)
 
(109,469
)
Proceeds from maturities of short-term investments
141,004

 
104,711

Business acquisitions, net of cash acquired

 
(5,977
)
Lease deposits
(36
)
 
(116
)
Net cash used in investing activities
(29,068
)

(25,338
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from exercise of equity awards
843

 
3,110

Net cash provided by financing activities
843


3,110

Net change in cash and cash equivalents
(3,772
)
 
(13,041
)
Cash and cash equivalents, beginning of period
409,829

 
180,891

Cash and cash equivalents, end of period
$
406,057


$
167,850

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid for income taxes
$
1,399

 
$
646

Cash paid for interest
$

 
$

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

 
$
15,386

Purchases of property and equipment and demonstration units in accounts payable and accrued liabilities
$
9,161

 
$
13,773


See accompanying notes to condensed consolidated financial statements.

6

Table of Contents
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 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 months ended March 31, 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 months ended March 31, 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 does 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 March 31, 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
$
35,997

 
$

 
$

 
$
35,997

 
$
25,748

 
$

 
$

 
$
25,748

Total cash equivalents
35,997

 

 

 
35,997

 
25,748

 

 

 
25,748

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate notes and bonds

 
450,070

 

 
450,070

 

 
448,323

 

 
448,323

U.S. Treasuries

 
98,437

 

 
98,437

 

 
112,700

 

 
112,700

U.S. Government agencies

 
175,465

 

 
175,465

 

 
145,668

 

 
145,668

Total short-term investments

 
723,972

 

 
723,972

 

 
706,691

 

 
706,691

Total assets measured at fair value
$
35,997

 
$
723,972

 
$

 
$
759,969

 
$
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 three months ended March 31, 2019.
The estimated fair value of the Convertible Senior Notes as of March 31, 2019 and December 31, 2018 was determined to be $1.2 billion and $1.1 billion, respectively. 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 March 31, 2019
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Corporate notes and bonds
$
449,764

 
$
801

 
$
(495
)
 
$
450,070

U.S. Treasuries
98,478

 
24

 
(65
)
 
98,437

U.S. Government agencies
175,709

 
8

 
(252
)
 
175,465

Total
$
723,951


$
833


$
(812
)

$
723,972


 
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 March 31, 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
$
34,326

 
$
(35
)
 
$
229,997

 
$
(460
)
 
$
264,323

 
$
(495
)
U.S. Treasuries
52,433

 
(65
)
 

 

 
52,433

 
(65
)
U.S. Government agencies
75,920

 
(74
)
 
85,513

 
(178
)
 
161,433

 
(252
)
Total
$
162,679


$
(174
)

$
315,510


$
(638
)

$
478,189


$
(812
)

 
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 March 31, 2019 and December 31, 2018.
The following table summarizes the contractual maturities of our investments at March 31, 2019 (in thousands):
 
Amortized Cost
 
Fair Value
Due within one year
$
423,642

 
$
423,064

Due within one to three years
300,309

 
300,908

Total
$
723,951

 
$
723,972


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 March 31, 2019, we held an 11.1% 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 $0.1 million as of March 31, 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 March 31, 2019
 
As of December 31, 2018
Computer equipment and software
$
180,205

 
$
171,078

Leasehold improvements
64,078

 
62,832

Furniture and fixtures
14,305

 
13,835

Machinery and equipment
447

 
447

Total property and equipment
259,035

 
248,192

Less: accumulated depreciation
(167,137
)
 
(159,029
)
Total property and equipment, net
$
91,898

 
$
89,163


Depreciation and amortization expense related to property, equipment and demonstration units during the three months ended March 31, 2019 and 2018 was $9.2 million and $9.4 million, respectively.
During the three months ended March 31, 2019 and 2018, we capitalized $5.5 million and $4.9 million, respectively, of software development costs primarily related to our cloud subscription offerings. Amortization expense related to capitalized software development costs during the three months ended March 31, 2019 and 2018 were $3.5 million and $1.9 million, respectively.
5. Business Combinations
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
There were no other changes in the carrying amount of goodwill for the three months ended March 31, 2019.
Purchased intangible assets consisted of the following (in thousands):
 
As of March 31, 2019
 
As of December 31, 2018
Developed technology
$
110,003

 
$
110,003

Content
158,700

 
158,700

Customer relationships
111,090

 
111,090

Contract backlog
12,500

 
12,500

Trade names
15,560

 
15,560

Non-competition agreements
1,400

 
1,400

Total intangible assets
409,253

 
409,253

Less: accumulated amortization
(278,217
)
 
(266,091
)
Total net intangible assets
$
131,036

 
$
143,162


Amortization expense of intangible assets during the three months ended March 31, 2019 and 2018 was $12.1 million and $12.6 million, respectively.

