GOODWILL AND INTANGIBLE ASSETS

Goodwill

We assess goodwill for impairment at the reporting unit level at least annually, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value.

Through the first quarter of fiscal year 2017, the Company had five reporting units: (1) legacy NetScout, (2) cybersecurity (Arbor Networks), (3) service assurance product lines focused on the service provider market (formerly known as Tektronix Communications), (4) network visibility product lines (formerly known as VSS Monitoring) and (5) service assurance product lines primarily focused on the enterprise market (formerly known as FNET). As part of its continued integration efforts of the Communication Business acquisition, effective July 1, 2016, the Company reorganized its business units. As a result of this change, the Company reduced the number of reporting units from five reporting units to two reporting units. The two reporting units are: (1) Service Assurance and (2) Security. The former cybersecurity reporting unit was aggregated within the Security reporting unit along with portions of the legacy NetScout business while all other former reporting units were aggregated into the Service Assurance reporting unit. Our reporting units are determined based on the components of our operating segments that constitute a business for which financial information is available and for which operating results are regularly reviewed by segment management.

As a result of the reduction in reporting units, the Company completed a quantitative impairment analysis for goodwill as of July 1, 2016. To conduct the impairment test, the Company performed a quantitative step 1 analysis, on a before and after basis, and concluded the estimated fair values of each of the Company’s current and former reporting units exceeded their respective carrying values both immediately prior to and subsequent to the change.

The Company determined the fair values of its reporting units by preparing a discounted cash flow analysis using forward looking projections of the reporting units’ future operating results and by comparing the value of the reporting units to the implied market value of selected peers. The significant assumptions used in the discounted cash flow analysis include: revenue and revenue growth, selling margins, other operating expenditures, the discounted rate used to present value future cash flows and terminal growth rates. The discount rate used is a cost of equity method, which is essentially equal to the “market participant” weighted-average cost of capital (WACC). The Service Assurance reporting unit's goodwill fair value substantially exceeded its carrying value. The Security reporting unit's goodwill fair value did not substantially exceed its carrying value. The Company performed a sensitivity analysis on the significant assumptions used to determine the fair value of the Security reporting unit and has determined that a reasonable, negative change in its assumptions, as follows, would not impact our conclusion: decrease projected revenue growth by 2%, decrease selling margin by 4%, decrease the operating margin by 5% or increase the WACC by 200 basis points.

At December 31, 2016, goodwill attributable to our Service Assurance and Security reporting units was $1.2 billion and $548.1 million, respectively. At March 31, 2016, goodwill attributable to our Service Assurance and Security reporting units was $1.2 billion and $547.4 million, respectively. Goodwill is tested for impairment at a reporting unit level at least annually, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value.

The change in the carrying amount of goodwill for the nine months ended December 31, 2016 is due to the acquisition of Avvasi, purchase accounting adjustments, and the impact of foreign currency translation adjustments related to asset balances that are recorded in currencies other than the U.S. Dollar.

The changes in the carrying amount of goodwill for the nine months ended December 31, 2016 are as follows (in thousands):



Balance at March 31, 2016	$	1,709,369
Goodwill attributable to the Avvasi acquisition	1,950
Purchase accounting adjustments	2,817
Foreign currency translation impact and other adjustments	6,775
Balance at December 31, 2016	$	1,720,911

Intangible Assets

The net carrying amounts of intangible assets were $959.0 million and $1.1 billion at December 31, 2016 and March 31, 2016, respectively. Intangible assets acquired in a business combination are recorded under the acquisition method of accounting at their estimated fair values at the date of acquisition. The Company amortizes intangible assets over their estimated useful lives, except for the acquired trade name which resulted from the Network General Central Corporation (Network General) acquisition, which has an indefinite life and thus is not amortized. The carrying value of the indefinite-lived trade name is evaluated for potential impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.

Intangible assets include the indefinite-lived trade name with a carrying value of $18.6 million and the following amortizable intangible assets at December 31, 2016 (in thousands):



	Cost		Accumulated Amortization			Net
Developed technology	$	253,105	$	(99,665	)	$	153,440
Customer relationships	828,592		(89,384		)	739,208
Distributor relationships	7,237		(2,366		)	4,871
Definite-lived trademark and trade name	43,681		(10,394		)	33,287
Core technology	7,052		(5,785		)	1,267
Net beneficial leases	336		(336		)	—
Non-compete agreements	269		(269		)	—
Leasehold interest	2,600		(852		)	1,748
Backlog	18,045		(15,205		)	2,840
Capitalized software	2,971		(368		)	2,603
Technical licenses	1,000		(167		)	833
Other	1,206		(861		)	345
	$	1,166,094	$	(225,652	)	$	940,442

Intangible assets include the indefinite-lived trade name with a carrying value of $18.6 million and the following amortizable intangible assets at March 31, 2016 (in thousands):



	Cost		Accumulated Amortization			Net
Developed technology	$	253,249	$	(69,810	)	$	183,439
Customer relationships	834,091		(42,526		)	791,565
Distributor relationships	5,348		(1,633		)	3,715
Definite-lived trademark and trade name	43,964		(5,511		)	38,453
Core technology	7,169		(4,659		)	2,510
Net beneficial leases	336		(336		)	—
Non-compete agreements	288		(288		)	—
Leasehold interest	2,600		(416		)	2,184
Backlog	18,245		(6,750		)	11,495
Capitalized software	1,625		—			1,625
Other	1,191		(737		)	454
	$	1,168,106	$	(132,666	)	$	1,035,440

Amortization included as product revenue consists of amortization of backlog. Amortization included as cost of product revenue consists of amortization of developed technology, distributor relationships, core technology and software. Amortization included as operating expense consists of all other intangible assets. The following table provides a summary of amortization expense for the three and nine months ended December 31, 2016 and 2015, respectively.



	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2016		2015		2016		2015
Amortization of intangible assets included as:
Product revenue	$	2,850	$	2,357	$	8,596	$	4,385
Cost of product revenue	11,773		14,765		33,202		30,330
Operating expense	17,548		11,291		52,811		22,027
	$	32,171	$	28,413	$	94,609	$	56,742

The following is the expected future amortization expense at December 31, 2016 for the fiscal years ending March 31 (in thousands):



2017 (remaining three months)	$	31,597
2018	111,239
2019	105,790
2020	97,535
2021	85,111
Thereafter	509,170
	$	940,442

The weighted average amortization period of developed technology and core technology is 11.5 years. The weighted average amortization period for customer and distributor relationships is 16.1 years. The weighted average amortization period for trademarks and trade names is 8.5 years. The weighted average amortization period for leasehold interests is 5.6 years. The weighted average amortization period for backlog is 2.0 years. The weighted average amortization period for capitalized software is 4.0 years. The weighted average amortization period for amortizing all intangible assets is 14.6 years.