form10q_093009.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________
FORM
10-Q
________________
|
R
|
Quarterly report
pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
|
|
For the quarterly period ended September 30,
2009
|
OR
|
£
|
Transition
report pursuant to Section 13 or 15(d) of the Securities
Exchange Act
of 1934
|
Commission
File Number: 0-25871
INFORMATICA
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
77-0333710
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
100
Cardinal Way
Redwood
City, California 94063
(Address
of principal executive offices, including zip code)
(650)
385-5000
(Registrant’s
telephone number, including area code)
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 (the
“Exchange Act”) 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 R 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 £ No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer R Accelerated
filer £ Non-accelerated
filer £ Smaller
reporting company £
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). £ Yes R
No
As of
October 30, 2009, there were approximately 89,450,000 shares of the registrant’s
common stock outstanding.
INFORMATICA
CORPORATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
INFORMATICA
CORPORATION
(In
thousands)
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
138,457 |
|
|
$ |
179,874 |
|
Short-term
investments
|
|
|
284,932 |
|
|
|
281,055 |
|
Accounts
receivable, net of allowances of $3,522 and $2,558,
respectively
|
|
|
83,625 |
|
|
|
87,492 |
|
Deferred
tax assets
|
|
|
24,273 |
|
|
|
22,336 |
|
Prepaid
expenses and other current assets
|
|
|
13,560 |
|
|
|
12,498 |
|
Total
current assets
|
|
|
544,847 |
|
|
|
583,255 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
8,042 |
|
|
|
9,063 |
|
Goodwill
|
|
|
287,569 |
|
|
|
219,063 |
|
Other
intangible assets, net
|
|
|
68,808 |
|
|
|
35,529 |
|
Long-term
deferred tax assets
|
|
|
2,481 |
|
|
|
7,294 |
|
Other
assets
|
|
|
8,324 |
|
|
|
8,908 |
|
Total
assets
|
|
$ |
920,071 |
|
|
$ |
863,112 |
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
5,172 |
|
|
$ |
7,376 |
|
Accrued
liabilities
|
|
|
33,261 |
|
|
|
34,541 |
|
Accrued
compensation and related expenses
|
|
|
29,058 |
|
|
|
29,365 |
|
Income
taxes payable and deferred tax liability
|
|
|
12,956 |
|
|
|
— |
|
Accrued
facilities restructuring charges
|
|
|
20,567 |
|
|
|
19,529 |
|
Deferred
revenues
|
|
|
126,040 |
|
|
|
120,892 |
|
Total
current liabilities
|
|
|
227,054 |
|
|
|
211,703 |
|
|
|
|
|
|
|
|
|
|
Convertible
senior notes
|
|
|
201,000 |
|
|
|
221,000 |
|
Accrued
facilities restructuring charges, less current portion
|
|
|
35,973 |
|
|
|
44,939 |
|
Long-term
deferred revenues
|
|
|
6,033 |
|
|
|
8,847 |
|
Long-term
income taxes payable
|
|
|
12,180 |
|
|
|
20,668 |
|
Total
liabilities
|
|
|
482,240 |
|
|
|
507,157 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
89 |
|
|
|
87 |
|
Additional
paid-in capital
|
|
|
412,073 |
|
|
|
374,091 |
|
Accumulated
other comprehensive income (loss)
|
|
|
911 |
|
|
|
(3,741 |
) |
Retained
earnings (accumulated deficit)
|
|
|
24,758 |
|
|
|
(14,482 |
) |
Total
stockholders’ equity
|
|
|
437,831 |
|
|
|
355,955 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
920,071 |
|
|
$ |
863,112 |
|
See
accompanying notes to condensed consolidated financial statements.
INFORMATICA
CORPORATION
(In
thousands, except per share data)
(Unaudited)
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$ |
49,981 |
|
|
$ |
45,846 |
|
|
$ |
142,770 |
|
|
$ |
138,578 |
|
Service
|
|
|
73,413 |
|
|
|
67,971 |
|
|
|
207,026 |
|
|
|
192,709 |
|
Total
revenues
|
|
|
123,394 |
|
|
|
113,817 |
|
|
|
349,796 |
|
|
|
331,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
|
648 |
|
|
|
722 |
|
|
|
2,024 |
|
|
|
2,312 |
|
Service
|
|
|
18,759 |
|
|
|
20,404 |
|
|
|
55,605 |
|
|
|
61,569 |
|
Amortization
of acquired technology
|
|
|
2,081 |
|
|
|
1,283 |
|
|
|
5,497 |
|
|
|
2,854 |
|
Total
cost of revenues
|
|
|
21,488 |
|
|
|
22,409 |
|
|
|
63,126 |
|
|
|
66,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
101,906 |
|
|
|
91,408 |
|
|
|
286,670 |
|
|
|
264,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
19,978 |
|
|
|
18,263 |
|
|
|
57,089 |
|
|
|
54,484 |
|
Sales
and marketing
|
|
|
47,484 |
|
|
|
43,667 |
|
|
|
135,366 |
|
|
|
132,420 |
|
General
