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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 June 29, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from_ to_
Commission File Number: 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      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      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer
  
Accelerated filer
  
Non-accelerated 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  

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 115,179,478 shares of our common stock outstanding on August 7, 2019.



PTC Inc.
INDEX TO FORM 10-Q
For the Quarter Ended June 29, 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)
 
June 29,
2019
 
September 30,
2018
ASSETS

 
 
Current assets:

 
 
Cash and cash equivalents
$
267,862

 
$
259,946

Short-term marketable securities
33,073

 
25,836

Accounts receivable, net of allowance for doubtful accounts of $822 and $607 at June 29, 2019 and September 30, 2018, respectively
321,426

 
129,297

Prepaid expenses
69,819

 
48,997

Other current assets
60,483

 
169,708

Total current assets
752,663

 
633,784

Property and equipment, net
107,752

 
80,613

Goodwill
1,245,084

 
1,182,457

Acquired intangible assets, net
183,180

 
200,202

Long-term marketable securities
21,553

 
30,115

Deferred tax assets
189,371

 
165,566

Other assets
148,998

 
36,285

Total assets
$
2,648,601

 
$
2,329,022

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

Accounts payable
$
44,065

 
$
53,473

Accrued expenses and other current liabilities
95,790

 
74,388

Accrued compensation and benefits
78,854

 
101,784

Accrued income taxes
8,222

 
18,044

Deferred revenue
374,291

 
487,590

Total current liabilities
601,222

 
735,279

Long-term debt
698,916

 
643,268

Deferred tax liabilities
37,354

 
5,589

Deferred revenue
8,288

 
11,852

Other liabilities
87,226

 
58,445

Total liabilities
1,433,006

 
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; 115,111 and 117,981 shares issued and outstanding at June 29, 2019 and September 30, 2018, respectively
1,151

 
1,180

Additional paid-in capital
1,504,512

 
1,558,403

Accumulated deficit
(197,056
)
 
(599,409
)
Accumulated other comprehensive loss
(93,012
)
 
(85,585
)
Total stockholders’ equity
1,215,595

 
874,589

Total liabilities and stockholders’ equity
$
2,648,601

 
$
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
 
Nine months ended
 
June 29,
2019
 
June 30,
2018
 
June 29,
2019
 
June 30,
2018
Revenue:
 
 
 
 
 
 
 
License
$
62,918

 
$
136,568

 
$
230,116

 
$
376,591

Support and cloud services
190,487

 
137,051

 
566,053

 
424,671

Total software revenue
253,405

 
273,619

 
796,169

 
801,262

Professional services
42,081

 
41,158

 
124,457

 
128,041

Total revenue
295,486

 
314,777

 
920,626

 
929,303

Cost of revenue:

 

 
 
 
 
Cost of license revenue
13,307

 
11,982

 
38,745

 
35,950

Cost of support and cloud services revenue
33,785

 
34,291

 
97,856

 
103,128

Total cost of software revenue
47,092

 
46,273

 
136,601

 
139,078

Cost of professional services revenue
35,613

 
35,360

 
103,360

 
109,298

Total cost of revenue
82,705

 
81,633

 
239,961

 
248,376

Gross margin
212,781

 
233,144

 
680,665

 
680,927

Operating expenses:


 


 
 
 
 
Sales and marketing
108,202

 
107,801

 
316,142

 
305,566

Research and development
60,590

 
61,221

 
182,774

 
187,390

General and administrative
28,773

 
33,098

 
102,008

 
101,487

Amortization of acquired intangible assets
5,920

 
7,850

 
17,786

 
23,566

Restructuring and other charges, net
(9
)
 
1,627

 
45,464

 
1,846

Total operating expenses
203,476

 
211,597

 
664,174

 
619,855

Operating income
9,305

 
21,547

 
16,491

 
61,072

Interest expense
(10,816
)
 
(10,646
)
 
(32,475
)
 
(31,072
)
Other income (expense), net
1,026

 
(930
)
 
