v2.4.1.9
Document and Entity Information
3 Months Ended
Dec. 31, 2014
Feb. 02, 2015
Document And Entity Information [Abstract]    
Entity Registrant Name F5 NETWORKS INC  
Entity Central Index Key 0001048695  
Current Fiscal Year End Date --09-30  
Entity Filer Category Large Accelerated Filer  
Document Type 10-Q  
Document Period End Date Dec. 31, 2014  
Document Fiscal Year Focus 2015  
Document Fiscal Period Focus Q1  
Amendment Flag false  
Entity Common Stock, Shares Outstanding   72,138,521dei_EntityCommonStockSharesOutstanding
v2.4.1.9
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2014
Sep. 30, 2014
ASSETS    
Cash and cash equivalents $ 268,954us-gaap_CashAndCashEquivalentsAtCarryingValue $ 281,502us-gaap_CashAndCashEquivalentsAtCarryingValue
Short-term investments 385,150us-gaap_ShortTermInvestments 363,877us-gaap_ShortTermInvestments
Accounts receivable, net of allowances of $3,526 and $4,958 255,864us-gaap_AccountsReceivableNetCurrent 242,242us-gaap_AccountsReceivableNetCurrent
Inventories 27,582us-gaap_InventoryNet 24,471us-gaap_InventoryNet
Deferred tax assets 44,963us-gaap_DeferredTaxAssetsNetCurrent 42,290us-gaap_DeferredTaxAssetsNetCurrent
Other current assets 44,344us-gaap_OtherAssetsCurrent 44,466us-gaap_OtherAssetsCurrent
Total current assets 1,026,857us-gaap_AssetsCurrent 998,848us-gaap_AssetsCurrent
Property and equipment, net 66,636us-gaap_PropertyPlantAndEquipmentNet 66,791us-gaap_PropertyPlantAndEquipmentNet
Long-term investments 512,538us-gaap_LongTermInvestments 482,917us-gaap_LongTermInvestments
Deferred tax assets 1,217us-gaap_DeferredTaxAssetsNetNoncurrent 4,434us-gaap_DeferredTaxAssetsNetNoncurrent
Goodwill 556,957us-gaap_Goodwill 556,957us-gaap_Goodwill
Other assets, net 72,219us-gaap_OtherAssetsNoncurrent 75,003us-gaap_OtherAssetsNoncurrent
Total assets 2,236,424us-gaap_Assets 2,184,950us-gaap_Assets
LIABILITIES AND SHAREHOLDERS’ EQUITY    
Accounts payable 41,223us-gaap_AccountsPayableCurrent 43,772us-gaap_AccountsPayableCurrent
Accrued liabilities 132,685us-gaap_AccruedLiabilitiesCurrent 108,772us-gaap_AccruedLiabilitiesCurrent
Deferred revenue 521,716us-gaap_DeferredRevenueCurrent 484,437us-gaap_DeferredRevenueCurrent
Total current liabilities 695,624us-gaap_LiabilitiesCurrent 636,981us-gaap_LiabilitiesCurrent
Other long-term liabilities 23,316us-gaap_OtherLiabilitiesNoncurrent 22,718us-gaap_OtherLiabilitiesNoncurrent
Deferred revenue, long-term 158,554us-gaap_DeferredRevenueNoncurrent 152,312us-gaap_DeferredRevenueNoncurrent
Deferred tax liabilities 3,153us-gaap_DeferredTaxLiabilitiesNoncurrent 3,629us-gaap_DeferredTaxLiabilitiesNoncurrent
Total long-term liabilities 185,023us-gaap_LiabilitiesNoncurrent 178,659us-gaap_LiabilitiesNoncurrent
Commitments and contingencies      
Shareholders’ equity    
Preferred stock, no par value; 10,000 shares authorized, no shares outstanding 0us-gaap_PreferredStockValue 0us-gaap_PreferredStockValue
Common stock, no par value; 200,000 shares authorized, 72,673 and 73,390 shares issued and outstanding 5,105us-gaap_CommonStockValue 15,753us-gaap_CommonStockValue
Accumulated other comprehensive loss (12,040)us-gaap_AccumulatedOtherComprehensiveIncomeLossNetOfTax (9,584)us-gaap_AccumulatedOtherComprehensiveIncomeLossNetOfTax
Retained earnings 1,362,712us-gaap_RetainedEarningsAccumulatedDeficit 1,363,141us-gaap_RetainedEarningsAccumulatedDeficit
Total shareholders’ equity 1,355,777us-gaap_StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest 1,369,310us-gaap_StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest
Total liabilities and shareholders’ equity $ 2,236,424us-gaap_LiabilitiesAndStockholdersEquity $ 2,184,950us-gaap_LiabilitiesAndStockholdersEquity
v2.4.1.9
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2014
Sep. 30, 2014
Statement of Financial Position [Abstract]    
Accounts receivable, allowances $ 3,526us-gaap_AllowanceForDoubtfulAccountsReceivableCurrent $ 4,958us-gaap_AllowanceForDoubtfulAccountsReceivableCurrent
Preferred stock, par value (dollars per share) $ 0us-gaap_PreferredStockNoParValue $ 0us-gaap_PreferredStockNoParValue
Preferred stock, shares authorized 10,000,000us-gaap_PreferredStockSharesAuthorized 10,000,000us-gaap_PreferredStockSharesAuthorized
Preferred stock, shares outstanding 0us-gaap_PreferredStockSharesOutstanding 0us-gaap_PreferredStockSharesOutstanding
Common stock, par value (dollars per share) $ 0us-gaap_CommonStockNoParValue $ 0us-gaap_CommonStockNoParValue
Common stock, shares authorized 200,000,000us-gaap_CommonStockSharesAuthorized 200,000,000us-gaap_CommonStockSharesAuthorized
Common stock, shares issued 72,673,000us-gaap_CommonStockSharesIssued 73,390,000us-gaap_CommonStockSharesIssued
Common stock, shares outstanding 72,673,000us-gaap_CommonStockSharesOutstanding 73,390,000us-gaap_CommonStockSharesOutstanding
v2.4.1.9
Consolidated Income Statements (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Net revenues    
Products $ 240,937us-gaap_SalesRevenueGoodsNet $ 218,601us-gaap_SalesRevenueGoodsNet
Services 221,856us-gaap_SalesRevenueServicesNet 187,851us-gaap_SalesRevenueServicesNet
Total 462,793us-gaap_SalesRevenueNet 406,452us-gaap_SalesRevenueNet
Cost of net revenues    
Products 42,070us-gaap_CostOfGoodsSold 37,244us-gaap_CostOfGoodsSold
Services 37,278us-gaap_CostOfServices 35,639us-gaap_CostOfServices
Total 79,348us-gaap_CostOfGoodsAndServicesSold 72,883us-gaap_CostOfGoodsAndServicesSold
Gross profit 383,445us-gaap_GrossProfit 333,569us-gaap_GrossProfit
Operating expenses    
Sales and marketing 148,816us-gaap_SellingAndMarketingExpense 134,803us-gaap_SellingAndMarketingExpense
Research and development 70,060us-gaap_ResearchAndDevelopmentExpense 64,133us-gaap_ResearchAndDevelopmentExpense
General and administrative 32,254us-gaap_GeneralAndAdministrativeExpense 25,500us-gaap_GeneralAndAdministrativeExpense
Total 251,130us-gaap_OperatingExpenses 224,436us-gaap_OperatingExpenses
Income from operations 132,315us-gaap_OperatingIncomeLoss 109,133us-gaap_OperatingIncomeLoss
Other income, net 2,594us-gaap_OtherNonoperatingIncomeExpense 246us-gaap_OtherNonoperatingIncomeExpense
Income before income taxes 134,909us-gaap_IncomeLossFromContinuingOperationsBeforeIncomeTaxesMinorityInterestAndIncomeLossFromEquityMethodInvestments 109,379us-gaap_IncomeLossFromContinuingOperationsBeforeIncomeTaxesMinorityInterestAndIncomeLossFromEquityMethodInvestments
Provision for income taxes 45,833us-gaap_IncomeTaxExpenseBenefit 41,331us-gaap_IncomeTaxExpenseBenefit
Net income $ 89,076us-gaap_NetIncomeLoss $ 68,048us-gaap_NetIncomeLoss
Net income per share — basic (dollars per share) $ 1.21us-gaap_EarningsPerShareBasic $ 0.88us-gaap_EarningsPerShareBasic
Weighted average shares — basic (shares) 73,350us-gaap_WeightedAverageNumberOfSharesOutstandingBasic 77,438us-gaap_WeightedAverageNumberOfSharesOutstandingBasic
Net income per share — diluted (dollars per share) $ 1.21us-gaap_EarningsPerShareDiluted $ 0.87us-gaap_EarningsPerShareDiluted
Weighted average shares — diluted (shares) 73,857us-gaap_WeightedAverageNumberOfDilutedSharesOutstanding 77,822us-gaap_WeightedAverageNumberOfDilutedSharesOutstanding
v2.4.1.9
Consolidated Statements Of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Statement of Comprehensive Income [Abstract]    
Net income $ 89,076us-gaap_NetIncomeLoss $ 68,048us-gaap_NetIncomeLoss
Other comprehensive loss:    
Foreign currency translation adjustment (1,965)us-gaap_OtherComprehensiveIncomeLossForeignCurrencyTransactionAndTranslationAdjustmentNetOfTax (576)us-gaap_OtherComprehensiveIncomeLossForeignCurrencyTransactionAndTranslationAdjustmentNetOfTax
Unrealized (losses) gains on securities, net of taxes of $288 and $(260) for the three months ended December 31, 2014 and 2013, respectively (479)us-gaap_OtherComprehensiveIncomeUnrealizedHoldingGainLossOnSecuritiesArisingDuringPeriodNetOfTax 480us-gaap_OtherComprehensiveIncomeUnrealizedHoldingGainLossOnSecuritiesArisingDuringPeriodNetOfTax
Reclassification adjustment for realized gains included in net income, net of taxes of $7 and $22 for the three months ended December 31, 2014 and 2013, respectively (12)us-gaap_OtherComprehensiveIncomeLossReclassificationAdjustmentFromAOCIForSaleOfSecuritiesNetOfTax (38)us-gaap_OtherComprehensiveIncomeLossReclassificationAdjustmentFromAOCIForSaleOfSecuritiesNetOfTax
Net change in unrealized (losses) gains on available-for-sale securities, net of tax (491)us-gaap_OtherComprehensiveIncomeAvailableforsaleSecuritiesAdjustmentNetOfTaxPortionAttributableToParent 442us-gaap_OtherComprehensiveIncomeAvailableforsaleSecuritiesAdjustmentNetOfTaxPortionAttributableToParent
Total other comprehensive loss (2,456)us-gaap_OtherComprehensiveIncomeLossNetOfTax (134)us-gaap_OtherComprehensiveIncomeLossNetOfTax
Comprehensive income $ 86,620us-gaap_ComprehensiveIncomeNetOfTaxIncludingPortionAttributableToNoncontrollingInterest $ 67,914us-gaap_ComprehensiveIncomeNetOfTaxIncludingPortionAttributableToNoncontrollingInterest
v2.4.1.9
Consolidated Statements Of Comprehensive Income (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Tax effect of unrealized gain (loss) on securities $ 288us-gaap_OtherComprehensiveIncomeUnrealizedHoldingGainLossOnSecuritiesArisingDuringPeriodTax $ (260)us-gaap_OtherComprehensiveIncomeUnrealizedHoldingGainLossOnSecuritiesArisingDuringPeriodTax
Tax effect of reclassification adjustment for realized (gains) losses $ 7us-gaap_OtherComprehensiveIncomeLossReclassificationAdjustmentFromAOCIForSaleOfSecuritiesTax $ 22us-gaap_OtherComprehensiveIncomeLossReclassificationAdjustmentFromAOCIForSaleOfSecuritiesTax
v2.4.1.9
Consolidated Statements Of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Operating activities    
Net income $ 89,076us-gaap_NetIncomeLoss $ 68,048us-gaap_NetIncomeLoss
Adjustments to reconcile net income to net cash provided by operating activities:    
Realized loss (gain) on disposition of assets and investments 7ffiv_RealizedGainLossOnDispositionOfAssetsAndInvestments (59)ffiv_RealizedGainLossOnDispositionOfAssetsAndInvestments
Stock-based compensation 30,625us-gaap_ShareBasedCompensation 34,528us-gaap_ShareBasedCompensation
Provisions for doubtful accounts and sales returns 345ffiv_ProvisionsForDoubtfulAccountsAndSalesReturns 1,168ffiv_ProvisionsForDoubtfulAccountsAndSalesReturns
