CITRIX SYSTEMS, INC. From time to time, information provided by us or statements made by our employees contain "forward-looking" information that involves risks and uncertainties. In particular, statements contained in this Quarterly Report on Form 10-Q that are not historical facts, including, but not limited to, statements concerning our pending acquisition by affiliates ofVista Equity Partners andEvergreen Coast Capital Corp. , our strategy and operational and growth initiatives, our expansion of cloud-based solutions (as opposed to traditional on-premise delivery of our products) and our efforts to transition our customers from on-premise to the cloud, including the pace of the transition, our transition to a subscription-based business model, changes in our product and service offerings and features, financial information and results of operations for future periods, revenue trends, the impacts of the novel coronavirus (COVID-19) pandemic and related market and economic conditions on our business, results of operations and financial condition, expectations regarding remote work, customer demand, seasonal factors or ordering patterns, stock-based compensation, international operations, investment transactions and valuations of investments and derivative instruments, restructuring charges, reinvestment or repatriation of foreign earnings, fluctuations in foreign exchange rates, tax estimates and other tax matters, liquidity, our debt, changes in accounting rules or guidance, acquisitions (including our acquisition ofWrike, Inc. ), litigation matters, and the security of our network, products and services, constitute forward-looking statements and are made under the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are neither promises nor guarantees. Readers are directed to the risks and uncertainties identified in Part I, Item 1A, "Risk Factors", in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , for additional detail regarding factors that may cause actual results to be different than those expressed in our forward-looking statements. Such factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q or presented elsewhere by our management from time to time. Such factors, among others, could have a material adverse effect upon our business, results of operations and financial condition. We caution readers not to place undue reliance on any forward-looking statements, which only speak as of the date made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.
Pending Merger
OnJanuary 31, 2022 , we entered into an Agreement and Plan of Merger (the "Merger Agreement"), withPicard Parent, Inc. ("Parent"),Picard Merger Sub, Inc. , a wholly owned subsidiary of Parent ("Merger Sub") and, for certain limited purposes detailed in the Merger Agreement,TIBCO Software, Inc. ("TIBCO"), pursuant to which Merger Sub will merge with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly-owned subsidiary of Parent. Parent and Merger Sub were formed by affiliates ofVista Equity Partners ("Vista"). Vista is partnering withEvergreen Coast Capital Corp. ("Evergreen"), an affiliate ofElliott Investment Management L.P. ("Elliott"), to acquire all of the Company Common Stock for$104.00 per share in cash. At a Special Meeting of Stockholders held onApril 21, 2022 , our stockholders approved the Merger Agreement. The Merger is currently expected to close during the third quarter of 2022, subject to customary closing conditions, including receipt of final regulatory approvals. We incurred$20.9 million of expenses related to the Merger, of which$3.2 million and$18.8 million were expensed during the three and six months endedJune 30, 2022 , respectively, and are included in General and administrative expense in the accompanying condensed consolidated statements of income.
See Note 18 to our condensed consolidated financial statements for additional details regarding the pending Merger.
Overview
Management's discussion and analysis of financial condition and results of operations is intended to help the reader understand our financial condition and results of operations. This section is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the three and six months endedJune 30, 2022 . The results of operations for the periods presented in this report are not necessarily indicative of the results expected for the full year or for any future period, due in part to the seasonality of our business. Historically, our revenue for the fourth quarter of any year is typically higher than our revenue for the first quarter of the subsequent year.Citrix is an enterprise software company focused on helping organizations deliver a consistent and secure work experience no matter where work needs to get done - in the office, at home, or in the field. We do this by delivering a digital workspace solution that provides unified, reliable and secure access to all work resources (apps, content, etc.) and simplifies work execution and collaboration across every work channel, device, and location. Our Workspace solutions are complemented by our general work solutions, such as content collaboration and collaborative work management solutions, and our App 33 --------------------------------------------------------------------------------
Delivery and Security solutions, which deliver the applications and data employees need across any network with security, reliability and speed.
We market and license our solutions through multiple channels worldwide, including selling through resellers and direct over the Web. Our partner community comprises thousands of value-added resellers, or VARs, known asCitrix Solution Advisors , value-added distributors, or VADs, systems integrators, or SIs, independent software vendors, or ISVs, original equipment manufacturers, or OEMs, and Citrix Service Providers, or CSPs.
Executive Summary
As described above, onJanuary 31, 2022 , we entered into a definitive Merger Agreement under which affiliates of Vista, a leading global investment firm focused exclusively on enterprise software, data and technology-enabled businesses, and Evergreen, an affiliate of Elliott that focuses on making investments exclusively in technology and technology-enabled services businesses, have agreed to acquireCitrix in an all-cash transaction valued at approximately$16.5 billion , including the assumption ofCitrix debt.