2,501

 
(2,013
)
Income (loss) before income taxes
(485
)
 
9,971

 
(13,483
)
 
27,987

Provision (benefit) for income taxes
14,273

 
(7,026
)
 
23,803

 
(10,809
)
Net income (loss)
$
(14,758
)
 
$
16,997

 
$
(37,286
)
 
$
38,796

Earnings (loss) per share—Basic
$
(0.13
)
 
$
0.15

 
$
(0.32
)
 
$
0.33

Earnings (loss) per share—Diluted
$
(0.13
)
 
$
0.14

 
$
(0.32
)
 
$
0.33

Weighted average shares outstanding—Basic
116,133

 
115,774

 
117,636

 
115,915

Weighted average shares outstanding—Diluted
116,133

 
117,500

 
117,636

 
117,687








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
 
Nine months ended
 
June 29,
2019
 
June 30,
2018
 
June 29,
2019
 
June 30,
2018
Net income (loss)
$
(14,758
)
 
$
16,997

 
$
(37,286
)
 
$
38,796

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Hedge gain (loss) arising during the period, net of tax of $0.2 million and $0.6 million in the third quarter of 2019 and 2018, respectively, and $0 million and $0.1 million in the first nine months of 2019 and 2018, respectively
(2,644
)
 
3,910

 
(1,818
)
 
950

Net hedge (gain) loss reclassified into earnings, net of tax of $0 million in the third quarter of 2019 and 2018, respectively, and $0.1 million and $0.3 million in the first nine months of 2019 and 2018, respectively

 
242

 
(549
)
 
2,327

Realized and unrealized gain (loss) on hedging instruments
(2,644
)
 
4,152

 
(2,367
)
 
3,277

Foreign currency translation adjustment, net of tax of $0 for each period
4,393

 
(21,628
)
 
(7,209
)
 
(8,859
)
Unrealized gain (loss) on marketable securities, net of tax of $0 for each period
175

 
67

 
477

 
(379
)
Amortization of net actuarial pension loss included in net income, net of tax of $0.2 million and $0.1 million in the third quarter of 2019 and 2018, respectively, and $0.5 million in the first nine months of 2019 and 2018, respectively
418

 
386

 
1,277

 
1,143

Change in unamortized pension loss during the period related to changes in foreign currency
(230
)
 
884

 
395

 
156

Other comprehensive income (loss)
2,112

 
(16,139
)
 
(7,427
)
 
(4,662
)
Comprehensive income (loss)
$
(12,646
)
 
$
858

 
$
(44,713
)
 
$
34,134




























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

3


PTC Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Nine months ended
 
June 29,
2019
 
June 30,
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(37,286
)
 
$
38,796

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
58,634

 
65,303

Stock-based compensation
71,608

 
52,015

Other non-cash items, net
(2,721
)
 
304

Changes in operating assets and liabilities, excluding the effects of acquisitions:
 
 
 
Accounts receivable
88,254

 
21,195

Accounts payable and accrued expenses
4,124

 
(16,539
)
Accrued compensation and benefits
(23,442
)
 
(22,348
)
Deferred revenue
25,325

 
82,794

Accrued income taxes
(12,777
)
 
(30,005
)
Other current assets and prepaid expenses
(6,336
)
 
(4,964
)
Other noncurrent assets and liabilities
64,546

 
(759
)
Net cash provided by operating activities
229,929

 
185,792

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(59,579
)
 
(18,666
)
Purchase of intangible asset

 
(3,000
)
Purchases of short- and long-term marketable securities
(18,950
)
 
(18,063
)
Proceeds from maturities of short- and long-term marketable securities
20,677

 
13,640

Acquisitions of businesses, net of cash acquired
(86,737
)
 
(3,000
)
Purchases of investments
(7,500
)
 
(1,000
)
Settlement of net investment hedges
4,509

 

Net cash used in investing activities
(147,580
)
 
(30,089
)
Cash flows from financing activities:
 
 
 
