Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-Q
____________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2019
Commission File Number: 0-18059
____________________________________________________
PTC Inc.
(Exact name of registrant as specified in its charter)
____________________________________________________
Massachusetts
 
04-2866152
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
121 Seaport Boulevard, Boston, MA 02210
(Address of principal executive offices, including zip code)
(781) 370-5000
(Registrant’s telephone number, including area code)
__________________________________________________
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  þ    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer
þ
  
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  þ

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value per share
PTC
NASDAQ Global Select Market

There were 115,041,840 shares of our common stock outstanding on May 7, 2019.



PTC Inc.
INDEX TO FORM 10-Q
For the Quarter Ended March 30, 2019

 
 
Page
Number
Part I—FINANCIAL INFORMATION
 
Item 1.
 
 

 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Part II—OTHER INFORMATION
 
Item 1A.
Item 2.
Item 6.




PART I—FINANCIAL INFORMATION

ITEM 1.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PTC Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
 
March 30,
2019
 
September 30,
2018
ASSETS

 
 
Current assets:

 
 
Cash and cash equivalents
$
294,299

 
$
259,946

Short-term marketable securities
25,428

 
25,836

Accounts receivable, net of allowance for doubtful accounts of $719 and $607 at March 30, 2019 and September 30, 2018, respectively
352,217

 
129,297

Prepaid expenses
66,210

 
48,997

Other current assets
52,448

 
169,708

Total current assets
790,602

 
633,784

Property and equipment, net
106,837

 
80,613

Goodwill
1,229,541

 
1,182,457

Acquired intangible assets, net
192,372

 
200,202

Long-term marketable securities
30,987

 
30,115

Deferred tax assets
195,884

 
165,566

Other assets
169,596

 
36,285

Total assets
$
2,715,819

 
$
2,329,022

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

Accounts payable
$
36,685

 
$
53,473

Accrued expenses and other current liabilities
100,319

 
74,388

Accrued compensation and benefits
73,408

 
101,784

Accrued income taxes
6,579

 
18,044

Deferred revenue
381,392

 
487,590

Total current liabilities
598,383

 
735,279

Long-term debt
738,700

 
643,268

Deferred tax liabilities
36,326

 
5,589

Deferred revenue
10,415

 
11,852

Other liabilities
84,287

 
58,445

Total liabilities
1,468,111

 
1,454,433

Commitments and contingencies (Note 14)

 

Stockholders’ equity:

 

Preferred stock, $0.01 par value; 5,000 shares authorized; none issued

 

Common stock, $0.01 par value; 500,000 shares authorized; 118,098 and 117,981 shares issued and outstanding at March 30, 2019 and September 30, 2018, respectively
1,181

 
1,180

Additional paid-in capital
1,523,949

 
1,558,403

Accumulated deficit
(182,298
)
 
(599,409
)
Accumulated other comprehensive loss
(95,124
)
 
(85,585
)
Total stockholders’ equity
1,247,708

 
874,589

Total liabilities and stockholders’ equity
$
2,715,819

 
$
2,329,022








The accompanying notes are an integral part of the condensed consolidated financial statements.

1


PTC Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

 
Three months ended
 
Six months ended
 
March 30,
2019
 
March 31,
2018
 
March 30,
2019
 
March 31,
2018
Revenue:
 
 
 
 
 
 
 
License
$
61,876

 
$
120,505

 
$
167,198

 
$
240,023

Support and cloud services
187,645

 
141,948

 
375,566

 
287,620

Total software revenue
249,521

 
262,453

 
542,764

 
527,643

Professional services
40,930

 
45,430

 
82,376

 
86,884

Total revenue
290,451

 
307,883

 
625,140

 
614,527

Cost of revenue:

 

 
 
 
 
Cost of license revenue
12,875

 
11,854

 
25,438

 
23,968

Cost of support and cloud services revenue
32,874

 
34,335

 
64,071

 
68,837

Total cost of software revenue
45,749

 
46,189

 
89,509

 
92,805

Cost of professional services revenue
34,155

 
37,519

 
67,747

 
73,938

Total cost of revenue
79,904

 
83,708

 
157,256

 
166,743

Gross margin
210,547

 
224,175

 
467,884

 
447,784

Operating expenses:


 


 
 
 
 
Sales and marketing
103,722

 
98,390

 
207,940

 
197,765

Research and development
61,402

 
62,197

 
122,184

 
126,169

General and administrative
35,371

 
33,369

 
73,235

 
68,389

Amortization of acquired intangible assets
5,930

 
7,895

 
11,866

 
15,716

Restructuring and other charges, net
26,980

 
114

 
45,473

 
219

Total operating expenses
233,405

 
201,965

 
460,698

 
408,258

Operating income (loss)
(22,858
)
 
22,210

 
7,186

 
39,526

Interest expense
(11,383
)
 
(10,379
)
 
(21,659
)
 
(20,426
)
Other income (expense), net
821

 
(285
)
 
1,475

 
(1,083
)
Income (loss) before income taxes
(33,420
)
 
11,546

 
(12,998
)
 
18,017

Provision (benefit) for income taxes
10,093

 
3,624

 
9,530

 
(3,782
)
Net income (loss)
$
(43,513
)
 
$
7,922

 
$
(22,528
)
 
$
21,799

Earnings (loss) per share—Basic
$
(0.37
)
 
$
0.07

 
$
(0.19
)
 
$
0.19

Earnings (loss) per share—Diluted
$
(0.37
)
 
$
0.07

 
$
(0.19
)
 
$
0.19

Weighted average shares outstanding—Basic
118,461

 
116,241

 
118,392

 
115,986

Weighted average shares outstanding—Diluted
118,461

 
117,905

 
118,392

 
117,780








The accompanying notes are an integral part of the condensed consolidated financial statements.

