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CITRIX SYSTEMS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[August 05, 2014]

CITRIX SYSTEMS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(Edgar Glimpses Via Acquire Media NewsEdge) Our operating results and financial condition have varied in the past and could in the future vary significantly depending on a number of factors. From time to time, information provided by us or statements made by our employees contain "forward-looking" information that involves risks and uncertainties. In particular, statements contained in this Quarterly Report on Form 10-Q, and in the documents incorporated by reference into this Quarterly Report on Form 10-Q, that are not historical facts, including, but not limited to, statements concerning new products, research and development, offerings of products and services, market positioning and opportunities, headcount, customer demand, distribution and sales channels, financial information and results of operations for future periods, other income (expense), net, product and price competition, strategy and growth initiatives, seasonal factors, restructuring activities, international operations and expansion, investment transactions and valuations of investments and derivative instruments, reinvestment or repatriation of foreign earnings, fluctuations in foreign exchange rates, tax matters, tax rates, the expected benefits of acquisitions, changes in domestic and foreign economic conditions and credit markets, liquidity and debt obligations, share repurchase activity, litigation and intellectual property matters, constitute forward-looking statements and are made under the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are neither promises nor guarantees. Our actual results of operations and financial condition have varied and could in the future vary materially from those stated in any forward-looking statements. The factors described in Part I, Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2013, as may be updated in Part II, Item 1A in this Quarterly Report on Form 10-Q, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q, in the documents incorporated by reference into this Quarterly Report on Form 10-Q or presented elsewhere by our management from time to time. Such factors, among others, could have a material adverse effect upon our business, results of operations and financial condition. We caution readers not to place undue reliance on any forward-looking statements, which only speak as of the date made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.



Overview Management's discussion and analysis of financial condition and results of operations is intended to help the reader understand our financial condition and results of operations. This section is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the three months ended June 30, 2014. The results of operations for the periods presented in this report are not necessarily indicative of the results expected for the full year or for any future period, due in part to the seasonality of our business. Historically, our revenue for the fourth quarter of any year is typically higher than our revenue for the first quarter of the subsequent year.

We are a leader in mobile workspaces, providing virtualization, mobility management, networking and cloud services to enable new ways to work better. Our solutions power business mobility through secure, personal workspaces that provide people with instant access to apps, desktops, data and communications on any device, over any network and cloud. This year we are celebrating 25 years of innovation, making IT simpler and people more productive.


We market and license our products directly to customers, over the Web, and through systems integrators, or SIs, in addition to indirectly through value-added resellers, or VARs, value-added distributors, or VADs, original equipment manufacturers, or OEMs and service providers.

Executive Summary We believe our approach is unique in the market because we have combined innovative technologies into solutions that enable and power mobile workspaces.

Our technologies mobilize desktops, apps, data and people to help our customers drive business value. Our Mobile and Desktop products are leaders in the area of desktop and app management, including Desktop and Application Virtualization products, marketed as XenDesktop and XenApp and mobile device management, or MDM, and mobile application management, including XenMobile products. Our Networking and Cloud products also offer customers a value-added approach to building and delivering cloud services to end-users. Our Cloud Networking products allow our customers to deliver IT services to users with high performance, security and reliability, and our Cloud Platform products allow our customers to build scalable and reliable private and public cloud computing environments. We believe this combination of products allows us to deliver a comprehensive end-to-end mobile workspace solution; and one that we believe, when considered as a whole, is competitively differentiated by its feature set and interoperability. Communications and Documents Cloud (formerly Collaboration and Data) products enable seamless collaboration and sharing across a diverse mix of devices.

In today's business environment there is a sharp focus on IT products and services that can reduce cost and deliver a quick, tangible return on investment, or ROI. We are focused on helping our customers, as they invest in IT products and 29 -------------------------------------------------------------------------------- services, to reduce IT costs, increase business flexibility and deliver ROI by offering a simpler more flexible approach to computing.

In 2013, we generally saw unevenness in the global IT spending environment and encountered hesitancy on the part of customers in initiating large capital projects while transitioning their top priorities to mobile workspaces. In addition, we introduced new product offerings in our Desktop and Application Virtualization business focused on reducing installation time and total cost of ownership. Although we expect a multi-year product cycle from these offerings, we initially experienced longer than normal customer evaluations causing longer than anticipated sales cycles in the second half of 2013. In the first half of 2014, we found that the investments that we have been making in go-to-market coverage has led to growth in our Cloud Networking business which outweighs the results in our Desktop and Application Virtualization business.

We believe that continued economic uncertainty and the transition of computing and legacy platforms to mobile, cloud, big data and social solutions may adversely affect sales of our products and services and may result in longer sales cycles, slower adoption of technologies and increased price competition.

We are focused on helping our customers embrace and power mobile workspaces and build cloud infrastructure so cloud services can be delivered virtually anywhere with a high quality user experience. We plan to sustain the long-term growth of our businesses around the world by expanding our go-to-market reach and direct customer touch; investing in product innovation and improving integration across our product portfolio to drive simplicity and end-user experience.

In April 2014, we completed a private placement of $1.25 billion principal amount of 0.500% Convertible Senior Notes due 2019, or the Convertible Notes. In May 2014, we issued an additional $187.5 million principal amount of Convertible Notes pursuant to the full exercise of the over-allotment option granted to the initial purchasers in the offering, or the Over-Allotment Option. The net proceeds from this offering were approximately $1.42 billion (including the proceeds from the Over-Allotment Option), after deducting the initial purchasers' discounts and commissions and the offering expenses payable by us.

Further, in order to operate more efficiently, we announced the implementation of the 2014 Restructuring Program to better align resource allocation with our strategic imperatives. The 2014 Restructuring Program included steps to reduce our headcount by 200 full-time positions. During the first and second quarters of 2014, we incurred pre-tax charges of $9.7 million and $4.5 million related to employee severance and related costs. We expect to incur additional charges in the third quarter of 2014 related to the 2014 Restructuring Program.

