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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ___________________________________________________________
FORM 10-Q 
___________________________________________________________
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-36162
___________________________________________________________
BARRACUDA NETWORKS, INC.
(Exact name of registrant as specified in its charter) 
___________________________________________________________
Delaware
 
83-0380411
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
3175 S. Winchester Blvd.
Campbell, California 95008
(408) 342-5400
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
___________________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ   No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨

Accelerated filer
þ
Non-accelerated filer
¨  (Do not check if a smaller reporting company)

 
 
 
 
Smaller reporting company
¨

 
 
Emerging growth company
þ
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
The number of shares outstanding of the registrant’s common stock outstanding as of December 29, 2017 was 53,672,307.


Table of Contents

TABLE OF CONTENTS 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our pending acquisition by Thoma Bravo, LLC and the potential timing and benefits thereof, our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "potentially," "estimate," "continue," "anticipate," "intend," "could," "would," "project," "plan," "expect" and the negative and plural forms of these words and similar expressions are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the following:

our pending acquisition by Thoma Bravo, including our expectations regarding the timing and expected benefits of such acquisition transaction, our plans, objectives and intentions with respect to our future operations, and the expected impact of the proposed acquisition transaction on our business, our customers and our market prior to consummation or termination of such transaction;
our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit or gross margin, operating expenses, including changes in research and development, sales and marketing and general and administrative expenses, and our ability to achieve and maintain future profitability;
our business plan and our ability to effectively manage our growth and associated investments;
anticipated trends, growth rates and challenges in our business and in the markets in which we operate;
market acceptance of recently introduced security and data protection solutions;
beliefs about and objectives for future operations;
our ability to increase sales of our solutions and renewals of our subscriptions;
our ability to attract and retain customers;
our ability to cross-sell to our existing customers;
maintaining and expanding our customer base and our relationships with our channel partners;
our ability to timely and effectively scale and adapt our existing solutions;
our ability to develop new solutions and bring them to market in a timely manner;
our ability to maintain, protect and enhance our brand and intellectual property;
our ability to continue to expand internationally;
the effects of increased competition in our markets and our ability to compete effectively;
sufficiency of cash to meet cash needs for at least the next 12 months;
future acquisitions or investments;
our ability to stay in compliance with laws and regulations that currently apply or become applicable to our business both in the United States and internationally;
economic and industry trends or trend analysis;
the attraction and retention of qualified employees and key personnel;
the impact of the recently passed Tax Cuts and Jobs Act;
the estimates and estimate methodologies used in preparing our condensed consolidated financial statements; and
the future trading prices of our common stock.
We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs; however, these forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 28, 2017 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment and new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the SEC as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.
Unless expressly indicated or the context requires otherwise, the terms "Barracuda," "company," "we," "us," and "our" in this document refer to Barracuda Networks, Inc., a Delaware corporation, and, where appropriate, its wholly owned subsidiaries. The term "Barracuda" may also refer to our products, regardless of the manner in which they are accessed.


3

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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
BARRACUDA NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
 
As of November 30, 2017
 
As of February 28, 2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
96,894

 
$
120,194

Marketable securities
80,850

 
79,915

Accounts receivable, net of allowance for doubtful accounts of $3,512 and $2,857 as of November 30, 2017 and February 28, 2017, respectively
45,229

 
40,560

Inventories, net
8,259

 
5,847

Prepaid income taxes
987

 
11,050

Deferred costs
34,352

 
32,598

Other current assets
9,221

 
5,245

Total current assets
275,792

 
295,409

Property and equipment, net
30,824

 
29,979

Deferred costs, non-current
30,502

 
27,285

Deferred income taxes, non-current
704

 
1,554

Other non-current assets
21,646

 
8,607

Intangible assets, net
52,111

 
32,145

Goodwill
98,135

 
69,795

Total assets
$
509,714

 
$
464,774

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
11,243

 
$
11,439

Accrued payroll and related benefits
12,803

 
13,593

Other accrued liabilities
19,089

 
12,942

Deferred revenue
247,330

 
239,796

Note payable

 
4,115

Total current liabilities
290,465

 
281,885

Long-term liabilities:
 
 
 
Deferred revenue, non-current
170,415

 
167,286

Deferred income taxes, non-current
3,293

 
2,803

Other long-term liabilities
7,394

 
6,377

Commitments and contingencies (Note 10)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value; 20,000,000 shares authorized; zero shares issued and outstanding as of November 30, 2017 and February 28, 2017, respectively

 

Common stock, $0.001 par value; 1,000,000,000 shares authorized; 53,606,385 and 52,897,128 shares issued and outstanding as of November 30, 2017 and February 28, 2017, respectively
54

 
53

Additional paid-in capital
393,048

 
370,745

Accumulated other comprehensive loss
(3,199
)
 
(5,226
)
Accumulated deficit
(351,756
)
 
(359,149
)
Total stockholders’ equity
38,147

 
6,423

Total liabilities and stockholders’ equity
$
509,714

 
$
464,774

See accompanying notes.

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BARRACUDA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
 
Three Months Ended November 30,
 
Nine Months Ended November 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Appliance
$
17,459

 
$
20,457

 
$
56,071

 
$
62,824

Subscription
77,288

 
68,349

 
227,180

 
200,566

Total revenue
94,747

 
88,806

 
283,251

 
263,390

Cost of revenue
22,098

 
21,098

 
70,944

 
61,579

Gross profit
72,649

 
67,708

 
212,307

 
201,811

Operating expenses:
 
 
 
 
 
 
 
Research and development
20,616

 
18,627

 
59,412

 
56,280

Sales and marketing
34,988

 
33,368

 
109,769

 
96,842

General and administrative
12,366

 
10,217

 
33,648

 
31,958

Total operating expenses
67,970

 
62,212

 
202,829

 
185,080

Income from operations
4,679

 
5,496

 
9,478

 
16,731

Gain on sale of business
7,382

 

 
7,382

 

Other income, net
332

 
(2,374
)
 
2,640

 
131

Income before income taxes
12,393

 
3,122

 
19,500

 
16,862

Provision for income taxes
(4,610
)
 
(1,329
)
 
(7,491
)
 
(9,848
)
Net income
$
7,783

 
$
1,793

 
$
12,009

 
$
7,014

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.15

 
$
0.03

 
$
0.23

 
$
0.13

Diluted
$
0.14

 
$
0.03

 
$
0.22

 
$
0.13

Weighted-average shares used to compute net income per share:
 
 
 
 
 
 
 
Basic
53,378

 
52,457

 
53,098

 
52,336

Diluted
54,995

 
53,995

 
54,645

 
53,391

See accompanying notes.

5

Table of Contents

BARRACUDA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
Three Months Ended November 30,
 
Nine Months Ended November 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
7,783

 
$
1,793

 
$
12,009

 
$
7,014

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Change in net foreign currency translation adjustment
190

 
493

 
2,181

 
119

Available-for-sale investments:
 
 
 
 
 
 
 
Change in net unrealized gains (losses) (net of tax effect of $0 in all periods)
(319
)
 
(339
)
 
(170
)
 
31

Less: reclassification adjustment for net gains (losses) included in net income (net of tax effect of $(3), $(1), $(9) and $393)
6

 
3

 
16

 
(729
)
Net change
(313
)
 
(336
)
 
(154
)
 
(698
)
Other comprehensive income (loss)
(123
)
 
157

 
2,027

 
(579
)
Comprehensive income
$
7,660

 
$
1,950

 
$
14,036

 
$
6,435

See accompanying notes.

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BARRACUDA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended November 30,
 
2017
 
2016
Operating activities
 
 
 
Net income
$
12,009

 
$
7,014

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization and impairment expense
12,716

 
12,442

Stock-based compensation expense
26,343

 
25,050

Excess tax benefits from equity compensation plans

 
(2,023
)
Deferred income taxes
1,158

 
391

Gain on sale of business
(7,382
)
 

Other
88

 
(555
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(1,531
)
 
(3,054
)
Inventories, net
(2,485
)
 
931

Income taxes, net
10,594

 
3,138

Deferred costs
(5,294
)
 
567

Other assets
(6,389
)
 
(469
)
Accounts payable
(63
)
 
(4,889
)
Accrued payroll and related benefits
629

 
898

Other liabilities
1,957

 
(646
)
Deferred revenue
12,565

 
8,916

Net cash provided by operating activities
54,915

 
47,711

Investing activities
 
 
 
Purchases of marketable securities
(32,810
)
 
(59,561
)
Proceeds from the sale of marketable securities
20,820

 
11,530

Proceeds from the maturity of marketable securities
11,027

 
13,590

Purchases of non-marketable investments
(4,056
)
 
(636
)
Purchases of property and equipment
(9,145
)
 
(4,265
)
Purchases of intangible assets

 
(1,374
)
Business combinations, net of cash acquired
(51,668
)
 
(243
)
Proceeds from sale of business
2,000

 

Payment for the sale of net liabilities
(800
)
 

Net cash used in investing activities
(64,632
)
 
(40,959
)
Financing activities
 
 
 
Proceeds from issuance of common stock
4,362

 
7,425

Taxes paid related to net share settlement of equity awards
(7,823
)
 
(6,003
)
Excess tax benefits from equity compensation plans

 
2,023

Employee loans extended, net of repayment
(23
)
 
(122
)
Repayment of note payable
(4,115
)
 
(200
)
Repurchases of common stock
(6,546
)
 
(7,241
)
Payments of acquisition-related liabilities
(742
)
 

Net cash used in financing activities
(14,887
)
 
(4,118
)
Effect of exchange rate changes
1,337

 
(175
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(23,267
)
 
2,459

Cash, cash equivalents and restricted cash at beginning of period
120,837

 
118,654

Cash, cash equivalents and restricted cash at end of period
$
97,570

 
$
121,113

See accompanying notes.