2


PTC Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
 
 
Three months ended
 
Six months ended
 
March 30,
2019
 
March 31,
2018
 
March 30,
2019
 
March 31,
2018
Net income (loss)
$
(43,513
)
 
$
7,922

 
$
(22,528
)
 
$
21,799

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Realized and unrealized hedge gain (loss) arising during the period, net of tax of $0.2 million and $0.3 million in the second quarter of 2019 and 2018, respectively, and $0.2 million and $0.4 million in the first six months of 2019 and 2018, respectively
(2,955
)
 
(2,046
)
 
826

 
(2,959
)
Net hedge (gain) loss reclassified into earnings, net of tax of $0 million and $0.2 million in the second quarter of 2019 and 2018, respectively, and $0.1 million and $0.3 million in the first six months of 2019 and 2018, respectively

 
1,511

 
(549
)
 
2,084

Realized and unrealized gain (loss) on hedging instruments
(2,955
)
 
(535
)
 
277

 
(875
)
Foreign currency translation adjustment, net of tax of $0 for each period
(4,033
)
 
7,540

 
(11,602
)
 
12,769

Unrealized gain (loss) on marketable securities, net of tax of $0 for each period
289

 
(267
)
 
302

 
(446
)
Amortization of net actuarial pension loss included in net income, net of tax of $0.2 million and $0.2 million in the second quarter of 2019 and 2018, respectively and $0.3 million and $0.3 million in the first six months of 2019 and 2018, respectively
428

 
386

 
858

 
757

Change in unamortized pension loss during the period related to changes in foreign currency
345

 
(465
)
 
626

 
(728
)
Other comprehensive income (loss)
(5,926
)
 
6,659

 
(9,539
)
 
11,477

Comprehensive income (loss)
$
(49,439
)
 
$
14,581

 
$
(32,067
)
 
$
33,276




























The accompanying notes are an integral part of the condensed consolidated financial statements.

3


PTC Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Six months ended
 
March 30,
2019
 
March 31,
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(22,528
)
 
$
21,799

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
39,558

 
42,727

Stock-based compensation
56,374

 
35,357

Other non-cash items, net
247

 
189

Loss on disposal of fixed assets
32

 
22

Changes in operating assets and liabilities, excluding the effects of acquisitions:
 
 
 
Accounts receivable
54,501

 
32,027

Accounts payable and accrued expenses
423

 
(9,474
)
Accrued compensation and benefits
(28,291
)
 
(29,656
)
Deferred revenue
36,947

 
59,027

Accrued income taxes
(15,677
)
 
(14,134
)
Other current assets and prepaid expenses
1,723

 
(7,217
)
Other noncurrent assets and liabilities
39,035

 
5,931

Net cash provided by operating activities
162,344

 
136,598

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(51,268
)
 
(11,139
)
Purchase of intangible asset

 
(3,000
)
Purchases of short- and long-term marketable securities
(14,460
)
 
(13,794
)
Proceeds from maturities of short- and long-term marketable securities
14,227

 
8,240

Acquisitions of businesses, net of cash acquired
(69,453
)
 
(3,000
)
Purchases of investments
(7,500
)
 

Settlement of net investment hedges
114

 

Net cash used in investing activities
(128,340
)
 
(22,693
)
Cash flows from financing activities:
 
 
 
Borrowings under credit facility
205,000

 
50,000

Repayments of borrowings under credit facility
(110,000
)
 
(120,000
)
Repurchases of common stock
(64,994
)
 

Proceeds from issuance of common stock
4,158

 
7,472

Contingent consideration
(1,575
)
 
(3,176
)
Payments of withholding taxes in connection with stock-based awards
(34,491
)
 
(33,942
)
Net cash used in financing activities
(1,902
)
 
(99,646
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
2,237

 
5,837

Net increase in cash, cash equivalents, and restricted cash
34,339

 
20,096

Cash, cash equivalents, and restricted cash, beginning of period
261,093

 
281,209

Cash, cash equivalents, and restricted cash, end of period
$
295,432

 
$
301,305


The accompanying notes are an integral part of the condensed consolidated financial statements.

4


PTC Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands) 
(unaudited)
 
Three months ended March 30, 2019
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance as of December 29, 2018
118,657

 
$
1,187

 
$
1,553,875

 
$
(138,785
)
 
$
(95,108
)
 
$
1,321,169

Common stock issued for employee stock-based awards
52

 

 

 

 

 

Shares surrendered by employees to pay taxes related to stock-based awards
(8
)
 

 
(703
)
 

 

 
(703
)
Common stock issued for employee stock purchase plan
122

 
1

 
8,797

 

 

 
8,798

Compensation expense from stock-based awards

 

 
26,967

 

 

 
26,967

Net income

 

 

 
(43,513
)
 

 
(43,513
)
Repurchases of common stock
(725
)
 
(7
)
 
(64,987
)
 

 

 
(64,994
)
Unrealized loss on net investment hedges, net of tax

 

 

 

 
2,955

 
2,955

Foreign currency translation adjustment

 

 

 

 
(4,033
)
 
(4,033
)
Unrealized loss on available-for-sale securities, net of tax

 

 

 

 
289

 
289

Change in pension benefits, net of tax

 

 

 

 
773

 
773

Balance as of March 30, 2019
118,098

 
$
1,181

 
$
1,523,949

 
$
(182,298
)
 
$
(95,124
)
 
$
1,247,708


 
Six months ended March 30, 2019
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance as of September 30, 2018
117,981

 
$
1,180

 
$
1,558,403

 
$
(599,409
)
 
$
(85,585
)
 
$
874,589

ASU 2016-16 adoption

 

 

 
72,261

 

 
72,261

ASC 606 adoption

 

 

 
367,378

 

 
367,378

Common stock issued for employee stock-based awards
1,108

 
11

 
(11
)
 

 

 

Shares surrendered by employees to pay taxes related to stock-based awards
(388
)
 
(4
)
 
(34,487
)
 

 

 
(34,491
)
Common stock issued

 

 
(140
)
 

 

 
(140
)
Common stock issued for employee stock purchase plan
122

 
1

 
8,797

 

 

 
8,798

Compensation expense from stock-based awards

 

 
56,374

 

 

 
56,374

Net income

 

 

 
(22,528
)
 

 
(22,528
)
Repurchases of common stock
(725
)
 
(7
)
 
(64,987
)
 

 

 
(64,994
)
Unrealized loss on cash flow hedges, net of tax

 

 

 

 
(385
)
 
(385
)
Unrealized loss on net investment hedges, net of tax

 

 

 

 
662

 
662

Foreign currency translation adjustment

 

 

 

 
(11,602
)
 
(11,602
)
Unrealized loss on available-for-sale securities, net of tax

 

 

 

 
302

 
302

Change in pension benefits, net of tax

 

 

 

 
1,484

 
1,484

Balance as of March 30, 2019
118,098

 
$
1,181

 
$
1,523,949

 
$
(182,298
)
 
$
(95,124
)
 
$
1,247,708



5


 
Three months ended March 31, 2018
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance as of December 30, 2017
116,126

 
$
1,161

 
$
1,594,546

 
$
(637,519
)
 
$
(69,089
)
 
$
889,099

Common stock issued for employee stock-based awards
60

 
1

 
(1
)
 

 

 

Shares surrendered by employees to pay taxes related to stock-based awards
(6
)
 

