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Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2020

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For certain of the Company’s financial instruments, including certain cash equivalents, accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their fair values due to the relatively short maturity of these balances.

The Company measures and reports certain cash equivalents, marketable securities, derivative foreign currency forward contracts and commitments associated with prior business combinations at fair value in accordance with the provisions of the authoritative accounting guidance that addresses fair value measurements. This guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1-Valuations based on quoted prices in active markets for identical assets or liabilities.

Level 2-Valuations based on other than quoted prices in active markets for identical assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3-Valuations based on inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

The Company's Level 1 assets include a highly liquid money market funds, which are valued using unadjusted quoted prices that are available in an active market for an identical asset. Level 2 assets include fixed-income U.S. government agency securities, commercial paper, corporate bonds, asset-backed securities and derivative financial instruments consisting of foreign currency forward contracts. The securities, bonds and commercial paper are valued using prices from independent pricing services based on quoted prices in active markets for similar instruments or on industry models using data inputs such as interest rates and prices that can be directly observed or corroborated in active markets. The foreign currency forward contracts are valued using observable inputs, such as quotations on forward foreign exchange points and foreign interest rates. During the fiscal years ended December 31, 2019 and 2018, the Company made investments of $0.6 million in a convertible security and $2.5 million in preferred stock, respectively, issued by a privately-held company. The estimated fair value of the investments was determined based on Level 3 inputs. As of June 30, 2020 and December 31, 2019, management estimated that the fair value of the investments equaled their carrying value.

The Company's cash and cash equivalents, and marketable securities consist of the following:


	June 30, 2020
	Amortized Cost		Unrealized Gains		Unrealized (Losses)		Fair Value
	(in thousands)
Cash and cash equivalents:
Cash	$	106,272	$	—	$	—	$	106,272
Money market funds	5,638		—		—		5,638

Commercial paper	1,999		—		—		1,999

Total	113,909		—		—		113,909
Short-term marketable securities:
Commercial paper	1,847		2		—		1,849

Corporate bonds	24,289		227		—		24,516
Asset-backed securities	6,511		52		—		6,563
U.S. government agencies	200,419		580		(5)		200,994
Total	233,066		861		(5)		233,922

Long-term marketable securities:
Asset-backed securities	35,441		407		—		35,848
U.S. government agencies	14,544		444		—		14,988
Foreign government agencies	1,005		34		—		1,039
Corporate bonds	44,542		1,066		—		45,608
Total	95,532		1,951		—		97,483


Total	$	442,507	$	2,812	$	(5)	$	445,314


	December 31, 2019
	Amortized Cost		Unrealized Gains		Unrealized (Losses)		Fair Value
	(in thousands)
Cash and cash equivalents:
Cash	$	84,102	$	—	$	—	$	84,102
Money market funds	58		—		—		58

Commercial paper	3,399		—		—		3,399
Total	87,559		—		—		87,559
Short-term marketable securities:
Commercial paper	2,239		—		—		2,239
Corporate bonds	33,048		51		(1)		33,098
Asset-backed securities	2,438		11		—		2,449
U.S. government agencies	173,364		184		(3)		173,545
Total	211,089		246		(4)		211,331
Long-term marketable securities:
Asset-backed securities	40,001		193		(1)		40,193
U.S. government agencies	46,447		370		—		46,817
Corporate bonds	32,236		262		—		32,498
Total	118,684		825		(1)		119,508
Total	$	417,332	$	1,071	$	(5)	$	418,398

There were no marketable securities that had been in a continuous unrealized loss position for 12 months or longer. As of June 30, 2020, the Company had the ability and intent to hold all marketable securities that were in an unrealized loss position until maturity or recovery. The Company considered the extent to which fair value was less than amortized cost basis and conditions related to security’s industry and geography and changes to the ratings, if any, and concluded the decline in fair value compared to carrying value was not related to credit loss.

The following table sets forth by level within the fair value hierarchy the fair value of the Company's cash equivalents and marketable securities measured on a recurring basis:


	June 30, 2020
	Level 1		Level 2		Fair Value
	(in thousands)
Money market funds	$	5,638	$	—	$	5,638
Commercial paper	—		3,848		3,848

U.S. government agencies	—		215,982		215,982
Foreign government agencies	—		1,039		1,039
Corporate bonds	—		70,124		70,124

Asset-backed securities	—		42,411		42,411

Total	$	5,638	$	333,404	$	339,042


	December 31, 2019
	Level 1		Level 2		Fair Value
	(in thousands)
Money market funds	$	58	$	—	$	58
Commercial paper	—		5,638		5,638
U.S. government agencies	—		220,362		220,362

Corporate bonds	—		65,596		65,596
Asset-backed securities	—		42,642		42,642
Total	$	58	$	334,238	$	334,296

There were no transfers between Level 1 and Level 2 of the fair value hierarchy, as determined at the end of each reporting period.