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BARRACUDA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Overview and Basis of Presentation
Nature of Operations
Barracuda Networks, Inc., also referred to in this report as "we," "our," "us," "Barracuda" or "the Company," is headquartered in Campbell, California, and designs and delivers powerful yet easy-to-use security and data protection solutions. We offer cloud-enabled solutions that help our customers address security threats, improve network performance and protect and store their data. Our solutions are designed to simplify IT operations for our customers, allowing them to enhance their return on technology investments.

On November 26, 2017, we entered into an Agreement and Plan of Merger (the "Merger Agreement") to be acquired by Thoma Bravo, LLC, a private equity investment firm (“Thoma Bravo”) in an all-cash transaction valued at approximately $1.6 billion. Our stockholders will receive $27.55 in cash for each share of Barracuda common stock they hold. The proposed transaction is expected to close before our fiscal year end of February 28, 2018, and is subject to approval by our stockholders and regulatory authorities, and the satisfaction of other customary closing conditions. See Note 12 for more information.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We evaluate our estimates on an ongoing basis, including those related to the fair values of stock-based awards, taxes and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates and such differences could be material to our condensed consolidated financial position and results of operations.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP, and follow the requirements of the U.S. Securities and Exchange Commission (the "SEC") for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP are condensed or omitted. In management’s opinion, the unaudited condensed financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of our financial information. The results for the three and nine months ended November 30, 2017 are not necessarily indicative of the results expected for the full fiscal year. The condensed consolidated balance sheet as of February 28, 2017 has been derived from audited financial statements at that date but does not include all of the information required by GAAP.
The accompanying unaudited condensed consolidated financial statements include the accounts of Barracuda Networks, Inc. and our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and related footnotes included in our most recent Annual Report on Form 10-K. There have been no material changes in our significant accounting policies from those that were disclosed in our Annual Report on Form 10-K for the fiscal year ended February 28, 2017.
Foreign Currency

For those subsidiaries whose functional currency is not the U.S. dollar, assets and liabilities are translated into U.S. dollar equivalents at the exchange rate in effect on the balance sheet date and revenues and expenses are translated into U.S. dollars using the average exchange rate over the period. Resulting currency translation adjustments are recorded in accumulated other comprehensive loss in our condensed consolidated balance sheets. We recorded net gains resulting from foreign exchange transactions of an immaterial amount and $1.9 million for the three and nine months ended November 30, 2017, respectively,

8

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and net losses of $2.4 million and $1.0 million for the three and nine months ended November 30, 2016, respectively, which were reflected as a component of other income, net in our condensed consolidated statements of income.
We have foreign subsidiaries that operate and sell our products in various markets around the world. As a result, we are exposed to foreign exchange risks. We utilize foreign exchange forward contracts to manage foreign currency risk associated with foreign currency denominated monetary assets and liabilities, primarily trade receivables, and to reduce the volatility of earnings and cash flows related to foreign currency transactions. The fair values of our contracts as of November 30, 2017 and February 28, 2017 were not significant. The change in the fair value of these foreign currency forward contracts is recorded as gains (losses) in other income, net in our condensed consolidated statements of income.
Recently Adopted Accounting Pronouncements
On March 1, 2017, we adopted Accounting Standards Update No. 2016-09 ("ASU 2016-09"), which simplifies several aspects of employee share-based payment accounting. The impact of the adoption on our condensed consolidated financial statements was as follows:
Forfeitures: Under the new standard, we can make an accounting policy election to either estimate the number of share-based awards that are expected to vest or account for forfeitures when they occur. We elected to account for forfeitures when they occur and adopted this change on a modified retrospective basis. As a result, we recorded the cumulative effect of the change as a $0.4 million increase to the March 1, 2017 opening accumulated deficit balance on our condensed consolidated balance sheets.
Income tax accounting: The standard eliminates additional paid-in-capital ("APIC") pools and requires excess tax benefits and tax deficiencies on share-based awards to be recognized in the statement of income prospectively when share-based awards vest or are settled. The standard also requires excess tax benefits to be recognized regardless of whether the benefit reduces taxes payable. We adopted the guidance related to the timing of previously unrecognized excess tax benefits, which resulted in no impact to the March 1, 2017 opening accumulated deficit balance on our condensed consolidated balance sheets.
Net income per share: Because excess tax benefits are no longer recognized in APIC, the assumed proceeds from applying the treasury stock method when calculating dilutive shares was amended to exclude the amount of excess tax benefits that would be recognized upon exercise or vesting of such awards. As a result, this reduces the assumed shares to be repurchased under the treasury stock method, thereby increasing the amount of dilutive shares used to compute earnings per share. We adopted the guidance related to the exclusion of excess tax benefits in calculating net income per share on a prospective basis, with an insignificant impact.
Cash flow presentation of excess tax benefits: Prior to the new standard, we were required to present excess tax benefits on share-based awards as a cash inflow from financing activities with a corresponding cash outflow from operating activities. The new standard required that these excess tax benefits be classified as an operating activity. We adopted the guidance related to the presentation of excess tax benefits in our condensed consolidated statements of cash flows on a prospective basis with an insignificant impact, while the prior period presented has not been adjusted.
In January 2017, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update No. 2017-04 ("ASU 2017-04"), which eliminates Step 2 from the goodwill impairment test. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We early adopted ASU 2017-04 for impairment tests to be performed on testing dates after January 1, 2017, which did not impact our condensed consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18 ("ASU 2016-18"), which requires the statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017. We early adopted ASU 2016-18 retrospectively, effective March 1, 2017. Net cash flows for the nine months ended November 30, 2016 did not significantly change as a result of including restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on our condensed consolidated statements of cash flows.

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Recent Accounting Pronouncements
In May 2017, the FASB issued Accounting Standards Update No. 2017-09 ("ASU 2017-09"), which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and early adoption is permitted, including in an interim period. ASU 2017-09 is to be applied on a prospective basis to an award modified on or after the adoption date. We do not intend to early adopt ASU 2017-09 and do not expect the adoption of ASU 2017-09 to have a material impact on our condensed consolidated financial statements.
In March 2017, the FASB issued Accounting Standards Update No. 2017-08 ("ASU 2017-08"), which shortens the amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest call date. ASU 2017-08 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, and early adoption is permitted, including in an interim period. If early adopted in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. ASU 2017-08 is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We are currently evaluating the timing of adoption and do not expect the adoption of ASU 2017-08 to have a material impact on our condensed consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01 ("ASU 2017-01"), which clarifies the definition of a business, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and early adoption is permitted for transactions which occur before the issuance or effective date of the amendments, only when the transaction has not been reported in the financial statements that have been issued or made available for issuance. ASU 2017-01 is to be applied on a prospective basis. We do not intend to early adopt ASU 2017-01 and do not expect the adoption of ASU 2017-01 to have a material impact on our condensed consolidated financial statements.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15 ("ASU 2016-15") which addresses eight cash flow classification issues. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and early adoption is permitted, including in an interim period. If early adopted in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. Early adoption requires the adoption of all the amendments in the same period. ASU 2016-15 is to be applied through a retrospective transition method to each period presented. If it is impracticable to apply retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. We do not intend to early adopt ASU 2016-15 and do not expect the adoption of ASU 2016-15 to have a material impact on our condensed consolidated statements of cash flows.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 ("ASU 2016-13") which requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2016-13 is to be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We are currently evaluating the timing and the impact of adopting ASU 2016-13 on our condensed consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 ("Topic 842") to amend lease accounting requirements and requires entities to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. Topic 842 will require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. Topic 842 is effective for fiscal years beginning after December 15, 2018 and interim periods within those years, and early adoption is permitted. Topic 842 is to be applied using a modified retrospective approach and includes a number of optional practical expedients that entities may elect to apply. We are currently evaluating the timing and the impact of adopting Topic 842 on our condensed consolidated financial statements and expect that most of our operating lease commitments will be subject to Topic 842 and recognized as operating lease liabilities and right-of-use assets upon the adoption.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01 ("ASU 2016-01") to enhance the reporting model for financial instruments by amending certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. Early application to financial statements of fiscal years or interim periods that have not yet been issued is permitted

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by presenting separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk if we elected to measure the liability at fair value in accordance with the fair value option for financial instruments, otherwise, early adoption is not permitted. ASU 2016-01 is to be applied with a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values for which the measurement alternative is applied (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. We expect to elect the measurement alternative, defined as cost, less impairments, adjusted by observable price changes. We anticipate that the adoption of ASU 2016-01 may increase the volatility of our other income, net, as a result of the remeasurement of our equity securities upon the occurrence of observable price changes and impairments.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 ("Topic 606") which completed the joint effort by the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and improving financial reporting. Topic 606 also provides guidance on the recognition of costs related to obtaining and fulfilling customer contracts. The FASB issued subsequent amendments to the initial guidance collectively under Topic 606. Topic 606 supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Topic 606 defines a five-step process to achieve this core principle, and more judgment and estimates may be required under the Topic 606 revenue recognition process than are required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation, among others.
Topic 606 is required to be effective for us on March 1, 2018. Topic 606 allows for either full retrospective adoption applied to all periods presented or modified adoption with the cumulative effect of initially applying Topic 606 recognized at the date of initial application. We are currently planning to adopt using the modified retrospective approach.
Currently, we are in the process of reviewing our historical contracts and evaluating the impact of Topic 606 on our accounting policies, processes and system requirements, and have assigned internal resources and engaged third-party service providers to assist in our evaluation. Furthermore, we will continue to make investments in systems to enable timely and accurate reporting under the new standard. While we continue to assess all potential impacts under the new standard, for the majority of our security solutions, our preliminary evaluation shows that revenue recognition will not change significantly upon the adoption of Topic 606. We will continue to review our contracts to validate such preliminary findings. For our remaining solutions, there is the potential for changes to the pattern of revenue recognition for our arrangements resulting from, for example, the identification of performance obligations, estimation of variable consideration, allocation of the transaction price, timing of recognition, among other areas. We also expect the adoption of the new standard to result in additional financial statement disclosure.
Additionally, with respect to contract acquisition costs, we believe that we will capitalize additional costs of obtaining the contract, including additional sales commissions, as the new cost guidance requires the capitalization of all incremental costs that we incur to obtain a contract with a customer that we would not have incurred if the contract had not been obtained, provided we expect to recover the costs. Under our current accounting policy, we would only capitalize such costs if they are both incremental and directly related to acquiring the customer.
As we are still in the process of evaluating the impact of the new standard and the impact on our accounting policies across our multiple solutions, we do not know or cannot reasonably estimate quantitative information related to the impact of Topic 606 on our consolidated financial statements, including the effect on our operating results and our accounting for deferred commission balances, at this time.
We are also in the process of identifying any necessary changes to our systems processes, and internal controls, which will ultimately assist us in the application of the new standard.