Depreciation and amortization 13,042us-gaap_DepreciationDepletionAndAmortization 11,437us-gaap_DepreciationDepletionAndAmortization
Deferred income taxes 231us-gaap_DeferredIncomeTaxesAndTaxCredits (8,702)us-gaap_DeferredIncomeTaxesAndTaxCredits
Changes in operating assets and liabilities:    
Accounts receivable (13,967)us-gaap_IncreaseDecreaseInAccountsReceivable (17,746)us-gaap_IncreaseDecreaseInAccountsReceivable
Inventories (3,111)us-gaap_IncreaseDecreaseInInventories (25)us-gaap_IncreaseDecreaseInInventories
Other current assets (120)us-gaap_IncreaseDecreaseInOtherCurrentAssets 2,189us-gaap_IncreaseDecreaseInOtherCurrentAssets
Other assets 460us-gaap_IncreaseDecreaseInOtherNoncurrentAssets (1,876)us-gaap_IncreaseDecreaseInOtherNoncurrentAssets
Accounts payable and accrued liabilities 26,286us-gaap_IncreaseDecreaseInAccountsPayableAndAccruedLiabilities 33,611us-gaap_IncreaseDecreaseInAccountsPayableAndAccruedLiabilities
Deferred revenue 43,521us-gaap_IncreaseDecreaseInDeferredRevenue 36,353us-gaap_IncreaseDecreaseInDeferredRevenue
Net cash provided by operating activities 186,395us-gaap_NetCashProvidedByUsedInOperatingActivities 158,926us-gaap_NetCashProvidedByUsedInOperatingActivities
Investing activities    
Purchases of investments (177,936)us-gaap_PaymentsToAcquireInvestments (147,534)us-gaap_PaymentsToAcquireInvestments
Maturities of investments 120,982us-gaap_ProceedsFromMaturitiesPrepaymentsAndCallsOfAvailableForSaleSecurities 168,026us-gaap_ProceedsFromMaturitiesPrepaymentsAndCallsOfAvailableForSaleSecurities
Sales of investments 2,693us-gaap_ProceedsFromSaleOfAvailableForSaleSecurities 54,660us-gaap_ProceedsFromSaleOfAvailableForSaleSecurities
Decrease (increase) in restricted cash 43us-gaap_IncreaseDecreaseInRestrictedCash (6)us-gaap_IncreaseDecreaseInRestrictedCash
Acquisition of intangible assets (1,005)us-gaap_PaymentsToAcquireIntangibleAssets 0us-gaap_PaymentsToAcquireIntangibleAssets
Purchases of property and equipment (10,319)us-gaap_PaymentsToAcquirePropertyPlantAndEquipment (4,980)us-gaap_PaymentsToAcquirePropertyPlantAndEquipment
Net cash (used in) provided by investing activities (65,542)us-gaap_NetCashProvidedByUsedInInvestingActivities 70,166us-gaap_NetCashProvidedByUsedInInvestingActivities
Financing activities    
Excess tax benefit from stock-based compensation 2,638us-gaap_ExcessTaxBenefitFromShareBasedCompensationFinancingActivities 182us-gaap_ExcessTaxBenefitFromShareBasedCompensationFinancingActivities
Proceeds from the exercise of stock options and purchases of stock under employee stock purchase plan 16,573us-gaap_ProceedsFromIssuanceOfSharesUnderIncentiveAndShareBasedCompensationPlansIncludingStockOptions 13,188us-gaap_ProceedsFromIssuanceOfSharesUnderIncentiveAndShareBasedCompensationPlansIncludingStockOptions
Repurchase of common stock (149,980)us-gaap_PaymentsForRepurchaseOfCommonStock (200,000)us-gaap_PaymentsForRepurchaseOfCommonStock
Net cash used in financing activities (130,769)us-gaap_NetCashProvidedByUsedInFinancingActivities (186,630)us-gaap_NetCashProvidedByUsedInFinancingActivities
Net (decrease) increase in cash and cash equivalents (9,916)us-gaap_CashAndCashEquivalentsPeriodIncreaseDecrease 42,462us-gaap_CashAndCashEquivalentsPeriodIncreaseDecrease
Effect of exchange rate changes on cash and cash equivalents (2,632)us-gaap_EffectOfExchangeRateOnCashAndCashEquivalents (827)us-gaap_EffectOfExchangeRateOnCashAndCashEquivalents
Cash and cash equivalents, beginning of period 281,502us-gaap_CashAndCashEquivalentsAtCarryingValue 189,693us-gaap_CashAndCashEquivalentsAtCarryingValue
Cash and cash equivalents, end of period $ 268,954us-gaap_CashAndCashEquivalentsAtCarryingValue $ 231,328us-gaap_CashAndCashEquivalentsAtCarryingValue
v2.4.1.9
Summary of Significant Accounting Policies
3 Months Ended
Dec. 31, 2014
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Description of Business
F5 Networks, Inc. (the “Company”) is the leading developer and provider of software-defined application services. The Company’s core technology is a full-proxy, programmable, highly-scalable software platform called TMOS, which supports the industry’s broadest array of features and functions designed to ensure that applications delivered over Internet Protocol (IP) networks are secure, fast and available. The Company’s TMOS-based offerings include software products for local and global traffic management, network and application security, access management, web acceleration and a number of other network and application services. These products are available as modules that can run individually or as part of an integrated solution on the Company’s high-performance, scalable, purpose-built BIG-IP appliances and VIPRION chassis-based hardware, or as software-only Virtual Editions. In connection with its products, the Company offers a broad range of services including consulting, training, installation, maintenance and other technical support services.
Basis of Presentation
The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for their fair statement in conformity with accounting principles generally accepted in the United States of America. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2014.
Revenue Recognition
The Company sells products through distributors, resellers, and directly to end users. Revenue is recognized provided that all of the following criteria have been met:
Persuasive evidence of an arrangement exists. Evidence of an arrangement generally consists of a purchase order issued pursuant to the terms and conditions of a distributor, reseller or end user agreement.
Delivery has occurred. The Company uses shipping or related documents, or written evidence of customer acceptance, when applicable, to verify delivery or completion of any performance terms.
The sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.
Collectability is reasonably assured. The Company assesses collectability primarily based on the creditworthiness of the customer as determined by credit checks and related analysis, as well as the Customer’s payment history.
Revenue from the sale of products is generally recognized when the product has been shipped and the customer is obligated to pay for the product. When rights of return are present and the Company cannot estimate returns, revenue is recognized when such rights of return lapse. Payment terms to domestic customers are generally net 30 days to net 45 days. Payment terms to international customers range from net 30 days to net 120 days based on normal and customary trade practices in the individual markets. The Company offers extended payment terms to certain customers, in which case, revenue is recognized when payments are due.
Revenues for post-contract customer support (PCS) are recognized on a straight-line basis over the service contract term. PCS includes a limited period of telephone support, updates, repair or replacement of any failed product or component that fails during the term of the agreement, bug fixes and rights to upgrades, when and if available. Consulting services are customarily billed at fixed hourly rates, plus out-of-pocket expenses, and revenues are recognized when the consulting has been completed. Training revenue is recognized when the training has been completed.
Arrangement consideration is first allocated between software (consisting of nonessential and stand-alone software) and non-software deliverables. The majority of the Company’s products are hardware appliances which contain software essential to the overall functionality of the products. Hardware appliances are generally sold with PCS and on occasion, with consulting and/or training services. Arrangement consideration in such multiple element transactions is allocated to each element based on a fair value hierarchy, where the selling price for an element is based on vendor specific objective evidence (VSOE), if available, third-party evidence (TPE), if available and VSOE is not available; or the best estimate of selling price (BESP), if neither VSOE or TPE is available.
For software deliverables, the Company allocates revenue between multiple elements based on software revenue recognition guidance. Software revenue recognition guidance requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of those elements. The fair value of an element must be based on VSOE. Where fair value of delivered elements is not available, revenue is recognized on the “residual method” based on the fair value of undelivered elements. If evidence of fair value of one or more undelivered elements does not exist, all revenue is deferred and recognized at the earlier of the delivery of those elements or the establishment of fair value of the remaining undelivered elements.
The Company establishes VSOE for its products, PCS, consulting and training services based on the sales price charged for each element when sold separately. The sales price is discounted from the applicable list price based on various factors including the type of customer, volume of sales, geographic region and program level. The Company’s list prices are generally not fair value as discounts may be given based on the factors enumerated above. The Company uses historical sales transactions to determine whether VSOE can be established for each of the elements. In most instances, VSOE of fair value is the sales price of actual standalone (unbundled) transactions within the past 12 month period, when a substantial majority of transactions (more than 80%) are priced within a narrow range, which the Company has determined to be plus or minus 15% of the median sales price.
The Company believes that the VSOE of fair value of training and consulting services is represented by the billable rate per hour, based on the rates charged to customers when they purchase standalone training or consulting services. The price of consulting services is not based on the type of customer, volume of sales, geographic region or program level.
The Company is typically not able to determine VSOE or TPE for non-software products. TPE is determined based on competitor prices for similar elements when sold separately. Generally, the Company’s go-to-market strategy differs from that of other competitive products or services in its markets and the Company’s offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine the selling prices on a stand-alone basis of similar products offered by its competitors.