Summary of Results For the three months ended June 30, 2014 compared to the three months ended June 30, 2013, a summary of our results included: • Product and licenses revenue increased 2.0% to $231.8 million; • Software as a service revenue increased 11.8% to $160.8 million; • License updates and maintenance revenue increased 7.5% to $347.0 million; • Professional services revenue increased 15.2% to $41.9 million; • Gross margin as a percentage of revenue decreased 5.0% to 77.6%; • Operating income decreased 28.3% to $54.4 million; and • Diluted net income per share decreased 9.3% to $0.31.

The increase in our Product and licenses revenue was driven by higher sales of our Networking and Cloud products, led by NetScaler, partially offset by lower overall sales of Mobile and Desktop products, primarily XenApp and XenDesktop, most pronounced in the Americas. Our Software as a service revenue increased primarily due to increased sales of our Communications Cloud products, led by GoToMeeting. The increase in License updates and maintenance revenue was driven by increased sales of maintenance and support across all of our Enterprise and Service Provider products and increased renewals of our Subscription Advantage product. The increase in Professional services revenue was primarily due to increased product training and certification and implementation sales of our Enterprise and Service Provider products. We currently target total revenue to increase when comparing the third quarter of 2014 to the third quarter of 2013.

In addition, when comparing the 2014 fiscal year to the 2013 fiscal year, we target total revenue to increase. The decrease in gross margin as a percentage of revenue, operating income and diluted net income per share when comparing the second quarter of 2014 to the second quarter of 2013 was primarily due to an increase in Amortization of product related intangible assets related to impairment charges recorded in relation to certain intangible assets. Partially offsetting the decrease in diluted net income per share was a tax benefit recorded in the second quarter of 2014 related to the closing of tax audits with the IRS for the tax years 2009 through 2010. Also offsetting the decrease in diluted net income per share was the impact of share repurchases during the second quarter of 2014, which reduced our weighted-average shares outstanding.

30 -------------------------------------------------------------------------------- 2014 Acquisitions On January 8, 2014, we acquired all of the issued and outstanding securities of Framehawk, Inc., or Framehawk. The Framehawk solution optimizes the delivery of virtual desktops and applications to mobile devices and will be combined with HDX technology in the Citrix XenApp and XenDesktop products to deliver an improved user experience under adverse network conditions. The total consideration for this transaction was approximately $24.2 million, net of $0.2 million of cash acquired, and was paid in cash. We recorded approximately $14.6 million of goodwill, which is not deductible for tax purposes, and acquired $29.2 million in assets including $14.0 million of identifiable product related intangible assets with a useful life of 7.0 years. We continue to evaluate certain income tax assets and liabilities related to this acquisition.

Transaction costs associated with the acquisition were approximately $0.1 million, all of which we expensed during the six months ended June 30, 2014 and are included in General and administrative expense in the accompanying condensed consolidated statements of income. We have included the effect of this transaction in our results of operations prospectively from the date of the acquisition, which was not material to our consolidated results.

During the second quarter of 2014, we acquired all of the issued and outstanding securities of a privately-held company. The total cash consideration for this transaction was approximately $17.2 million, net of $0.8 million of cash acquired. Transaction costs associated with the acquisition were approximately $0.2 million, all of which we expensed during the six months ended June 30, 2014 and are included in General and administrative expense in the accompanying condensed consolidated statements of income.

2013 Acquisitions Zenprise In January 2013, we acquired all of the issued and outstanding securities of Zenprise, Inc., or Zenprise, a privately-held leader in mobile device management. Zenprise became part of our Enterprise and Service Provider segment, in which we have integrated the Zenprise offering for mobile device management into our XenMobile Enterprise edition. The total consideration for this transaction was approximately $324.0 million, net of $2.9 million of cash acquired, and was paid in cash. Transaction costs associated with the acquisition were approximately $0.6 million, of which we expensed approximately $0.1 million during the six months ended June 30, 2013 and are included in General and administrative expense in the accompanying condensed consolidated statements of income. In addition, in connection with the acquisition, we assumed certain stock options which are exercisable for 285,817 shares of our common stock, for which the vesting period reset fully upon the closing of the transaction.

2013 Other Acquisitions During the third quarter of 2013, we acquired all of the issued and outstanding securities of a privately-held company. The total consideration for this transaction was approximately $5.3 million, net of $2.8 million of cash acquired and was paid in cash. We will pay contingent consideration of up to $3.0 million in cash upon the satisfaction of certain milestone achievements, as defined pursuant to the share purchase agreement. This business became part of our SaaS division. Transaction costs associated with the acquisition were approximately $0.2 million, and are included in General and administrative expense in the accompanying condensed consolidated statements of income. No transaction costs were recorded for this transaction during the three and six months ended June 30, 2014 and 2013.

During the fourth quarter of 2013, we acquired all of the issued and outstanding securities of a privately-held company. The total cash consideration for this transaction was approximately $5.5 million. This business became part of our Enterprise and Service Provider division. Transaction costs associated with the acquisition were approximately $0.2 million, and are included in General and administrative expense in the accompanying condensed consolidated statements of income. No transaction costs were recorded for this transaction during the three and six months ended June 30, 2014 and 2013.

We have included the effects of all of the companies acquired in our results of operations prospectively from the dates of the acquisition.

Critical Accounting Policies and Estimates Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base these estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience.

31 -------------------------------------------------------------------------------- Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted. For more information regarding our critical accounting policies and estimates please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" contained in our Annual Report on Form 10-K for the year ended December 31, 2013, or the Annual Report, and Note 2 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. There have been no material changes to the critical accounting policies disclosed in the Annual Report.