Impact of COVID-19 Pandemic
The COVID-19 pandemic did not have a significant impact on our results of
operations for the three and six months ended
The ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic, the severity of the disease and outbreak, the impact of new strains of the virus, the effectiveness and availability of existing or new vaccines, future and ongoing actions that may be taken by governmental authorities, including the implementation of vaccine mandates, the impact on the businesses of our customers and partners, and the length of its impact on the global economy, which remain uncertain and are difficult to predict at this time. We are conducting business with substantial modifications to employee travel, employee work locations, and virtualization or cancellation of certain sales and marketing events, among other modifications. We will continue to actively monitor the situation and may take further actions that alter our business operations as required by federal, state or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers and stockholders. The potential effects of any such alterations or modifications could have an impact on our business, including our customers and prospects, or on our financial results. Cash from operations, accounts receivable and revenues could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and other risks detailed in Part 1, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . While the pandemic has not materially impacted our liquidity and capital resources to date, it has led to increased disruption and volatility in capital markets and credit markets which could adversely affect our liquidity and capital resources in the future.
Metrics
We use certain operating metrics in assessing the health and trajectory of our
business, including annualized recurring revenue ("ARR") and Citrix Cloud Paid
Subscriber count. These operating metrics do not have any standardized
definition within our industry and therefore may not be comparable to similarly
titled measures reported by other companies.
ARR
Total ARR is an operating metric that represents the contracted recurring value of all termed subscriptions and perpetual maintenance agreements normalized to a one-year period. Total ARR includes only active contractually committed, fixed fees and consists of the following components: Subscription ARR and Maintenance ARR. Subscription ARR represents ARR related to our Subscription offerings, including SaaS ARR, and is calculated at the end of a reporting period by taking each contract's recurring total contract value and dividing by the length of the contract. In the normal course of business, all contracts are annualized, including 30 day subscription offerings where we take monthly recurring revenue multiplied by 12 to annualize. Maintenance ARR is the contracted recurring value of all termed perpetual maintenance agreements normalized to a one-year period. SaaS ARR represents the contracted recurring value of all cloud subscriptions normalized to a one-year period. Our definitions of ARR include contracts expected to recur and therefore exclude contracts with durations of 12 months or less where licenses were issued to address extraordinary business continuity events for our customers. ARR should be viewed independently ofU.S. GAAP revenue, deferred revenue and unbilled revenue and is not intended to be combined with or to replace those items. ARR is not a forecast of future revenue. We believe ARR is a key indicator of the overall trajectory of our business and that certain investors and financial analysts may find this information helpful. Management uses ARR to monitor the performance underlying our operations while the business model is in transition. 34 -------------------------------------------------------------------------------- In the fourth quarter of 2021, Total ARR was$3.2 billion , up 19% year-over-year. Excluding the contribution of Wrike, Total ARR was$3.0 billion , up 12% year-over-year. Total ARR in the first quarter of 2022 was$3.2 billion and grew 11% year-over-year. Excluding the contribution of Wrike, Total ARR was$3.1 billion and grew 10% year-over-year. Total ARR in the second quarter of 2022 was$3.3 billion and grew 8% year-over-year. Excluding the contribution of Wrike, Total ARR was$3.1 billion and grew 8% year-over-year. Subscription ARR in the second quarter of 2022 was$2.1 billion and grew 27% year-over-year. Excluding the contribution of Wrike, Subscription ARR was$1.9 billion and grew 28% year-over-year. SaaS ARR in the second quarter of 2022 was$1.4 billion and grew 32% year-over-year. Excluding the contribution of Wrike, SaaS ARR was$1.2 billion and grew 34% year-over-year.
Citrix Cloud Paid Subscribers
Citrix Cloud Paid Subscribers is defined as the count of users (or devices in the case of named device licensing) on a paid cloud-hosted subscription as of the end of the reporting period. It is not inclusive of allCitrix paid SaaS subscribers and excludes cloud services not delivered or accessed via theCitrix Cloud platform, cloud services not billed on a per subscriber basis, and CSP. Management uses Citrix Cloud Paid Subscriber count as a key measure of our ability to retain and expand revenue from our cloud-based solutions over time. We believe this metric might be useful to certain investors and analysts to monitor the health of our cloud business. Citrix Cloud Paid Subscriber count was 14.3 million in the fourth quarter of 2021, up 52% year-over year. In the first quarter of 2022, the number ofCitrix Cloud paid subscribers was 14.9 million, up 45% year-over-year. In the second quarter of 2022, the number of Citrix Cloud paid subscribers was 16.0 million, up 40% year-over-year. Summary of Results
For the three months ended
•Total net revenue increased 5.8% to
•Subscription revenue increased 36.2% to
•SaaS revenue increased 37.5% to
•Product and license revenue decreased 41.5% to
•Support and services revenue decreased 16.8% to
•Gross margin as a percentage of revenue increased from 80.1% to 81.9%;
•Operating income increased 104.6% to
•Diluted net income per share increased from
•Deferred and unbilled revenue increased
Also, operating cash flows increased
Our Subscription revenue increased primarily due to continued customer adoption of our solutions delivered via the cloud, mostly from our Workspace offerings, and an increase in on-premise license demand, mostly from our App Delivery and Security offerings. Our Product and license revenue decreased primarily due to lower sales of our perpetual App Delivery and Security solutions as well as our perpetual Workspace solutions, as customers continue to shift toward our subscription offerings. The decrease in Support and services revenue was primarily due to decreased sales of maintenance services, primarily across our Workspace perpetual offerings, as more of the revenue is reported in the Subscription revenue line commensurate with our subscription model transition. The increase in gross margin as a percentage of revenue was not significant. The increase in operating income was primarily due to an increase in gross margin and a decrease in operating expenses. The increase in diluted net income per share was primarily due to an increase in operating income.