 
(454
)
 

 

 
(454
)
Common stock issued for employee stock purchase plan
158

 
1

 
7,471

 

 

 
7,472

Compensation expense from stock-based awards

 

 
17,026

 

 

 
17,026

Net income

 

 

 
7,922

 

 
7,922

Unrealized loss on hedging instruments, net of tax

 

 

 

 
(535
)
 
(535
)
Foreign currency translation adjustment

 

 

 

 
7,540

 
7,540

Unrealized loss on available-for-sale securities, net of tax

 

 

 

 
(267
)
 
(267
)
Change in pension benefits, net of tax

 

 

 

 
(79
)
 
(79
)
Balance as of March 31, 2018
116,338

 
$
1,163

 
$
1,618,588

 
$
(629,597
)
 
$
(62,430
)
 
$
927,724

 
Six months ended March 31, 2018
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance as of September 30, 2017
115,333

 
$
1,153

 
$
1,609,030

 
$
(650,840
)
 
$
(73,907
)
 
$
885,436

ASU 2016-09 adoption

 

 
681

 
(556
)
 

 
125

Common stock issued for employee stock-based awards
1,377

 
14

 
(14
)
 

 

 

Shares surrendered by employees to pay taxes related to stock-based awards
(530
)
 
(5
)
 
(33,937
)
 

 

 
(33,942
)
Common stock issued for employee stock purchase plan
158

 
1

 
7,471

 

 

 
7,472

Compensation expense from stock-based awards

 

 
35,357

 

 

 
35,357

Net income

 

 

 
21,799

 

 
21,799

Unrealized loss on cash flow hedges, net of tax

 

 

 

 
(875
)
 
(875
)
Foreign currency translation adjustment

 

 

 

 
12,769

 
12,769

Unrealized loss on available-for-sale securities, net of tax

 

 

 

 
(446
)
 
(446
)
Change in pension benefits, net of tax

 

 

 

 
29

 
29

Balance as of March 31, 2018
116,338

 
$
1,163

 
$
1,618,588

 
$
(629,597
)
 
$
(62,430
)
 
$
927,724


The accompanying notes are an integral part of the condensed consolidated financial statements.


6


PTC Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
General
The accompanying unaudited condensed consolidated financial statements include the accounts of PTC Inc. and its wholly owned subsidiaries and have been prepared by management in accordance with accounting principles generally accepted in the United States of America and in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. While we believe that the disclosures presented are adequate in order to make the information not misleading, these unaudited quarterly financial statements should be read in conjunction with our annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair statement of our financial position, results of operations and cash flows at the dates and for the periods indicated. The September 30, 2018 Consolidated Balance Sheet included herein is derived from our audited consolidated financial statements.
Unless otherwise indicated, all references to a year mean our fiscal year, which ends on September 30. Our fiscal quarters end on a Saturday following a thirteen-week calendar and may result in different quarter end dates year to year. The second quarter of 2019 ended on March 30, 2019 and the second quarter of 2018 ended on March 31, 2018. The results of operations for the six months ended March 30, 2019 are not necessarily indicative of the results expected for the remainder of the fiscal year.
Changes in Presentation and Reclassifications
On October 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASC 606). Results for reporting periods beginning on or after October 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the guidance provided by ASC 985-605, Software-Revenue Recognition and revenues for non-software deliverables in accordance with ASC 605-25, Revenue Recognition, Multiple-Element Arrangements (ASC 605). In connection with the adoption of ASC 606, we changed our presentation of the statement of operations to reflect revenue and associated costs as license, support and cloud services, and professional services. For the prior year period, all components of subscription licenses (including support) are included in license revenue. Prior to our adoption of ASC 606, revenues from subscription licenses and support thereon were not separated and were previously included in subscription revenue in our consolidated statement of operations since we did not have VSOE of fair value for support on subscription sales. In addition, revenue and costs associated with our cloud services, which are immaterial and were previously reported in subscription revenue, are classified as support and cloud services for all periods presented.
Effective at the beginning of fiscal 2019, in accordance with the adoption of ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, all non-service net periodic pension costs are now presented in Other income (expense), net on the Consolidated Statement of Operations. The prior period non-service net periodic pension cost amounts have been reclassified for comparability.
Effective at the beginning of fiscal 2019, in accordance with the adoption of ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, restricted cash is now included with cash and cash equivalents in the net cash increase (decrease), beginning of period total amount and end of period total amount on the Consolidated Statements of Cash Flows. The prior period restricted cash amounts have been reclassified for comparability. As of March 30, 2019 and September 30, 2018, $1.1 million of restricted cash was included in other current assets.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Revenue Recognition

7


On October 1, 2018, we adopted ASC 606, which supersedes substantially all existing revenue recognition guidance under U.S. GAAP. We adopted ASC 606 using the modified retrospective method, under which the cumulative effect of initially applying ASC 606 was recorded as a reduction to accumulated deficit with no restatement of comparative periods.
The core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to a customer in an amount that reflects the consideration that is expected to be received for those goods or services. Under the new guidance, an entity is required to evaluate revenue recognition through a five-step process: (1) identifying a contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when (or as) the entity satisfies a performance obligation. The standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In applying the principles of ASC 606, more judgment and estimates are required within the revenue recognition process than is required under previous U.S. GAAP, including identifying performance obligations, estimating the amount of variable consideration to include in the transaction price, and estimating the value of each performance obligation to allocate the total transaction price to each separate performance obligation.
The most significant impact of ASC 606 relates to accounting for our subscription arrangements that include term-based on-premise software licenses bundled with support. Under previous GAAP (ASC 605, through September 30, 2018), revenue attributable to these subscription licenses was recognized ratably over the term of the arrangement because VSOE does not exist for the undelivered support element as it is not sold separately. Under the new standard, the requirement to have VSOE for undelivered elements to enable the separation of revenue for the delivered software licenses is eliminated. Accordingly, under the new standard we recognize as revenue a portion of the subscription fee upon delivery of the software license. Revenue recognition related to our perpetual licenses and related support contracts, professional services and cloud offerings is substantially unchanged, with support and cloud revenue being recorded ratably over the contract term. Due to the complexity of certain of our contracts, the actual revenue recognition treatment required under the new standard may be dependent on contract-specific terms and, therefore, may vary in some instances.
Upon implementation of the new standard in fiscal 2019, we made prospective revisions to contract terms with our customers that will result in shortening the initial, non-cancellable term of our multi-year subscriptions to one year for contract periods that begin on or after October 1, 2018. This change will result in annual contractual periods for most of our software subscriptions, the license portion of which will be recognized at the beginning of each annual contract period and the support portion of which will be recognized ratably over the one-year contractual period. As a result, we anticipate one year of subscription revenue will be recognized for each contract each year; however, more of the revenue will be recognized in the quarter that the contract period begins and less will be recognized in the subsequent three quarters of the contract than under ASC 605.
Under the modified retrospective method, we evaluated each contract that was ongoing on October 1, 2018 as if that contract had been accounted for under ASC 606 from contract inception. Some license revenue related to subscription arrangements that would have been recognized in future periods under current GAAP was recast under ASC 606 as if the revenue had been recognized in prior periods. Under this transition method, we did not adjust historical reported revenue amounts. Instead, the revenue that would have been recognized under this method prior to the adoption date was recorded as an adjustment to accumulated deficit and will not be recognized as revenue in future periods as previously expected. Because license revenue associated with subscription contracts is recognized up front instead of over time under ASC 606, a material portion of our deferred revenue was adjusted to accumulated deficit upon adoption.
Another significant provision under ASC 606 includes the capitalization and amortization of costs associated with obtaining a contract, such as sales commissions. Prior to October 1, 2018, we expensed commissions in the period incurred. Under ASC 606, direct and incremental costs to acquire a contract are capitalized and amortized using a systematic basis over the pattern of transfer of the goods and services to which the asset relates.
Refer to Note 2. Revenue from Contracts with Customers for further detail about the impact of the adoption of ASC 606 and further disclosures.
Income Taxes