2. Balance Sheet Information
Cash, Cash Equivalents and Restricted Cash

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The following table summarizes our cash, cash equivalents and restricted cash by category (in thousands):
 
As of November 30, 2017
 
As of February 28, 2017
Cash and cash equivalents:
 
 
 
Cash
$
79,900

 
$
103,726

Money market funds
16,994

 
16,468

Other non-current assets:
 
 
 
Restricted cash
676

 
643

 
$
97,570

 
$
120,837

Restricted cash is primarily related to customs obligations and letters of credit associated with our leases.
Marketable Securities
The following tables summarize our marketable securities by category (in thousands):
 
As of November 30, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Asset-backed securities
$
9,511

 
$

 
$
(44
)
 
$
9,467

Corporate debt securities
43,776

 
1

 
(212
)
 
43,565

Foreign government bonds
1,050

 

 
(6
)
 
1,044

Mortgage-backed securities
3,510

 

 
(22
)
 
3,488

U.S. government agency securities
15,323

 

 
(88
)
 
15,235

U.S. government notes
8,112

 

 
(61
)
 
8,051

 
$
81,282

 
$
1

 
$
(433
)
 
$
80,850

 
 
 
 
 
 
 
 
 
As of February 28, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Asset-backed securities
$
9,597

 
$
6

 
$
(28
)
 
$
9,575

Corporate debt securities
41,822

 
11

 
(140
)
 
41,693

Foreign government bonds
650

 

 
(1
)
 
649

Mortgage-backed securities
3,324

 

 
(22
)
 
3,302

U.S. government agency securities
12,707

 
1

 
(77
)
 
12,631

U.S. government notes
12,092

 
2

 
(29
)
 
12,065

 
$
80,192

 
$
20

 
$
(297
)
 
$
79,915

We use the specific-identification method to determine any realized gains or losses from the sale of our marketable securities classified as available-for-sale. For the three and nine months ended November 30, 2017, realized gross gains and losses were insignificant. For the three and nine months ended November 30, 2016, we realized gross gains of zero and $1.1 million, respectively, and an insignificant amount of gross losses. We reflect these gains and losses as a component of other income, net in our condensed consolidated statements of income.

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The following tables present gross unrealized losses and fair values for those marketable securities that were in an unrealized loss position aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):
 
As of November 30, 2017
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Asset-backed securities
$
6,706

 
$
(25
)
 
$
2,361

 
$
(19
)
 
$
9,067

 
$
(44
)
Corporate debt securities
23,558

 
(103
)
 
18,116

 
(109
)
 
41,674

 
(212
)
Foreign government bonds
844

 
(6
)
 
200

 

 
1,044

 
(6
)
Mortgage-backed securities
1,384

 
(8
)
 
1,704

 
(14
)
 
3,088

 
(22
)
U.S. government agency securities
6,421

 
(44
)
 
8,601

 
(44
)
 
15,022

 
(88
)
U.S. government notes
6,951

 
(48
)
 
1,100

 
(13
)
 
8,051

 
(61
)
 
$
45,864

 
$
(234
)
 
$
32,082

 
$
(199
)
 
$
77,946

 
$
(433
)
 
As of February 28, 2017
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Asset-backed securities
$
6,086

 
$
(28
)
 
$

 
$

 
$
6,086

 
$
(28
)
Corporate debt securities
35,095

 
(140
)
 

 

 
35,095

 
(140
)
Foreign government bonds
650

 
(1
)
 

 

 
650

 
(1
)
Mortgage-backed securities
3,204

 
(22
)
 

 

 
3,204

 
(22
)
U.S. government agency securities
11,306

 
(65
)
 
731

 
(12
)
 
12,037

 
(77
)
U.S. government notes
7,265

 
(29
)
 

 

 
7,265

 
(29
)
 
$
63,606

 
$
(285
)
 
$
731

 
$
(12
)
 
$
64,337

 
$
(297
)
We periodically review our marketable securities for other-than-temporary impairment. We consider factors such as the duration, severity and the reason for the decline in value, the potential recovery period and whether we intend to sell. For marketable debt securities, we also consider whether (i) it is more likely than not that we will be required to sell the debt securities before recovery of their amortized cost basis and (ii) the amortized cost basis cannot be recovered as a result of credit losses. Unrealized losses related to these investments are due to interest rate fluctuations as opposed to changes in credit quality. We do not intend to sell and it is not more likely than not that we would be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. As of November 30, 2017, we have recognized no other-than-temporary impairment loss.

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The following table summarizes the estimated fair value of our investments in marketable debt securities by contractual maturities (in thousands):
 
As of November 30, 2017
Due in 1 year
$
25,821

Due in 1 year through 5 years
50,382

Due in 5 years through 10 years
993

Due after 10 years
3,654

 
$
80,850

Fair Value Measurements
We determine fair value based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. 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. The fair value assumes that the transaction to sell the asset or transfer the liability occurs in the principal or most advantageous market for the asset or liability and establishes that the fair value of an asset or liability shall be determined based on the assumptions that market participants would use in pricing the asset or liability. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value:
Level 1:
Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2:
Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3:
Inputs are unobservable inputs based on our assumptions.
Cash equivalents and marketable equity securities are classified within Level 1 because they are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Marketable debt securities and derivative assets are classified within Level 2 if the investments are valued using model driven valuations which use observable inputs such as quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Our marketable securities are held by custodians who obtain investment prices from a third-party pricing provider that incorporates standard inputs in various asset price models.
We estimated the fair value of our Level 3 contingent consideration liabilities based on a weighted probability assessment of achieving the milestones related to certain of our acquisitions. Significant increases (decreases) in the probability assumptions in isolation would result in a significantly higher (lower) fair value measurement. In developing these estimates, we considered unobservable inputs that are supported by little or no market activity and reflect our own assumptions.

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Financial assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
 
As of November 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
16,994

 
$

 
$

 
$
16,994

Marketable securities:
 
 
 
 
 
 
 
Asset-backed securities
$

 
$
9,467

 
$

 
$
9,467

Corporate debt securities
$

 
$
43,565

 
$

 
$
43,565

Foreign government bonds
$

 
$
1,044

 
$

 
$
1,044

Mortgage-backed securities
$

 
$
3,488

 
$

 
$
3,488

U.S. government agency securities
$

 
$
15,235

 
$

 
$
15,235

U.S. government notes
$

 
$
8,051

 
$

 
$
8,051

 
 
 
 
 
 
 
 
 
As of February 28, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
16,468

 
$

 
$

 
$
16,468

Marketable securities:
 
 
 
 
 
 
 
Asset-backed securities
$

 
$
9,575

 
$

 
$
9,575

Corporate debt securities
$

 
$
41,693

 
$

 
$
41,693

Foreign government bonds
$

 
$
649

 
$

 
$
649

Mortgage-backed securities
$

 
$
3,302

 
$

 
$
3,302

U.S. government agency securities
$

 
$
12,631

 
$

 
$
12,631

U.S. government notes
$

 
$
12,065

 
$

 
$
12,065

Other accrued liabilities (current):
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
902

 
$
902

The following table summarizes the change in fair value of our Level 3 contingent consideration amounts (in thousands):
Balance as of February 28, 2017
$
902

Total remeasurement recognized in earnings
(160
)
Settlements
(742
)
Balance as of November 30, 2017
$

For the nine months ended November 30, 2017, the contingent consideration remeasurement was recognized within research and development expense in our condensed consolidated statements of income. No other assets or liabilities were recorded using non-recurring fair value measurements.
Inventories, Net
Inventories, net consisted of the following (in thousands):
 
As of November 30, 2017
 
As of February 28, 2017
Raw materials
$
4,959

 
$
3,479

Finished goods
3,782

 
2,878

Reserves
(482
)
 
(510
)
 
$
8,259

 
$
5,847

Deferred Costs

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Deferred costs consisted of the following (in thousands):
 
As of November 30, 2017
 
As of February 28, 2017
Appliance
$
40,316

 
$
39,474

Commissions
24,538

 
20,409

 
$
64,854

 
$
59,883

Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
 
As of November 30, 2017
 
As of February 28, 2017
Land
$
9,849

 
$
9,849

Building
6,549

 
6,549

Computer hardware and software
41,204

 
32,850

Vehicles, machinery and equipment
4,535

 
4,797

Leasehold improvements
4,509

 
4,379

 
66,646

 
58,424

Accumulated depreciation and amortization
(35,822
)
 
(28,445
)
 
$
30,824

 
$
29,979

Depreciation and amortization expense related to property and equipment was $2.6 million and $7.7 million for the three and nine months ended November 30, 2017, respectively, and $2.3 million and $7.0 million for the three and nine months ended November 30, 2016, respectively.

Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) ("AOCI"), net of tax, were as follows (in thousands):
 
Foreign
Currency
Translation
Adjustments
 
Unrealized
Gains
(Losses) on
Available-for-
Sale Investments
 
Total
Balance as of February 28, 2017
$
(4,954
)
 
$
(272
)
 
$
(5,226
)
Other comprehensive income before reclassifications
2,181

 
(170
)
 
2,011

Amounts reclassified from AOCI

 
16

 
16

Other comprehensive income
2,181

 
(154
)
 
2,027

Balance as of November 30, 2017
$
(2,773
)
 
$
(426
)
 
$
(3,199
)
3. Acquisition
Sonian, Inc.
In November 2017, we acquired Sonian, Inc. (“Sonian”), a provider of public cloud archiving and business insights, to add additional archiving functionality to our current products and improve the efficiency of retrieving archived documents. We acquired all of the outstanding equity interests of Sonian for aggregate purchase consideration of $59.6 million in cash, subject to certain adjustments set forth in an Agreement and Plan of Merger underlying the Sonian acquisition. Purchase consideration totaling $5.4 million is being held back for one year from the date of acquisition for potential indemnification obligations of the former stockholders of Sonian, and is recorded in other accrued liabilities in our condensed consolidated balance sheet.
The following table reflects the fair values of assets acquired and liabilities assumed as of the acquisition date (in thousands):

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Cash
 
$
3,078

Accounts receivable
 
3,258

Other assets
 
534

Customer relationships
 
10,530

Developed technology
 
15,400

Goodwill
 
28,034

Accounts payable and accruals
 
(890
)
Deferred liabilities
 
(354
)
Total value of assets acquired and liabilities assumed
 
$
59,590

The fair values of assets acquired and liabilities assumed were based on a preliminary valuation and our estimates and assumptions are subject to change within the measurement period of one year from the acquisition date. The primary areas of the purchase price accounting that are not yet finalized are related to the valuation of deferred income taxes and residual goodwill.
As of the acquisition date, Sonian's developed technology and customer relationships had weighted-average useful lives of 5.0 years and 7.0 years, respectively. The total weighted-average useful life of these acquired intangible assets is 5.8 years. The goodwill is primarily attributed to the synergies expected to be realized following the acquisition. Goodwill is not expected to be deductible for income tax purposes.
Included in our results of operations for the nine months ended November 30, 2017 are $1.1 million and $0.4 million of revenue and net income, respectively, attributable to Sonian since the acquisition.

The following unaudited pro forma information presents the combined results of operations of Barracuda and Sonian as if the acquisition had been completed on March 1, 2016, the beginning of the comparable prior annual reporting period. The unaudited pro forma information primarily includes amortization associated with preliminary estimates for the acquired intangible assets, adjustments for loan interest, and other immaterial items, and the associated tax impact on these unaudited pro forma adjustments and certain changes in judgment of valuation allowance as a combined business. The unaudited pro forma information does not reflect any cost saving synergies from operating efficiencies or the effect of the incremental costs incurred in integrating the two companies. Accordingly, this unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations.

 
Three Months Ended November 30,
 
Nine Months Ended November 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Pro forma revenue
$
98,005

 
$
92,801

 
294,643

 
275,284

Pro forma net income
$
7,240

 
$
1,482

 
10,798

 
6,324


4. Sale of SignNow Business

As part of our strategy of divesting of non-core solutions, in October 2017, we completed the sale of SignNow for $8.6 million. Our SignNow technology provided customers with an easy to use electronic signature and online notarization tool. The components of the sales proceeds and resulting impact on our results of operations is as follows:


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Table of Contents

Cash
$2,000
Notes receivable
4,360

Non-marketable securities
2,250

Total consideration
8,610

Less: carrying value of assets sold:
 
Goodwill
(545
)
Intangibles
(915
)
Other net liabilities
232

Gain on sale of business
$7,382

A gain on sale of business, net of tax, of $7.4 million was recorded in the condensed consolidated statement of income.
In connection with the sale, we received interest-free notes receivable with a principal amount of $5.0 million payable in three annual payments starting February 28, 2018. A discount was applied to the notes receivable as reflected in the table above with $1.7 million and $2.7 million included in other current assets and other non-current assets, respectively, in the condensed consolidated balance sheets. We also received non-marketable securities with a fair value of $2.3 million that are accounted for under the cost method. The fair value of the non-marketable securities received as consideration was determined based on observable private-market transactions. Notes receivable and non-marketable securities received as consideration are noncash investing activities.

Pro forma results of operations related to the sale have not been presented as the impact was not material to our condensed consolidated results of operations for the three and nine months ended November 30, 2017 and 2016.

5. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill are summarized as follows (in thousands):
Balance as of February 28, 2017
$
69,795

Goodwill acquired
28,034

Goodwill sold
(545
)
Effect of foreign exchange rates
851

Balance as of November 30, 2017
$
98,135

Intangible assets subject to amortization are summarized as follows (in thousands):
 
As of November 30, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Value
Acquired developed technology
$
60,914

 
$
(29,359
)
 
$
31,555

Customer relationships
30,051

 
(10,732
)
 
19,319

Patents
2,999

 
(2,096
)
 
903

Trade name
422

 
(282
)
 
140

 
$
94,386

 
$
(42,469
)
 
$
51,917


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As of February 28, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Value
Acquired developed technology
$
50,013

 
$
(30,105
)
 
$
19,908

Customer relationships
19,736

 
(9,348
)
 
10,388

Patents
2,999

 
(1,781
)
 
1,218

Trade name
812

 
(375
)
 
437

 
$
73,560

 
$
(41,609
)
 
$
31,951

Certain intangible assets were removed as they were fully amortized as of the periods presented. In addition to the above, we maintained other intangible assets not subject to amortization of $0.2 million as of each of November 30, 2017 and February 28, 2017.
Amortization expense, including impairment charges, was $1.6 million and $5.0 million for the three and nine months ended November 30, 2017, respectively, and $1.8 million and $5.5 million for the three and nine months ended November 30, 2016, respectively.
As of November 30, 2017, amortization expense for intangible assets in future periods was as follows: $2.9 million for the remainder of fiscal 2018, $10.3 million for fiscal 2019, $10.3 million for fiscal 2020, $9.8 million for fiscal 2021, $9.5 million for fiscal 2022 and $9.2 million thereafter.
6. Stockholders’ Equity
Stock-Based Compensation
Total stock-based compensation expense has been classified as follows in our condensed consolidated statements of income (in thousands):
 
Three Months Ended November 30,
 
Nine Months Ended November 30,
 
2017
 
2016
 
2017
 
2016
Cost of revenue
$
550

 
$
323

 
$
1,472

 
$
959

Research and development
4,272

 
3,737

 
10,081

 
8,809

Sales and marketing
2,426

 
2,211

 
7,960

 
6,002

General and administrative
2,083

 
2,946

 
6,830

 
9,280

 
$
9,331

 
$
9,217

 
$
26,343

 
$
25,050

As of November 30, 2017, there was $4.6 million of unrecognized compensation cost related to outstanding stock options, expected to be recognized over a weighted-average period of 1.35 years, and $77.1 million of unrecognized compensation cost related to unvested restricted stock units ("RSUs"), expected to be recognized over a weighted-average period of 2.99 years.
Our 2015 Employee Stock Purchase Plan (the "ESPP") allows eligible employee participants to purchase shares of our common stock at a discount through payroll deductions. The ESPP consists of offering periods that are six months in length and employees may purchase shares in each period at 85% of the lower of the Company’s fair market value on the first trading day of each offering period or on the purchase date. The ESPP will continue until the earlier to occur of (i) the termination of the ESPP by our board of directors, or (ii) June 15, 2035. As of November 30, 2017, we had reserved 750,000 shares of our common stock for issuance under the ESPP and 594,652 shares remain available for future issuance.
Stock Repurchase Program
Our stock repurchase program, which allowed us to repurchase shares of our common stock for an aggregate purchase price not to exceed $50.0 million, expired on September 30, 2017.

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No shares were repurchased in the three months ended November 30, 2017 or 2016. The following table summarizes our common stock repurchases for the nine months ended November 30, 2017 and 2016 (in thousands, except per share data).
 
 
Nine Months Ended November 30,
 
 
2017
 
2016
Total number of shares repurchased
 
331

 
482

Dollar amount of shares repurchased
 
$
6,546

 
$
7,241

Average price paid per share
 
$
19.75

 
$
15.03

7. Income Taxes
For the three and nine months ended November 30, 2017, we recorded an income tax provision of $4.6 million and $7.5 million, respectively. For the three and nine months ended November 30, 2016, we recorded an income tax provision of $1.3 million and $9.8 million, respectively.
We maintain a valuation allowance against a significant portion of our deferred tax assets, including U.S. federal and state deferred tax assets and certain foreign deferred tax assets, because realization of these tax benefits through future taxable income did not meet the more-likely-than-not threshold. We intend to maintain the valuation allowance until sufficient positive evidence exists to support its reversal.
The difference between the income tax provision that would be derived by applying the statutory rate to our before tax income for the three and nine months ended November 30, 2017 and the income tax provision actually recorded is primarily due to the temporary differences we do not expect to benefit from due to our valuation allowance, as well as non-deductible stock-based compensation expense and other currently non-deductible items.
8. Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our chief executive officer. Our chief executive officer reviews financial information presented on a consolidated basis, accompanied by information about sales by geographic region, for purposes of allocating resources and evaluating financial performance. We have one business activity and there are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated level. Accordingly, we have determined that we have a single reportable segment and operating segment structure.
Revenue by geographic region is based on our customers' billing addresses and is presented as follows (in thousands):
 