Borrowings under credit facility
205,000

 
200,000

Repayments of borrowings under credit facility
(150,000
)
 
(220,000
)
Repurchases of common stock
(89,995
)
 
(100,000
)
Proceeds from issuance of common stock
4,158

 
7,472

Contingent consideration
(1,575
)
 
(7,750
)
Payments of withholding taxes in connection with stock-based awards
(44,191
)
 
(44,797
)
Net cash used in financing activities
(76,603
)
 
(165,075
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
2,143

 
(3,609
)
Net increase in cash, cash equivalents, and restricted cash
7,889

 
(12,981
)
Cash, cash equivalents, and restricted cash, beginning of period
261,093

 
281,209

Cash, cash equivalents, and restricted cash, end of period
$
268,982

 
$
268,228


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 June 29, 2019
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance as of March 31, 2019
118,098

 
$
1,181

 
$
1,523,949

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

Common stock issued for employee stock-based awards
371

 
4

 
(4
)
 

 

 

Shares surrendered by employees to pay taxes related to stock-based awards
(113
)
 
(1
)
 
(9,699
)
 

 

 
(9,700
)
Compensation expense from stock-based awards

 

 
15,234

 

 

 
15,234

Net loss

 

 

 
(14,758
)
 

 
(14,758
)
Repurchases of common stock
(3,245
)
 
(33
)
 
(24,968
)
 

 

 
(25,001
)
Unrealized loss on net investment hedges, net of tax

 

 

 

 
(2,644
)
 
(2,644
)
Foreign currency translation adjustment

 

 

 

 
4,393

 
4,393

Unrealized gain on marketable securities, net of tax

 

 

 

 
175

 
175

Change in pension benefits, net of tax

 

 

 

 
188

 
188

Balance as of June 29, 2019
115,111

 
$
1,151

 
$
1,504,512

 
$
(197,056
)
 
$
(93,012
)
 
$
1,215,595

 
Nine months ended June 29, 2019
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance as of October 1, 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
1,479

 
15

 
(15
)
 

 

 

Shares surrendered by employees to pay taxes related to stock-based awards
(501
)
 
(5
)
 
(44,186
)
 

 

 
(44,191
)
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

 

 
71,608

 

 

 
71,608

Net loss

 

 

 
(37,286
)
 

 
(37,286
)
Repurchases of common stock
(3,970
)
 
(40
)
 
(89,955
)
 

 

 
(89,995
)
Unrealized loss on cash flow hedges, net of tax

 

 

 

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

 

 

 

 
(1,982
)
 
(1,982
)
Foreign currency translation adjustment

 

 

 

 
(7,209
)
 
(7,209
)
Unrealized gain on marketable securities, net of tax

 

 

 

 
477

 
477

Change in pension benefits, net of tax

 

 

 

 
1,672

 
1,672

Balance as of June 29, 2019
115,111

 
$
1,151

 
$
1,504,512

 
$
(197,056
)
 
$
(93,012
)
 
$
1,215,595



5


 
Three months ended June 30, 2018
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance as of April 1, 2018
116,338

 
$
1,163

 
$
1,618,588

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

Common stock issued for employee stock-based awards
428

 
4

 
(4
)
 

 

 

Shares surrendered by employees to pay taxes related to stock-based awards
(128
)
 
(1
)
 
(10,854
)
 

 

 
(10,855
)
Compensation expense from stock-based awards

 

 
16,658

 

 

 
16,658

Net income

 

 

 
16,997

 

 
16,997

Repurchases of common stock
(1,147
)
 
(11
)
 
(99,989
)
 

 

 
(100,000
)
Unrealized gain on cash flow hedges, net of tax

 

 

 

 
4,152

 
4,152

Foreign currency translation adjustment

 

 

 

 
(21,628
)
 
(21,628
)
Unrealized gain on marketable securities, net of tax

 

 

 

 
67

 
67

Change in pension benefits, net of tax

 

 

 