8


In October 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The purpose of ASU 2016-16 is to simplify the income tax accounting of an intra-entity transfer of an asset other than inventory and to record its effect when the transfer occurs. We adopted this amendment beginning in the first quarter of 2019 using the modified retrospective method with a cumulative effect adjustment to accumulated deficit of $72.3 million, with a corresponding increase of $75.3 million to deferred tax assets, $6.0 million decrease to income tax assets and a $3.0 million decrease to income tax liabilities. The adjustment primarily relates to deductible amortization of intangible assets in Ireland.  Post adoption, our effective tax rate no longer includes the benefit of this amortization.
Pension Accounting
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which provides guidance on the capitalization, presentation and disclosure of net benefit costs related to post-retirement benefit plans. We adopted the new guidance in the first quarter of 2019 on a full retrospective basis, which resulted in the retrospective reclassification of $0.2 million and $0.3 million of non-service net periodic pension cost for the three and six months ended March 31, 2018, respectively, from line items within cost of revenue and operating expenses into Other income (expense), net on the Consolidated Statement of Operations.
Equity Investments
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities and requires equity securities to be measured at fair value, unless the measurement alternative method has been elected for equity investments without readily determinable fair values. Adoption of this guidance in the first quarter of fiscal 2019 did not have a material impact on our consolidated financial statements.
Restricted Cash
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Statement of Cash Flows. Adoption of this guidance in the first quarter of fiscal 2019 did not have a material impact on our consolidated financial statements.

Pending Accounting Pronouncements
Derivative Financial Instruments
In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities", which amends and simplifies existing guidance to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The guidance is effective for annual reporting periods beginning after December 15, 2018 (our fiscal 2020) including interim reporting periods within those annual reporting periods and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will replace the existing guidance in ASC 840, Leases. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and to disclose important information about leasing arrangements. ASU 2016-02 is effective for annual periods beginning after December 15, 2018 (our fiscal 2020) and interim periods within those annual periods. Early adoption is permitted and modified retrospective application is required. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
2. Revenue from Contracts with Customers

9


Upon adoption of ASC 606, we recorded a decrease in accumulated deficit of $431.9 million ($367.4 million, net of tax) due to the cumulative effect of the ASC 606 adoption, with the impact primarily derived from revenue related to on-premise subscription software licenses.
Nature of Products and Services
Our sources of revenue include: (1) subscription, (2) perpetual license, (3) perpetual support and (4) professional services. Revenue is derived from the licensing of computer software products and from related support and/or professional services contracts. We enter into contracts that include combinations of products, support and professional services, which are accounted for as separate performance obligations with differing revenue recognition patterns.
Performance Obligation
When Performance Obligation is Typically Satisfied
Term-based subscriptions
 
     On-premise software licenses
Point in Time: Upon the later of when the software is made available or the subscription term commences
     Support and cloud-based offerings
Over Time: Ratably over the contractual term; commencing upon the later of when the software is made available or the subscription term commences
Perpetual software licenses
Point in Time: when the software is made available
Support for perpetual software licenses
Over Time: Ratably over the contractual term
Professional services
Over time: As services are provided
Judgments and Estimates
Our contracts with customers for subscriptions typically include commitments to transfer term-based on-premise software licenses bundled with support and/or cloud services. On-premise software is determined to be a distinct performance obligation from support which is sold for the same term of the subscription. For subscription arrangements which include cloud services, we assessed whether the cloud component was highly interrelated with on-premise term software licenses. Other than a limited population of subscriptions, the cloud component is not currently deemed to be interrelated with the on-premise term software and, as a result, cloud services will be accounted for as a distinct performance obligation from the software and support components of the subscription.
Judgment is required to allocate the transaction price to each performance obligation. We use the estimated standalone selling price method to allocate the transaction price for items that are not sold separately. The estimated standalone selling price is determined using all information reasonably available to us, including market conditions and other observable inputs. The corresponding revenues are recognized as the related performance obligations are satisfied. We determined that 50% to 55% of the estimated standalone selling price for subscriptions that contain distinct license and support performance obligations are attributable to software licenses and 45% to 50%, depending upon the product offering, is attributable to support for those licenses.
Our multi-year, non-cancellable on-premise subscription contracts provide customers with an annual right to exchange software within the original subscription with other software. Although the exchange right is limited to software products within a similar product grouping, the exchange right is not limited to products with substantially similar features and functionality as those originally delivered. We determined that this right to exchange previously delivered software for different software represents variable consideration to be accounted for as a liability. We have identified a standard portfolio of contracts with common characteristics and applied the expected value method of determining variable consideration associated with this right. Additionally, where there are isolated situations that are outside of the standard portfolio of contracts due to contract size, longer contract duration, or other unique contractual terms, we used the most likely amount method to determine the amount of variable consideration. In both circumstances, the amount of variable consideration included in the transaction price is constrained by an amount where it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. As of March 30, 2019, the total refund liability was $23.4 million, primarily associated with the annual right to exchange on-premise subscription software.