and administrative
|
|
|
8,845 |
|
|
|
9,412 |
|
|
|
30,646 |
|
|
|
26,927 |
|
Amortization
of intangible assets
|
|
|
2,754 |
|
|
|
1,502 |
|
|
|
7,239 |
|
|
|
2,857 |
|
Facilities
restructuring charges
|
|
|
557 |
|
|
|
896 |
|
|
|
1,961 |
|
|
|
2,764 |
|
Purchased
in-process research and development
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
390 |
|
Total
operating expenses
|
|
|
79,618 |
|
|
|
73,740 |
|
|
|
232,301 |
|
|
|
219,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
22,288 |
|
|
|
17,668 |
|
|
|
54,369 |
|
|
|
44,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,295 |
|
|
|
3,191 |
|
|
|
4,651 |
|
|
|
11,698 |
|
Interest
expense
|
|
|
(1,611 |
) |
|
|
(1,830 |
) |
|
|
(4,863 |
) |
|
|
(5,431 |
) |
Other
income, net
|
|
|
189 |
|
|
|
139 |
|
|
|
964 |
|
|
|
556 |
|
Income
before provision for income taxes
|
|
|
22,161 |
|
|
|
19,168 |
|
|
|
55,121 |
|
|
|
51,533 |
|
Provision
for income taxes
|
|
|
5,969 |
|
|
|
5,787 |
|
|
|
15,881 |
|
|
|
15,425 |
|
Net
income
|
|
$ |
16,192 |
|
|
$ |
13,381 |
|
|
$ |
39,240 |
|
|
$ |
36,108 |
|
Basic
net income per common share
|
|
$ |
0.18 |
|
|
$ |
0.15 |
|
|
$ |
0.45 |
|
|
$ |
0.41 |
|
Diluted
net income per common share
|
|
$ |
0.17 |
|
|
$ |
0.14 |
|
|
$ |
0.41 |
|
|
$ |
0.38 |
|
Shares
used in computing basic net income per common share
|
|
|
88,283 |
|
|
|
88,570 |
|
|
|
87,837 |
|
|
|
88,422 |
|
Shares
used in computing diluted net income per common share
|
|
|
103,516 |
|
|
|
103,740 |
|
|
|
102,507 |
|
|
|
103,735 |
|
See
accompanying notes to condensed consolidated financial statements.
INFORMATICA
CORPORATION
(In
thousands)
(Unaudited)
|
|
Nine
Months Ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Operating
activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
39,240 |
|
|
$ |
36,108 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,063 |
|
|
|
4,199 |
|
Allowance
for doubtful accounts
|
|
|
221 |
|
|
|
742 |
|
Gain
on early extinguishment of debt
|
|
|
(337 |
) |
|
|
— |
|
Share-based
payments
|
|
|
13,132 |
|
|
|
11,984 |
|
Deferred
income taxes
|
|
|
(3,421 |
) |
|
|
(5,637 |
) |
Tax
benefits from share-based payments
|
|
|
2,631 |
|
|
|
7,067 |
|
Excess
tax benefits from share-based payments
|
|
|
(2,812 |
) |
|
|
(5,237 |
) |
Amortization
of intangible assets and acquired technology
|
|
|
12,736 |
|
|
|
5,711 |
|
Non-cash
facilities restructuring charges
|
|
|
1,961 |
|
|
|
2,764 |
|
Other
non-cash items
|
|
|
(44 |
) |
|
|
636 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
7,425 |
|
|
|
16,143 |
|
Prepaid
expenses and other assets
|
|
|
(300 |
) |
|
|
(10,022 |
) |
Accounts
payable and other current liabilities
|
|
|
(20,085 |
) |
|
|
(7,363 |
) |
Income
taxes payable
|
|
|
5,709 |
|
|
|
2,788 |
|
Accrued
facilities restructuring charges
|
|
|
(9,766 |
) |
|
|
(9,222 |
) |
Deferred
revenues
|
|
|
(2,825 |
) |
|
|
1,460 |
|
Net
cash provided by operating activities
|
|
|
47,528 |
|
|
|
52,121 |
|
Investing
activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(2,037 |
) |
|
|
(3,162 |
) |
Purchases
of marketable securities and other investments
|
|
|
(306,577 |
) |
|
|
(201,302 |
) |
Purchase
of patent
|
|
|
(2,420 |
) |
|
|
— |
|
Maturities
of investments
|
|
|
284,495 |
|
|
|
254,935 |
|
Sales
of investments
|
|
|
18,097 |
|
|
|
54,351 |
|
Business
acquisitions, net of cash acquired
|
|
|
(86,024 |
) |
|
|
(79,844 |
) |
Transfer
from restricted cash
|
|
|
— |
|
|
|
12,016 |
|
Net
cash provided by (used in) investing activities
|
|
|
(94,466 |
) |
|
|
36,994 |
|
Financing
activities:
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock
|
|
|
28,832 |
|
|
|
26,089 |
|
Repurchases
and retirement of common stock
|
|
|
(9,021 |
) |
|
|
(37,260 |
) |
Repurchases
of convertible senior notes
|
|
|
(19,200 |
) |
|
|
— |
|
Excess
tax benefits from share-based payments
|
|
|
2,812 |
|
|
|
5,237 |
|
Net
cash provided by (used in) financing activities
|
|
|
3,423 |
|
|
|
(5,934 |
) |
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
|
2,098 |
|
|
|
(5,222 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
(41,417 |
) |
|
|
77,959 |
|
Cash
and cash equivalents at beginning of period
|
|
|
179,874 |
|
|
|
203,661 |
|
Cash
and cash equivalents at end of period
|
|
$ |
138,457 |
|
|
$ |
281,620 |
|
See
accompanying notes to condensed consolidated financial statements.