Three Months Ended November 30,
 
Nine Months Ended November 30,
 
2017
 
2016
 
2017
 
2016
North America
$
70,642

 
$
66,760

 
$
211,213

 
$
197,712

United States
66,909

 
63,305

 
199,766

 
187,311

Other
3,733

 
3,455

 
11,447

 
10,401

Latin America
1,399

 
1,163

 
4,040

 
3,513

Asia-Pacific
6,032

 
5,273

 
17,964

 
15,557

EMEA
16,674

 
15,610

 
50,034

 
46,608

 
$
94,747

 
$
88,806

 
$
283,251

 
$
263,390

9. Borrowings
Credit Facility
We had a $25.0 million credit facility with Silicon Valley Bank which expired in November 2017. The credit facility included an option to request an increase of the available funds to $50.0 million and was secured by a security interest on substantially all of our assets and contained restrictive covenants. .
10. Commitments and Contingencies

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Legal Matters
On February 27, 2017, Realtime Data LLC ("Realtime Data") filed a lawsuit against us in the United States District Court for the Eastern District of Texas, Tyler Division (the “Court”), alleging that certain of our products infringe U.S. patent numbers 9,054,728, 7,415,530, 9,116,908 and 8,717,204 (the “Realtime Matter”). On June 2, 2017, we filed a motion to dismiss for improper venue, and on September 22, 2017, we filed a motion to transfer venue of the action from the Eastern District of Texas to the Northern District of California. On October 24, 2017, the Court granted our motion and transferred the lawsuit to the Northern District of California. Given the early stage of the Realtime Matter, we are unable to estimate a possible loss or range of possible loss, if any.
On January 8, 2018, a purported class action lawsuit, captioned Robert Whiteley, on Behalf of Himself and all Others Similarly Situated v. Barracuda Networks, Inc., et al., was filed against us in the Superior Court of California, in and for the County of Santa Clara, alleging a breach of fiduciary duties against the Company and its Board of Directors in connection with the Merger Agreement and the transactions contemplated thereby.  The complaint seeks, among other things, to enjoin the merger, a declaration that the Merger Agreement was entered into in breach of fiduciary duties owed to our stockholders, rescission of the merger should it be completed, and damages.  Given the early stage of this lawsuit, we are unable to estimate a possible loss or range of possible loss, if any.
We may, from time to time, be party to litigation and subject to claims that arise in the ordinary course of business. In addition, third parties may, from time to time, assert claims against us in the form of letters and other communications. We currently believe that these ordinary course matters will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows; however, the results of litigation and claims are inherently unpredictable. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
11. Net Income Per Share
The following table presents the calculation of basic and diluted net income per share (in thousands, except per share amounts):
 
Three Months Ended November 30,
 
Nine Months Ended November 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
7,783

 
$
1,793

 
$
12,009

 
$
7,014

Weighted-average shares used to compute net income per share, basic
53,378

 
52,457

 
53,098

 
52,336

Dilutive shares from stock options and RSUs
1,617

 
1,538

 
1,547

 
1,055

Weighted-average shares used to compute net income per share, diluted
54,995

 
53,995

 
54,645

 
53,391

Net income per share, basic
$
0.15

 
$
0.03

 
$
0.23

 
$
0.13

Net income per share, diluted
$
0.14

 
$
0.03

 
$
0.22

 
$
0.13


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12. Agreement and Plan of Merger

On November 26, 2017, we entered into the Merger Agreement with Project Deep Blue Holdings, LLC (“Newco”) and Project Deep Blue Merger Corp., a wholly owned subsidiary of Newco (“Merger Sub”), providing for the merger of Merger Sub with and into us (the “Merger”), with us surviving the Merger as a wholly owned subsidiary of Newco. Newco and Merger Sub were formed by an affiliate of private equity investment firm Thoma Bravo. Capitalized terms used in this Note 12 not otherwise defined have the meanings set forth in the Merger Agreement.

At the Effective Time of the Merger, each share of our common stock issued and outstanding as of immediately prior to the Effective Time (other than Owned Shares or Dissenting Shares) will be cancelled and extinguished and automatically converted into the right to receive cash in an amount equal to $27.55, without interest thereon (the “Per Share Price”). Our vested Options will be cancelled and converted into the right to receive the Per Share Price, less the exercise price per share of such Options. Our unvested Options and unvested RSUs will be cancelled and converted into the contingent right to receive the Per Share Price following satisfaction of the underlying vesting conditions of such unvested Options and unvested RSUs.

Newco and Merger Sub have secured committed financing, consisting of a combination of equity to be provided by investment funds affiliated with Thoma Bravo and debt financing from Goldman Sachs & Co. LLC, Credit Suisse and UBS Investment Bank, the aggregate proceeds of which will be sufficient for Newco and Merger Sub to pay the aggregate merger consideration and all related fees and expenses. The transaction is not subject to a financing condition.

The proposed transaction is expected to close before our fiscal year end of February 28, 2018, and the consummation of the Merger is subject to customary closing conditions, including, without limitation, the absence of certain legal impediments, the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, antitrust regulatory approval in Germany and Austria and approval by the Company’s stockholders.

We have made customary representations and warranties in the Merger Agreement and have agreed to customary covenants regarding the operation of our business and our subsidiaries prior to the Effective Time. We are also subject to customary restrictions on our ability to solicit alternative acquisition proposals from third parties and to provide non-public information to, and participate in discussions and engage in negotiations with, third parties regarding alternative acquisition proposals, with customary exceptions for Superior Proposals.

The Merger Agreement contains certain termination rights for us and Newco. Upon termination of the Merger Agreement under specified circumstances, we will be required to pay Newco a termination fee of $48.26 million. If the Merger Agreement is terminated in connection with our accepting a Superior Proposal or due to our Board’s change or withdrawal of its recommendation of the Merger, then the termination fee will become payable by the Company to Newco. This termination fee will also be payable if the Merger Agreement is terminated because our stockholders did not vote to adopt the Merger Agreement and prior to such termination, a proposal to acquire at least 50% of our stock or assets is publicly announced and we enter into an agreement for, or complete, a transaction contemplated by such proposal within one year of termination. In addition, we will be required to reimburse Newco for up to $3.0 million of its expenses associated with the transaction if the Merger Agreement is terminated because our stockholders do not vote to adopt the Merger Agreement or if we breach representations, warranties or covenants in a manner that would cause the related closing conditions to not be met.

Upon termination of the Merger Agreement under other specified circumstances, Newco will be required to pay us a termination fee of $96.53 million. The termination fee by Newco will become payable if Newco fails to consummate the Merger after certain conditions are met, if Newco breaches its representations, warranties or covenants in a manner that would cause the related closing conditions to not be met, or if either party terminates because of the termination date described below, and at the time of such termination, we were otherwise entitled to terminate the Agreement for either of the above reasons. Thoma Bravo has provided us with a limited guaranty in our favor (the “Limited Guaranty”). In the aggregate, the Limited Guaranty guarantees the payment of the termination fee payable by Newco and certain reimbursement obligations that may be owed by Newco to the Company pursuant to the Merger Agreement. The Merger Agreement also provides that either party may specifically enforce the other party’s obligations under the Merger Agreement, provided that we may only cause Newco to fund the equity financing if certain conditions are satisfied, including the funding or availability of the debt financing.

In addition to the foregoing termination rights, and subject to certain limitations, we or Newco may terminate the Merger Agreement if the Merger is not consummated by March 26, 2018.

13. Subsequent event

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In December 2017, we entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with Chapman Technology Group, Inc., a Wisconsin corporation ("Seller"), and certain other parties to acquire the Seller’s wholly-owned subsidiary PhishLine, LLC (“PhishLine”), a Wisconsin limited liability company, for a purchase price of $25.0 million, subject to certain net working capital adjustments. PhishLine is engaged in the business of designing, developing, marketing, selling and providing enterprise level social engineering and phishing simulation and training software solutions, and we expect will add additional functionality to our security products. The purchase price was financed through available cash and cash equivalents. We are is in the initial stages of determining the accounting related to the transaction, specifically related to the fair value of intangible assets acquired, and the related tax impact.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended February 28, 2017. The last day of our fiscal year is February 28/29. Our fiscal quarters end on May 31, August 31, November 30 and February 28/29. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 28, 2017 and in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Overview
Barracuda designs and delivers powerful yet easy-to-use security and data protection solutions. We offer cloud-enabled solutions that empower customers to address security threats, improve network performance and protect and store their data. Our security platform helps customers simplify their IT operations and address their most pressing security needs even as they adopt new deployment models and move applications, data and workloads to the cloud. Our business model is built on the core values of speed and agility, which we apply to all aspects of our approach, including our technology innovations, the delivery and deployment of our solutions and responses to customer inquiries.
Pending Merger
On November 26, 2017, we entered into an agreement to be acquired by Thoma Bravo, LLC, a private equity investment firm, in an all-cash transaction valued at approximately $1.6 billion. Our stockholders will receive $27.55 in cash for each share of Barracuda common stock they hold. The proposed transaction is expected to close before our fiscal year end of February 28, 2018, and is subject to approval by our stockholders and regulatory authorities, and the satisfaction of other customary closing conditions.
See Note 12, Agreement and Plan of Merger, in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, for further details.
Acquisition of Sonian, Inc.
In November 2017, we acquired Sonian, Inc., a provider of public cloud archiving and business insights, to add additional archiving functionality to our current products and improve the efficiency of retrieving archived documents. We acquired all of the outstanding equity interests of Sonian for aggregate purchase consideration of $59.6 million in cash, subject to certain adjustments set forth in an Agreement and Plan of Merger underlying the Sonian acquisition. Purchase consideration totaling $5.4 million is being held back for one year from the date of acquisition for potential indemnification obligations of the former stockholders of Sonian.
Sale of SignNow Business

As part of our strategy of divesting of non-core solutions, in October 2017, we completed the sale of SignNow for $8.6 million. Our SignNow technology provided customers with an easy to use electronic signature and online notarization tool. The total consideration of $8.6 million was received in cash, notes receivable and equity. We recognized a gain on sale of $7.4 million.