Results of Operations The following table sets forth our unaudited condensed consolidated statements of income data and presentation of that data as a percentage of change from period-to-period (in thousands): Three Months Ended Six Months Ended Three Months Ended Six Months Ended June 30, June 30, June 30, 2014 June 30, 2014 2014 2013 2014 2013 vs. June 30, 2013 vs. June 30, 2013 Revenues: Product and licenses $ 231,792 $ 227,215 $ 439,216 $ 420,298 2.0 % 4.5 % Software as a service 160,779 143,858 317,911 281,424 11.8 13.0 License updates and maintenance 347,041 322,895 690,799 638,633 7.5 8.2 Professional services 41,948 36,416 84,453 62,928 15.2 34.2Total net revenues 781,560 730,384 1,532,379 1,403,283 7.0 9.2 Cost of net revenues: Cost of product and license revenues 32,762 31,700 64,099 57,494 3.4 11.5 Cost of services and maintenance revenues 88,099 71,198 166,782 135,609 23.7 23.0 Amortization of product related intangible assets 54,395 24,342 78,701 49,051 123.5 60.4 Total cost of net revenues 175,256 127,240 309,582 242,154 37.7 27.8 Gross margin 606,304 603,144 1,222,797 1,161,129 0.5 5.3 Operating expenses: Research and development 140,375 132,299 273,993 262,791 6.1 4.3 Sales, marketing and services 321,539 317,096 638,035 614,778 1.4 3.8 General and administrative 75,015 67,343 147,403 130,128 11.4 13.3 Amortization of other intangible assets 10,445 10,518 22,899 20,936 (0.7 ) 9.4 Restructuring 4,511 - 14,161 - * * Total operating expenses 551,885 527,256 1,096,491 1,028,633 4.7 6.6 Income from operations 54,419 75,888 126,306 132,496 (28.3 ) (4.7 ) Interest income 2,141 2,021 4,294 3,983 5.9 7.8 Interest expense 6,984 47 7,050 61 * * Other income (expense), net 1,452 (599 ) (3,767 ) (1,351 ) * 178.8 Income before income taxes 51,028 77,263 119,783 135,067 (34.0 ) (11.3 ) Income tax (benefit) expense (1,996 ) 12,802 10,820 10,918 * (0.9 ) Net income $ 53,024 $ 64,461 $ 108,963 $ 124,149 (17.7 ) (12.2 ) * not meaningful 32--------------------------------------------------------------------------------Revenues Net revenues of our Enterprise and Service Provider division include Product and licenses, License updates and maintenance, and Professional services. Product and licenses primarily represent fees related to the licensing of the following major products: • Mobile and Desktop is primarily comprised of our desktop and application virtualization products, which include XenDesktop and XenApp and our mobility products which include XenMobile products; and • Networking and Cloud is primarily comprised of our cloud networking products, which include NetScaler, Cloud Bridge and ByteMobile Smart Capacity, and our cloud platform products, which include XenServer, CloudPlatform and CloudPortal.

In addition, we offer incentive programs to our VADs and VARs to stimulate demand for our products. Product and license revenues associated with these programs are partially offset by these incentives to our VADs and VARs.

License updates and maintenance consists of: • Our Subscription Advantage program, an annual renewable program that provides subscribers with automatic delivery of unspecified software upgrades, enhancements and maintenance releases when and if they become available during the term of the subscription, for which fees are recognized ratably over the term of the contract, which is typically 12 to 24 months; and • Our maintenance fees, which include technical support and hardware and software maintenance, and which are recognized ratably over the contract term.

Professional services are comprised of: • Fees from consulting services related to implementation of our products, which are recognized as the services are provided; and • Fees from product training and certification, which are recognized as the services are provided.

Our SaaS revenues, which are recognized ratably over the contractual term, consist of fees related to our SaaS products including: • Communications Cloud products, which primarily include GoToMeeting, GoToWebinar and GoToTraining; • Documents Cloud products, which primarily include ShareFile; • Remote Access product, GoToMyPC; and • Remote IT Support products, which primarily include GoToAssist.

Three Months Ended Six Months Ended Three Months Ended Six Months Ended June 30, June 30, June 30, 2014 June 30, 2014 2014 2013 2014 2013 vs. June 30, 2013 vs. June 30, 2013 (In thousands) Product and licenses $ 231,792 $ 227,215 $ 439,216 $ 420,298 $ 4,577 $ 18,918 Software as a service 160,779 143,858 317,911 281,424 16,921 36,487 License updates and maintenance 347,041 322,895 690,799 638,633 24,146 52,166 Professional services 41,948 36,416 84,453 62,928 5,532 21,525 Total net revenues $ 781,560 $ 730,384 $ 1,532,379 $ 1,403,283 $ 51,176 $ 129,096 Product and Licenses The increase in Product and licenses revenue for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 was primarily due to increased sales of our Networking and Cloud products of $14.2 million, led by NetScaler, partially offset by an overall decrease in sales of our Mobile and Desktop products of $10.3 million, primarily XenApp and XenDesktop. The increase in Product and licenses revenue for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 was primarily due to increased sales of our Networking and Cloud products of $31.9 million, led by NetScaler, partially offset by a decrease in sales of our Mobile and Desktop products of $13.7 million, primarily XenApp and XenDesktop. These Product and licenses revenue results were primarily due to the factors discussed in the Executive Summary Overview above. We currently target Product and licenses revenue to increase when comparing the third quarter of 2014 to the third quarter of 2013.

Software as a Service Software as a service revenue increased for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 primarily due to increased sales of our Communications Cloud products of $12.3 million, led by GoToMeeting, and increased sales of our Documents Cloud products of $5.2 million. Software as a service revenue increased for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily due to increased sales of our Communications Cloud products of $26.1 million, led by GoToMeeting, and increased sales of our Documents Cloud products of $10.3 million. We currently target Software as a service revenue to increase when comparing the third quarter of 2014 to the third quarter of 2013.

License Updates and Maintenance License updates and maintenance revenue increased for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 primarily due to an increase in maintenance revenues of $13.9 million, primarily driven by 33 -------------------------------------------------------------------------------- increased sales of maintenance and support contracts across all of our Enterprise and Service Provider division's products and an increase in renewals of our Subscription Advantage product of $11.6 million. License updates and maintenance revenue increased for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily due to an increase in maintenance revenues of $32.4 million, primarily driven by increased sales of maintenance and support contracts across all of our Enterprise and Service Provider division's products and an increase in renewals of our Subscription Advantage product of $25.1 million. We currently target License updates and maintenance revenue to increase when comparing the third quarter of 2014 to the third quarter of 2013.