10


Contract Assets and Contract Liabilities
 
March 30, 2019
 
October 1, 2018, as adjusted
 
(in thousands)
Contract asset
$
19,628

 
$
26,265

Deferred revenue
$
391,807

 
$
357,490

As of March 30, 2019, our contract assets are expected to be transferred to receivables within the next 12 months and therefore are included in other current assets. Approximately $14.1 million of the October 1, 2018 contract asset balance was transferred to receivables during the six months ended March 30, 2019 as a result of the right to payment becoming unconditional. The majority of both the contract asset balance and the amounts transferred to receivables relates to two large professional services contracts with invoicing terms based on performance milestones. Additions to contract assets of approximately $7.5 million related to revenue recognized in the period, net of period billings. There were no impairments of contract assets during the six months ended March 30, 2019.
During the six months ended March 30, 2019, $246.1 million of revenue that was included in the deferred revenue opening balance was recognized. There were additional deferrals of $280.4 million, which were primarily related to new billings.
Costs to Obtain or Fulfill a Contract
The new revenue recognition standard requires the capitalization of certain incremental costs of obtaining a contract, which impacts the period in which we record our commission expense. Prior to our adoption of the new revenue standard, we recognized commissions expense as incurred. Under the new revenue recognition standard, we are required to recognize these expenses over the period of benefit associated with these costs. This results in a deferral of certain commission expenses each period. Upon adoption, we reduced our accumulated deficit by $70.0 million and recognized an offsetting asset for deferred commission related to contracts that were not completed prior to October 1, 2018.
We recognize an asset for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year. These deferred costs are amortized proportionately related to revenue over five years, which is generally longer than the term of the initial contract because of anticipated renewals as commissions for renewals are not commensurate with commissions related to our initial contracts. As of March 30, 2019, deferred costs of $20.1 million were included in other current assets and $57.6 million were included in other assets (non-current).
As the revenue recognition pattern has changed under ASC 606, the costs to fulfill contracts has also changed to match this pattern of expense recognition. As of October 1, 2018, this resulted in a $2.8 million increase in our accumulated deficit with recognition of an offsetting current liability.
Remaining Performance Obligations
Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. The amounts include additional performance obligations that are not yet recorded in the consolidated balance sheets. As of March 30, 2019, amounts allocated to these additional contractual obligations are $883.7 million, of which we expect to recognize approximately 90% over the next 24 months, with the remaining amount thereafter.

11


Disaggregation of Revenue
 
 
Three months ended
 
Six months ended
 
 
As Reported ASC 606
 
ASC 605
 
As Reported ASC 605
 
As Reported ASC 606
 
ASC 605
 
As Reported ASC 605
 
 
March 30, 2019
 
March 30, 2019
 
March 31, 2018
 
March 30, 2019
 
March 30, 2019
 
March 31, 2018
Revenue
 
 
 
 
 
 
 
 
(in thousands)
Subscription license
 
$
51,540

 
 
 
 
 
$
115,057

 
 
 
 
Subscription support & cloud services
 
83,228

 
 
 
 
 
160,652

 
 
 
 
Total Subscription
 
134,768

 
$
162,070

 
$
112,931

 
275,709

 
$
310,483

 
$
212,939

Perpetual support
 
104,417

 
103,564

 
126,683

 
214,914

 
212,789

 
257,880

Total recurring revenue
 
239,185

 
265,634

 
239,614

 
490,623

 
523,272

 
470,819

Perpetual license
 
10,336

 
11,267

 
22,839

 
52,141

 
53,017

 
56,824

Total software revenue
 
249,521

 
276,901

 
262,453

 
542,764

 
576,289

 
527,643

Professional services
 
40,930

 
38,598

 
45,430

 
82,376

 
77,967

 
86,884

Total revenue
 
$
290,451

 
$
315,499

 
$
307,883

 
$
625,140

 
$
654,256

 
$
614,527


For further disaggregation of revenue by geographic region and product area see Note 11. Segment and Geographic Information.
Practical Expedients
We elected certain practical expedients with the adoption of the new revenue standard. We do not account for significant financing components if the period between revenue recognition and when the customer pays for the products or services will be one year or less. Additionally, we recognize revenue equal to the amount we have a right to invoice, when the amount corresponds directly with the value to the customer of our performance date.
Transition Disclosures
In accordance with the modified retrospective method transition requirements, we will present the financial statement line items impacted and adjusted to compare to presentation under ASC 605 for each of the interim and annual periods during the first year of adoption of ASC 606.

12


The following tables present our Balance Sheets and Statements of Operations as reported under ASC 606 for the current period with comparative periods reported under ASC 605:
 
As Reported ASC 606
 
ASC 605
 
As Reported ASC 605
 
March 30,
2019
 
March 30,
2019
 
September 30,
2018
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
294,299

 
$
294,299

 
$
259,946

Short-term marketable securities
25,428

 
25,428

 
25,836

Accounts receivable (1)
352,217

 
110,510

 
129,297

Prepaid expenses
66,210

 
66,509

 
48,997

Other current assets (2)
52,448

 
153,687

 
169,708

Total current assets
790,602

 
650,433

 
633,784

Property and equipment, net
106,837

 
106,837

 
80,613

Goodwill
1,229,541

 
1,229,541

 
1,182,457

Acquired intangible assets, net
192,372

 
192,372

 
200,202

Long-term marketable securities
30,987

 
30,987

 
30,115

Deferred tax assets (3)
195,884

 
228,776

 
165,566

Other assets (4)
169,596

 
41,750

 
36,285

Total assets
$
2,715,819

 
$
2,480,696

 
$
2,329,022

LIABILITIES AND STOCKHOLDERS’ EQUITY

 
 
 

Current liabilities:

 
 
 

Accounts payable
$
36,685

 
$
36,685

 
$
53,473

Accrued expenses and other current liabilities (5)
100,319

 
73,719

 
74,388

Accrued compensation and benefits
73,408

 
73,408

 
101,784

Accrued income taxes (3)
6,579

 
1,181

 
18,044

Deferred revenue (6)
381,392

 
545,168

 
487,590

Total current liabilities
598,383

 
730,161

 
735,279

Long-term debt
738,700

 
738,700

 
643,268

Deferred tax liabilities (3)
36,326

 
6,079

 
5,589

Deferred revenue (6)
10,415

 
8,541

 
11,852

Other liabilities
84,287

 
84,287

 
58,445

Total liabilities
1,468,111

 
1,567,768

 
1,454,433

 
 
 
 
 

Stockholders’ equity:

 
 
 

Preferred stock

 

 