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis
of Presentation
The
accompanying condensed consolidated financial statements of Informatica
Corporation (“Informatica,” or the “Company”) have been prepared in conformity
with generally accepted accounting principles (“GAAP”) in the United States of
America. However, certain information and footnote disclosures normally included
in financial statements prepared in accordance with GAAP have been condensed, or
omitted, pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). In the opinion of management, the financial statements
include all adjustments necessary, which are of a normal and recurring nature
for the fair presentation of the results of the interim periods presented. All
of the amounts included in this Report related to the condensed consolidated
financial statements and notes thereto as of and for the three and nine months
ended September 30, 2009 and 2008 are unaudited. The interim results presented
are not necessarily indicative of results for any subsequent interim period, the
year ending December 31, 2009, or any future period.
The
preparation of the Company’s condensed consolidated financial statements in
conformity with GAAP requires management to make certain estimates, judgments,
and assumptions. The Company believes that the estimates, judgments, and
assumptions upon which it relies are reasonable based on information available
at the time that these estimates, judgments, and assumptions were made. These
estimates, judgments, and assumptions can affect the reported amounts of assets
and liabilities as of the date of the financial statements as well as the
reported amounts of revenues and expenses during the periods presented. To the
extent there are material differences between these estimates and actual
results, Informatica’s financial statements would be affected. In many cases,
the accounting treatment of a particular transaction is specifically dictated by
GAAP and does not require management’s judgment in its application. There are
also instances that management’s judgment in selecting an available alternative
would not produce a materially different result.
These
unaudited, condensed consolidated financial statements should be read in
conjunction with the Company’s audited consolidated financial statements and
notes thereto for the year ended December 31, 2008 included in the Company’s
Annual Report on Form 10-K filed with the SEC. The condensed consolidated
balance sheet as of December 31, 2008 has been derived from the audited
consolidated financial statements of the Company.
Informatica,
in accordance with Financial Accounting Standards Board (“FASB”) Subsequent Events (Accounting
Standards Codification (“ASC”) 855-10-50-1), has evaluated its subsequent events
through the date and time that the financial statements were issued on November
5, 2009.
Revenue
Recognition
The
Company derives its revenues from software license fees, maintenance fees, and
professional services, which consist of consulting and education services. The
Company recognizes revenue in accordance with FASB Software Revenue Recognition (ASC
985-605-25), FASB Revenue
Recognition for Construction-Type and Production-Type Contracts (ASC
605-35), and the
Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 (“SAB No.
104”), Revenue Recognition,
and other authoritative accounting literature.
Under ASC
985-605-25, revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, and collection
is probable.
Persuasive evidence of an
arrangement exists. The Company determines that persuasive evidence of an
arrangement exists when it has a written contract, signed by both the customer
and the Company, and written purchase authorization.
Delivery has occurred.
Software is considered delivered when title to the physical software
media passes to the customer or, in the case of electronic delivery, when the
customer has been provided with the access codes to download and operate the
software.
Fee is fixed or determinable.
The Company considers arrangements with extended payment terms not to be
fixed or determinable. If the license fee in an arrangement is not fixed or
determinable, revenue is recognized as payments become due. Revenue arrangements
with resellers and distributors require evidence of sell-through, that is,
persuasive evidence that the products have been sold to an identified end user.
The Company’s standard agreements do not contain product return
rights.
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Collection is probable. The
Company assesses first the credit-worthiness and collectibility at a country
level based on the country’s overall economic climate and general business risk.
Then, for the customers in the countries that are deemed credit-worthy, it
assesses credit and collectibility based on their payment history and credit
profile. When a customer is not deemed credit-worthy, revenue is recognized at
the time that payment is received.
The
Company also enters into Original Equipment Manufacturer (“OEM”) arrangements
that provide for license fees based on inclusion of technology and/or products
in the OEM’s products. These arrangements provide for fixed and irrevocable
royalty payments. The Company recognizes royalty payments as revenues based on
the royalty report that it receives from the OEMs. In the case of OEMs with
fixed royalty payments, revenue is recognized upon execution of the agreement,
delivery of the software, and when all other criteria for revenue recognition
have been met.
Multiple
contracts with a single counterparty executed within close proximity of each
other are evaluated to determine if the contracts should be combined and
accounted for as a single arrangement. The Company recognizes revenues net of
applicable sales taxes, financing charges absorbed by Informatica, and amounts
retained by our resellers and distributors, if any.
The
Company’s software license arrangements include the following multiple elements:
license fees from our core software products and/or product upgrades that are
not part of post-contract services, maintenance fees, consulting, and/or
education services. The Company uses the residual method to recognize license
revenue when the license arrangement includes elements to be delivered at a
future date and vendor-specific objective evidence (“VSOE”) of fair value exists
to allocate the fee to the undelivered elements of the arrangement. VSOE is
based on the price charged when an element is sold separately. If VSOE does not
exist for any undelivered software product element of the arrangement, all
revenue is deferred until all elements have been delivered, or VSOE is
established. If VSOE does not exist for any undelivered services elements of the
arrangement, all revenue is recognized ratably over the period that the services
are expected to be performed. If the software arrangement includes significant
modification or customization of the software, software license revenue is
recognized as the consulting services revenue is recognized.
The
Company recognizes maintenance revenues, which consist of fees for ongoing
support and product updates, ratably over the term of the contract, typically
one year.