Professional Services The increase in Professional services revenue when comparing the three and six months ended June 30, 2014 to the three months ended June 30, 2013 was primarily due to increased product training and certification and implementation sales of our Enterprise and Service Provider products. We currently target Professional services revenue to increase when comparing the third quarter of 2014 to the third quarter of 2013 consistent with the targeted increase in Product and licenses revenue described above.

Deferred Revenue Deferred revenues are primarily comprised of License updates and maintenance revenue from our Subscription Advantage product as well as maintenance contracts for our software and hardware products. Deferred revenues also include SaaS revenue from annual service agreements for our online services and Professional services revenue primarily related to our consulting contracts. Deferred revenues increased approximately $18.3 million as of June 30, 2014 compared to December 31, 2013 primarily due to an increase related to our hardware and software maintenance contracts of $33.9 million and increased sales of our SaaS products of $8.7 million, partially offset by a decrease in new and renewal sales of our Subscription Advantage product of $25.9 million. We currently anticipate that deferred revenues will increase throughout the remainder of 2014.

International Revenues International revenues (sales outside the United States) accounted for approximately 44.4% of our net revenues for the three months ended June 30, 2014 and 45.5% of our net revenues for the three months ended June 30, 2013.

International revenues (sales outside the United States) accounted for approximately 44.4% of our net revenues for the six months ended June 30, 2014 and 44.5% of our net revenues for the six months ended June 30, 2013. See Note 9 to our condensed consolidated financial statements for detailed information on net revenues by geography.

Segment Revenues Our revenues are derived from sales of Enterprise and Service Provider products which include our Mobile and Desktop products, Networking and Cloud products and related License updates and maintenance and Professional services and from our SaaS products which include Communications Cloud, Documents Cloud, Remote Access and Remote IT Support products. Enterprise and Service Provider and SaaS constitute our two reportable segments.

34 --------------------------------------------------------------------------------An analysis of our reportable segment net revenue is presented below (in thousands): Increase for the Three Months Ended Six Months Ended Three Months Ended Six Months Ended June 30, June 30, June 30, 2014 June 30, 2014 2014 2013 2014 2013 vs. June 30, 2013 vs. June 30, 2013 Enterprise and Service Provider $ 620,781 $ 586,526 $ 1,214,468 $ 1,121,859 5.8 % 8.3 % SaaS 160,779 143,858 317,911 281,424 11.8 % 13.0 % Net revenues $ 781,560 $ 730,384 $ 1,532,379 $ 1,403,283 7.0 % 9.2 % With respect to our segment revenues, the increase in net revenues for the comparative periods presented was due primarily to the factors previously discussed above. See Note 9 of our condensed consolidated financial statements for additional information on our segment revenues.

Cost of Net Revenues Three Months Ended Six Months Ended Three Months Ended Six Months Ended June 30, June 30, June 30, 2014 June 30, 2014 2014 2013 2014 2013 vs. June 30, 2013 vs. June 30, 2013 (In thousands) Cost of product and license revenues $ 32,762 $ 31,700 $ 64,099 $ 57,494 $ 1,062 $ 6,605 Cost of services and maintenance revenues 88,099 71,198 166,782 135,609 16,901 31,173 Amortization of product related intangible assets 54,395 24,342 78,701 49,051 30,053 29,650 Total cost of net revenues $ 175,256 $ 127,240 $ 309,582 $ 242,154 $ 48,016 $ 67,428 Cost of product and license revenues consists primarily of hardware, shipping expense, royalties, product media and duplication, manuals and packaging materials. Cost of services and maintenance revenues consists primarily of compensation and other personnel-related costs of providing technical support and consulting, as well as the costs related to providing our SaaS, which includes the cost to support the voice and video offerings in our Communications Cloud products. Also included in Cost of net revenues is amortization of product related intangible assets.

Cost of product and license revenues increased for the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013 primarily due to increased sales of our Networking and Cloud products, as described above, many of which contain hardware components that have a higher cost than our other software products. We currently target Cost of product and license revenues to increase when comparing the third quarter of 2014 to the third quarter of 2013 consistent with the targeted increase in sales of our hardware products.

Cost of services and maintenance revenues increased for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 primarily due to an increase in sales of our Communications and Documents Cloud products of $6.7 million. Also contributing to the increase in Cost of services and maintenance revenues is an increase in product training and certification and implementation costs of $6.1 million related to increased sales of our Enterprise and Service Provider division's products as described above. Cost of services and maintenance revenues increased for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily due to an increase in sales of our Communications and Documents Cloud products of $14.3 million. Also contributing to the increase in Cost of services and maintenance revenues is an increase in product training and certification and implementation costs of $11.4 million related to increased sales of our Enterprise and Service Provider division's products as described above. We currently target Cost of services and maintenance revenues to increase when comparing the third quarter of 2014 to the third quarter of 2013, consistent with the targeted increases in Software as a service revenue, License updates and maintenance revenue and Professional services revenue as discussed above.

Amortization of product related intangible assets increased for the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013 primarily as a result of impairment charges of $29.6 million recorded in relation to certain intangible assets.

35 -------------------------------------------------------------------------------- Gross Margin Gross margin as a percentage of revenue was 77.6% for the three months ended June 30, 2014 and 82.6% for the three months ended June 30, 2013. Gross margin as a percentage of revenue was 79.8% for the six months ended June 30, 2014 and 82.7% for the six months ended June 30, 2013. The decrease in gross margin as a percentage of net revenue is primarily a result of impairment charges recorded in relation to certain intangible assets of $29.6 million. When comparing the third quarter of 2014 to the third quarter of 2013, we expect a slight decline in gross margin, consistent with our targeted increase in sales of our hardware products and services. When comparing the full year 2014 to the full year 2013, we expect a decline in gross margin primarily due to impairment charges recorded in relation to certain intangible assets during the second quarter of 2014.