When the Company is unable to establish selling price using VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company has been able to establish BESP through the list price, less a discount deemed appropriate to maintain a reasonable gross margin. Management regularly reviews the gross margin information. Non-software product BESP is determined through the Company’s review of historical sales transactions within the past 12 month period. Additional factors considered in determining an appropriate BESP include, but are not limited to, cost of products, pricing practices, geographies, customer classes, and distribution channels.
The Company regularly validates the VSOE of fair value and BESP for elements in its multiple element arrangements. The Company accounts for taxes collected from customers and remitted to governmental authorities on a net basis and excluded these amounts from revenues.
Goodwill and Acquired Intangible Assets
Goodwill represents the excess purchase price over the estimated fair value of net assets acquired as of the acquisition date. The Company tests goodwill for impairment on an annual basis and between annual tests when impairment indicators are identified, and goodwill is written down when impaired. Goodwill was recorded in connection with the acquisition of Defense.Net, Inc. in fiscal year 2014, Versafe Ltd. and LineRate Systems, Inc. in fiscal year 2013, Traffix Systems in fiscal year 2012, Acopia Networks, Inc. in fiscal year 2007, Swan Labs, Inc. in fiscal year 2006, MagniFire Websystems, Inc. in fiscal year 2004 and uRoam, Inc. in fiscal year 2003. For its annual goodwill impairment test in all periods to date, the Company has operated under one reporting unit and the fair value of its reporting unit has been determined by the Company’s enterprise value. The Company performs its annual goodwill impairment test during the second fiscal quarter.
As part of the annual goodwill impairment test, the Company first performs a qualitative assessment to determine whether further impairment testing is necessary. If, as a result of its qualitative assessment, it is more-likely-than-not (i.e. greater than 50% chance) that the fair value of the Company’s reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required.
Examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount include macro-economic conditions such as deterioration in the entity’s operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on either an absolute basis or relative to peers.
If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of the Company’s reporting unit is less than its carrying amount, the provisions of authoritative guidance require that the Company perform a two-step impairment test on goodwill. The first step of the test identifies whether potential impairment may have occurred, while the second step of the test measures the amount of the impairment, if any. Impairment is recognized when the carrying amount of goodwill exceeds its fair value. In March 2014, the Company completed a qualitative assessment of potential impairment indicators and concluded that it was more-likely-than-not that the fair value of its reporting unit exceeded its carrying amount. The Company considered potential impairment indicators of goodwill and acquired intangible assets at December 31, 2014 and noted no indicators of impairment.
Stock-Based Compensation
The Company accounts for stock-based compensation using the straight-line attribution method for recognizing compensation expense. The Company recognized $30.6 million and $34.5 million of stock-based compensation expense for the three months ended December 31, 2014 and 2013, respectively. As of December 31, 2014, there was $212.5 million of total unrecognized stock-based compensation cost, the majority of which will be recognized over the next two years. Going forward, stock-based compensation expenses may increase as the Company issues additional equity-based awards to continue to attract and retain key employees.
The Company issues incentive awards to its employees through stock-based compensation consisting of restricted stock units (RSUs). On October 31, 2014, the Company’s Compensation Committee approved 1,064,464 RSUs to employees and executive officers pursuant to the Company’s annual equity awards program. The value of RSUs is determined using the fair value method, which in this case, is based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant.
The Company recognizes compensation expense for only the portion of restricted stock units that are expected to vest. Therefore, the Company applies estimated forfeiture rates that are derived from historical employee termination behavior. Based on historical differences with forfeitures of stock-based awards granted to the Company’s executive officers and Board of Directors versus grants awarded to all other employees, the Company has developed separate forfeiture expectations for these two groups. The Company’s estimated forfeiture rate in the first quarter of fiscal year 2015 is 5.5% for grants awarded to the Company’s executive officers and Board of Directors, and 6.3% for grants awarded to all other employees. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.
In November 2014, the Company granted 171,575 RSUs to certain current executive officers as part of the annual equity awards program. Fifty percent of the aggregate number of RSUs vest in equal quarterly increments over four years, until such portion of the grant is fully vested on November 1, 2018. 12.5% of the RSU grant, or a portion thereof, is subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal year 2015. In each case, 70% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 30% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold. Each goal is also capped at achievement of 200% above target. The remaining 37.5% of this annual equity awards RSU grant shall be subject to quarterly performance based vesting for fiscal years 2016, 2017 and 2018 (12.5% in each period). The Compensation Committee of the Board of Directors sets applicable performance targets and vesting formulas at the beginning of each fiscal year.
In November 2013, the Company granted 231,320 RSUs to certain current executive officers as part of the annual equity awards program. Fifty percent of the aggregate number of RSUs vest in equal quarterly increments over four years, until such portion of the grant is fully vested on November 1, 2017. 12.5% of the RSU grant, or a portion thereof, was subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal year 2014. 12.5% of the RSU grant, or a portion thereof, is subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal year 2015. In each case, 70% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 30% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold. Each goal is also capped at achievement of 200% above target. The remaining 25.0% of this annual equity awards RSU grant shall be subject to quarterly performance based vesting for fiscal years 2016 and 2017 (12.5% in each period). The Compensation Committee of the Board of Directors sets applicable performance targets and vesting formulas at the beginning of each fiscal year.
In November 2012, the Company granted 290,415 RSUs to certain current executive officers as part of the annual equity awards program. Fifty percent of the aggregate number of RSUs vest in equal quarterly increments over four years, until such portion of the grant is fully vested on November 1, 2016. One-quarter of the RSU grant, or a portion thereof, was subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal years 2013 and 2014. 12.5% of the RSU grant, or a portion thereof, is subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal year 2015. In each case, 70% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 30% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold. Each goal is also capped at achievement of 200% above target. The remaining 12.5% of this annual equity awards RSU grant shall be subject to quarterly performance based vesting for fiscal year 2016. The Compensation Committee of the Board of Directors sets applicable performance targets and vesting formulas at the beginning of each fiscal year.
In November 2011, as part of the annual review of executive compensation by the Compensation Committee of the Board of Directors and a change in the grant date for the Company’s annual equity awards program for the executive officers from August 1 to November 1, the Company granted 82,968 RSUs to certain current executive officers. 50% of the aggregate number of RSUs vested in equal quarterly increments over three years, until such portion of the grant was fully vested on November 1, 2014. 50% of the RSU grant, or a portion thereof, was subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal years 2012, 2013 and 2014.
The Company recognizes compensation costs for awards with performance conditions when it concludes it is probable that the performance condition will be achieved. The Company reassesses the probability of vesting at each balance sheet date and adjusts compensation costs based on the probability assessment.
Common Stock Repurchase
On January 22, 2014, the Company announced that its Board of Directors authorized an additional $500 million for its common stock share repurchase program. This new authorization is incremental to the existing $1.1 billion program, initially approved in October 2010 and expanded in August 2011, October 2011, April 2013 and November 2013. Acquisitions for the share repurchase programs will be made from time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements. The programs can be terminated at any time.
Earnings Per Share
Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. The Company’s nonvested restricted stock awards and restricted stock units do not have nonforfeitable rights to dividends or dividend equivalents and are not considered participating securities that should be included in the computation of earnings per share under the two-class method.
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):
 