Consulting
revenues are primarily related to implementation services and product
configurations performed on a time-and-materials basis and, occasionally, on a
fixed fee basis. Education services revenues are generated from classes offered
at both Company and customer locations. Revenues from consulting and education
services are recognized as the services are performed.
Deferred
revenues include deferred license, maintenance, consulting, and education
services revenues. For customers not deemed credit-worthy, the Company’s
practice is to net unpaid deferred revenue for that customer against the related
receivable balance.
Investments
Investments
are comprised of marketable securities, which consist primarily of commercial
paper, Federal agency and U.S. government notes and bonds, corporate bonds and
municipal securities with original maturities beyond 90 days. All marketable
securities are held in the Company’s name and managed by four major financial
institutions. The Company’s marketable securities are classified as
available-for-sale and are reported at fair value, with unrealized gains and
losses, net of tax, recorded in stockholders’ equity. Informatica has classified
its debt securities as available-for-sale since they would be available-for-sale
due to any changes in market conditions or needs for liquidity. Further, the
Company has classified all available-for-sale marketable securities, including
those with original maturity dates greater than one year, as short-term
investments.
Informatica
applies the provisions of Recognition and Presentation of
Other-Than-Temporary Impairments (ASC 320-10-35) to its debt securities
classified as available-for-sale and evaluates them for other-than-temporary
impairment based on the following three criteria: (i) Informatica has decided to
sell the debt security, (ii) it is more likely than not that the Company will be
required to sell the security before recovery of its amortized cost basis, and
(iii) the Company does not expect to recover the security’s entire amortized
cost basis from the present value of cash flows expected to be collected from
the debt security (“credit loss”). In determining the amount of credit loss, the
Company compares its best estimate of the present value of the cash flows
expected to be collected from the security with the amortized cost basis of the
security. Any shortfall resulted from this comparison (credit loss) is reflected
as other income or expense in the condensed consolidated statement of income.
Further, Informatica also considers other factors such as
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
industry
analysts’ reports and credit ratings, in addition to the above three criteria to
determine the other-than-temporary impairment status of its
investments.
If
Informatica intends to sell an impaired debt security and is more likely than
not that it will be required to sell the security before recovery of its
amortized cost basis less any current-period credit loss, the impairment is
considered other-than-temporary and should be recognized in current earnings in
an amount equal to the entire difference between fair value and amortized
cost.
If a
credit loss exists, but Informatica does not intend to sell the impaired debt
security and is not more likely than not to be required to sell before recovery,
the impairment is other-than-temporary and should be separated into (i) the
estimated amount relating to credit loss and (ii) the
amount relating to all other factors. Only the estimated credit loss amount is
recognized currently in earnings, with the remainder of the loss amount
recognized in other comprehensive income.
Realized
gains or losses and other-than-temporary impairments, if any, on
available-for-sale securities will be reported in other income or expense as
incurred. The Company recognizes realized gains and losses upon sales of
investment and reclassifies unrealized gains and losses out of accumulated other
comprehensive income into earnings using the specific identification
method.
Fair
Value Measurement of Financial Assets and Liabilities
FASB
Fair Value Measurements and
Disclosures (ASC 820-10-35) establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair value as
follows:
|
●
|
|
Level 1. Observable
inputs such as quoted prices in active
markets;
|
|
|
|
Level 2. Inputs, other
than the quoted prices in active markets, that are observable either
directly or indirectly; and
|
|
|
|
Level 3. Unobservable
inputs in which there is little or no market data, which require the
reporting entity to develop its own
assumptions.
|
Further,
FASB Fair Value Measurements
and Disclosures (ASC 820-10-35) allows the Company to measure the fair
value of its financial assets and liabilities based on one or more of the three
following valuation techniques:
|
|
Market approach. Prices
and other relevant information generated by market transactions involving
identical or comparable assets or
liabilities;
|
|
|
|
Cost approach. Amount
that would be required to replace the service capacity of an asset
(replacement cost); and
|
|
|
Income approach.
Techniques to convert future amounts to a single present amount based on
market expectations (including present value techniques, option-pricing,
and excess earnings models).
|
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
following table summarizes the fair value measurement classification of
Informatica as of September 30, 2009 (in thousands):
|
|
Total
|
|
|
Quoted
Prices
in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds (1)
|
|
$ |
26,613 |
|
|
$ |
26,613 |
|
|
$ |
— |
|
|
$ |
— |
|
Marketable
securities (2)
|
|
|
290,460 |
|
|
|
— |
|
|
|
290,460 |
|
|
|
— |
|
Total
money market funds and marketable securities
|
|
|
317,073 |
|
|
|
26,613 |
|
|
|
290,460 |
|
|
|
— |
|
Investment
in equity interest (3)
|
|
|
3,000 |
|
|
|
— |
|
|
|
— |
|
|
|
3,000 |
|
Foreign
currency derivatives (4)
|
|
|
126 |
|
|
|
— |
|
|
|
126 |
|
|
|
— |
|
Total
|
|
$ |
320,199 |
|
|
$ |
26,613 |
|
|
$ |
290,586 |
|
|
$ |
3,000 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
senior notes
|
|
$ |
251,853 |
|
|
$ |
251,853 |
|
|
$ |
— |
|
|
$ |
— |
|
Total
|
|
$ |
251,853 |
|
|
$ |
251,853 |
|
|
$ |
— |
|
|
$ |
— |
|
The
following table summarizes the fair value measurement classification of
Informatica as of December 31, 2008 (in thousands):
|
|
Total
|
|
|
Quoted
Prices
in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds (1)
|
|
$ |
25,542 |
|
|
$ |
25,542 |
|
|
$ |
— |
|
|
$ |
— |
|
Marketable
securities (2)
|
|
|
322,796 |
|
|
|
— |
|
|
|
322,796 |
|
|
|
— |
|
Total
money market funds and marketable securities
|
|
|
348,338 |
|
|
|
25,542 |
|
|
|
322,796 |
|
|
|
— |
|
Investment
in equity interest (3)
|
|
|
3,000 |
|
|
|
— |
|
|
|
— |
|
|
|
3,000 |
|
Foreign
currency derivatives (4)
|
|
|
155 |
|
|
|
— |
|
|
|
155 |
|
|
|
— |
|
Total
|
|
$ |
351,493 |
|
|
$ |
25,542 |
|
|
$ |
322,951 |
|
|
$ |
3,000 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
senior notes
|
|
$ |
204,259 |
|
|
$ |
204,259 |
|
|
$ |
— |
|
|
$ |
— |
|
Total
|
|
$ |
204,259 |
|
|
$ |
204,259 |
|
|
$ |
— |
|
|
$ |
— |
|
____________
|
(1)
|
Included
in cash and cash equivalents on the condensed consolidated balance
sheets.