2021 Business Combination
OnFebruary 26, 2021 (the "Closing Date"), we completed the acquisition ofWrangler Topco, LLC ("Wrangler"), the parent entity of Wrike, a leader in the SaaS collaborative work management space, for approximately$2.07 billion (the "Purchase Consideration"). The Purchase Consideration consists of a base purchase price of$2.25 billion and was subject to certain adjustments as provided for under the related Agreement and Plan of Merger datedJanuary 16, 2021 (the "Wrike Agreement"). The addition of Wrike's cloud-delivered capabilities was intended to expand our collaborative work management capabilities. Under the Wrike Agreement, we acquired all of the issued and outstanding equity securities of Wrangler. Wrike revenue is included in our Workspace product grouping. 35 -------------------------------------------------------------------------------- We incurred$20.4 million of expenses related to the Wrike acquisition, of which$0.3 million and$0.6 million were expensed during the three and six months endedJune 30, 2022 , respectively, and$0.3 million and$15.8 million were expensed during the three and six months endedJune 30, 2021 , respectively, and are included in General and administrative expense in the accompanying condensed consolidated statements of income.
See Note 6 to our condensed consolidated financial statements for additional details regarding our acquisition of Wrike.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base these estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted. For more information regarding our critical accounting policies and estimates, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" contained in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , or the Annual Report, and Note 2 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. There have been no material changes to the critical accounting policies disclosed in the Annual Report. 36 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth our unaudited condensed consolidated statements of income data and presentation of that data as a percentage of change from period-to-period (in thousands other than percentages):
Three Months Ended Six Months Ended Three Months Six Months Ended
June 30, June 30, Ended June 30, June 30,
2022 2021 2022 2021 2022 vs. 2021 2022 vs. 2021
Revenues:
Subscription $ 509,595 $ 374,271 $ 973,232 $ 716,400 36.2 % 35.9 %
Product and license 34,302 58,683 67,599 102,918 (41.5) (34.3)
Support and services 315,625 379,157 644,029 768,559 (16.8) (16.2)
Total net revenues 859,522 812,111 1,684,860 1,587,877 5.8 6.1
Cost of net revenues: Cost of subscription, support and services 112,590 116,027 219,616 226,772 (3.0)
(3.2)
Cost of product and license revenues 25,861 25,160 43,388 46,875 2.8
(7.4)
Amortization of product related intangible assets 17,471 20,119 34,814 31,128 (13.2)
11.8
Total cost of net revenues 155,922 161,306 297,818 304,775 (3.3) (2.3) Gross profit 703,600 650,805 1,387,042 1,283,102 8.1 8.1 Operating expenses: Research and development 137,166 146,179 285,071 290,337 (6.2)
(1.8)
Sales, marketing and services 274,432 306,920 567,383 600,204 (10.6)
(5.5)
General and administrative 90,256 93,594 199,315 188,584 (3.6)
5.7
Amortization of other intangible assets 19,434 19,435 38,655 26,967 - 43.3 Restructuring 9,023 - 27,101 - * * Total operating expenses 530,311 566,128 1,117,525 1,106,092 (6.3)
1.0
Income from operations 173,289 84,677 269,517 177,010 104.6 52.3 Interest income 941 272 1,383 593 246.0 133.2 Interest expense (23,849) (22,905) (45,925) (47,265) 4.1 (2.8) Other (expense) income, net (3,817) 6,635 (4,894) 19,531 (157.5)
(125.1)
Income before income taxes 146,564 68,679 220,081 149,869 113.4
46.8
Income tax expense (benefit) 31,107 5,913 44,392 (2,945) * * Net income$ 115,457 $ 62,766 $ 175,689 $ 152,814 83.9 % 15.0 % *Not meaningful 37
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Revenues
We generate revenue from sales of our Subscription, Product and license and Support and services offerings.
Subscription revenue relates to fees for SaaS, which are generally recognized ratably over the contractual term and non-SaaS, which are generally recognized at a point in time. SaaS primarily consists of subscriptions delivered via a cloud-hosted service whereby the customer does not take possession of the software, hybrid subscription offerings and the related support. Non-SaaS consists primarily of on-premise licensing, hybrid subscription offerings, CSP services and the related support. Our hybrid subscription offerings are allocated between SaaS and non-SaaS. In addition, our CSP program provides subscription-based services in which the CSP partners host software services to their end users. The fees from the CSP program are recognized based on usage and as the CSP services are provided to their end users. Product and license revenue represents fees related to the perpetual licensing of our solutions, primarily our App Delivery and Security products, which are recognized at a point in time. InOctober 2020 , we discontinued broad availability of perpetual licenses for Citrix Workspace. We offer incentive programs to our VADs and VARs to stimulate demand for our solutions. Product and license and Subscription revenues associated with these programs are partially offset by these incentives to our VADs and VARs.