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See Note 3, Acquisition, and Note 4, Sale of SignNow Business in the Notes to the Condensed Consolidated Financial Statements, each, in Part I, Item 1 of this Quarterly Report on Form 10-Q, for further discussion on these transactions.
Overview
We derive revenue from sales of appliances and subscriptions. Revenue from the sale of our appliances includes hardware and a perpetual license. Subscription revenue is generated primarily from our subscription services such as our Barracuda Energize Updates and our cloud solutions. Subscription revenue also includes revenue from fixed term licenses of our managed service provider solutions, virtual appliance software, support and maintenance. Our subscriptions include monthly and annual terms ranging from one to five years, the substantial majority of which are for one-year periods. Subscriptions are billed in advance of the purchased subscription period. Annualized renewal rates from subscriptions, on a dollars basis, were 101% and 95% for the three and nine months ended November 30, 2017, respectively, and 98% and 99% for the three and nine months ended November 30, 2016, respectively. Subscription annual recurring revenue, which represents the annualized dollar amount of recurring subscription revenue in the final month of the fiscal quarter, was $324.3 million and $278.8 million for the nine months ended November 30, 2017 and 2016, respectively.
The growth of our business and our future success depend on many factors, including our ability to continue to expand our customer base, pursue cross-sale opportunities and grow revenues from our existing customer base, expand our distribution channels, particularly internationally, continue to develop new solutions to promptly respond to our customers’ needs and successfully integrate acquisitions into our business. In aligning our investments, product portfolio and routes to market to address our customers' growing adoption of public cloud, software-as-a-service ("SaaS") and managed service IT deployment models, we provide a security platform that spans email, management, network and application security as well as data protection, all of which can be deployed and centrally managed across diverse and distributed architectures. As our existing customers’ IT buying needs evolve, or as our customers realize the benefits of the solutions that they previously purchased, our platform provides us an opportunity to cross-sell additional solutions. To support our cross-sell efforts, we intend to continue adding higher touch sales and marketing field resources to liaise with our channel partners as we continue to grow our sales both domestically and internationally. We expect that our continued investment in resources to expand our cross-sell efforts to existing customers will result in longer-term revenue growth opportunities.
In addition to our cross-sell efforts, our sales and marketing initiatives are primarily focused on higher-growth segments within the security and data protection markets. Our future success will depend in part on our ability to continue to timely identify these higher-growth segments and expand our sales within them. While these areas represent significant opportunities for us, they also pose risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results.
Furthermore, our business depends on the overall demand for security and data protection solutions. Weak global economic conditions, particularly market and financial uncertainty and instability in the United States and Europe, or a reduction in security and data protection solution spending even if general economic conditions are unaffected, could adversely impact our business, financial condition and operating results in a number of ways. Additionally, we face significant competition across all of our market segments, and must continue to execute across all functions and add qualified personnel to succeed.
Our Business Model
We generally invoice at the time of sale for the total price of the solutions we deliver, and we typically collect cash in 30 to 60 days. We refer to the total amount of invoices we issue in a period as gross billings. All of the gross billings we record are recognized as revenue ratably under U.S. generally accepted accounting principles ("GAAP"), once all revenue recognition criteria have been met. Gross billings are initially recorded as deferred revenue, less reserves. The hardware appliance component of our gross billings is recognized ratably as revenue over the estimated customer relationship period, which is typically three years, commencing upon the activation of the unit by the end customer. The subscription component of our gross billings is recognized ratably as revenue over the contractual period of the subscription. Because we typically bill in advance for the entire term, substantially all of our new and renewal gross billings increase our deferred revenue balance, which contributes significantly to our cash flow.
Components of Results of Operations
Revenue
We generate revenue from the sales of our appliances and subscriptions. 

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Appliance Revenue. Revenue from the sale of our appliances includes hardware and a perpetual software license. We recognize hardware appliance revenue over the estimated customer relationship period of three years, commencing with the end-user’s activation of the appliance and related subscription, provided all other criteria for the recognition of appliance revenue are met.
Subscription Revenue. Subscription revenue is generated primarily from our subscription services such as our Barracuda Energize Updates. Subscription revenue also includes revenue from licenses of our virtual appliance software, support and maintenance. Our subscription terms include monthly and annual terms ranging from one year to five years. We recognize revenue from subscriptions, support and maintenance over the contractual service period.
Cost of Revenue
Cost of revenue consists of costs related to our appliance and subscription revenue. Such costs include hardware, manufacturing, shipping and logistics, customer support, royalty, warranty, personnel costs, service delivery and data center costs and amortization of intangible assets related to acquired technology. We expect our cost of revenue to increase in absolute dollars, although it may fluctuate as a percentage of total revenue from period to period, as we continue to grow.
Gross Profit
Gross profit as a percentage of total revenue, or gross margin, has been and will continue to be affected by a variety of factors, including manufacturing costs, cost of technical support and the mix of our solutions sold. We expect our gross profit to fluctuate over time depending on the factors described above.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation expense and travel-related expenses. Operating expenses also include allocated overhead costs for facilities, IT and depreciation. We expect operating expenses to increase in absolute dollars, although they may fluctuate as a percentage of total revenue from period to period, as we continue to grow. In particular, we expect our stock-based compensation expense to increase in absolute dollars as a result of our existing stock-based compensation expense to be recognized as options and restricted stock units ("RSUs") vest and as we issue additional stock-based awards to attract and retain employees.
Research and development. Research and development expenses consist primarily of salaries, benefits and stock-based compensation for employees and executives on our engineering and technical teams who are responsible for increasing the functionality and enhancing the ease-of-use of our appliance and subscription services, as well as the development of new products. We expense our research and development costs as they are incurred. We expect research and development expenses to increase in absolute dollars as we continue to invest in our future solutions, although our research and development expenses may fluctuate as a percentage of total revenue.
Sales and marketing. Our sales and marketing expenses consist primarily of advertising, as well as salaries, commissions, benefits and stock-based compensation for our employees and executives engaged in sales, sales support, marketing, business development and customer service functions. Our advertising expenses include the costs of cooperative marketing programs developed with our channel partners and other marketing programs such as online lead generation, promotional events and web seminars. We market and sell our subscription services worldwide through our sales organization and distribution channels, such as strategic resellers and distributors. We capitalize and amortize the direct and incremental portion of our sales commissions over the period the related revenue is recognized. We expect sales and marketing expenses to increase in absolute dollars as we continue to introduce marketing campaigns and invest in sales resources in key focus areas, although our sales and marketing expenses may fluctuate as a percentage of total revenue.
General and administrative. Our general and administrative expenses consist primarily of salaries, benefits and stock-based compensation for our finance, legal, regulatory and compliance, human resources and other administrative employees and executives. In addition, general and administrative expenses include outside consulting, legal and accounting services and facilities and other supporting overhead costs. We expect general and administrative expenses to increase in absolute dollars due to professional services fees primarily related to outside legal, audit, investor relations and consulting services to support the business, although our general and administrative expenses may fluctuate as a percentage of total revenue.

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Gain on sale of business

Gain on sale of business relates to the sale of our SignNow business. See Note 4, Sale of SignNow Business in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, for further discussion on this transaction
Other Income, Net
Other income, net consists primarily of foreign exchange gains and losses, interest expense on our outstanding debt and interest income earned on our cash, cash equivalents and marketable securities, as well as realized gains and losses from our marketable securities portfolio. We expect interest income will vary each reporting period depending on our average investment balances during the period, types and mix of investments and market interest rates.
Provision for Income Taxes

In fiscal year ended February 28, 2015, we established a valuation allowance against a significant portion of our deferred tax assets, including U.S. federal and state deferred tax assets and certain foreign deferred tax assets, because realization of these tax benefits through future taxable income did not meet the more-likely-than-not threshold. We intend to maintain the valuation allowance until sufficient positive evidence exists to support its reversal.

The difference between the income tax provision that would be derived by applying the statutory rate to our income before tax for the three and nine months ended November 30, 2017 and the income tax provision actually recorded is primarily due to the temporary differences, which we do not expect to benefit from due to our valuation allowance, as well as the non-deductible stock-based compensation expense and other currently non-deductible items.

Results of Operations
Comparison of the Three Months Ended November 30, 2017 and 2016
The following table summarizes our condensed consolidated results of operations for the periods presented and as a percentage of our total revenue for those periods (dollars in thousands):
 
Three Months Ended November 30,
 
2017
 
% of
Total
Revenue
 
2016
 
% of
Total
Revenue
 
Change
Revenue:
 
 
 
 
 
 
 
 
 
Appliance
$
17,459

 
18
 %
 
$
20,457

 
23
 %
 
$
(2,998
)
Subscription
77,288

 
82

 
68,349

 
77

 
8,939

Total revenue
94,747

 
100

 
88,806

 
100

 
5,941

Cost of revenue
22,098

 
23

 
21,098

 
24

 
1,000

Gross profit
72,649

 
77

 
67,708

 
76

 
4,941

Operating expenses:
 
 
 
Research and development
20,616

 
22

 
18,627

 
21

 
1,989

Sales and marketing
34,988

 
37

 
33,368

 
38

 
1,620

General and administrative
12,366

 
13

 
10,217

 
11

 
2,149

Total operating expenses
67,970

 
72

 
62,212

 
70

 
5,758

Income from operations
4,679

 
5

 
5,496

 
6

 
(817
)
Gain on sale of business
7,382

 
8

 

 

 
7,382

Other income (expense), net
332

 

 
(2,374
)
 
(2
)
 
2,706

Income before income taxes
12,393

 
13

 
3,122

 
4

 
9,271

Provision for income taxes
(4,610
)
 
(5
)
 
(1,329
)
 
(2
)
 