Common stock
1,181

 
1,181

 
1,180

Additional paid-in capital
1,523,949

 
1,523,949

 
1,558,403

Accumulated deficit
(182,298
)
 
(519,930
)
 
(599,409
)
Accumulated other comprehensive loss
(95,124
)
 
(92,272
)
 
(85,585
)
Total stockholders’ equity
1,247,708

 
912,928

 
874,589

Total liabilities and stockholders’ equity
$
2,715,819

 
$
2,480,696

 
$
2,329,022

The changes in balance sheet accounts due to the adoption of ASC 606 are due primarily to the following:
(1)
Up front license recognition under our subscription contracts and billed but uncollected support and subscription receivables that had corresponding deferred revenue, which were included in other current assets prior to our adoption of ASC 606.
(2) Contract assets and capitalized commission costs.
(3)
The tax effect of the accumulated deficit impact related to the acceleration of revenue and deferral of costs (primarily commissions).
(4) The long-term portion of unbilled receivables due to the acceleration of license revenue on multi-year subscription contracts and the long-term portion of capitalized commission costs.
(5) Refund liability, primarily associated with the annual right to exchange on-premise subscription software described above in Judgments and Estimates.
(6) The decrease in deferred revenue recorded to accumulated deficit upon adoption of ASC 606 primarily related to on-premise subscription software licenses.

13


 
Three months ended
 
Six months ended
 
As Reported ASC 606
 
ASC 605
 
As Reported ASC 605
 
As Reported ASC 606
 
ASC 605
 
As Reported ASC 605
 
March 30,
2019
 
March 30,
2019
 
March 31,
2018
 
March 30,
2019
 
March 30,
2019
 
March 31,
2018
Revenue:
 
 
 
 
 
 
 
 
 
 
 
License (1)
$
61,876

 
$
156,131

 
$
120,505

 
$
167,198

 
$
330,036

 
$
240,023

Support and cloud services (1)
187,645

 
120,770

 
141,948

 
375,566

 
246,253

 
287,620

Total software revenue
249,521

 
276,901

 
262,453

 
542,764

 
576,289

 
527,643

Professional services 
40,930

 
38,598

 
45,430

 
82,376

 
77,967

 
86,884

Total revenue
290,451

 
315,499

 
307,883

 
625,140

 
654,256

 
614,527

Cost of revenue:

 
 
 

 
 
 
 
 
 
Cost of license revenue
12,875

 
12,245

 
11,854

 
25,438

 
24,592

 
23,968

Cost of support and cloud services revenue 
32,874

 
32,977

 
34,335

 
64,071

 
63,607

 
68,837

Total cost of software revenue
45,749

 
45,222

 
46,189

 
89,509

 
88,199

 
92,805

Cost of professional services revenue
34,155

 
32,745

 
37,519

 
67,747

 
64,964

 
73,938

Total cost of revenue (2)
79,904

 
77,967

 
83,708

 
157,256

 
153,163

 
166,743

Gross margin
210,547

 
237,532

 
224,175

 
467,884

 
501,093

 
447,784

Operating expenses:


 
 
 


 
 
 
 
 
 
Sales and marketing (3)
103,722

 
109,421

 
98,390

 
207,940

 
216,725

 
197,765

Research and development
61,402

 
61,402

 
62,197

 
122,184

 
122,184

 
126,169

General and administrative
35,371

 
35,371

 
33,369

 
73,235

 
73,235

 
68,389

Amortization of acquired intangible assets
5,930

 
5,930

 
7,895

 
11,866

 
11,866

 
15,716

Restructuring and other charges, net
26,980

 
26,980

 
114

 
45,473

 
45,473

 
219

Total operating expenses
233,405

 
239,104

 
201,965

 
460,698

 
469,483

 
408,258

Operating income
(22,858
)
 
(1,572
)
 
22,210

 
7,186

 
31,610

 
39,526

Interest expense
(11,383
)
 
(11,383
)
 
(10,379
)
 
(21,659
)
 
(21,659
)
 
(20,426
)
Other income (expense), net
821

 
1,065

 
(285
)
 
1,475

 
1,613

 
(1,083
)
Income (loss) before income taxes
(33,420
)
 
(11,890
)
 
11,546

 
(12,998
)
 
11,564

 
18,017

Provision (benefit) for income taxes (4)
10,093

 
140

 
3,624

 
9,530

 
4,346

 
(3,782
)
Net income (loss)
$
(43,513
)
 
$
(12,030
)
 
$
7,922

 
$
(22,528
)
 
$
7,218

 
$
21,799

(1)
The reduction in license revenue and increase in support revenue is a result of the support component of subscription licenses which is included in license revenue under ASC 605. Additionally, for the three months ended March 30, 2019, license revenue decreased by approximately $58.3 million as a result of the revenue recorded to accumulated deficit, which would have been recognized during the period and approximately $15.0 million as a result of revenue recognized during the first quarter of 2019 which would have been recognized during the period. For the six months ended March 30, 2019, license revenue decreased by approximately $123.3 million as a result of the revenue recorded to accumulated deficit which would have been recognized during the period. This was partially offset by approximately $48.5 million and $92.0 million of upfront license revenue recognition on new and renewal bookings for the three- and six-months ending March 30, 2019, respectively.
(2) Cost of revenue under ASC 606 is higher than under ASC 605 due to the treatment of deferred professional services costs under the new accounting guidance, partially offset by the timing of revenue recognition under ASC 606 resulting in lower associated royalty costs.
(3) Sales and marketing costs are lower under ASC 606 due to the amortization of commissions costs capitalized upon adoption of ASC 606, offset by the deferral of ongoing commission expenses under the new accounting guidance.
(4) The benefit for income taxes under ASC 606 includes indirect effects of the adoption.
3. Restructuring and Other Charges
Restructuring and other charges, net includes restructuring charges (credits) and headquarters relocation charges.