Support and services revenue consists of maintenance and support fees primarily related to our perpetual offerings and include the following:
•Customer Success Services, which gives customers a choice of tiered support offerings that combine the elements of technical support, product version upgrades, guidance, enablement and proactive monitoring to help our customers and our partners fully realize their business goals. Fees associated with this offering are recognized ratably over the term of the contract; and
•Hardware maintenance fees for our perpetual App Delivery and Security products, which include technical support and hardware and software maintenance, are recognized ratably over the contract term; and
•Fees from consulting services related to the implementation of our solutions, which are recognized as the services are provided; and
•Fees from product training and certification, which are recognized as the
services are provided.
Three Months Ended Six Months Ended Three Months Six Months
June 30, June 30, Ended June 30, Ended June 30,
2022 2021 2022 2021 2022 vs. 2021 2022 vs. 2021
(in thousands)
Subscription $ 509,595 $ 374,271 $
973,232
34,302 58,683 67,599 102,918 (24,381) (35,319)
Support and services 315,625 379,157 644,029 768,559 (63,532) (124,530)
Total net revenues $ 859,522 $ 812,111 $ 1,684,860 $ 1,587,877 $ 47,411 $ 96,983
Subscription
Subscription revenue increased during the three months ended June 30, 2022
compared to the three months ended June 30, 2021 primarily due to continued
customer adoption of our solutions delivered via the cloud of $78.7 million ,
primarily from our Workspace offerings, which includes $19.8 million
attributable to the Wrike acquisition. There was also an increase in on-premise
subscription license revenue of $56.6 million , primarily from our App Delivery
and Security offerings, mainly from pooled capacity.
Subscription revenue increased during the six months ended June 30, 2022
compared to the six months ended June 30, 2021 primarily due to continued
customer adoption of our solutions delivered via the cloud of $179.1 million ,
primarily from our Workspace offerings, which includes $55.1 million
attributable to the Wrike acquisition. There was also an increase in on-premise
subscription license revenue of $77.7 million , primarily from our App Delivery
and Security offerings, mainly from pooled capacity.
38
--------------------------------------------------------------------------------Product and license
Product and license revenue decreased when comparing the three months endedJune 30, 2022 to the three months endedJune 30, 2021 primarily from lower sales of our perpetual App Delivery and Security solutions of$15.9 million and perpetual Workspace offerings of$8.5 million , as customers continue to shift toward our subscription offerings. Product and license revenue decreased when comparing the six months endedJune 30, 2022 to the six months endedJune 30, 2021 primarily from lower sales of our perpetual App Delivery and Security solutions of$22.1 million and perpetual Workspace offerings of$13.2 million , as customers continue to shift toward our subscription offerings.
Support and services
Support and services revenue decreased during the three and six months endedJune 30, 2022 compared to the three and six months endedJune 30, 2021 primarily due to a decrease in sales of maintenance services across our Workspace perpetual offerings, as more of the revenue is reported in the Subscription revenue line commensurate with our subscription model transition.
Deferred Revenue, Unbilled Revenue and Backlog
Deferred revenue is primarily comprised of Support and services revenue from
maintenance fees, which include software and hardware maintenance, technical
support related to our perpetual offerings and services revenue related to our
consulting contracts. Deferred revenue also includes Subscription revenue from
our cloud-based subscription offerings and our on-premise subscription
offerings.
Deferred revenue consists of billings or payments received in advance of revenue
recognition and is recognized in our condensed consolidated balance sheets and
statements of income as the revenue recognition criteria are met. Unbilled
revenue primarily represents future billings under our subscription agreements
that have not been invoiced and, accordingly, are not recorded in accounts
receivable or deferred revenue within our condensed consolidated financial
statements. Deferred revenue and unbilled revenue are influenced by several
factors, including new business seasonality within the year, the specific
timing, size and duration of customer subscription agreements, annual billing
cycles of subscription agreements, and invoice timing. Fluctuations in unbilled
revenue may not be a reliable indicator of future performance and the related
revenue associated with these contractual commitments.
The following table presents the amounts of deferred and unbilled revenue (in
thousands):
June 30,
2022
compared to
December
June 30, 2022 December 31, 2021 31, 2021
Deferred revenue $ 1,928,838 $ 2,037,593 $ (108,755)
Unbilled revenue 1,388,068 1,300,048 88,020
Deferred revenues decreased $108.8 million as of June 30, 2022 compared to
December 31, 2021 primarily due to a decrease in deferred maintenance and
support revenue of $149.3 million , mostly from Workspace perpetual software
maintenance, partially offset by an increase in deferred subscription revenue of
$45.6 million . Unbilled revenue increased when comparing June 30, 2022 to
December 31, 2021 primarily due to increased customer adoption of multi-year
subscription agreements.
While it is generally our practice to promptly ship our products upon receipt of
properly finalized orders, at any given time, we have confirmed product license
orders that have not shipped and are unfulfilled. Backlog includes the aggregate
amounts we expect to recognize as point-in-time revenue in the following quarter
associated with contractually committed amounts for on-premise subscription
software licenses, as well as confirmed product license orders that have not
shipped and are wholly unfulfilled. As of June 30, 2022 , the amount of backlog
was not material. We do not believe that backlog, as of any particular date, is
a reliable indicator of future performance.