(3,281
)
Net income
$
7,783

 
8
 %
 
$
1,793

 
2
 %
 
$
5,990


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Revenue
Total revenue increased $5.9 million, or 7%, for the three months ended November 30, 2017 compared to the three months ended November 30, 2016. Subscription revenue increased by $8.9 million, or 13%, for the three months ended November 30, 2017 compared to the three months ended November 30, 2016, primarily driven by an increase in active subscribers during the period of 51,003, or 16%, from 309,323 active subscribers as of November 30, 2016 to 360,326 active subscribers as of November 30, 2017 and $1.1 million of revenue in connection with our acquisition of Sonian in November 2017. The increase in active subscribers was primarily driven by our high level of customer retention and an increase in the number of customers purchasing subscriptions from us. Total appliance revenue decreased by $3.0 million, or 15%, primarily due to the continuing shift by our customers from traditional and solely on-premises deployments to include the cloud, which includes hybrid network architectures, public and/or private clouds, SaaS applications and managed service solutions.
Cost of Revenue and Gross Margin
Cost of revenue increased $1.0 million, or 5%, for the three months ended November 30, 2017 compared to the three months ended November 30, 2016. Gross margin moderately increased from 76% for the three months ended November 30, 2016 to 77% for the three months ended November 30, 2017. Cost of revenue increased due to product mix shifts and increases of $0.8 million in service delivery costs, $0.5 million in compensation and personnel costs, $0.4 million in royalty costs and $0.2 million cost of revenue from our Sonian acquisition in November 2017, partially offset by $0.8 million decrease in provision for inventory obsolescence. Additionally, our gross margin is generally impacted by the timing of investments in our data center infrastructure and our technical support.
Operating Expenses
Research and development expenses increased $2.0 million, or 11%, for the three months ended November 30, 2017 compared to the three months ended November 30, 2016, primarily due to increases of $1.3 million in stock-based compensation expense and $0.5 million in compensation and personnel costs, each primarily attributable to additional headcount, as well as a $0.2 million increase in service costs. As a percentage of total revenue, research and development expenses remained relatively consistent period over period.
Sales and marketing expenses increased $1.6 million, or 5%, for the three months ended November 30, 2017 compared to the three months ended November 30, 2016, primarily due to increases of $2.4 million in compensation and personnel costs, primarily attributable to additional headcount and sales commission attainment, and $0.2 million in stock-based compensation expense partially offset by a decrease of $1.0 million in marketing online service costs. As a percentage of total revenue, sales and marketing expenses increased for the comparable period primarily due to the timing and nature of marketing campaigns.
General and administrative expenses increased $2.2 million, or 21%, for the three months ended November 30, 2017 compared to the three months ended November 30, 2016, primarily due to increases of $1.6 million in legal costs mainly due to acquisition and transaction activities, $0.6 million in audit fee costs and $0.5 million in consulting costs mainly for internal control compliance, partially offset by a decrease of $0.9 million in stock-based compensation expense primarily due to cancellations and the vesting of grants in full. As a percentage of total revenue, general and administrative expenses increased for the comparable period due to the legal costs related to acquisition and transaction activities.
Gain on sale of business

In October 2017, we completed the sale of our SignNow business for consideration of approximately $8.6 million. The consideration consists of $2.0 million in cash, $4.4 million in notes receivable and $2.2 million in non-marketable securities. As a result of the sale, we recognized a gain of $7.4 million during the three month ended November 30, 2017.
Other Income, Net
Other income, net increased $2.7 million for the three months ended November 30, 2017 compared to the three months ended November 30, 2016, primarily due to an increase of $2.3 million in net foreign exchange gains and $0.3 million gain on investments in marketable equity securities.
Provision for Income Taxes
We recorded an income tax provision of $4.6 million for the three months ended November 30, 2017. The difference between the income tax provision that would be derived by applying the statutory rate to our before tax income for the three

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Table of Contents

months ended November 30, 2017 and the income tax provision actually recorded is primarily due to the temporary differences, which we do not expect to benefit from due to our valuation allowance, as well as non-deductible stock-based compensation expense and other currently non-deductible items. For the three months ended November 30, 2016, we recorded an income tax provision of $1.3 million.

Comparison of the Nine Months Ended November 30, 2017 and 2016
The following table summarizes our condensed consolidated results of operations for the periods presented and as a percentage of our total revenue for those periods (dollars in thousands):
 
Nine Months Ended November 30,
 
2017
 
% of
Total
Revenue
 
2016
 
% of
Total
Revenue
 
Change
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
Appliance
$
56,071

 
20
 %
 
$
62,824

 
24
 %
 
$
(6,753
)
Subscription
227,180

 
80

 
200,566

 
76

 
26,614

Total revenue
283,251

 
100

 
263,390

 
100

 
19,861

Cost of revenue
70,944

 
25

 
61,579

 
23

 
9,365

Gross profit
212,307

 
75

 
201,811

 
77

 
10,496

Operating expenses:
 
 
 
Research and development
59,412

 
21

 
56,280

 
21

 
3,132

Sales and marketing
109,769

 
39

 
96,842

 
38

 
12,927

General and administrative
33,648

 
12

 
31,958

 
12

 
1,690

Total operating expenses
202,829

 
72

 
185,080

 
71

 
17,749

Income from operations
9,478

 
3

 
16,731

 
6

 
(7,253
)
Gain on sale of business
7,382

 
3

 

 

 
7,382

Other income, net
2,640

 
1

 
131

 

 
2,509

Income before income taxes
19,500

 
7

 
16,862

 
6

 
2,638

Provision for income taxes
(7,491
)
 
(3
)
 
(9,848
)
 
(3
)
 
2,357

Net income
$
12,009

 
4
 %
 
$
7,014

 
3
 %
 
$
4,995

Revenue
Total revenue increased $19.9 million, or 8%, for the nine months ended November 30, 2017 compared to the nine months ended November 30, 2016. Subscription revenue increased by $26.6 million, or 13%, for the nine months ended November 30, 2017 compared to the nine months ended November 30, 2016, primarily due to an increase in active subscribers during the period of 51,003, or 16%, from 309,323 active subscribers as of November 30, 2016 to 360,326 active subscribers as of November 30, 2017 and the inclusion of $1.1 million revenue in connection with our acquisition of Sonian in November 2017. The increase in active subscribers primarily resulted from our high level of customer retention and an increase in the number of customers purchasing subscriptions. Total appliance revenue decreased by $6.8 million, or 11%, primarily due to the continuing shift by our customers from traditional and solely on-premises deployments to include the cloud, which includes hybrid network architectures, public and/or private clouds, SaaS applications and managed service solutions.
Cost of Revenue and Gross Margin
Cost of revenue increased $9.4 million, or 15%, for the nine months ended November 30, 2017 compared to the nine months ended November 30, 2016. Gross margin decreased from 77% for the nine months ended November 30, 2016 to 75% for the nine months ended November 30, 2017, primarily due to product mix shifts and increases of $3.5 million in warranty costs, $2.6 million in service delivery costs, $1.5 million in royalty costs and $1.0 million in stock-based compensation expense. Additionally, our gross margin is generally impacted by the timing of investments in our data center infrastructure and our technical support.

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Operating Expenses
Research and development expenses increased $3.1 million, or 6%, for the nine months ended November 30, 2017 compared to the nine months ended November 30, 2016, primarily due to increases of $0.6 million in compensation and personnel costs and $1.3 million in stock-based compensation expense. As a percentage of total revenue, research and development expenses remained relatively consistent period over period.
Sales and marketing expenses increased $12.9 million, or 13%, for the nine months ended November 30, 2017 compared to the nine months ended November 30, 2016, primarily due to increases of $9.0 million in compensation and personnel costs, primarily attributable to an increase in headcount and commission expenses, $2.0 million in stock-based compensation expense, $0.6 million in marketing and channel partner program expenses, primarily attributable to higher search engine marketing, sponsorship and advertising spend and event and trade show costs, $0.6 million in travel and other related costs, and $0.3 million in license usage fees. As a percentage of total revenue, sales and marketing expenses remained relatively consistent period over period. We expect sales and marketing expenses to increase on a dollar basis and as a percentage of total revenue for the remainder of fiscal 2018 as we invest in sales resources in key focus areas.
General and administrative expenses increased $1.7 million, or 5%, for the nine months ended November 30, 2017 compared to the nine months ended November 30, 2016 primarily due to increases of $1.7 million in sales tax provision, $1.2 million increase in legal costs related to acquisition and transactions activities, $0.6 million in compensation and personnel costs and $0.5 million increase in consulting costs mainly for internal control compliance, partially offset by a decrease of $2.5 million in stock-based compensation expense primarily due to vested grants. As a percentage of total revenue, general and administrative expenses remained relatively consistent period over period.
Gain on sale of business

In October 2017, we completed the sale of our SignNow business for consideration of approximately $8.6 million. The consideration consists of $2.0 million in cash, $4.4 million in notes receivable and $2.2 million in non-marketable securities. As a result of the sale, we recognized a gain of $7.4 million during the nine months ended November 30, 2017.
Other Income, Net
Other income, net increased $2.5 million for the three months ended November 30, 2017 compared to the three months ended November 30, 2016, primarily due to $2.5 million in realized gain on sale of investment in marketable equity securities and in foreign exchange gain.
Provision for Income Taxes
We recorded an income tax provision of $7.5 million for the nine months ended November 30, 2017. The difference between the income tax provision that would be derived by applying the statutory rate to our before tax income for the nine months ended November 30, 2017 and the income tax provision actually recorded is primarily due to the temporary differences, which we do not expect to benefit from due to our valuation allowance, as well as non-deductible stock-based compensation expense and other currently non-deductible items. For the nine months ended November 30, 2016, we recorded an income tax provision of $9.8 million.
Liquidity and Capital Resources 
 
Nine Months Ended November 30,
 
2017
 
2016
 
 
 
 
 
(in thousands)
Net cash provided by operating activities
$
54,915

 
$
47,711

Net cash used in investing activities
$
(64,632
)
 
$
(40,959
)
Net cash used in financing activities
$
(14,887
)
 
$
(4,118
)
As of November 30, 2017, we had cash and cash equivalents of $96.9 million, of which approximately $20.7 million was held outside of the United States and not presently available to fund domestic operations and obligations. In addition, we held marketable securities of $80.9 million as of November 30, 2017. If we were to repatriate cash held outside of the United States, it could be subject to U.S. and foreign withholding taxes.