 
 
Three months ended
December 31,
 
 
2014
 
2013
Numerator
 
 
 
 
Net income
 
$
89,076

 
$
68,048

Denominator
 
 
 
 
Weighted average shares outstanding — basic
 
73,350

 
77,438

Dilutive effect of common shares from stock options and restricted stock units
 
507

 
384

Weighted average shares outstanding — diluted
 
73,857

 
77,822

Basic net income per share
 
$
1.21

 
$
0.88

Diluted net income per share
 
$
1.21

 
$
0.87


An immaterial amount of common shares potentially issuable from stock options for the three months ended December 31, 2014 and 2013, are excluded from the calculation of diluted earnings per share because the exercise price was greater than the average market price of common stock for the respective period.
Comprehensive Income
Comprehensive income includes certain changes in equity that are excluded from net income. Specifically, unrealized gains or losses on securities and foreign currency translation adjustments are included in accumulated other comprehensive income or loss.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and early adoption is not permitted. The standard can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently assessing the impact that this updated standard will have on its consolidated financial statements and footnote disclosures.
In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period (ASU 2014-12), which requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements.
v2.4.1.9
Fair Value Measurements
3 Months Ended
Dec. 31, 2014
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
In accordance with the authoritative guidance on fair value measurements and disclosure under GAAP, the Company determines fair value using a fair value hierarchy that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity, and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances and expands disclosure about fair value measurements.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date, essentially the exit price.
The levels of fair value hierarchy are:
Level 1: Quoted prices in active markets for identical assets and liabilities at the measurement date that the Company has the ability to access.
Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Unobservable inputs for which there is little or no market data available. These inputs reflect management’s assumptions of what market participants would use in pricing the asset or liability.
Level 1 investments are valued based on quoted market prices in active markets and include the Company’s cash equivalent investments. Level 2 investments, which include investments that are valued based on quoted prices in markets that are not active, broker or dealer quotations, actual trade data, benchmark yields or alternative pricing sources with reasonable levels of price transparency, include the Company’s certificates of deposit, corporate bonds and notes, municipal bonds and notes, U.S. government securities, U.S. government agency securities and international government securities. Fair values for the Company’s level 2 investments are based on similar assets without applying significant judgments. In addition, all of the Company’s level 2 investments have a sufficient level of trading volume to demonstrate that the fair values used are appropriate for these investments.
A financial instrument’s level within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. The Company considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.
The Company’s financial assets measured at fair value on a recurring basis subject to the disclosure requirements at December 31, 2014, were as follows (in thousands):
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
 