|
|
|
|
|
(2)
|
Included
in either cash and cash equivalents or short-term investments on the
condensed consolidated balance sheets.
|
|
|
|
|
(3)
|
Included
in other non-current assets on the condensed consolidated balance
sheets.
|
|
|
|
|
(4)
|
Included
in prepaid expenses and other current assets on the condensed consolidated
balance sheets.
|
|
|
|
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Marketable
Securities and Convertible Senior Notes
Informatica
uses a market approach
for determining the fair value of all its Level 1 and Level 2 marketable
securities financial assets and Convertible Senior Notes
liabilities.
Foreign
Currency Derivatives and Hedging Instruments
Informatica
uses the income approach
to value the derivatives, using observable Level 2 market
expectations at measurement date and standard valuation techniques to convert
future amounts to a single discounted present amount, assuming that participants
are motivated but not compelled to transact. Level 2 inputs are
limited to quoted prices that are observable for the asset and liabilities,
which include interest rates and credit risk. The Company has used mid-market
pricing as a practical expedient for fair value measurements. Key inputs for
currency derivatives are the spot rates, forward rates, interest rates, and
credit derivative markets. The spot rate for each currency is the same spot rate
used for all balance sheet translations at the measurement date and is sourced
from the Federal Reserve Bulletin. The following values are interpolated from
commonly quoted intervals available from Bloomberg: forward points and the
London Interbank Offered Rate (LIBOR) used to discount and fair value assets and
liabilities. One-year credit default swap spreads identified per counterparty at
month end in Bloomberg are used to discount derivative assets for counterparty
non-performance risk, all of which have terms of less than 12 months. The
Company discounts derivative liabilities to reflect the Company’s own potential
non-performance risk to lenders and has used the spread over LIBOR on its most
recent corporate borrowing rate.
The
counterparty associated with Informatica’s foreign currency forward contracts is
a large credit worthy financial institution- and the derivatives transacted with
this entity are relatively short in duration; therefore, the Company does not
consider counterparty concentration and non-performance material risks at this
time. Both the Company and the counterparty are expected to perform under the
contractual terms of the instruments.
See Note
5. Other Comprehensive
Income, Note 6. Derivative Financial
Instruments, and Note 12. Commitments and
Contingencies, of Notes to Condensed Consolidated Financial Statements
for a further discussion.
Investment
in Equity Securities
The
Company also held a $3 million investment in the preferred stock of a
privately-held company at September 30, 2009, which was classified as Level 3 for value
measurement purposes. In determining the fair value of this investment, the
Company uses the cash flow of the entity against its own cash flow assumptions
at the time that investment was made for the determination of the fair value of
this investment.
Note
2. Cash, Cash Equivalents, and Short-Term Investments
The
Company’s marketable securities are classified as available-for-sale as of the
balance sheet date and are reported at fair value with unrealized gains and
losses reported as a separate component of accumulated other comprehensive
income in the stockholders’ equity, net of tax. Realized gains and losses and
other-than-temporary impairments, if any, on available-for-sale securities are
reported in other income or expense as incurred.
For the
three and nine months ended September 30, 2009 and 2008, the realized gains
recognized were not material. The realized gains are included in other income of
the condensed consolidated statements of income for the respective periods. The
cost of securities sold was determined based on the specific identification
method.
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
following is a summary of the Company’s investments as of September 30, 2009 and
December 31, 2008 (in thousands):
|
|
September 30, 2009
|
|
|
|
Amortized
Cost Basis
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Cash
|
|
$ |
106,316 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
106,316 |
|
Cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
|
26,613 |
|
|
|
— |
|
|
|
— |
|
|
|
26,613 |
|
Municipal
notes and bonds
|
|
|
5,535 |
|
|
|
— |
|
|
|
(7 |
) |
|
|
5,528 |
|
Total
cash equivalents
|
|
|
32,148 |
|
|
|
— |
|
|
|
(7 |
) |
|
|
32,141 |
|
Total
cash and cash equivalents
|
|
|
138,464 |
|
|
|
— |
|
|
|
(7 |
) |
|
|
138,457 |
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper
|
|
|
12,960 |
|
|
|
— |
|
|
|
— |
|
|
|
12,960 |
|
Certificates
of deposits
|
|
|
5,280 |
|
|
|
— |
|
|
|
— |
|
|
|
5,280 |
|
Corporate
notes and bonds
|
|
|
69,386 |
|
|
|
552 |
|
|
|
(11 |
) |
|
|
69,927 |
|
Federal
agency notes and bonds
|
|
|
121,105 |
|
|
|
561 |
|
|
|
(3 |
) |
|
|
121,663 |
|
U.S.
