Fair Value of Financial Instruments

Available-for-sale investments within cash equivalents and investments consist of the following:



	July 31, 2018
	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
	(in thousands)
U.S. Government agency securities	$	9,000	$	—	$	(27	)	$	8,973
Commercial paper	471,966		4		(141		)	471,829
Corporate bonds	432,234		69		(763		)	431,540
U.S. Government bonds	89,986		—		(55		)	89,931
Foreign government bonds	9,306		7		(1		)	9,312
Certificate of deposit	81,985		53		(8		)	82,030
Money market funds	90,766		—		—			90,766
Total	$	1,185,243	$	133	$	(995	)	$	1,184,381



	July 31, 2017
	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
	(in thousands)
U.S. Government agency securities	$	22,662	$	—	$	(66	)	$	22,596
Commercial paper	147,371		2		(34		)	147,339
Corporate bonds	258,334		157		(146		)	258,345
U.S. Government bonds	67,164		—		(185		)	66,979
Certificate of deposit	27,498		29		—			27,527
Money market funds	96,313		—		—			96,313
Total	$	619,342	$	188	$	(431	)	$	619,099

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses, aggregated by investment category and length of time that individual securities have been in an unrealized loss position:



	July 31, 2018
	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
	(in thousands)
U.S. Government agency securities	$	6,974	$	(24	)	$	1,999	$	(3	)	$	8,973	$	(27	)
Commercial paper	144,342		(141		)	—		—			144,342		(141		)
Corporate bonds	307,590		(755		)	13,497		(8		)	321,087		(763		)
U. S. Government bonds	65,013		(11		)	19,948		(44		)	84,961		(55		)
Foreign government bonds	766		(1		)	—		—			766		(1		)
Certificate of deposit	23,734		(8		)	—		—			23,734		(8		)
Total	$	548,419	$	(940	)	$	35,444	$	(55	)	$	583,863	$	(995	)

As of July 31, 2018, the Company had 188 investments in a gross unrealized loss position. The unrealized losses on its available-for-sale securities were primarily a result of unfavorable changes in interest rates subsequent to the initial purchase of these securities. The Company does not intend to sell, nor does it believe it will need to sell, these securities before recovering the associated unrealized losses. The Company does not consider any portion of the unrealized losses at July 31, 2018 to be other-than-temporarily impaired, nor are any unrealized losses considered to be credit losses. The Company has recorded the securities at fair value in its consolidated balance sheets, with unrealized gains and losses reported as a component of accumulated other comprehensive loss. The amount of realized gains and losses reclassified into earnings are based on the specific identification of the securities sold. The realized gains and losses from sales of securities in the periods presented were not material.

The following table summarizes the contractual maturities of the Company’s available-for-sale investments measured at fair value:



	July 31, 2018
	Less Than 12 Months		12 to 24 Months		Total
	(in thousands)
U.S. Government agency securities	$	1,999	$	6,974	$	8,973
Commercial paper	465,030		6,799		471,829
Corporate bonds	280,249		151,291		431,540
U.S. Government bonds	89,931		—		89,931
Foreign government bonds	4,448		4,864		9,312
Certificate of deposit	61,006		21,024		82,030
Money market funds	90,766		—		90,766
Total	$	993,429	$	190,952	$	1,184,381

Fair Value Measurement

The Company classifies cash equivalents, short-term investments and long-term investments within Level 1 or Level 2 in the fair value hierarchy because the Company uses quoted market prices or alternative pricing sources and models utilizing observable market inputs to determine their fair value.

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2 - Inputs other than quoted prices that are observable but do not qualify as a Level 1 quoted price, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data; and

Level 3 - Unobservable inputs that are supported by little or no market activity, which require the Company to develop its own assumptions.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The carrying value of the Company’s accounts receivable, accounts payable and accrued liabilities approximates their fair value due to the short-term nature of these instruments.