Quoted Prices in
Active Markets for
Identical Securities
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value at December 31,
2014
Cash equivalents
 
$
22,925

 
$

 
$

 
$
22,925

Short-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — certificates of deposits
 

 
8,150

 

 
8,150

Available-for-sale securities — corporate bonds and notes
 

 
222,980

 

 
222,980

Available-for-sale securities — municipal bonds and notes
 

 
49,165

 

 
49,165

Available-for-sale securities — U.S. government securities
 

 
5,004

 

 
5,004

Available-for-sale securities — U.S. government agency securities
 

 
99,851

 

 
99,851

Long-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — corporate bonds and notes
 

 
342,060

 

 
342,060

Available-for-sale securities — municipal bonds and notes
 

 
45,695

 

 
45,695

Available-for-sale securities — U.S. government securities
 

 
7,405

 

 
7,405

Available-for-sale securities — U.S. government agency securities
 

 
114,561

 

 
114,561

Available-for-sale securities — international government securities
 

 
2,817

 

 
2,817

Total
 
$
22,925

 
$
897,688

 
$

 
$
920,613


The Company’s financial assets measured at fair value on a recurring basis subject to the disclosure requirements at September 30, 2014, were as follows (in thousands):
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
 
Quoted Prices in
Active Markets for
Identical Securities
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value at
September 30,
2014
Cash equivalents
 
$
43,618

 
$

 
$

 
$
43,618

Short-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — corporate bonds and notes
 

 
205,698

 

 
205,698

Available-for-sale securities — municipal bonds and notes
 

 
43,430

 

 
43,430

Available-for-sale securities — U.S. government securities
 

 
5,006

 
 
 
5,006

Available-for-sale securities — U.S. government agency securities
 

 
109,743

 

 
109,743

Long-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — corporate bonds and notes
 

 
325,282

 

 
325,282

Available-for-sale securities — municipal bonds and notes
 

 
24,582

 

 
24,582

Available-for-sale securities — U.S. government securities
 

 
7,407

 

 
7,407

Available-for-sale securities — U.S. government agency securities
 

 
123,087

 

 
123,087

Available-for-sale securities — international government securities
 

 
2,559

 

 
2,559

Total
 
$
43,618

 
$
846,794

 
$

 
$
890,412


The following table provides a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3) (in thousands):
 
 
 
Three months ended
December 31,
 
 
2014
 
2013
Balance, beginning of period
 
$

 
$
3,036

Total gains realized or unrealized:
 
 
 
 
Included in other comprehensive income
 

 
264

Settlements
 

 
(3,300
)
Balance, end of period
 
$

 
$

Unrealized losses attributable to assets still held as of end of period
 

 


Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable or there is limited market activity such that the determination of fair value requires significant judgment or estimation.
The Company uses the fair value hierarchy for financial assets and liabilities. The Company’s non-financial assets and liabilities, which include goodwill, intangible assets, and long-lived assets, are not required to be carried at fair value on a recurring basis. These non-financial assets and liabilities are measured at fair value on a non-recurring basis when there is an indicator of impairment, and they are recorded at fair value only when impairment is recognized. The Company reviews goodwill and intangible assets for impairment annually, during the second quarter of each fiscal year, or as circumstances indicate the possibility of impairment. The Company monitors the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate its carrying amount may not be recoverable. During the three months ended December 31, 2014, the Company did not recognize any impairment charges related to goodwill, intangible assets, or long-lived assets.
v2.4.1.9
Short-Term and Long-Term Investments
3 Months Ended
Dec. 31, 2014
Investments, Debt and Equity Securities [Abstract]  
Short-Term and Long-Term Investments
Short-Term and Long-Term Investments
Short-term investments consist of the following (in thousands):
 
December 31, 2014
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Certificates of deposit
 
$
8,150

 
$

 
$

 
$
8,150

Corporate bonds and notes
 
222,957

 
100

 
(77
)
 
222,980

Municipal bonds and notes
 
49,139

 
31

 
(5
)
 
49,165

U.S. government securities
 
4,998

 
6

 

 
5,004

U.S. government agency securities
 
99,835

 
29

 
(13
)
 
99,851

 
 
$
385,079

 
$
166

 
$
(95
)
 
$
385,150

 
September 30, 2014
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Corporate bonds and notes
 
$
205,490

 
$
244

 
$
(36
)
 
$
205,698

Municipal bonds and notes
 
43,398

 
34

 
(2
)
 
43,430

U.S. government securities
 
4,996

 
10

 

 
5,006

U.S. government agency securities
 
109,685

 
66

 
(8
)
 
109,743

 
 
$
363,569

 
$
354

 
$
(46
)
 
$
363,877


Long-term investments consist of the following (in thousands):
 
December 31, 2014
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Corporate bonds and notes
 
$
343,028

 
$
128

 
$
(1,096
)
 
$
342,060

Municipal bonds and notes
 
45,755

 
9

 
(69
)
 
45,695

U.S. government securities
 
7,381

 
24

 

 
7,405

U.S. government agency securities
 
114,782

 
16

 
(237
)
 
114,561

International government securities
 
2,827

 

 
(10
)
 
2,817

 
 
$
513,773

 
$
177

 
$
(1,412
)
 
$
512,538

 
September 30, 2014
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Corporate bonds and notes
 
$
325,896

 
$
208

 
$
(822
)
 
$
325,282

Municipal bonds and notes
 
24,559

 
31

 
(8
)
 
24,582

U.S. government securities
 
7,377

 
30

 

 
7,407

U.S. government agency securities
 
123,207

 
40

 
(160
)
 
123,087

International government securities
 
2,568

 

 
(9
)
 
2,559

 
 
$
483,607

 
$
309

 
$
(999
)
 
$
482,917


The amortized cost and fair value of fixed maturities at December 31, 2014, by contractual years-to-maturity, are presented below (in thousands):
 
 
 
Cost or
Amortized
Cost
 
Fair Value
One year or less
 
$
385,079

 
$
385,150

Over one year
 
513,773

 
512,538

 
 
$
898,852

 
$
897,688


The following table summarizes investments that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for more than 12 months as of December 31, 2014 (in thousands):
 
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
December 31, 2014
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Corporate bonds and notes
 
$
336,087

 
$
(1,084
)
 
$
53,625

 
$
(89
)
 
$
389,712

 
$
(1,173
)
Municipal bonds and notes
 
43,885

 
(74
)
 

 

 
43,885

 
(74
)
U.S. government agency securities
 
122,313

 
(229
)
 
18,956

 
(21
)
 
141,269

 
(250
)
International government securities
 
2,817

 
(10
)
 

 

 
2,817

 
(10
)
Total
 
$
505,102

 
$
(1,397
)
 
$
72,581

 
$
(110
)
 
$
577,683

 
$
(1,507
)