government notes and bonds
|
|
|
25,547 |
|
|
|
73 |
|
|
|
— |
|
|
|
25,620 |
|
Municipal
notes and bonds
|
|
|
49,324 |
|
|
|
167 |
|
|
|
(9 |
) |
|
|
49,482 |
|
Total
short-term investments *
|
|
|
283,602 |
|
|
|
1,353 |
|
|
|
(23 |
) |
|
|
284,932 |
|
Total
cash, cash equivalents, and short-term investments **
|
|
$ |
422,066 |
|
|
$ |
1,353 |
|
|
$ |
(30 |
) |
|
$ |
423,389 |
|
___________
*
|
|
There
are a total of 16 investments for a total amortized cost basis of $33
million which are in the gross unrealized loss position at September 30,
2009.
|
**
|
|
Total
estimated fair value above included $317 million comprised of cash
equivalents and short-term investments at September 30,
2009.
|
In
determining whether a credit loss exists, FASB Investments – Debt and Equity
Securities (ASC 320-10-65) requires that an entity compares its best
estimate of the present value of the cash flows expected to be collected from
the security with the amortized cost basis of the security. Any shortfall in
that comparison represents a credit loss. Informatica has determined that no
credit loss has
occurred with respect to its investments in debt securities for the three months
ended September 30, 2009 since it neither intended to sell nor it was more
likely than not that it would have been required to sell such
securities.
|
|
December 31, 2008
|
|
|
|
Amortized
Cost Basis
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Cash
|
|
$ |
112,591 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
112,591 |
|
Cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
|
25,542 |
|
|
|
— |
|
|
|
— |
|
|
|
25,542 |
|
Commercial
paper
|
|
|
9,741 |
|
|
|
— |
|
|
|
— |
|
|
|
9,741 |
|
Federal
agency notes and bonds
|
|
|
17,996 |
|
|
|
4 |
|
|
|
— |
|
|
|
18,000 |
|
U.S.
government notes and bonds
|
|
|
14,000 |
|
|
|
— |
|
|
|
— |
|
|
|
14,000 |
|
Total
cash equivalents
|
|
|
67,279 |
|
|
|
4 |
|
|
|
— |
|
|
|
67,283 |
|
Total
cash and cash equivalents
|
|
|
179,870 |
|
|
|
4 |
|
|
|
— |
|
|
|
179,874 |
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper
|
|
|
43,125 |
|
|
|
— |
|
|
|
— |
|
|
|
43,125 |
|
Corporate
notes and bonds
|
|
|
38,569 |
|
|
|
174 |
|
|
|
(18 |
) |
|
|
38,725 |
|
Federal
agency notes and bonds
|
|
|
133,220 |
|
|
|
1,015 |
|
|
|
(1 |
) |
|
|
134,234 |
|
U.S.
government notes and bonds
|
|
|
61,569 |
|
|
|
266 |
|
|
|
— |
|
|
|
61,835 |
|
Municipal
notes and bonds
|
|
|
3,134 |
|
|
|
3 |
|
|
|
(1 |
) |
|
|
3,136 |
|
Total
short-term investments *
|
|
|
279,617 |
|
|
|
1,458 |
|
|
|
(20 |
) |
|
|
281,055 |
|
Total
cash, cash equivalents, and short-term investments **
|
|
$ |
459,487 |
|
|
$ |
1,462 |
|
|
$ |
(20 |
) |
|
$ |
460,929 |
|
___________
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
*
|
|
There
are a total of 9 investments for a total amortized cost basis of $20
million which are in the gross unrealized loss position at December 31,
2008.
|
**
|
|
Total
estimated fair value above included $348 million comprised of cash
equivalents and short-term investments at December 31,
2008.
|
The
following table summarizes the fair value and gross unrealized losses related to
available-for-sale securities, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position, at September 30, 2009 (in thousands):
|
|
Less Than 12 Months
|
|
|
More Than 12 Months
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Gross
Unrealized
Losses
|
|
Corporate
notes and bonds
|
|
$ |
7,985 |
|
|
$ |
(11 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
7,985 |
|
|
$ |
(11 |
) |
Federal
agency notes and bonds
|
|
|
10,997 |
|
|
|
(3 |
) |
|
|
— |
|
|
|
— |
|
|
|
10,997 |
|
|
|
(3 |
) |
Municipal
notes and bonds
|
|
|
13,189 |
|
|
|
(16 |
) |
|
|
— |
|
|
|
— |
|
|
|
13,189 |
|
|
|
(16 |
) |
Total
|
|
$ |
32,171 |
|
|
$ |
(30 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
32,171 |
|
|
$ |
(30 |
) |
Informatica
uses a market approach
for determining the fair value of all its marketable securities
and money market funds, which it has classified as Level 2 and Level 1, respectively. The
declines in value of these investments are primarily related to changes in
interest rates and are considered to be temporary in nature.