39
--------------------------------------------------------------------------------International Revenues
International revenues (sales outsidethe United States ) accounted for 47.4% and 48.3% of our net revenues for the three months endedJune 30, 2022 and 2021, respectively. The change in our international revenues as a percentage of our net revenues for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 was not significant. International revenues (sales outsidethe United States ) accounted for 48.0% and 49.3% of our net revenues for the six months endedJune 30, 2022 and 2021, respectively. The decrease in our international revenues as a percentage of our net revenues when comparing the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 was primarily due to a decrease in the EMEA region as it shifts away from perpetual licenses and related support offerings toward subscription offerings. See Note 10 to our condensed consolidated financial statements for detailed information on net revenues by geography. Cost of Net Revenues Three Months Ended Six Months Ended Three Months Six Months June 30, June 30, Ended June 30, Ended June 30, 2022 2021 2022 2021 2022 vs. 2021 2022 vs. 2021 (In thousands) Cost of subscription, support and services revenues$ 112,590 $ 116,027 $ 219,616 $ 226,772 $ (3,437) $ (7,156) Cost of product and license revenues 25,861 25,160 43,388 46,875 701 (3,487) Amortization of product related intangible assets 17,471 20,119 34,814 31,128 (2,648) 3,686 Total cost of net revenues$ 155,922 $ 161,306 $ 297,818 $ 304,775 $ (5,384) $ (6,957) Cost of subscription, support and services revenues consists primarily of compensation and other personnel-related costs of providing technical support, consulting and cloud capacity costs, as well as the costs related to providing our offerings delivered via the cloud and hardware costs related to certain on-premise subscription offerings. Cost of product and license revenues consists primarily of hardware, shipping expense, royalties, product media and duplication, manuals and packaging materials. Also included in cost of net revenues is amortization and impairment of product related intangible assets. Cost of subscription, support and services revenues decreased during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 and for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 primarily due to a decrease in the cost of providing our support and services offerings of$6.4 million and$13.0 million , respectively, consistent with the related revenues, partially offset by an increase in the cost of providing our subscription offerings of$2.9 million and$5.9 million , respectively, in line with related revenues.
Cost of product and license revenues remained consistent for the three months
ended
Amortization of product related intangible assets decreased for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 primarily due to the impairment ofSapho Inc. technology in the fourth quarter of 2021, and increased for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 primarily due to acquired intangible assets in connection with the Wrike acquisition of$8.9 million , partially offset by amortization ofSapho Inc. technology of$5.2 million in 2021.
Gross Margin
Gross margin as a percentage of revenue was 81.9% for the three months endedJune 30, 2022 , and 80.1% for the three months endedJune 30, 2021 , respectively, and 82.3% for the six months endedJune 30, 2022 , and 80.8% for the six months endedJune 30, 2021 , respectively. The change in gross margin as a percentage of revenues is due to drivers noted above.
Operating Expenses
Foreign Currency Impact on Operating Expenses
The functional currency for all of our wholly-owned foreign subsidiaries is theU.S. dollar. A substantial majority of our overseas operating expenses and capital purchasing activities are transacted in local currencies and are therefore subject to fluctuations in foreign currency exchange rates. In order to minimize the impact on our operating results, we generally initiate our hedging of currency exchange risks up to 12 months in advance of anticipated foreign currency expenses. Generally, when 40 -------------------------------------------------------------------------------- the dollar is weak, foreign currency denominated expenses will be higher, and these higher expenses will be partially offset by the gains realized from our hedging contracts. Conversely, if the dollar is strong, foreign currency denominated expenses will be lower. These lower expenses will in turn be partially offset by the losses incurred from our hedging contracts. There is a risk that there will be fluctuations in foreign currency exchange rates beyond the time frame for which we hedge our risk.
Research and Development Expenses
Three Months Ended Six Months Ended Three Months Six Months
June 30, June 30, Ended June 30, Ended June 30,
2022 2021 2022 2021 2022 vs. 2021 2022 vs. 2021
(In thousands)
Research and development $ 137,166 $ 146,179 $ 285,071 $ 290,337 $ (9,013) $ (5,266)
Research and development expenses consist primarily of personnel related costs
and facility and equipment costs directly related to our research and
development activities. We expensed substantially all development costs included
in the research and development of our products.
Research and development expenses decreased during the three months ended
June 30, 2022 compared to the three months ended June 30, 2021 primarily due to
compensation and employee-related costs as a result of decreased headcount.
Research and development expenses decreased during the six months ended June 30,
2022 compared to the six months ended June 30, 2021 primarily due to
compensation and employee-related costs of $6.7 million as a result of decreased
headcount partially offset by an increase in stock-based compensation of $2.3
million .
Sales, Marketing and Services Expenses
Three Months Ended Six Months Ended Three Months Six Months
June 30, June 30, Ended June 30, Ended June 30,
2022 2021 2022 2021 2022 vs. 2021 2022 vs. 2021
(In thousands)
Sales, marketing and services
Sales, marketing and services expenses consist primarily of personnel related costs, including sales commissions, pre-sales support, the costs of marketing programs aimed at increasing revenue, such as brand development, advertising, trade shows, public relations and other market development programs and costs related to our facilities, equipment, information systems and pre-sale demonstration related cloud capacity costs that are directly related to our sales, marketing and services activities. The decrease in Sales, marketing and services expenses during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 was primarily due to decreases in compensation and employee-related costs of$19.8 million as a result of decreased headcount and stock-based compensation of$10.9 million . Sales, marketing and services expenses decreased during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 primarily due to decreases in compensation and employee-related costs of$24.5 million as a result of decreased headcount and stock-based compensation of$16.5 million . These decreases were partially offset by an increase in variable compensation of$8.0 million .