 
1,270

 
1,270

Balance as of June 30, 2018
115,491

 
$
1,155

 
$
1,524,399

 
$
(612,600
)
 
$
(78,569
)
 
$
834,385

 
Nine months ended June 30, 2018
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance as of October 1, 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
1,805

 
18

 
(18
)
 

 

 

Shares surrendered by employees to pay taxes related to stock-based awards
(658
)
 
(6
)
 
(44,791
)
 

 

 
(44,797
)
Common stock issued for employee stock purchase plan
158

 
1

 
7,471

 

 

 
7,472

Compensation expense from stock-based awards

 

 
52,015

 

 

 
52,015

Net income

 

 

 
38,796

 

 
38,796

Repurchases of common stock
(1,147
)
 
(11
)
 
(99,989
)
 

 

 
(100,000
)
Unrealized gain on cash flow hedges, net of tax

 

 

 

 
3,277

 
3,277

Foreign currency translation adjustment

 

 

 

 
(8,859
)
 
(8,859
)
Unrealized loss on marketable securities, net of tax

 

 

 

 
(379
)
 
(379
)
Change in pension benefits, net of tax

 

 

 

 
1,299

 
1,299

Balance as of June 30, 2018
115,491

 
$
1,155

 
$
1,524,399

 
$
(612,600
)
 
$
(78,569
)
 
$
834,385


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 third quarter of 2019 ended on June 29, 2019 and the third quarter of 2018 ended on June 30, 2018. The results of operations for the nine months ended June 29, 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 on the Consolidated Statements of Cash Flows. The prior period restricted cash amounts have been reclassified for comparability. As of June 29, 2019 and September 30, 2018, $1.1 million of restricted cash was included in other current assets.

7


Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Revenue Recognition
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.
Certain of our multi-year subscription contracts with start dates on or after October 1, 2018 contain a limited annual cancellation right.  For such cancellable subscription contracts, we consider each annual period a discrete contract.  We recognize the license portion at the beginning of each one-year contract period and the support portion ratably over each one-year contractual period.  Early in the fourth quarter of 2019, we discontinued offering the cancellation right for substantially all new contracts.
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, a $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 $0.5 million of non-service net periodic pension cost for the three and nine months ended June 30, 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. We plan to adopt ASU 2016-02 effective October 1, 2019. Financial information for the comparative periods will not be recast. We are currently evaluating the impact of our pending adoption of ASU 2016-02 on our consolidated financial statements. We intend to elect the available practical expedients, including carrying forward the classification of our existing leases and our assessment of their remaining lease terms. We have completed the inventory of our leases and policy election and currently

9


expect that our operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon our adoption of the standard. ASU 2016-02 will materially increase our total assets and total liabilities that we report relative to such amounts prior to adoption. We are currently identifying new processes, systems and controls to meet the accounting and disclosure requirements under the new standard, which will be implemented by the time of adoption.
2. Revenue from Contracts with Customers
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 assess whether the cloud component is 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 are 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 use 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

10


recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. As of June 29, 2019, the total refund liability was $21.5 million, primarily associated with the annual right to exchange on-premise subscription software.
Contract Assets and Contract Liabilities
 
June 29, 2019
 
October 1, 2018, as adjusted
 
(in thousands)
Contract asset
$
22,808

 
$
26,265

Deferred revenue
$
382,579

 
$
357,490


As of June 29, 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 $14.6 million of the October 1, 2018 contract asset balance was transferred to receivables during the nine months ended June 29, 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 $11.1 million related to revenue recognized in the period, net of billings. There were no impairments of contract assets during the nine months ended June 29, 2019.
During the three and nine months ended June 29, 2019, $54.7 million and $300.8 million of revenue that was included in the deferred revenue opening balance was recognized, respectively. There were additional deferrals of $325.9 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 June 29, 2019, deferred costs of $23.0 million were included in other current assets and $60.1 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 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 June 29, 2019, amounts allocated to these additional contractual obligations are $862.7 million, of which we expect to recognize approximately 90% over the next