The following summarizes the fair value of marketable securities by contractual or effective maturity as of June 30, 2020 and December 31, 2019:


	June 30, 2020
	Mature within One Year		Mature after One Year through Two Years		Mature over Two Years		Fair Value
	(in thousands)
Commercial paper	$	3,848	$	—	$	—	$	3,848

U.S. government agencies	200,994		14,988		—		215,982
Foreign government agencies	—		—		1,039		1,039
Corporate bonds	24,516		24,506		21,102		70,124
Asset-backed securities	6,563		18,270		17,578		42,411
Total	$	235,921	$	57,764	$	39,719	$	333,404


	December 31, 2019
	Mature within One Year		Mature after One Year through Two Years		Mature over Two Years		Fair Value
	(in thousands)
Commercial paper	$	5,638	$	—	$	—	$	5,638

U.S. government agencies	173,546		46,816		—		220,362
Corporate bonds	33,098		23,251		9,247		65,596
Asset-backed securities	2,449		15,550		24,643		42,642
Total	$	214,731	$	85,617	$	33,890	$	334,238

Derivative Financial Instruments

Designated cash flow hedges

The Company uses a hedging strategy to reduce its exposure to foreign currency exchange rate fluctuations for forecasted subscription renewals and new orders in British Pound ("GBP") and Euro. The Company uses forward currency contracts accounted for as cash flow hedges against a designated portion of forecasted subscription renewals and new orders. Unrealized foreign exchange gains or losses related to those designated cash flow hedge contracts are recorded in AOCI and will be reclassified into revenues in the same periods when the hedged contracts are recognized into revenues.

In addition, the Company uses a hedging strategy to reduce its exposure associated with costs incurred in Indian Rupee ("INR"). Unrealized foreign exchange gains or losses related to those designated cash flow hedge contracts are recorded in AOCI and will be reclassified into operating expenses when the associated hedged expenses are incurred.

At June 30, 2020, the Company had 39 open designated cash flow hedge contracts with notional amounts of €21.8 million, £9.2 million and Rs.1,590 million. At December 31, 2019, the Company had 26 open designated cash flow hedge contracts with notional amounts of €24.2 million and £9.7 million.

The following table shows the gains and losses, before tax, of the Company's derivative instruments designated as cash flow hedges in AOCI and the condensed consolidated statements of operation for the three and six months ended June 30, 2020 and 2019:


	Three Months Ended June 30,						Six Months Ended June 30,
Derivative instruments designated as cash flow hedges:	2020		2019		2020		2019
Net unrealized (losses) gains recognized in AOCI:	(in thousands)
Foreign currency forward contracts (GBP, Euro and INR)	$	(141)	$	191	$	269	$	442

Net unrealized (gains) losses reclassified from AOCI into income:
Foreign currency forward contracts (GBP and Euro)	(328)		56		(576)		69
Foreign currency forward contracts (INR)	215		—		215		—
Net change in AOCI before tax	$	(254)	$	247	$	(92)	$	511

As of June 30, 2020, the net amount of unrealized gains and losses on the foreign currency forward contracts for GBP and Euro reported in AOCI that is expected to be reclassified into revenue within the next 12 months is a gain of $0.9 million (before tax). As of June 30, 2020, the net amount of unrealized gains and losses on the foreign currency forward contracts for INR reported in AOCI that is expected to be reclassified into operating expenses is a loss of $0.6 million (before tax).

Non-designated forward contracts

At June 30, 2020, the Company had 15 outstanding non-designated forward contracts with notional amounts of €12.5 million, £7.9 million and Rs.351.7 million. At December 31, 2019, the Company had 15 outstanding non-designated forward contracts with notional amounts of €20.0 million, £5.6 million and Rs.756.0 million.

The following summarizes derivative financial instruments as of June 30, 2020 and December 31, 2019:



	June 30,		December 31,
	2020		2019
Assets:	(in thousands)
Foreign currency forward contracts designated as cash flow hedge	$	453	$	427
Foreign currency forward contracts not designated as hedging instruments	409		515
Total	$	862	$	942
Liabilities:
Foreign currency forward contracts designated as cash flow hedge	$	(802)	$	(524)
Foreign currency forward contracts not designated as hedging instruments	(309)		(550)
Total	$	(1,111)	$	(1,074)

All foreign currency forward contracts were valued at fair value using Level 2 inputs.

The following summarizes the gains (losses) recognized from forward contracts and other foreign currency transactions in other income, net on the condensed consolidated statement of operations:


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
	(in thousands)
Net (losses) gains from non-designated forward contracts	$	(224)	$	44	$	580	$	66
Other foreign currency transactions gains (losses)	475		249		(396)		66
Total foreign exchange gains, net	251		293		184		132
Other expenses	(57)		(62)		(125)		(125)
Other income, net	$	194	$	231	$	59	$	8

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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