14


Restructuring Charges (Credits)
In October 2018, we initiated a restructuring plan to realign our workforce to shift investment to support Industrial Internet of Things and Augmented Reality strategic high growth opportunities. As this is a realignment of resources rather than a cost-savings initiative, we do not expect this realignment to result in significant cost savings. The restructuring plan was completed in the first quarter of 2019 and resulted in restructuring charges of $16 million for termination benefits associated with approximately 240 employees, substantially all of which we expect will be paid in fiscal 2019. In the second quarter of 2019, we also recorded $0.3 million of charges related to prior facility restructuring actions.
In January 2019, we relocated our worldwide headquarters to the Boston Seaport District. Because our prior headquarters lease will not expire until November 2022, we are seeking to sublease that space, but have not yet done so. As a result, we will bear overlapping rent obligations for those premises and, in the second quarter of 2019, we incurred a restructuring charge of approximately $26.7 million, based on the net present value of remaining lease commitments net of estimated sublease income. From a cash perspective, the free rent and estimated sublease income over the first 18 months on the Seaport headquarters total approximately $30 million, as compared to the estimated cash outflows of $34 million on the prior headquarters, which will be incurred over the next 44 months (rent obligations and operating expenses net of estimated sublease income). Restructuring charges and estimated cash outflows could increase if we are unable to sublease our prior headquarters as we expect. Other costs associated with the move were recorded as incurred.
The following table summarizes restructuring accrual activity for the six months ended March 30, 2019:
 
Employee severance and related benefits
 
Facility closures and related costs
 
Total
 
(in thousands)
October 1, 2018
$

 
$
2,415

 
$
2,415

Charges to operations, net
16,034

 
26,937

 
42,971

Cash disbursements
(15,085
)
 
(2,847
)
 
(17,932
)
Other non-cash charges

 
4,812

 
4,812

Foreign exchange impact
6

 
(34
)
 
(28
)
Accrual, March 30, 2019
$
955

 
$
31,283

 
$
32,238


The following table summarizes restructuring accrual activity for the six months ended March 31, 2018:
 
Employee severance and related benefits
 
Facility closures and related costs
 
Total
 
(in thousands)
October 1, 2017
$
1,736

 
$
4,508

 
$
6,244

Charges (credit) to operations, net
(395
)
 
(339
)
 
(734
)
Cash disbursements
(1,120
)
 
(806
)
 
(1,926
)
Foreign exchange impact
22

 
(47
)
 
(25
)
Accrual, March 31, 2018
$
243

 
$
3,316

 
$
3,559

Of the accrual for facility closures and related costs, as of March 30, 2019, $12.4 million is included in accrued expenses and other current liabilities and $18.9 million is included in other liabilities in the Consolidated Balance Sheets. The accrual for facility closures is net of assumed sublease income of $13.9 million. The accrual for employee severance and related benefits is included in accrued compensation and benefits in the Consolidated Balance Sheets.

15


Of the accrual for facility closures and related costs, as of March 31, 2018, $1.9 million is included in accrued expenses and other current liabilities and $1.4 million is included in other liabilities in the Consolidated Balance Sheets.
In determining the amount of the facilities accrual, we are required to estimate such factors as future vacancy rates, the time required to sublet properties and sublease rates. These estimates are reviewed quarterly based on known real estate market conditions and the credit-worthiness of subtenants, and may result in revisions to established facility reserves. The accrual is based on the net present value of remaining lease commitments net of estimated sublease income. We had $31.3 million accrued as of March 30, 2019 related to excess facilities (compared to $2.4 million at September 30, 2018), representing gross lease commitments with agreements expiring at various dates through 2023 of approximately $43.6 million, net of committed sublease income of approximately $1.0 million and uncommitted sublease income of approximately $11.3 million.
Other - Headquarters Relocation Charges
Headquarters relocation charges represent other expenses associated with exiting our Needham headquarters facility and relocating to our new worldwide headquarters in the Boston Seaport District. In the first six months of 2019 we recorded $1.9 million of accelerated depreciation expense related to shortening the estimated useful lives of leasehold improvements related to the Needham location. In January 2019, we made rental payments for both our new and previous headquarters. Headquarters relocation charges for the second quarter of 2019 include $0.6 million of rental expense for the Needham facility that overlapped with rental expense for the new Seaport headquarters.
4. Stock-based Compensation
Our equity incentive plan provides for grants of nonqualified and incentive stock options, common stock, restricted stock, restricted stock units (RSUs) and stock appreciation rights to employees, directors, officers and consultants. We award RSUs as the principal equity incentive awards, including performance-based awards that are earned based on achievement of performance criteria established by the Compensation Committee of our Board of Directors. Each RSU represents the contingent right to receive one share of our common stock.
We measure the cost of employee services received in exchange for RSU awards based on the fair value of the RSU awards on the date of grant. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. We account for forfeitures as they occur, rather than estimate expected forfeitures.
Our employee stock purchase plan (ESPP), initiated in the fourth quarter of 2016, allows eligible employees to contribute up to 10% of their base salary, up to a maximum of $25,000 per year and subject to other plan limitations, toward the purchase of our common stock at a discounted price. The purchase price of the shares on each purchase date is equal to 85% of the lower of the fair market value of our common stock on the first and last trading days of each offering period. The ESPP is qualified under Section 423 of the Internal Revenue Code. We estimate the fair value of each purchase right under the ESPP on the date of grant using the Black-Scholes option valuation model and use the straight-line attribution approach to record the expense over the six-month offering period. 
Restricted stock unit activity for the six months ended March 30, 2019
Shares
 
Weighted
Average
Grant Date
Fair Value
(Per Share)
 
(in thousands)
 
 
Balance of outstanding restricted stock units October 1, 2018
3,284

 
$
65.93

Granted (1)
1,061

 
$
82.09

Vested
(1,108
)
 
$
54.42

Forfeited or not earned
(322
)
 
$
63.98

Balance of outstanding restricted stock units March 31, 2019
2,915

 
$
76.48

 _________________
(1) Restricted stock granted includes 141,000 shares from prior period TSR awards that were earned upon achievement of the performance criteria and vested in November 2018.

16


 
Restricted Stock Units
Grant Period
Performance-based RSUs (1)
 
Service-based RSUs (2)
 
(Number of Units in thousands)
First six months of 2019
347
 
573
_________________
(1)
Substantially all the performance-based RSUs were granted to our executive officers. Approximately 147,000 shares are eligible to vest based upon annual performance measures over a three-year period. RSUs not earned for a period may be earned in the third period. To the extent earned, those performance-based RSUs will vest in three substantially equal installments on November 15, 2019, November 15, 2020 and November 15, 2021, or the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved for each performance period. An additional 200,000 performance-based RSUs are eligible to vest based upon a 2019 performance measure, which RSUs will be forfeited to the extent the performance measure is not achieved. These RSUs will vest, to the extent earned, in three substantially equal installments on November 15, 2019, 2020 and 2021.
(2)
The service-based RSUs were granted to employees, including our executive officers. Substantially all service-based RSUs will vest in three substantially equal annual installments on or about the anniversary of the date of grant.
Compensation expense recorded for our stock-based awards was classified in our Consolidated Statements of Operations as follows:
 