The Company bases the fair value of its Level 1 financial instruments, which are in active markets, using quoted market prices for identical instruments.

The Company obtains the fair value of its Level 2 financial instruments, which are not in active markets, from a third-party professional pricing service using quoted market prices for identical or comparable instruments, rather than direct observations of quoted prices in active markets. The Company’s professional pricing service gathers observable inputs for all of its fixed income securities from a variety of industry data providers (e.g. large custodial institutions) and other third-party sources. Once the observable inputs are gathered, all data points are considered and an average price is determined.

The Company validates the quoted market prices provided by its primary pricing service by comparing their assessment of the fair values of our Level 2 investment portfolio balance against the fair values of its Level 2 investment portfolio balance provided by its investment managers. The Company’s investment managers use similar techniques to its professional pricing service to derive pricing as described above.

The Company did not have any Level 3 financial assets or liabilities as of July 31, 2018, or 2017.

Available-for-sale investments

The following tables summarize the Company’s available-for-sale investments measured at fair value on a recurring basis, by level within the fair value hierarchy:



	July 31, 2018
	Level 1		Level 2		Level 3		Total
	(in thousands)
Cash equivalents:
Commercial paper	$	—	$	269,654	$	—	$	269,654
Corporate bonds	—		3,001		—		3,001
Money market funds	90,766		—		—		90,766
Total Cash equivalents	90,766		272,655		—		363,421
Short-term investments:
U.S. Government agency securities	—		1,999		—		1,999
Commercial paper	—		195,376		—		195,376
U.S. Government bonds	—		89,931		—		89,931
Foreign government bonds	—		4,448		—		4,448
Corporate bonds	—		277,248		—		277,248
Certificate of deposit	—		61,006		—		61,006
Total Short-term investments	—		630,008		—		630,008
Long-term investments:
U.S. Government agency securities	—		6,974		—		6,974
Certificate of deposit	—		21,024		—		21,024
Corporate bonds	—		151,291		—		151,291
Commercial paper	—		6,799		—		6,799
Foreign government bonds	—		4,864		—		4,864
Total Long-term investments	—		190,952		—		190,952
Total	$	90,766	$	1,093,615	$	—	$	1,184,381



	July 31, 2017
	Level 1		Level 2		Level 3		Total
	(in thousands)
Cash and cash equivalents:
Commercial paper	$	—	$	98,174	$	—	$	98,174
Money market funds	96,313		—		—		96,313
Total Cash equivalents	96,313		98,174		—		194,487
Short-term investments:
U.S. Government agency securities	—		20,583		—		20,583
Commercial paper	—		49,165		—		49,165
U. S. Government bonds	—		47,105		—		47,105
Foreign government bonds	—		—		—		—
Corporate bonds	—		170,654		—		170,654
Certificate of deposit	—		22,520		—		22,520
Total Short-term investments	—		310,027		—		310,027
Long-term investments:
U.S. Government agency securities	—		2,013		—		2,013
Certificate of deposit	—		5,007		—		5,007
Corporate bonds	—		87,691		—		87,691
U.S. Government bonds	—		19,874		—		19,874
Foreign government bonds	—		—		—		—
Total Long-term investments	—		114,585		—		114,585
Total	$	96,313	$	522,786	$	—	$	619,099

Convertible Senior Notes

The carrying value of the Convertible Senior Notes was $310.5 million before consideration of issuance costs, which approximates their fair value at July 31, 2018. In accounting for the issuance of the notes, the Company separated the notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated conversion feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the notes as a whole.

The Company estimates the fair value of the Convertible Senior Notes using commonly accepted valuation methodologies and market-based risk measurements that are indirectly observable, such as credit risk (Level 2). The Company carries the Convertible Senior Notes at face value less unamortized debt discount and issuance costs on its consolidated balance sheet, and presents the fair value for required disclosure purposes only. For further information on the Convertible Senior Notes see Note 6.