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Our $25.0 million credit facility with Silicon Valley Bank expired on November 11, 2017 and was not renewed.
We believe that our existing cash, cash equivalents and marketable securities, and net cash provided by operating activities will be sufficient to meet our working capital, and capital expenditure requirements, including any potential merger and acquisition activity, for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate organically, or through acquisitions, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced solutions and service offerings and the continuing market acceptance of our solutions. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected.
In addition, as described in the section "Legal Proceedings" included in Part II, Item 1 of this Quarterly Report on Form 10-Q, we are currently involved in ongoing litigation. Any adverse settlements or judgments in any litigation could have a material adverse impact on our results of operations, cash balances and cash flows in the period in which such events occur.
Operating Activities
Our primary source of cash from operating activities has been from cash collections from our customers. We expect cash inflows from operating activities to be affected by increases in sales and timing of collections. Our primary uses of cash from operating activities have been for personnel costs and investment in sales and marketing and research and development infrastructure. We expect cash outflows from operating activities to be affected by increases in sales and increases in personnel costs as we grow our business.
For the nine months ended November 30, 2017, operating activities provided $54.9 million in cash primarily due to non-cash charges of $39.1 million related to stock-based compensation, depreciation and amortization expenses, gain of $7.4 million on the sale of our SignNow business, a positive change of $10.0 million in our net operating assets and liabilities and our consolidated net income of $12.0 million.
For the nine months ended November 30, 2016, operating activities provided $47.7 million in cash primarily due to non-cash charges of $37.5 million related to stock-based compensation, depreciation and amortization expenses and our consolidated net income of $7.0 million and a positive change of $5.4 million in our net operating assets and liabilities.
Investing Activities
Our investing activities have generally consisted of transactions related to marketable and non-marketable securities, purchases of property and equipment and activity in connection with acquisitions. We expect to continue to purchase property and equipment to support the continued growth of our business as well as continue to invest in our data center infrastructure.
Cash used in investing activities of $64.6 million in the nine months ended November 30, 2017 was primarily related to the acquisition of Sonian of $51.2 million, purchases of marketable securities of $32.8 million, property and equipment of $9.1 million and non-marketable securities of $4.1 million and payments related to sale of net liabilities of $0.8 million, partially offset by proceeds from the sale and maturity of certain marketable securities of $31.8 million and proceeds of $2.0 million from the sale of our SignNow business.
Cash used in investing activities of $41.0 million in the nine months ended November 30, 2016 was primarily related to purchases of marketable securities of $59.6 million, property and equipment of $4.3 million, intangible assets of $1.4 million and non-marketable investments of $0.6 million, partially offset by proceeds from the sale and maturity of certain marketable securities of $25.1 million.
Our annual capital expenditures generally have varied between approximately 2% and 5% of annual total revenue. We believe future capital expenditures are likely to be consistent with historical experience with variations above or below the range depending upon specific strategic opportunities.
Financing Activities
Our financing activities generally consist of equity related transactions, including proceeds from the exercises of employee stock options, excess tax benefits from equity incentive plans and tax payments associated with the net share settlements of equity awards and repurchases of common stock.

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For the nine months ended November 30, 2017, financing activities used $14.9 million in cash primarily related to repurchases of our common stock of $6.5 million, tax payments related to $7.8 million of net share settlements of equity awards, repayment of a note payable of $4.1 million and payments related to contingent considerations of $0.7 million, partially offset by proceeds from stock option exercises of $4.4 million.
For the nine months ended November 30, 2016, financing activities provided $4.1 million in cash primarily related to repurchases of our common stock of $7.2 million and tax payments related to $6.0 million of net share settlements of equity awards, partially offset by proceeds from stock option exercises of $7.4 million.

Key Metrics
We monitor the following key metrics to help us evaluate growth trends, establish budgets and assess operational efficiencies. In addition to our results determined in accordance with GAAP, we believe the following non-GAAP and operational measures are useful in evaluating our operating performance.
The following presents our key metrics and provides reconciliations of the most directly comparable GAAP financial measure to each non-GAAP financial measure (in thousands, except active subscribers and percentages).
 
Three Months Ended November 30,
 
Nine Months Ended November 30,
 
2017
 
2016
 
2017
 
2016
Gross billings
$
110,633

 
$
100,399

 
$
324,355

 
$
298,898

Year-over-year percentage change
10
%
 
13
%
 
9
%
 
6
%
Year-over-year percentage change on a constant currency basis (1)
9
%
 
13
%
 
9
%
 
6
%
Adjusted EBITDA
$
19,064

 
$
18,854

 
$
51,192

 
$
55,190

Adjusted EBITDA as a percentage of total revenue
20
%
 
21
%
 
18
%
 
21
%
Free cash flow
$
22,376

 
$
13,786

 
$
45,770

 
$
43,446

Free cash flow as a percentage of total revenue
24
%
 
16
%
 
16
%
 
16
%
Active subscribers at period end
360,326

 
309,323

 
348,087

 
309,323

 ______________________
(1) 
In order to determine how our business performed exclusive of the effect of foreign currency fluctuations, we compare the percentage change in our gross billings from one period to another using a constant currency. To present this gross billings information, the current and comparative prior period results for entities that operate in other than U.S. dollars are converted into U.S. dollars at constant exchange rates. For example, the average exchange rates for the second quarter of fiscal 2018 were used to convert current and comparable prior period gross billings rather than the actual exchange rates in effect during the respective period.

Gross billings. We define gross billings as total revenue plus the change in deferred revenue and other adjustments which primarily reflect returns and reserves during a particular period. We use gross billings as a performance measurement, based on our business model of invoicing our customers at the time of sale of our solutions and recognizing revenue ratably over subsequent periods. Accordingly, we believe gross billings provide valuable insight into the sales of our solutions and the performance of our business. The gross billings we record in any period reflect sales to new customers plus renewals and additional sales to existing customers adjusted for returns, rebates and other offsets, which we do not expect to be recognized as revenue in future periods. In many cases, these returns, rebates and other offsets occur in periods different from the period of sale and are unrelated to the marketing efforts leading to the initial sale, and therefore by adjusting for such offsets, we believe our computation of gross billings better reflects the effectiveness of our sales and marketing efforts.

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The following table reconciles total revenue to gross billings (in thousands, except percentages):
 
Three Months Ended November 30,
 
Nine Months Ended November 30,
 
2017
 
2016
 
2017
 
2016
Total revenue
$
94,747

 
$
88,806

 
$
283,251

 
$
263,390

Total deferred revenue, end of period
417,745

 
401,300

 
417,745

 
401,300

Less: total deferred revenue, beginning of period
(413,665
)
 
(398,878
)
 
(407,082
)
 
(392,774
)
Add: deferred revenue adjustments
11,806

 
9,171

 
30,441

 
26,982

Total change in deferred revenue and adjustments
15,886

 
11,593

 
41,104

 
35,508

Gross billings
$
110,633

 
$
100,399

 
$
324,355

 
$
298,898

Year-over-year percentage change
10
%
 
13
%
 
9
%
 
6
%
Year-over-year percentage change on a constant currency basis (1)
9
%
 
13
%
 
9
%
 
6
%
 ______________________
(1) 
In order to determine how our business performed exclusive of the effect of foreign currency fluctuations, we compare the percentage change in our gross billings from one period to another using a constant currency. To present this gross billings information, the current and comparative prior period results for entities that operate in other than U.S. dollars are converted into U.S. dollars at constant exchange rates. For example, the average exchange rates for the third quarter of fiscal 2018 were used to convert current and comparable prior period gross billings rather than the actual exchange rates in effect during the respective period.
In the three and nine months ended November 30, 2017, gross billings increased 9% over the prior year’s comparable period. The increase in gross billings were primarily driven by our continued ability to cross-sell additional solutions to existing customers and the growth in our renewal subscriptions as a result of our high level of customer retention as well as additional lead generation opportunities and associated new customer billings. For the three and nine months ended November 30, 2017, increased sales of our core products were the primary drivers for the increased gross billings. When evaluating our gross billings from period to period, we also evaluate our gross billings for the comparable period using a fixed exchange rate, thereby excluding the effect of currency fluctuations.
Adjusted EBITDA. We define adjusted EBITDA as net income plus non-cash and non-operating charges, which include: (i) other income, net, (ii) provision for income taxes, (iii) acquisition and other charges, (iv) stock-based compensation expense, (v) amortization of intangible assets, including certain losses on disposal and impairment of intangible assets, and (vi) depreciation expense, including certain losses on disposal of fixed assets. Because adjusted EBITDA excludes certain non-cash and non-operating charges, this measure enables us to eliminate the impact of items we do not consider indicative of our ongoing operating performance, and therefore provides a better indication of profitability from our operations, and provides a consistent measure of our performance from period to period. Prior period information has been recast to conform to the current period presentation of adjusted EBIDTA and exclude changes in deferred revenue and associated deferred costs in our calculation of adjusted EBIDTA.
The following table reconciles net income to adjusted EBITDA (in thousands, except percentages):
 
Three Months Ended November 30,
 
Nine Months Ended November 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
7,783

 
$
1,793

 
$
12,009

 
$
7,014

Other income, net (1)
(7,714
)
 
2,374

 
(10,022
)
 
(131
)
Provision for income taxes
4,610

 
1,329

 
7,491

 
9,848

Depreciation, amortization and impairment expense (2)
4,173

 
3,975

 
12,716

 
12,442

Stock-based compensation expense
9,331

 
9,217

 
26,343

 
25,050

Acquisition and other charges (3)
881

 
166

 
2,655

 
967

Adjusted EBITDA
$
19,064

 
$
18,854

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