General and Administrative Expenses
Three Months Ended Six Months Ended Three Months Six Months
June 30, June 30, Ended June 30, Ended June 30,
2022 2021 2022 2021 2022 vs. 2021 2022 vs. 2021
(In thousands)
General and administrative $ 90,256 $ 93,594 $ 199,315 $ 188,584 $ (3,338) $ 10,731
General and administrative expenses consist primarily of personnel related costs
and expenses related to outside consultants assisting with information systems,
as well as accounting and legal fees.
General and administrative expenses decreased during the three months ended
June 30, 2022 compared to the three months ended June 30, 2021 primarily due to
decreases in compensation and employee-related costs of $7.5 million as a result
of decreased headcount and stock-based compensation of $3.5 million . These
decreases were partially offset by increases in transaction costs of $3.2
million related to the pending Merger incurred in the second quarter of 2022 and
credit loss expense of $2.5 million . General and administrative expenses
increased during the six months ended June 30, 2022 compared to the six months
ended June 30, 2021 primarily due to increases in transaction costs of $18.8
million related to the pending Merger
41
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incurred during 2022 and an increase in credit loss expense of $13.9 million .
These increases are partially offset by decreases of $15.5 million due to Wrike
acquisition costs incurred in 2021 and compensation and employee-related costs
of $4.5 million .
Amortization of Other Intangible Assets
Three Months Ended Six Months Ended Three Months Six Months
June 30, June 30, Ended June 30, Ended June 30,
2022 2021 2022 2021 2022 vs. 2021 2022 vs. 2021
(In thousands)
Amortization of other intangible
assets $ 19,434 $ 19,435 $ 38,655 $ 26,967 $ (1) $ 11,688
Amortization of other intangible assets consists of amortization of customer
relationships, trade names and covenants not to compete primarily related to our
acquisitions.
Amortization of other intangible assets remained consistent for the three months
ended June 30, 2022 compared to the three months ended June 30, 2021 and
increased for the six months ended June 30, 2022 compared to the six months
ended June 30, 2021 , primarily due to acquired intangible assets in connection
with the Wrike acquisition.
Restructuring Expenses
Three Months Ended Six Months Ended Three Months Six Months
June 30, June 30, Ended June 30, Ended June 30,
2022 2021 2022 2021 2022 vs. 2021 2022 vs. 2021
(In thousands)
Restructuring $ 9,023 $ - $ 27,101 $ - $ 9,023 $ 27,101
Restructuring expenses increased for the three and six months ended June 30,
2022 compared to the three and six months ended June 30, 2021 due to the 2021
Restructuring Program implemented in the fourth quarter of 2021, primarily for
employee severance and related costs.
See Note 16 to our condensed consolidated financial statements for additional details regarding our restructuring programs.
Interest Expense
Three Months Ended Six Months Ended Three Months Six Months
June 30, June 30, Ended June 30, Ended June 30,
2022 2021 2022 2021 2022 vs. 2021 2022 vs. 2021
(In thousands)
Interest expense $ (23,849) $ (22,905) $ (45,925) $ (47,265) $ (944) $ 1,340
Interest expense primarily consists of interest paid on our 2026 Notes, 2027
Notes and 2030 Notes, 2021 Term Loan Credit Agreement, Term Loan Credit
Agreement and our credit facility. Interest expense remained consistent for the
three and six months ended June 30, 2022 compared to the three and six months
ended June 30, 2021 . See Note 11 to our condensed consolidated financial
statements for additional details regarding our debt.
Other (expense) income, net
Three Months Ended Six Months Ended Three Months Six Months
June 30, June 30, Ended June 30, Ended June 30,
2022 2021 2022 2021 2022 vs. 2021 2022 vs. 2021
(In thousands)
Other (expense) income, net $ (3,817) $ 6,635 $ (4,894) $ 19,531 $ (10,452) $ (24,425) Other (expense) income, net is primarily comprised of gains (losses) from remeasurement of foreign currency transactions and non-designated hedges, sublease income, realized losses related to changes in the fair value of our investments that have a decline in fair value and recognized gains (losses) related to our investments.
The change in Other (expense) income, net during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 is primarily attributable to our strategic investment activities, which include recognized net losses of$3.0 42 -------------------------------------------------------------------------------- million during the three months endedJune 30, 2022 as compared to recognized net gains of$7.8 million during the three months endedJune 30, 2021 . The change in Other (expense) income, net during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 is primarily attributable to our strategic investment activities, which include recognized net losses of$4.2 million during the six months endedJune 30, 2022 as compared to recognized net gains of$17.3 million during the six months endedJune 30, 2021 .