Operating Expenses Foreign Currency Impact on Operating Expenses The functional currency for all of our wholly-owned foreign subsidiaries in our Enterprise and Service Provider segment is the U.S. dollar. A substantial majority of our overseas operating expenses and capital purchasing activities are transacted in local currencies and are therefore subject to fluctuations in foreign currency exchange rates. In order to minimize the impact on our operating results, we generally initiate our hedging of currency exchange risks up to 12 months in advance of anticipated foreign currency expenses. When the dollar is weak, the resulting increase to foreign currency denominated expenses will be partially offset by the gain in our hedging contracts. When the dollar is strong, the resulting decrease to foreign currency denominated expenses will be partially offset by the loss in our hedging contracts. There is a risk that there will be fluctuations in foreign currency exchange rates beyond the timeframe for which we hedge our risk.

Research and Development Expenses Three Months Ended Six Months Ended Three Months Ended Six Months Ended June 30, June 30, June 30, 2014 June 30, 2014 2014 2013 2014 2013 vs. June 30, 2013 vs. June 30, 2013 (In thousands) Research and development $ 140,375 $ 132,299 $ 273,993 $ 262,791 $ 8,076 $ 11,202 Research and development expenses consisted primarily of personnel related costs and facility and equipment costs directly related to our research and development activities. We expensed substantially all development costs included in the research and development of our products.

Research and development expenses increased during the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013 primarily due to an increase in compensation, including stock-based compensation and employee-related costs, primarily related to increased headcount.

Sales, Marketing and Services Expenses Three Months Ended Six Months Ended Three Months Ended Six Months Ended June 30, June 30, June 30, 2014 June 30, 2014 2014 2013 2014 2013 vs. June 30, 2013 vs. June 30, 2013 (In thousands) Sales, marketing and services $ 321,539 $ 317,096 $ 638,035 $ 614,778 $ 4,443 $ 23,257 Sales, marketing and services expenses consisted primarily of personnel related costs, including sales commissions, pre-sales support, the costs of marketing programs aimed at increasing revenue, such as brand development, advertising, trade shows, public relations and other market development programs and costs related to our facilities, equipment and information systems that are directly related to our sales, marketing and services activities.

Sales, marketing and services expenses increased during the three months ended June 30, 2014 compared to the three months ended June 30, 2013 primarily due to an increase in professional fees incurred on projects to support business growth. Sales, marketing and services expenses increased during the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily due to an increase in compensation, including variable and stock-based compensation and employee-related costs due to additional headcount in our sales force and professional services group.

36 --------------------------------------------------------------------------------General and Administrative Expenses Three Months Ended Six Months Ended Three Months Ended Six Months Ended June 30, June 30, June 30, 2014 June 30, 2014 2014 2013 2014 2013 vs. June 30, 2013 vs. June 30, 2013 (In thousands) General and administrative $ 75,015 $ 67,343 $ 147,403 $ 130,128 $ 7,672 $ 17,275 General and administrative expenses consisted primarily of personnel related costs and expenses related to outside consultants assisting with information systems, as well as accounting and legal fees.

General and administrative expenses increased for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 primarily due to an increase in compensation and employee related costs of $5.5 million due to additional headcount, primarily in finance and operations. Also contributing to the increase in General and administrative expense when comparing the three months ended June 30, 2014 to the three months ended June 30, 2013 is an increase in professional fees of $3.3 million primarily related to projects to support business growth.

General and administrative expenses increased for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily due to an increase in compensation and employee related costs of $11.1 million due to additional headcount, primarily in finance and operations. Also contributing to the increase in General and administrative expense when comparing the six months ended June 30, 2014 to the six months ended June 30, 2013 is an increase in professional fees of $7.7 million primarily related to projects to support business growth.

Restructuring Expenses Three Months Ended Six Months Ended Three Months Ended Six Months Ended June 30, June 30, June 30, 2014 June 30, 2014 2014 2013 2014 2013 vs. June 30, 2013 vs. June 30, 2013 (In thousands) Restructuring $ 4,511 $ - $ 14,161 $ - $ 4,511 $ 14,161 In March 2014, we implemented the 2014 Restructuring Program, which primarily included the reduction of our headcount by 200 full-time positions. The pre-tax charges we incurred were primarily related to severance and other costs directly related to the reduction of our workforce. The restructuring program is expected to be completed by the end of 2014. For more information, see "-Executive Summary- Overview" and Note 16 to our condensed consolidated financial statements.

2014 Operating Expense Outlook When comparing the third quarter of 2014 to the third quarter of 2013, we are targeting Operating expenses to increase across all functional areas primarily related to increases in headcount and ongoing investments in the business. We also expect to incur additional charges in the remainder of 2014 related to the 2014 Restructuring Program.

Interest Expense Three Months Ended Six Months Ended Three Months Ended Six Months Ended June 30, June 30, June 30, 2014 June 30, 2014 2014 2013 2014 2013 vs. June 30, 2013 vs. June 30, 2013 (In thousands) Interest expense $ 6,984 $ 47 $ 7,050 $ 61 $ 6,937 $ 6,989 Interest expense, in 2014, consists primarily of interest on our convertible senior notes. The increase was primarily due to interest expense associated with the issuance of our convertible senior notes. We currently target interest expense to increase when comparing the third quarter of 2014 to the third quarter of 2013.

37 --------------------------------------------------------------------------------Other Income (Expense), Net Three Months Ended Six Months Ended Three Months Ended Six Months Ended June 30, June 30, June 30, 2014 June 30, 2014 2014 2013 2014 2013 vs. June 30, 2013 vs. June 30, 2013 (In thousands) Other income (expense), net $ 1,452 $ (599 ) $ (3,767 ) $ (1,351 ) $ 2,051 $ (2,416 ) Other income (expense), net is primarily comprised of remeasurement of foreign currency transaction gains (losses), realized losses related to changes in the fair value of our investments that have a decline in fair value considered other-than-temporary and recognized gains (losses) related to our investments, which was not material for all periods presented.

The change in Other income (expense), net, during the three months ended June 30, 2014 compared to the three months ended June 30, 2013 is primarily due to a gain on remeasurement of our foreign currency transactions. For more information on our cost method investments, see Note 5 to our condensed consolidated financial statements.

The change in Other income (expense), net, during the six months ended June 30, 2014 compared to the six months ended June 30, 2013 is primarily due to net losses recognized on cost method investments of $5.1 million, partially offset by a gain on remeasurement of our foreign currency transactions of $1.7 million.