The Company invests in securities that are rated investment grade or better. The Company reviews the individual securities in its portfolio to determine whether a decline in a security's fair value below the amortized cost basis is other-than-temporary. The Company determined that as of December 31, 2014, there were no investments in its portfolio that were other-than-temporarily impaired.
v2.4.1.9
Inventories
3 Months Ended
Dec. 31, 2014
Inventory Disclosure [Abstract]  
Inventories
Inventories
The Company outsources the manufacturing of its pre-configured hardware platforms to contract manufacturers, who assemble each product to the Company’s specifications. As protection against component shortages and to provide replacement parts for its service teams, the Company also stocks limited supplies of certain key product components. The Company reduces inventory to net realizable value based on excess and obsolete inventories determined primarily by historical usage and forecasted demand. Inventories consist of hardware and related component parts and are recorded at the lower of cost or market (as determined by the first-in, first-out method).
Inventories consist of the following (in thousands):
 
 
 
December 31,
2014
 
September 30,
2014
Finished goods
 
$
20,545

 
$
18,046

Raw materials
 
7,037

 
6,425

 
 
$
27,582

 
$
24,471

v2.4.1.9
Commitments and Contingencies
3 Months Ended
Dec. 31, 2014
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
Commitments and Contingencies
Guarantees and Product Warranties
In the normal course of business to facilitate sales of its products, the Company indemnifies other parties, including customers, resellers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other party harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. The Company has entered into indemnification agreements with its officers and directors and certain other employees, and the Company’s bylaws contain similar indemnification obligations to the Company’s agents. It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement.
The Company generally offers warranties of one year for hardware for those customers without service contracts, with the option of purchasing additional warranty coverage in yearly increments. The Company accrues for warranty costs as part of its cost of sales based on associated material product costs and technical support labor costs. Accrued warranty costs as of December 31, 2014 and December 31, 2013 were not considered material.
Commitments
As of December 31, 2014, the Company’s principal commitments consisted of obligations outstanding under operating leases. The Company leases its facilities under operating leases that expire at various dates through 2024. There have been no material changes in the Company’s principal lease commitments compared to those discussed in Note 8 to its annual consolidated financial statements.
The Company currently has arrangements with contract manufacturers and other suppliers for the manufacturing of its products. The arrangement with the primary contract manufacturer allows them to procure component inventory on the Company’s behalf based on a rolling production forecast provided by the Company. The Company is obligated to the purchase of component inventory that the contract manufacturer procures in accordance with the forecast, unless it gives notice of order cancellation in advance of applicable lead times. There have been no material changes in the Company's inventory purchase obligations compared to those discussed in Note 8 to its annual consolidated financial statements.
Legal Proceedings
The Company is not aware of any pending legal proceedings that, individually or in the aggregate, are reasonably possible to have a material adverse effect on the Company’s business, operating results, or financial condition. The Company is subject to a variety of other claims and suits that arise from time to time in the ordinary course of business. Although management currently believes that resolving claims against the Company, individually or in aggregate, will not have a material adverse impact on its financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.
v2.4.1.9
Income Taxes
3 Months Ended
Dec. 31, 2014
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
The effective tax rate was 34.0% and 37.8% for the three months ended December 31, 2014 and 2013, respectively.
At December 31, 2014, the Company had $7.6 million of unrecognized tax benefits that, if recognized, would affect the effective tax rate. It is anticipated that the Company’s existing liabilities for unrecognized tax benefits will change within the next twelve months due to audit settlements or the expiration of statutes of limitations. The Company does not expect these changes to be material to the consolidated financial statements.  The Company recognizes interest and, if applicable, penalties for any uncertain tax positions as a component of income tax expense.
The Company and its subsidiaries are subject to U.S. federal income tax as well as the income tax of multiple state and foreign jurisdictions. The Company has concluded all U.S. federal income tax matters for fiscal years through September 30, 2011. The Company is currently under audit by various states for fiscal years 2009 through 2013. Major jurisdictions where there are wholly owned subsidiaries of F5 Networks, Inc. which require income tax filings include the United Kingdom, Japan, Singapore and Australia. The earliest periods open for review by local taxing authorities are fiscal years 2012 for the United Kingdom, 2008 for Japan, 2009 for Singapore, and 2010 for Australia. Within the next four fiscal quarters, the statute of limitations will begin to close on the fiscal years 2010 and 2011 state income tax returns.
v2.4.1.9
Geographic Sales and Significant Customers
3 Months Ended
Dec. 31, 2014
Segment Reporting [Abstract]  
Geographic Sales and Significant Customers
Geographic Sales and Significant Customers
Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Management has determined that the Company is organized as, and operates in, one reportable operating segment: the development, marketing and sale of application delivery networking products that optimize the security, performance and availability of network applications, servers and storage systems.
The Company does business in four main geographic regions: the Americas (primarily the United States); Europe, the Middle East, and Africa (EMEA); Japan; and the Asia Pacific region (APAC). The Company’s chief operating decision-making group reviews financial information presented on a consolidated basis accompanied by information about revenues by geographic region. The Company’s foreign offices conduct sales, marketing and support activities. Revenues are attributed by geographic location based on the location of the customer. The Company’s assets are primarily located in the United States. Therefore, geographic information is presented only for net revenue.
The following presents revenues by geographic region (in thousands):
 
 
 
Three months ended
December 31,
 
 
2014
 
2013
Americas:
 
 
 
 
United States
 
$
231,680

 
$
205,611

Other
 
25,648

 
21,046

Total Americas
 
257,328

 
226,657

EMEA
 
117,066

 
97,348

Japan
 
21,719

 
21,050

Asia Pacific
 
66,680

 
61,397

 
 