Income Taxes
We are required to estimate our income taxes in each of the jurisdictions in which we operate as part of the process of preparing our condensed consolidated financial statements. We maintain certain strategic management and operational activities in overseas subsidiaries and our foreign earnings are taxed at rates that are generally lower than inthe United States . Our effective tax rate generally differs from theU.S. federal statutory rate primarily due to tax credits and lower tax rates on earnings generated by our foreign operations that are taxed primarily inSwitzerland . Our effective tax rate was 21.2% and 8.6% for the three months endedJune 30, 2022 and 2021, respectively. The increase in the effective tax rate when comparing the three months endedJune 30, 2022 to the three months endedJune 30, 2021 , was primarily due to the geographical mix of income towards higher tax regions and tax benefits unique to the period endedJune 30, 2021 . These amounts include a tax benefit related to stock-based compensation deductions. Our effective tax rate was 20.2% and (2.0)% for the six months endedJune 30, 2022 and 2021, respectively. The increase in the effective tax rate when comparing the six months endedJune 30, 2022 to the six months endedJune 30, 2021 , was primarily due to tax items unique to the period endedJune 30, 2021 . These amounts include stock-based compensation deductions and a tax benefit related to a favorable foreign tax ruling in the period endedJune 30, 2021 . We are subject to tax in theU.S. and in multiple foreign tax jurisdictions. OurU.S. liquidity needs are currently satisfied using cash flows generated from ourU.S. operations, borrowings, or both. We also utilize a variety of tax planning strategies in an effort to ensure that our worldwide cash is available in locations in which it is needed. We expect to repatriate a substantial portion of our foreign earnings over time, to the extent that the foreign earnings are not restricted by local laws or result in significant incremental costs associated with repatriating the foreign earnings. See Note 13 to our condensed consolidated financial statements for additional details regarding our income taxes.
Liquidity and Capital Resources
Cash, Cash Equivalents and Investments
June 30, 2022 December 31, June 30, 2022 compared
2021 to December 31, 2021
(In thousands)
Cash, cash equivalents and investments $ 872,799 $ 541,933 $ 330,866
Our principal sources of liquidity are our cash, cash equivalents and
investments. The increase in Cash, cash equivalents and investments when
comparing June 30, 2022 to December 31, 2021 , is primarily due to cash provided
by operating activities of $446.4 million , partially offset by cash paid for tax
withholding on vested stock awards of $78.9 million and purchases of property
and equipment of $33.5 million .
As of June 30, 2022 , $202.9 million of the $872.8 million of Cash, cash
equivalents and investments was held by our foreign subsidiaries. The Cash, cash
equivalents and investments held by our foreign subsidiaries can be repatriated
without incurring any additional U.S. federal tax. Upon repatriation of these
funds, we could be subject to foreign and U.S. state income taxes. The amount of
taxes due is dependent on the amount and manner of the repatriation, as well as
the locations from which the funds are repatriated and received. We generally
invest our cash and cash equivalents in investment grade, highly liquid
securities to allow for flexibility in the event of immediate cash needs. Our
short-term and long-term investments primarily consist of interest-bearing
securities.
Cash Flow Activities
During the six months endedJune 30, 2022 , we generated operating cash flows of$446.4 million . These operating cash flows related primarily to net income of$175.7 million , adjusted for, among other things, non-cash charges, including depreciation and amortization expenses of$170.5 million , which includes depreciation and amortization of property and equipment of$16.5 million and$32.1 million , respectively, for the three and six months endedJune 30, 2022 , stock-based compensation expense of$145.4 million , and a change in operating assets and liabilities, net of acquisitions of$93.7 million . 43 -------------------------------------------------------------------------------- The change in our operating assets and liabilities, net of acquisitions was primarily the result of outflows from deferred revenue of$108.8 million , accrued expenses and other current liabilities of$79.1 million , mostly from decreases in employee-related accruals, and other assets of$39.1 million , primarily due to an increase in capitalized commissions. Also contributing to the change in operating assets and liabilities, net of acquisitions were outflows from income taxes of$15.9 million , primarily due to an increase in prepaid taxes, and accounts payable of$15.9 million , primarily due to the timing of payments. These outflows were partially offset by inflows from accounts receivable of$174.6 million , primarily due to collections from prior period sales. Our investing activities used$6.9 million of cash consisting primarily of cash paid for the purchase of property and equipment of$33.5 million , partially offset by net proceeds from investments of$21.1 million . Our financing activities used cash of$76.9 million , primarily due to cash paid for tax withholding on vested stock awards. During the six months endedJune 30, 2021 , we generated operating cash flows of$356.6 million . These operating cash flows related primarily to net income of$152.8 million , adjusted for, among other things, non-cash charges, including stock-based compensation expense of$168.8 million , depreciation and amortization expenses of$150.9 million and a change in operating assets and liabilities, net of acquisitions of$120.5 million . The change in our operating assets and liabilities, net of acquisitions, was primarily the result of outflows from accrued expenses and other current liabilities of$188.4 million , mostly from employee-related accruals of$106.1 million and decreases in other accruals of$53.5 million , income taxes, net of$71.0 million , primarily due to an increase in prepaid taxes of$31.3 million and a decrease in taxes payable of$30.7 million . Also contributing to the change in operating assets and liabilities, net of acquisitions was an outflow from other assets of$44.9 million , primarily due to an increase in capitalized commissions, and deferred revenue of$43.9 million . These outflows were partially offset by an inflow from accounts receivable of$207.9 million , primarily due to collections from prior period sales. Our investing activities used$1.96 billion of cash consisting primarily of cash paid for the Wrike acquisition, net of cash acquired of$2.02 billion and cash paid for the purchase of property and equipment of$44.9 million , partially offset by net proceeds from investments of$114.1 million . Our financing activities provided cash of$1.35 billion , primarily net proceeds from the 2021 Term Loan of$997.9 million and 2026 Notes of$741.4 million , partially offset by the repayment of the Wrike acquired debt of$190.0 million , cash paid for tax withholding on vested stock awards of$101.7 million and cash dividends on our common stock of$91.5 million . Historically, significant portions of our cash inflows were generated by our operations. We currently expect this trend to continue for the remainder of 2022. Our 2022 operating cash flows could be impacted due to incremental cash outlays related to the 2021 Restructuring Program and expected transaction costs related to the pending Merger. We believe that our existing cash and investments together with cash flows expected from operations will be sufficient to meet expected operating and capital expenditure requirements and service our debt obligations for the next 12 months.