For more information on our cost method investments, see Note 5 to our condensed consolidated financial statements.

Income Taxes As of June 30, 2014, our net unrecognized tax benefits totaled approximately $59.9 million as compared to $63.8 million as of December 31, 2013. All amounts included in this balance affect the annual effective tax rate. We have $0.3 million accrued for the payment of interest and penalties as of June 30, 2014.

We and certain of our subsidiaries are subject to U.S. federal income taxes, as well as income taxes of multiple state and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S., income tax examinations by tax authorities for years prior to 2011.

During the quarter ended June 30, 2014, the Internal Revenue Service, or IRS, concluded its field examination of our 2009 and 2010 tax years and issued proposed adjustments primarily related to transfer pricing and the research and development tax credit. In June 2014, we finalized our tax deficiency calculations and formally closed the audit with the IRS for the 2009 and 2010 tax years. As a result, we recognized a net tax benefit related to the settlement of all tax issues with the IRS for the 2009 and 2010 tax years, the impact on subsequent years and the reduction of our uncertain tax positions for the closed tax years of $9.3 million during the second quarter of 2014.

In the ordinary course of global business, there are transactions for which the ultimate tax outcome is uncertain and judgment is required in determining the worldwide provision for income taxes. We provide for income taxes on transactions based on our estimate of the probable liability. We adjust our provision as appropriate for changes that impact our underlying judgments.

Changes that impact provision estimates include such items as jurisdictional interpretations on tax filing positions based on the results of tax audits and general tax authority rulings. Due to the evolving nature of tax rules combined with the large number of jurisdictions in which we operate, it is possible that our estimates of our tax liability and the realizability of our deferred tax assets could change in the future, which may result in additional tax liabilities and adversely affect our results of operations, financial condition and cash flows.

We are required to estimate our income taxes in each of the jurisdictions in which we operate as part of the process of preparing our condensed consolidated financial statements. At June 30, 2014, we had approximately $132.9 million in net deferred tax assets. The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We review deferred tax assets periodically for recoverability and make estimates and judgments regarding the expected geographic sources of taxable income and gains from investments, as well as tax planning strategies in assessing the need for a valuation allowance.

We maintain certain strategic management and operational activities in overseas subsidiaries and its foreign earnings are taxed at rates that are generally lower than in the United States. We do not expect to remit earnings from its foreign subsidiaries. Our effective tax rate was approximately (3.9)% and 16.6% for the three months ended June 30, 2014 and 2013, respectively, and 9.0% and 8.1% for the six months ended June 30, 2014 and 2013, respectively. The decrease in the effective tax rate when comparing the three months ended June 30, 2014 to the three months ended June 30, 2013 was primarily due to the impact of settling the federal IRS examination.

38 -------------------------------------------------------------------------------- Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due primarily to lower tax rates on earnings generated by our foreign operations that are taxed primarily in Switzerland. We have not provided for U.S. taxes for those earnings because we plan to reinvest all of those earnings indefinitely outside the United States.

Liquidity and Capital Resources During the six months ended June 30, 2014, we generated operating cash flows of $491.4 million. These operating cash flows related primarily to a change in operating assets and liabilities of $137.0 million, net of effect of our acquisitions. Also contributing to these cash inflows was net income of $109.0 million, adjusted for, among other things, non-cash charges, depreciation and amortization expenses of $168.8 million and stock-based compensation expense of $86.0 million. Our investing activities used $320.3 million of cash consisting primarily of net purchases of investments of $202.1 million, cash paid for the purchase of property and equipment of $67.1 million and cash paid for acquisitions of $41.3 million. Our financing activities used cash of $173.3 million primarily due to cash paid for stock repurchases of $1.5 billion, the purchase of hedges on the convertible senior notes of $184.3 million and cash paid for tax withholding on vested stock awards of $22.8 million, partially offset by proceeds from the issuance of convertible senior notes of $1.4 billion, proceeds from the issuance of warrants of $101.8 million and the issuance of common stock under our employee stock-based compensation plans of $18.1 million.

During the six months ended June 30, 2013, we generated operating cash flows of $475.7 million. These operating cash flows related primarily to a change in operating assets and liabilities of $144.8 million, net of effect of our acquisitions. Also contributing to these cash inflows was net income of $124.1 million, adjusted for, among other things, non-cash charges, including depreciation and amortization expenses of $130.5 million, stock-based compensation expense of $91.4 million and the tax effect of stock-based compensation of $15.1 million. These cash inflows were partially offset by operating outflows related to a deferred income tax benefit of $25.2 million.

Our investing activities used $776.3 million of cash consisting primarily of cash paid for acquisitions of $324.0 million, cash paid for net purchases of investments of $381.0 million and the purchase of property and equipment of $66.8 million. Our financing activities used cash of $78.0 million primarily due to cash paid for stock repurchases of $101.0 million, partially offset by proceeds received from the issuance of common stock under our employee stock-based compensation plans of $35.0 million and the excess tax benefit from stock-based compensation of $11.9 million.

Historically, significant portions of our cash inflows have been generated by our operations. We believe that our existing cash and investments, together with cash flows expected from operations, will be sufficient to meet expected operating and capital expenditure requirements for the next 12 months. We continue to search for suitable acquisition candidates and could acquire or make investments in companies we believe are related to our strategic objectives. We could from time to time seek to raise additional funds through the issuance of debt or equity securities for larger acquisitions.

Convertible Senior Notes In April 2014, we completed a private placement of $1.25 billion principal amount of 0.500% Convertible Senior Notes due 2019, or the Convertible Notes.

Thereafter, in May 2014, we issued an additional $187.5 million principal amount of Convertible Notes pursuant to the full exercise of the over-allotment option granted to the initial purchasers in the offering, or the Over-Allotment Option.

The net proceeds from this offering were approximately $1.42 billion (including the proceeds from the Over-Allotment Option), after deducting the initial purchasers' discounts and commissions and the offering expenses payable by us.

We used approximately $82.5 million of the net proceeds to pay the cost of certain bond hedges entered into in connection with the offering (after such cost was partially offset by the proceeds to us from certain warrant transactions). Please see Note 10 to our condensed consolidated financial statements for additional details on the Convertible Notes offering and the related bond hedges and warrant transactions.