$
462,793

 
$
406,452


Four worldwide distributors of the Company’s products accounted for 17.5%, 16.7%, 13.9% and 11.4% of total net revenue for the three month period ended December 31, 2014. Three worldwide distributors of the Company’s products accounted for 13.5%, 17.9%, and 14.3% of total net revenue for the three month period ended December 31, 2013. Three worldwide distributors accounted for 18.8%, 14.4% and 13.3% of the Company’s accounts receivable as of December 31, 2014. Three worldwide distributors accounted for 16.1%, 11.0% and 12.0% of the Company’s accounts receivable as of December 31, 2013. No other distributors accounted for more than 10% of total net revenue or receivables.
v2.4.1.9
Subsequent Events
3 Months Ended
Dec. 31, 2014
Subsequent Events [Abstract]  
Subsequent Events
Subsequent Events
On January 21, 2015, the Company announced that its Board of Directors authorized an additional $750 million for its common stock share repurchase program. This new authorization is incremental to the existing $1.6 billion program, initially approved in October 2010 and expanded in August 2011, October 2011, April 2013, November 2013 and January 2014. Acquisitions for the share repurchase programs will be made from time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements. The programs can be terminated at any time. As of February 2, 2015, the Company had repurchased and retired 15,144,635 shares at an average price of $99.58 per share as part of its current repurchase program and the Company had $841.7 million remaining authorized to purchase shares.
v2.4.1.9
Summary of Significant Accounting Policies (Policy)
3 Months Ended
Dec. 31, 2014
Accounting Policies [Abstract]  
Description of Business
Description of Business
F5 Networks, Inc. (the “Company”) is the leading developer and provider of software-defined application services. The Company’s core technology is a full-proxy, programmable, highly-scalable software platform called TMOS, which supports the industry’s broadest array of features and functions designed to ensure that applications delivered over Internet Protocol (IP) networks are secure, fast and available. The Company’s TMOS-based offerings include software products for local and global traffic management, network and application security, access management, web acceleration and a number of other network and application services. These products are available as modules that can run individually or as part of an integrated solution on the Company’s high-performance, scalable, purpose-built BIG-IP appliances and VIPRION chassis-based hardware, or as software-only Virtual Editions. In connection with its products, the Company offers a broad range of services including consulting, training, installation, maintenance and other technical support services.
Basis of Presentation
Basis of Presentation
The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for their fair statement in conformity with accounting principles generally accepted in the United States of America. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2014.
Revenue Recognition
Revenue Recognition
The Company sells products through distributors, resellers, and directly to end users. Revenue is recognized provided that all of the following criteria have been met:
Persuasive evidence of an arrangement exists. Evidence of an arrangement generally consists of a purchase order issued pursuant to the terms and conditions of a distributor, reseller or end user agreement.
Delivery has occurred. The Company uses shipping or related documents, or written evidence of customer acceptance, when applicable, to verify delivery or completion of any performance terms.
The sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.
Collectability is reasonably assured. The Company assesses collectability primarily based on the creditworthiness of the customer as determined by credit checks and related analysis, as well as the Customer’s payment history.
Revenue from the sale of products is generally recognized when the product has been shipped and the customer is obligated to pay for the product. When rights of return are present and the Company cannot estimate returns, revenue is recognized when such rights of return lapse. Payment terms to domestic customers are generally net 30 days to net 45 days. Payment terms to international customers range from net 30 days to net 120 days based on normal and customary trade practices in the individual markets. The Company offers extended payment terms to certain customers, in which case, revenue is recognized when payments are due.
Revenues for post-contract customer support (PCS) are recognized on a straight-line basis over the service contract term. PCS includes a limited period of telephone support, updates, repair or replacement of any failed product or component that fails during the term of the agreement, bug fixes and rights to upgrades, when and if available. Consulting services are customarily billed at fixed hourly rates, plus out-of-pocket expenses, and revenues are recognized when the consulting has been completed. Training revenue is recognized when the training has been completed.
Arrangement consideration is first allocated between software (consisting of nonessential and stand-alone software) and non-software deliverables. The majority of the Company’s products are hardware appliances which contain software essential to the overall functionality of the products. Hardware appliances are generally sold with PCS and on occasion, with consulting and/or training services. Arrangement consideration in such multiple element transactions is allocated to each element based on a fair value hierarchy, where the selling price for an element is based on vendor specific objective evidence (VSOE), if available, third-party evidence (TPE), if available and VSOE is not available; or the best estimate of selling price (BESP), if neither VSOE or TPE is available.
For software deliverables, the Company allocates revenue between multiple elements based on software revenue recognition guidance. Software revenue recognition guidance requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of those elements. The fair value of an element must be based on VSOE. Where fair value of delivered elements is not available, revenue is recognized on the “residual method” based on the fair value of undelivered elements. If evidence of fair value of one or more undelivered elements does not exist, all revenue is deferred and recognized at the earlier of the delivery of those elements or the establishment of fair value of the remaining undelivered elements.
The Company establishes VSOE for its products, PCS, consulting and training services based on the sales price charged for each element when sold separately. The sales price is discounted from the applicable list price based on various factors including the type of customer, volume of sales, geographic region and program level. The Company’s list prices are generally not fair value as discounts may be given based on the factors enumerated above. The Company uses historical sales transactions to determine whether VSOE can be established for each of the elements. In most instances, VSOE of fair value is the sales price of actual standalone (unbundled) transactions within the past 12 month period, when a substantial majority of transactions (more than 80%) are priced within a narrow range, which the Company has determined to be plus or minus 15% of the median sales price.
The Company believes that the VSOE of fair value of training and consulting services is represented by the billable rate per hour, based on the rates charged to customers when they purchase standalone training or consulting services. The price of consulting services is not based on the type of customer, volume of sales, geographic region or program level.
The Company is typically not able to determine VSOE or TPE for non-software products. TPE is determined based on competitor prices for similar elements when sold separately. Generally, the Company’s go-to-market strategy differs from that of other competitive products or services in its markets and the Company’s offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine the selling prices on a stand-alone basis of similar products offered by its competitors.
When the Company is unable to establish selling price using VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company has been able to establish BESP through the list price, less a discount deemed appropriate to maintain a reasonable gross margin. Management regularly reviews the gross margin information. Non-software product BESP is determined through the Company’s review of historical sales transactions within the past 12 month period. Additional factors considered in determining an appropriate BESP include, but are not limited to, cost of products, pricing practices, geographies, customer classes, and distribution channels.
The Company regularly validates the VSOE of fair value and BESP for elements in its multiple element arrangements. The Company accounts for taxes collected from customers and remitted to governmental authorities on a net basis and excluded these amounts from revenues.
Goodwill and Acquired Intangible Assets
Goodwill and Acquired Intangible Assets
Goodwill represents the excess purchase price over the estimated fair value of net assets acquired as of the acquisition date. The Company tests goodwill for impairment on an annual basis and between annual tests when impairment indicators are identified, and goodwill is written down when impaired. Goodwill was recorded in connection with the acquisition of Defense.Net, Inc. in fiscal year 2014, Versafe Ltd. and LineRate Systems, Inc. in fiscal year 2013, Traffix Systems in fiscal year 2012, Acopia Networks, Inc. in fiscal year 2007, Swan Labs, Inc. in fiscal year 2006, MagniFire Websystems, Inc. in fiscal year 2004 and uRoam, Inc. in fiscal year 2003. For its annual goodwill impairment test in all periods to date, the Company has operated under one reporting unit and the fair value of its reporting unit has been determined by the Company’s enterprise value. The Company performs its annual goodwill impairment test during the second fiscal quarter.
As part of the annual goodwill impairment test, the Company first performs a qualitative assessment to determine whether further impairment testing is necessary. If, as a result of its qualitative assessment, it is more-likely-than-not (i.e. greater than 50% chance) that the fair value of the Company’s reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required.
Examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount include macro-economic conditions such as deterioration in the entity’s operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on either an absolute basis or relative to peers.
If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of the Company’s reporting unit is less than its carrying amount, the provisions of authoritative guidance require that the Company perform a two-step impairment test on goodwill. The first step of the test identifies whether potential impairment may have occurred, while the second step of the test measures the amount of the impairment, if any. Impairment is recognized when the carrying amount of goodwill exceeds its fair value. In March 2014, the Company completed a qualitative assessment of potential impairment indicators and concluded that it was more-likely-than-not that the fair value of its reporting unit exceeded its carrying amount. The Company considered potential impairment indicators of goodwill and acquired intangible assets at December 31, 2014 and noted no indicators of impairment.
Stock-Based Compensation
Stock-Based Compensation
The Company accounts for stock-based compensation using the straight-line attribution method for recognizing compensation expense. The Company recognized $30.6 million and $34.5 million of stock-based compensation expense for the three months ended December 31, 2014 and 2013, respectively. As of December 31, 2014, there was $212.5 million of total unrecognized stock-based compensation cost, the majority of which will be recognized over the next two years. Going forward, stock-based compensation expenses may increase as the Company issues additional equity-based awards to continue to attract and retain key employees.
The Company issues incentive awards to its employees through stock-based compensation consisting of restricted stock units (RSUs). On October 31, 2014, the Company’s Compensation Committee approved 1,064,464 RSUs to employees and executive officers pursuant to the Company’s annual equity awards program. The value of RSUs is determined using the fair value method, which in this case, is based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant.
The Company recognizes compensation expense for only the portion of restricted stock units that are expected to vest. Therefore, the Company applies estimated forfeiture rates that are derived from historical employee termination behavior. Based on historical differences with forfeitures of stock-based awards granted to the Company’s executive officers and Board of Directors versus grants awarded to all other employees, the Company has developed separate forfeiture expectations for these two groups. The Company’s estimated forfeiture rate in the first quarter of fiscal year 2015 is 5.5% for grants awarded to the Company’s executive officers and Board of Directors, and 6.3% for grants awarded to all other employees. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.
In November 2014, the Company granted 171,575 RSUs to certain current executive officers as part of the annual equity awards program. Fifty percent of the aggregate number of RSUs vest in equal quarterly increments over four years, until such portion of the grant is fully vested on November 1, 2018. 12.5% of the RSU grant, or a portion thereof, is subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal year 2015. In each case, 70% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 30% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold. Each goal is also capped at achievement of 200% above target. The remaining 37.5% of this annual equity awards RSU grant shall be subject to quarterly performance based vesting for fiscal years 2016, 2017 and 2018 (12.5% in each period). The Compensation Committee of the Board of Directors sets applicable performance targets and vesting formulas at the beginning of each fiscal year.
In November 2013, the Company granted 231,320 RSUs to certain current executive officers as part of the annual equity awards program. Fifty percent of the aggregate number of RSUs vest in equal quarterly increments over four years, until such portion of the grant is fully vested on November 1, 2017. 12.5% of the RSU grant, or a portion thereof, was subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal year 2014. 12.5% of the RSU grant, or a portion thereof, is subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal year 2015. In each case, 70% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 30% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold. Each goal is also capped at achievement of 200% above target. The remaining 25.0% of this annual equity awards RSU grant shall be subject to quarterly performance based vesting for fiscal years 2016 and 2017 (12.5% in each period). The Compensation Committee of the Board of Directors sets applicable performance targets and vesting formulas at the beginning of each fiscal year.
In November 2012, the Company granted 290,415 RSUs to certain current executive officers as part of the annual equity awards program. Fifty percent of the aggregate number of RSUs vest in equal quarterly increments over four years, until such portion of the grant is fully vested on November 1, 2016. One-quarter of the RSU grant, or a portion thereof, was subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal years 2013 and 2014. 12.5% of the RSU grant, or a portion thereof, is subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal year 2015. In each case, 70% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 30% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold. Each goal is also capped at achievement of 200% above target. The remaining 12.5% of this annual equity awards RSU grant shall be subject to quarterly performance based vesting for fiscal year 2016. The Compensation Committee of the Board of Directors sets applicable performance targets and vesting formulas at the beginning of each fiscal year.
In November 2011, as part of the annual review of executive compensation by the Compensation Committee of the Board of Directors and a change in the grant date for the Company’s annual equity awards program for the executive officers from August 1 to November 1, the Company granted 82,968 RSUs to certain current executive officers. 50% of the aggregate number of RSUs vested in equal quarterly increments over three years, until such portion of the grant was fully vested on November 1, 2014. 50% of the RSU grant, or a portion thereof, was subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal years 2012, 2013 and 2014.
The Company recognizes compensation costs for awards with performance conditions when it concludes it is probable that the performance condition will be achieved. The Company reassesses the probability of vesting at each balance sheet date and adjusts compensation costs based on the probability assessment.
Common Stock Repurchase
Common Stock Repurchase
On January 22, 2014, the Company announced that its Board of Directors authorized an additional $500 million for its common stock share repurchase program. This new authorization is incremental to the existing $1.1 billion program, initially approved in October 2010 and expanded in August 2011, October 2011, April 2013 and November 2013. Acquisitions for the share repurchase programs will be made from time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements. The programs can be terminated at any time.
Earnings Per Share
Earnings Per Share
Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. The Company’s nonvested restricted stock awards and restricted stock units do not have nonforfeitable rights to dividends or dividend equivalents and are not considered participating securities that should be included in the computation of earnings per share under the two-class method.
Comprehensive Income
Comprehensive Income
Comprehensive income includes certain changes in equity that are excluded from net income. Specifically, unrealized gains or losses on securities and foreign currency translation adjustments are included in accumulated other comprehensive income or loss.
Recent Accounting Pronouncements
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and early adoption is not permitted. The standard can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently assessing the impact that this updated standard will have on its consolidated financial statements and footnote disclosures.
In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period (ASU 2014-12), which requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements.
v2.4.1.9
Summary of Significant Accounting Policies (Tables)
3 Months Ended
Dec. 31, 2014
Accounting Policies [Abstract]  
Schedule of Computation of Basic and Diluted Net Income Per Share
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):
 