The
following table summarizes the cost and estimated fair value of the Company’s
cash equivalents and short-term investments by contractual maturity at September
30, 2009 (in thousands):
|
|
Cost
|
|
|
Fair Value
|
|
Due
within one year
|
|
$ |
247,715 |
|
|
$ |
248,506 |
|
Due
in one year to two years
|
|
|
68,035 |
|
|
|
68,567 |
|
Total
|
|
$ |
315,750 |
|
|
$ |
317,073 |
|
Note 3. Goodwill and Intangible
Assets
The
carrying amounts of intangible assets other than goodwill as of September 30,
2009 and December 31, 2008 are as follows (in thousands):
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Amount
|
|
Developed
and core technology
|
|
$ |
55,366 |
|
|
$ |
(19,627 |
) |
|
$ |
35,739 |
|
|
$ |
32,583 |
|
|
$ |
(14,216 |
) |
|
$ |
18,367 |
|
Customer
relationships
|
|
|
31,450 |
|
|
|
(11,934 |
) |
|
|
19,516 |
|
|
|
20,257 |
|
|
|
(5,870 |
) |
|
|
14,387 |
|
Vendor
relationships
|
|
|
7,827 |
|
|
|
(576 |
) |
|
|
7,251 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
names
|
|
|
2,492 |
|
|
|
(695 |
) |
|
|
1,797 |
|
|
|
700 |
|
|
|
(408 |
) |
|
|
292 |
|
Covenants
not to compete
|
|
|
2,000 |
|
|
|
(1,117 |
) |
|
|
883 |
|
|
|
2,000 |
|
|
|
(817 |
) |
|
|
1,183 |
|
Patents
|
|
|
3,720 |
|
|
|
(98 |
) |
|
|
3,622 |
|
|
|
1,300 |
|
|
|
— |
|
|
|
1,300 |
|
|
|
$ |
102,855 |
|
|
$ |
(34,047 |
) |
|
$ |
68,808 |
|
|
$ |
56,840 |
|
|
$ |
(21,311 |
) |
|
$ |
35,529 |
|
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amortization
expense of intangible assets was approximately $4.8 million and $2.8 million for
the three months ended September 30, 2009 and 2008, respectively, and $12.7
million and $5.7 million for the nine months ended September 30, 2009 and 2008,
respectively. The weighted-average amortization period of the Company’s
developed and core technology, customer relationships, vendor relationships,
trade names, covenants not to compete, and patents are five years, five years,
five years, five years, five years, and ten years, respectively.
As of
September 30, 2009, the amortization expense related to identifiable intangible
assets in future periods is expected to be as follows (in
thousands):
|
|
Acquired
Technology
|
|
|
Other
Intangible
Assets
|
|
|
Total
Intangible
Assets
|
|
Remaining
2009
|
|
$ |
2,451 |
|
|
$ |
2,807 |
|
|
$ |
5,258 |
|
2010
|
|
|
8,630 |
|
|
|
9,591 |
|
|
|
18,221 |
|
2011
|
|
|
8,423 |
|
|
|
7,691 |
|
|
|
16,114 |
|
2012
|
|
|
7,747 |
|
|
|
5,547 |
|
|
|
13,294 |
|
2013
|
|
|
6,858 |
|
|
|
3,835 |
|
|
|
10,693 |
|
Thereafter
|
|
|
1,815 |
|
|
|
3,413 |
|
|
|
5,228 |
|
Total
expected amortization expense
|
|
$ |
35,924 |
|
|
$ |
32,884 |
|
|
$ |
68,808 |
|
The
increase of $22.8 million in the gross carrying amount of developed and core
technology was due to the intangibles of $10.7 million, $1.0 million, and $11.0
million acquired from Applimation, AddressDoctor, and Agent Logic, respectively.
The increase of $11.2 million in the gross carrying amount of customer
relationships was primarily due to the intangibles of $8.3 million, $1.3
million, and $1.4 million acquired from Applimation, AddressDoctor, and Agent
Logic, respectively. The increase of $7.8 million of vendor relationships was
primarily attributable to the acquisition of AddressDoctor. See Note 15. Acquisitions, of Notes to Condensed
Consolidated Financial Statements for a further discussion. In addition, $3.3
million of developed and core technology, $5.0 million of customer
relationships, $7.2 million of vendor relationships, and $0.2 million of trade
names at September 30, 2009, related to the Identity Systems, Inc., PowerData,
and AddressDoctor acquisitions, were recorded in European local currencies, and,
therefore, the gross carrying amount and accumulated amortization are subject to
periodic translation adjustments.
The
customer relationships are intangible assets that Informatica has acquired
through several past acquisitions and consist of renewable 12-month revenue
maintenance programs. Informatica’s accounting policy is to expense the costs
incurred to renew or extend the terms of these revenue maintenance
programs.
The
change in the carrying amount of goodwill for the nine months ended September
30, 2009 is as follows (in thousands):
|
|
September
30,
2009
|
|
Beginning
balance as of December 31, 2008
|
|
$ |
219,063 |
|
Goodwill
recorded in acquiring Applimation
|
|
|
19,740 |
|
Goodwill
recorded in acquiring AddressDoctor
|
|
|
23,019 |
|
Goodwill
recorded in acquiring Agent Logic
|
|
|
24,403 |
|
Subsequent
goodwill adjustments:
|
|
|
|
|
Earn-out for
PowerData
|
|
|
796 |
|
Tax adjustments for
Applimation
|
|
|
(1,402 |
) |
Local currency translation
adjustments
|
|
|
1,955 |
|
Other
adjustments
|
|
|
(5 |
) |
Ending
balance as of September 30, 2009
|
|
$ |
287,569 |
|
The
Company is obligated to pay certain variable and deferred earn-out payments
based on the percentage of license revenues recognized subsequent to the
acquisition of PowerData. The Company recorded $796,000 earn-out as additional
goodwill during the three months ended June 30, 2009. The Company considers
these earn-outs as additional contingent consideration and will record them in
goodwill as they occur.