We used the remainder of the net proceeds from the offering and a portion of our existing cash and investments to purchase an aggregate of approximately $1.5 billion of our common stock under our share repurchase program. We used approximately $101.0 million to purchase shares of our common stock from certain purchasers of the Convertible Notes in privately negotiated transactions concurrently with the closing of the offering, and the remaining $1.4 billion to purchase additional shares of our common stock through an accelerated share repurchase transaction, or the ASR, which we entered into with Citibank, N.A., or Citibank, on April 25, 2014, and which is discussed in further detail in Note 14 to our condensed consolidated financial statements. We intend to use the remaining net proceeds resulting from the exercise of the Over-Allotment Option for working capital and general corporate purposes.

39 --------------------------------------------------------------------------------Cash, Cash Equivalents and Investments 2014 Compared to June 30, 2014 December 31, 2013 2013 (In thousands)Cash, cash equivalents and investments $ 1,796,074 $ 1,590,416 $ 205,658 The increase in Cash, cash equivalents and investments when comparing June 30, 2014 to December 31, 2013, is primarily due to proceeds from the issuance of convertible senior notes of $1.42 billion, cash provided by our operating activities of $491.4 million and proceeds from the issuance of warrants of $101.8 million, partially offset by cash paid for stock repurchases of $1.50 billion, the purchase of hedges on the convertible senior notes of $184.3 million, purchases of property and equipment of $67.1 million and cash paid for acquisitions, net of cash acquired, of $41.3 million. As of June 30, 2014, $1.30 billion of the $1.80 billion of Cash, cash equivalents and investments was held by our foreign subsidiaries. If these funds are needed for our operations in the United States, we would be required to accrue and pay U.S. taxes to repatriate these funds. Our current plans are not expected to require repatriation of cash and investments to fund our U.S. operations and, as a result, we intend to permanently reinvest our foreign earnings. We generally invest our cash and cash equivalents in investment grade, highly liquid securities to allow for flexibility in the event of immediate cash needs. Our short-term and long-term investments primarily consist of interest-bearing securities.

Fair Value Measurements The authoritative guidance defines fair value as an exit price, representing the amount that would either be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: • Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities; • Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and • Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Available-for-sale securities included in Level 2 are valued utilizing inputs obtained from an independent pricing service, or the Service, which uses quoted market prices for identical or comparable instruments rather than direct observations of quoted prices in active markets. The Service gathers observable inputs for all of our fixed income securities from a variety of industry data providers, for example, large custodial institutions and other third-party sources. Once the observable inputs are gathered by the Service, all data points are considered and an average price is determined. The Service's providers utilize a variety of inputs to determine their quoted prices. These inputs may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes.

Substantially all of our available-for-sale investments are valued utilizing inputs obtained from the Service and accordingly are categorized as Level 2. We periodically independently assess the pricing obtained from the Service and historically have not adjusted the Service's pricing as a result of this assessment. Available-for-sale securities are included in Level 3 when relevant observable inputs for a security are not available.

Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and liabilities within the fair value hierarchy. In certain instances, the inputs used to measure fair value may meet the definition of more than one level of the fair value hierarchy. The input with the lowest level priority is used to determine the applicable level in the fair value hierarchy.

Assets and Liabilities Measured at Fair Value on a Recurring Basis Our fixed income available-for-sale security portfolio generally consists of investment grade securities from diverse issuers with a minimum credit rating of A-/A3 and a weighted average credit rating of AA-/Aa3. We value these securities based on pricing from the Service, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value, and accordingly, we classify all of our fixed income available-for-sale securities as Level 2.

We measure our cash flow hedges, which are classified as Prepaid expenses and other current assets and Accrued expenses and other current liabilities, at fair value based on indicative prices in active markets (Level 2 inputs).

40 --------------------------------------------------------------------------------Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) We have invested in convertible debt securities of certain early-stage entities that are classified as available-for-sale investments. As quoted prices in active markets or other observable inputs were not available for these investments, in order to measure them at fair value, we utilized a discounted cash flow model using a discount rate reflecting the market risk inherent in holding securities of an early-stage enterprise, adjusted by the probability-weighted exit possibilities associated with the convertible debt securities. Typically the discount rate used by us in measuring the fair value of investments in convertible debt securities of certain early-stage entities is commensurate with the nature and size of these entities. This methodology required us to make assumptions that were not directly or indirectly observable regarding the fair value of the convertible debt securities; accordingly they are a Level 3 valuation and are included in the table below. See Note 5 to our condensed consolidated financial statements for more information regarding our available-for-sale investments.

Corporate Securities (In thousands) Balance at December 31, 2013 $ 10,291 Purchases of Level 3 securities 1,300 Proceeds received on Level 3 securities (7,875 ) Total realized losses included in earnings 2,875 Balance at June 30, 2014 $ 6,591 Assets Measured at Fair Value on a Non-recurring Basis Using Significant Unobservable Inputs (Level 3) During the three and six months ended June 30, 2014, certain cost method investments with a combined carrying value of $3.2 million were determined to be impaired and were written down to zero. The impairment charge is included in Other income (expense), net in the accompanying condensed consolidated financial statements. In determining the fair value of cost method investments, we considered many factors including but not limited to operating performance of the investee, the amount of cash that the investee has on-hand, the ability to obtain additional financing and the overall market conditions in which the investee operates. The fair value of the cost method investments represent a Level 3 valuation as the assumptions used in valuing these investments were not directly or indirectly observable.