12


The expected future annual amortization expense of intangible assets as of March 31, 2019 is presented below (in thousands):
Years Ending December 31,
Amount
2019 (remaining nine months)
$
36,321

2020
33,897

2021
29,337

2022
18,209

2023
13,105

2024
80

 and thereafter
87

Total
$
131,036


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 three months ended March 31, 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
(2,073
)
 

 
(2,073
)
Other adjustments

 
(1,150
)
 
(1,150
)
Balance, March 31, 2019
$
214

 
$
650

 
$
864


The total provision for restructuring charges during the three months ended March 31, 2019 of $3.8 million includes $2.9 million of cash charges shown above, as well as non-cash charges of $0.9 million related to right-of-use asset and fixed asset write-offs.
Other adjustments represent a reclassification of relief of unused benefits to reduce ROU assets as part of the transition to ASC 842.
The remainder of the restructuring balance of $0.9 million at March 31, 2019 is composed of $0.2 million of severance payments which we expect to pay during the second quarter of 2019, and $0.7 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.
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 March 31, 2019
Operating lease costs
$
4,762

Short-term lease costs
937

Sublease income
(272
)
Total net lease costs
$
5,427



13


Supplemental balance sheet information related to leases is as follows (in thousands, except lease term and discount rate):
 
Three Months Ended March 31, 2019
Operating leases:
 
Operating lease right-of-use assets, net
$
59,108

 
 
Operating lease liabilities, current
$
15,387

Operating lease liabilities, non-current
74,370

Total operating lease liabilities
$
89,757

 
 
Weighted average remaining lease term (in years):
7.8

Weighted average discount rate:
6.9
%

Supplemental cash flow and other information related to leases is as follows (in thousands):
 
Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from Operating leases
$
2,585

 
 
Lease liabilities arising from obtaining right-of-use assets:
 
Operating leases
$
2,575


Undiscounted cash flows of operating lease liabilities are as follows (in thousands):
Years Ending December 31, 
Amount 
2019 (remaining nine months)
$
11,873

2020
16,489

2021
15,592

2022
13,324

2023
12,502

2024
11,220

2025 and thereafter
37,679

Total lease payments
118,679

Less: Imputed interest
(28,922
)
Total lease obligation
89,757

Less: Current lease obligations
(15,387
)
Long-term lease obligations
$
74,370


As of March 31, 2019, we have additional operating lease commitments of $4.8 million for an office lease that has not yet commenced. The operating lease commitments will commence in the second quarter of 2019 with a lease term of one to five 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



14


8. Deferred Revenue
Deferred revenue consisted of the following (in thousands):
 
As of March 31, 2019
 
As of December 31, 2018
Product, subscription and support, current
$
478,381

 
$
492,109

Professional services, current
63,182

 
64,706

Total deferred revenue, current
541,563

 
556,815

Product, subscription and support, non-current
363,449

 
375,915

Professional services, non-current
1,178

 
2,098

Total deferred revenue, non-current
364,627

 
378,013

Total deferred revenue
$
906,190

 
$
934,828


Changes in the balance of deferred revenue for the periods presented are as follows (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
 
 
 
 
Deferred revenue, beginning of period
$
934,828

 
$
910,100

Billings for the period
181,906

 
175,106

Revenue recognized
(210,544
)
 
(199,070
)
Deferred revenue, end of period
$
906,190

 
$
886,136


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 March 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $906.2 million in deferred revenue and $18.8 million in backlog.
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%
 
12%
 
3%
Backlog
100%
 
49%
 
29%
 
18%
 
4%



15


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 March 31, 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 $16.79 per share on March 29, 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.

16


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 March 31, 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
(134,555
)
 
(140,239
)
Net carrying amount
$
465,445


$
459,761

 
 
 
 
Equity component, net of issuance costs
$
138,064

 
$
138,064


The unamortized issuance costs as of March 31, 2019 will be amortized over a weighted-average remaining period of approximately 5.2 years.
Interest expense for the three months ended March 31, 2019 related to the 2024 Notes consisted of the following (dollars in thousands):
 
Three Months Ended March 31, 2019
 
2024 Notes
Coupon interest
$
1,313

Amortization of 2024 Notes discounts and issuance costs
5,684

Total interest expense recognized
$
6,997

 
 
Effective interest rate on the liability component
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 expressly subordinated to the 2035 Notes and effectively rank junior in right of payment to any of our secured indebtedness to the extent

17


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

18


attributed to the liability component and the sum of the net carrying amount of the liability component and unamortized costs. As of March 31, 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 March 31, 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
(6,978
)
 
(63,940
)
 
(8,420
)
 
(68,592
)
Net carrying amount
$
112,850


$
396,060

 
$
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 March 31, 2019 will be amortized over a weighted-average remaining period of approximately 3.0 years.
Interest expense for the three months ended March 31, 2019 related to the 2035 Notes consisted of the following (dollars in thousands):