Three months ended
 
Six months ended
 
March 30,
2019
 
March 31,
2018
 
March 30,
2019
 
March 31,
2018
 
(in thousands)
Cost of license revenue
$
48

 
$
106

 
$
370

 
$
16

Cost of support and cloud services revenue
1,158

 
992

 
2,133

 
2,303

Cost of professional services revenue
1,906

 
1,669

 
3,720

 
3,375

Sales and marketing
9,522

 
5,038

 
19,244

 
9,917

Research and development
5,190

 
3,383

 
10,090

 
6,343

General and administrative
9,143

 
5,838

 
20,817

 
13,403

Total stock-based compensation expense
$
26,967

 
$
17,026

 
$
56,374

 
$
35,357

Stock-based compensation expense includes $1.4 million and $2.7 million in the second quarter and first six months of 2019, respectively and $1.0 million and $2.1 million in the second quarter and first six months of 2018, respectively, related to the ESPP.
5. Earnings per Share (EPS) and Common Stock
EPS
Basic EPS is calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding RSUs using the treasury stock method. The calculation of the dilutive effect of outstanding equity awards under the treasury stock method includes consideration of unrecognized compensation expense as additional proceeds.

17


 
Three months ended
 
Six months ended
Calculation of Basic and Diluted EPS
March 30,
2019
 
March 31,
2018
 
March 30,
2019
 
March 31,
2018
 
(in thousands, except per share data)
Net income (loss)
$
(43,513
)
 
$
7,922

 
$
(22,528
)
 
$
21,799

Weighted average shares outstanding—Basic
118,461

 
116,241

 
118,392

 
115,986

Dilutive effect of restricted stock units

 
1,664

 

 
1,794

Weighted average shares outstanding—Diluted
118,461

 
117,905

 
118,392

 
117,780

Earnings (loss) per share—Basic
$
(0.37
)
 
$
0.07

 
$
(0.19
)
 
$
0.19

Earnings (loss) per share—Diluted
$
(0.37
)
 
$
0.07

 
$
(0.19
)
 
$
0.19


There were 23,000 anti-dilutive shares for the six months ended March 30, 2019. There were no anti-dilutive shares for the six months ended March 31, 2018.
Common Stock Repurchases
Our Articles of Organization authorize us to issue up to 500 million shares of our common stock.
Our Board of Directors has authorized us to repurchase up to $1,500 million of our common stock in the period October 1, 2017 through September 30, 2020. We repurchased $65.0 million of our common stock in the second quarter and first six months of 2019. We did not repurchase any shares in the second quarter and first six months of 2018. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.
6. Acquisitions
Acquisition-related costs in the second quarter and first six months of 2019 totaled $0.4 million and $0.8 million, respectively, compared to $0.1 million in the second quarter and first six months of 2018, respectively. Acquisition-related costs include direct costs of potential and completed acquisitions (e.g., investment banker fees and professional fees, including legal and valuation services) and expenses related to acquisition integration activities (e.g., professional fees and severance). In addition, subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are included within acquisition-related charges. These costs are classified in general and administrative expenses in the accompanying Consolidated Statements of Operations.
Frustum
On November 19, 2018, we acquired Frustum Inc. for $69.5 million (net of cash acquired of $0.7 million). We financed the acquisition with borrowings under our credit facility. Frustum is engaged in next-generation computer-aided design, including generative design, an approach that leverages artificial intelligence to generate design options. At the time of the acquisition, Frustum had approximately 12 employees and historical annualized revenues were not material. We do not expect the acquisition to add material revenue in fiscal 2019.
The acquisition of Frustum has been accounted for as a business combination. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using a discounted cash flow model which requires the use of significant estimates and assumptions, including estimating future revenues and costs. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. 
The purchase price allocation resulted in $53.7 million of goodwill, $17.9 million of purchased software and $2.1 million of other net liabilities. The acquired technology is being amortized over a useful life of 15 years based on the expected benefit pattern of the assets. The acquired goodwill was allocated to our software products segment and will not be deductible for income tax purposes. The resulting amount of goodwill reflects the expected value that will be created by integrating Frustum generative design technology into our CAD solutions.
7. Goodwill and Intangible Assets
We have two operating and reportable segments: (1) Software Products and (2) Professional Services. We assess goodwill for impairment at the reporting unit level. Our reporting units are

18


determined based on the components of our operating segments that constitute a business for which discrete financial information is available and for which operating results are regularly reviewed by segment management. Our reporting units are the same as our operating segments.
As of March 30, 2019, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $1,391.9 million and attributable to our Professional Services segment was $30.0 million. As of September 30, 2018, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $1,352.4 million and attributable to our Professional Services segment was $30.2 million. Acquired intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.
We completed our annual goodwill impairment review as of June 30, 2018 based on a qualitative assessment. Our qualitative assessment included company specific (financial performance and long-range plans), industry, and macroeconomic factors, and consideration of the fair value of each reporting unit relative to its carrying value at the last valuation date. Based on our qualitative assessment, we believe it is more likely than not that the fair values of our reporting units exceed their carrying values and no further impairment testing is required.
Goodwill and acquired intangible assets consisted of the following:
 
March 30, 2019
 
September 30, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
(in thousands)
Goodwill (not amortized)
 
 
 
 
$
1,229,541

 
 
 
 
 
$
1,182,457

Intangible assets with finite lives (amortized) (1):
 
 
 
 
 
 
 
 
 
 
 
Purchased software
$
378,842

 
$
265,881

 
$
112,961

 
$
362,679

 
$
254,059

 
$
108,620

Capitalized software
22,877

 
22,877

 

 
22,877

 
22,877

 

Customer lists and relationships
354,600

 
279,139

 
75,461

 
357,586

 
270,272

 
87,314

Trademarks and trade names
18,994

 
15,044

 
3,950

 
19,054

 
14,786

 
4,268

Other
3,952

 
3,952

 

 
4,003

 
4,003

 

 
$
779,265

 
$
586,893

 
$
192,372

 
$
766,199

 
$
565,997

 
$
200,202

Total goodwill and acquired intangible assets
 
 
 
 
$
1,421,913

 
 
 
 
 
$
1,382,659

(1) The weighted-average useful lives of purchased software, customer lists and relationships, and trademarks and trade names with a remaining net book value are 9 years, 10 years, and 11 years, respectively.
Goodwill
Changes in goodwill presented by reportable segments were as follows: 
 
Software Products
 
Professional Services
 
Total
 
(in thousands)
Balance, October 1, 2018
$
1,152,720

 
$
29,737

 
$
1,182,457

Frustum acquisition
53,673

 

 
53,673

Foreign currency translation adjustment
(6,423