Accounts Receivable, Net 2014 Compared to June 30, 2014 December 31, 2013 2013 (In thousands) Accounts receivable $ 511,495 $ 660,175 $ (148,680 ) Allowance for returns (1,088 ) (2,062 ) 974 Allowance for doubtful accounts (3,998 ) (3,292 ) (706 ) Accounts receivable, net $ 506,409 $ 654,821 $ (148,412 ) The decrease in Accounts receivable, net, when comparing June 30, 2014 to December 31, 2013 was primarily due to increased collections during the six months ended June 30, 2014 on higher sales in the fourth quarter of 2013. The activity in our Allowance for returns was comprised primarily of $2.2 million in credits issued for returns during the six month period ended June 30, 2014, partially offset by $1.2 million of provisions for returns recorded during the six month period ended June 30, 2014. The activity in our Allowance for doubtful accounts was comprised primarily of $1.3 million in additional provisions for doubtful accounts during the six month period ended June 30, 2014, partially offset by $0.6 million of uncollectible accounts written off, net of recoveries during the six month period ended June 30, 2014. From time to time, we could maintain individually significant accounts receivable balances from our distributors or customers, which are comprised of large business enterprises, governments and small and medium-sized businesses. If the financial condition of our distributors or customers deteriorates, our operating results could be adversely affected.

41 -------------------------------------------------------------------------------- Stock Repurchase Programs Our Board of Directors authorized an ongoing stock repurchase program with a total repurchase authority granted to us of $5.4 billion, of which $1.5 billion was approved in April 2014. We may use the approved dollar authority to repurchase stock at any time until the approved amount is exhausted. The objective of our stock repurchase program is to improve stockholders' returns.

At June 30, 2014, approximately $428.3 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock. A portion of the funds used to repurchase stock over the course of the program was provided by net proceeds from the Convertible Notes offering, as well as proceeds from employee stock option exercises and the related tax benefit.

We are authorized to make open market purchases of our common stock using general corporate funds through open market purchases or pursuant to a Rule 10b5-1 plan or in privately negotiated transactions.

In April 2014, in connection with the $1.5 billion increase in repurchase authority granted to us under our ongoing stock repurchase program, we used approximately $101.0 million to purchase 1.7 million shares of our common stock from certain purchasers of the Convertible Notes in privately negotiated transactions concurrently with the closing of the Convertible Notes offering discussed above, and an additional $1.4 billion to purchase additional shares of our common stock through our ASR with Citibank. On April 30, 2014, under the ASR agreement, we paid approximately $1.4 billion to Citibank and received approximately 19.2 million shares of our common stock. The total number of shares of our common stock that we will repurchase under the ASR agreement will be based on the average of the daily volume-weighted average prices of our common stock during the term of the ASR agreement, less a discount. At settlement, Citibank may be required to deliver additional shares of our common stock to us or, under certain circumstances, we may be required to deliver shares of our common stock or make a cash payment to Citibank. Final settlement of the ASR agreement is expected to be completed by the end of December 2014, although the settlement may be accelerated at Citibank's option. See Note 10 to our condensed consolidated financial statements for detailed information on our Convertible Notes offering and the transactions related thereto, including the ASR.

During the three and six months ended June 30, 2014, we had no open market purchases, other than under the ASR.

During the three months ended June 30, 2013, we expended approximately $39.7 million on open market purchases, repurchasing 614,750 shares of outstanding common stock at an average price of $64.53. During the six months ended June 30, 2013, we expended approximately $101.0 million on open market purchases, repurchasing 1,475,250 shares of outstanding common stock at an average price of $68.49.

Shares for Tax Withholding During the three months ended June 30, 2014, we withheld 26,460 shares from stock units that vested, totaling $1.6 million, to satisfy minimum tax withholding obligations that arose on the vesting of stock units. During the six months ended June 30, 2014, we withheld 394,770 shares from stock units that vested, totaling $22.8 million, to satisfy minimum tax withholding obligations that arose on the vesting of stock units. These shares are reflected as treasury stock in our condensed consolidated balance sheets and the related cash outlays do not reduce our total stock repurchase authority.

During the three months ended June 30, 2013, we withheld 23,796 shares from stock units that vested, totaling $1.6 million, to satisfy minimum tax withholding obligations that arose on the vesting of stock units. During the six months ended June 30, 2013, we withheld 346,334 shares from stock units that vested, totaling $24.8 million, to satisfy minimum tax withholding obligations that arose on the vesting of stock units. These shares are reflected as treasury stock in our condensed consolidated balance sheets and the related cash outlays do not reduce our total stock repurchase authority.

42 -------------------------------------------------------------------------------- Contractual Obligations and Off-Balance Sheet Arrangement Contractual Obligations We have certain contractual obligations that are recorded as liabilities in our condensed consolidated financial statements. Other items, such as operating lease obligations, are not recognized as liabilities in our condensed consolidated financial statements, but are required to be disclosed in the notes to our condensed consolidated financial statements.

The following table summarizes our significant contractual obligations at June 30, 2014 and the future periods in which such obligations are expected to be settled in cash. Additional details regarding these obligations are provided in the notes to our condensed consolidated financial statements (in thousands): Payments due by period Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Operating lease obligations $ 425,900 $ 33,127 $ 142,767 $ 100,154 $ 149,852 Convertible senior notes(1) 1,437,500 - - 1,437,500 Purchase obligations(2) 34,579 34,579 - - - Total contractual obligations(3) $ 1,897,979 $ 67,706 $ 142,767 $ 1,537,654 $ 149,852 (1) During the second quarter of 2014, we completed a private placement of $1.44 billion principal amount of 0.500% Convertible Senior Notes due 2019. The amount above represents the principal balance to be repaid. See Note 10 to our condensed consolidated financial statements for detailed information on the Convertible Notes offering and the transactions related thereto.

(2) Purchase obligations represent non-cancelable commitments to purchase inventory ordered before June 30, 2014 of approximately $19.7 million and a contingent obligation to purchase inventory, which is based on amount of usage, of approximately $18.1 million.

(3) Total contractual obligations do not include agreements where our commitment is variable in nature or where cancellations without payment provisions exist and excludes $59.9 million of liabilities related to uncertain tax positions recorded in accordance with authoritative guidance, because we could not make reasonably reliable estimates of the period or amount of cash settlement with the respective taxing authorities. See Note 13 to our condensed consolidated financial statements.

As of June 30, 2014, we did not have any individually material capital lease obligations or other material long-term commitments reflected on our condensed consolidated balance sheets.

Off-Balance Sheet Arrangements We do not have any special purpose entities or off-balance sheet financing arrangements.

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