Term Loan Credit Agreements
OnFebruary 5, 2021 , we entered into the 2021 Term Loan Credit Agreement, consisting of a$1.00 billion 2021 Term Loan. We borrowed$1.00 billion onFebruary 26, 2021 under the 2021 Term Loan, and the loan matures onFebruary 26, 2024 . The proceeds under the 2021 Term Loan were used to finance a portion of the purchase price for the Wrike acquisition. OnJanuary 21, 2020 , we entered into a$1.00 billion Term Loan Credit Agreement, consisting of a$500.0 million 364-day Term Loan facility (the "364-day Term Loan"), and a$500.0 million 3-year Term Loan facility (the "3-year Term Loan"). As ofJune 30, 2022 ,$100.0 million was outstanding under the 3-year Term Loan. These amounts are due inJanuary 2023 and included in Short-term debt in the accompanying condensed consolidated balance sheet.
Senior Notes
OnFebruary 18, 2021 , we issued$750.0 million of unsecured senior notes dueMarch 1, 2026 (the "2026 Notes"). The 2026 Notes accrue interest at a rate of 1.250% per annum, which is due semi-annually onMarch 1 andSeptember 1 of each year beginning onSeptember 1, 2021 . The net proceeds from this offering were$741.4 million . The net proceeds from the 2026 Notes were used to fund a portion of the purchase price for the Wrike acquisition.
Credit Facility
OnNovember 26, 2019 , we entered into a$250.0 million five-year unsecured revolving credit facility under an amended and restated credit agreement (the "Credit Agreement"). We may elect to increase the revolving credit facility by up to$250.0 million if existing or new lenders provide additional revolving commitments in accordance with the terms of the Credit Agreement. As ofJune 30, 2022 , no amounts were outstanding under the credit facility.
See Note 11 to our condensed consolidated financial statements for additional details regarding our debt.
44
--------------------------------------------------------------------------------Stock Repurchase Program
Our Board of Directors authorized an ongoing stock repurchase program. The objective of the stock repurchase program was to improve stockholders' returns and mitigate earnings per share dilution posed by the issuance of shares related to employee equity compensation awards. AtJune 30, 2022 ,$625.6 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased were recorded as treasury stock. While the Merger Agreement is in effect, we are prohibited from repurchasing shares of our common stock, including under the stock repurchase program.
During the three and six months ended
See Note 14 to our condensed consolidated financial statements for additional details on our share repurchase program.
Shares for Tax Withholding
During the three and six months endedJune 30, 2022 , we withheld 347,267 and 774,649 shares, respectively, from equity awards that vested, totaling$35.2 million and$78.9 million , respectively, to satisfy minimum tax withholding obligations that arose on the vesting of such equity awards. These shares are reflected as treasury stock in our condensed consolidated balance sheets.
Other Purchase Commitments
InMay 2020 , we entered into an amended agreement with a third-party provider, in the ordinary course of business, for the use of certain cloud services throughJune 2029 . Under the amended agreement, we are committed to a purchase of$1.00 billion throughout the term of the agreement. As ofJune 30, 2022 , we had$798.4 million of remaining obligations under the purchase agreement. InMay 2021 , we entered into an amended agreement with a third-party provider, in the ordinary course of business, for the use of certain cloud services throughMay 2024 . Under the amended agreement, we are committed to purchase services under this agreement totaling$100.0 million over the term, with commitments of$32.0 million in fiscal year beginning 2021,$24.0 million in fiscal year beginning 2022,$24.0 million in fiscal year beginning 2023 and$20.0 million at any time over the three-year term. As ofJune 30, 2022 , we had$37.4 million of remaining obligations under the purchase agreement.
Contractual Obligations
There have been no material changes, outside the ordinary course of business, to our contractual obligations sinceDecember 31, 2021 . For further information, see "Contractual Obligations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 .
Off-Balance Sheet Arrangements
We do not have any special purpose entities or off-balance sheet financing arrangements.
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