 
 
Three months ended
December 31,
 
 
2014
 
2013
Numerator
 
 
 
 
Net income
 
$
89,076

 
$
68,048

Denominator
 
 
 
 
Weighted average shares outstanding — basic
 
73,350

 
77,438

Dilutive effect of common shares from stock options and restricted stock units
 
507

 
384

Weighted average shares outstanding — diluted
 
73,857

 
77,822

Basic net income per share
 
$
1.21

 
$
0.88

Diluted net income per share
 
$
1.21

 
$
0.87

v2.4.1.9
Fair Value Measurements (Tables)
3 Months Ended
Dec. 31, 2014
Fair Value Disclosures [Abstract]  
Schedule of Financial Assets Measured at Fair Value on a Recurring Basis
The Company’s financial assets measured at fair value on a recurring basis subject to the disclosure requirements at December 31, 2014, were as follows (in thousands):
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
 
Quoted Prices in
Active Markets for
Identical Securities
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value at December 31,
2014
Cash equivalents
 
$
22,925

 
$

 
$

 
$
22,925

Short-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — certificates of deposits
 

 
8,150

 

 
8,150

Available-for-sale securities — corporate bonds and notes
 

 
222,980

 

 
222,980

Available-for-sale securities — municipal bonds and notes
 

 
49,165

 

 
49,165

Available-for-sale securities — U.S. government securities
 

 
5,004

 

 
5,004

Available-for-sale securities — U.S. government agency securities
 

 
99,851

 

 
99,851

Long-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — corporate bonds and notes
 

 
342,060

 

 
342,060

Available-for-sale securities — municipal bonds and notes
 

 
45,695

 

 
45,695

Available-for-sale securities — U.S. government securities
 

 
7,405

 

 
7,405

Available-for-sale securities — U.S. government agency securities
 

 
114,561

 

 
114,561

Available-for-sale securities — international government securities
 

 
2,817

 

 
2,817

Total
 
$
22,925

 
$
897,688

 
$

 
$
920,613


The Company’s financial assets measured at fair value on a recurring basis subject to the disclosure requirements at September 30, 2014, were as follows (in thousands):
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
 
Quoted Prices in
Active Markets for
Identical Securities
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value at
September 30,
2014
Cash equivalents
 
$
43,618

 
$

 
$

 
$
43,618

Short-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — corporate bonds and notes
 

 
205,698

 

 
205,698

Available-for-sale securities — municipal bonds and notes
 

 
43,430

 

 
43,430

Available-for-sale securities — U.S. government securities
 

 
5,006

 
 
 
5,006

Available-for-sale securities — U.S. government agency securities
 

 
109,743

 

 
109,743

Long-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities — corporate bonds and notes
 

 
325,282

 

 
325,282

Available-for-sale securities — municipal bonds and notes
 

 
24,582

 

 
24,582

Available-for-sale securities — U.S. government securities
 

 
7,407

 

 
7,407

Available-for-sale securities — U.S. government agency securities
 

 
123,087

 

 
123,087

Available-for-sale securities — international government securities
 

 
2,559

 

 
2,559

Total
 
$
43,618

 
$
846,794

 
$

 
$
890,412

Schedule of Reconciliation of Items Measured at Fair Value on a Recurring Basis That Used Significant Unobservable Inputs (Level 3)
The following table provides a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3) (in thousands):
 
 
 
Three months ended
December 31,
 
 
2014
 
2013
Balance, beginning of period
 
$

 
$
3,036

Total gains realized or unrealized:
 
 
 
 
Included in other comprehensive income
 

 
264

Settlements
 

 
(3,300
)
Balance, end of period
 
$

 
$