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4. Convertible Senior
Notes
On March
8, 2006, the Company issued and sold Convertible Senior Notes (“Notes”) with an
aggregate principal amount of $230 million due 2026. The Company pays interest
at 3.0% per annum to holders of the Notes, payable semi-annually on March 15 and
September 15 of each year, commencing September 15, 2006. Each $1,000 principal
amount of Notes is initially convertible, at the option of the holders, into 50
shares of common stock prior to the earlier of the maturity date (March 15,
2026) or the redemption or repurchase of the Notes. The initial conversion price
represented a premium of 29.28% relative to the last reported sale price of
common stock of the Company on the NASDAQ Stock Market (Global Select) of $15.47
on March 7, 2006. The conversion rate is subject to certain adjustments. The
conversion rate initially represents a conversion price of $20.00 per share.
After March 15, 2011, the Company may from time to time redeem the Notes, in
whole or in part, for cash, at a redemption price equal to the full principal
amount of the Notes, plus any accrued and unpaid interest. Holders of the Notes
may require the Company to repurchase all or a portion of their Notes at a
purchase price in cash equal to the full outstanding principle amount of the
Notes plus any accrued and unpaid interest on March 15, 2011, March 15, 2016,
and March 15, 2021, or upon the occurrence of certain events including a change
in control.
Pursuant
to a Purchase Agreement (the “Purchase Agreement”), the Notes were sold for cash
consideration in a private placement to an initial purchaser, UBS Securities
LLC, an “accredited investor,” within the meaning of Rule 501 under the
Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the
private placement exemption afforded by Section 4(2) of the Securities Act. The
initial purchaser reoffered and resold the Notes to “qualified institutional
buyers” under Rule 144A of the Securities Act without being registered under the
Securities Act, in reliance on applicable exemptions from the registration
requirements of the Securities Act. In connection with the issuance of the
Notes, the Company filed a shelf registration statement with the SEC for the
resale of the Notes and the common stock issuable upon conversion of the Notes.
The Company also agreed to periodically update the shelf registration and to
keep it effective until the earlier of the date the Notes or the common stock
issuable upon conversion of the Notes is eligible to be sold to the public
pursuant to Rule 144(k) of the Securities Act or the date on which there are no
outstanding registrable securities. The Company has evaluated the terms of the
call feature, redemption feature, and the conversion feature under applicable
accounting literature, including FASB Derivatives and
Hedging (ASC 815) and FASB Debt With Conversion and Other
Options (ASC 470-20) and concluded that none
of these features should be separately accounted for as
derivatives.
In
connection with the issuance of the Notes, the Company incurred $6.2 million of
issuance costs, which primarily consisted of investment banker fees and legal
and other professional fees. These costs are classified within Other Assets and
are being amortized as a component of interest expense using the effective
interest method over the life of the Notes from issuance through March 15, 2026.
If the holders require repurchase of some or all of the Notes on the first
repurchase date, which is March 15, 2011, the Company would accelerate
amortization of the pro rata share of the unamortized balance of the issuance
costs on such date. Also if the Company repurchases some of the outstanding
balance of the Notes, it would accelerate amortization of the pro rata share of
the unamortized balance of the issuance costs at the time of such repurchases.
If the holders require conversion of some or all of the Notes when the
conversion requirements are met, the Company would accelerate amortization of
the pro rata share of the unamortized balance of the issuance cost to additional
paid-in capital on such date. Amortization expenses related to the issuance
costs were $68,000 and $78,000 for the three-month periods ended September 30,
2009 and 2008, respectively, and $671,000 and $234,000 for the nine-month
periods ended September 30, 2009 and 2008, respectively. Interest expenses on
the Notes were $1.5 million and $1.7 million for the three-month periods ended
September 30, 2009 and 2008, respectively. Interest expenses on the Notes were
$4.6 and $5.2 million for the nine-month periods ended September 30, 2009 and
2008, respectively. Interest payments of $6.3 million and $6.9 million were made
in the nine-month periods ended September 30, 2009 and 2008,
respectively.
In
October 2008, Informatica’s Board of Directors authorized the repurchase of a
portion of its outstanding Notes due in 2026 in privately negotiated
transactions with the holders of the Notes. During the three-month period ended
December 31, 2008, Informatica repurchased $9.0 million of its outstanding
Notes at a discounted cost of $7.8 million. As a result, $1.0 million,
net of $0.2 million of prorated deferred expenses, is reflected in other income
for the three months ended December 31, 2008. During the three-month period
ended March 31, 2009, Informatica repurchased an additional $20.0 million of its
outstanding Notes, net of $0.3 million gain due to early retirement of the Notes
and $0.5 million due to recapture of prorated deferred expenses, at a discounted
cost of $19.2 million. There was no repurchase of the Notes during the second
and third quarters of 2009.
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
following table sets forth the ending balance of the Convertible Senior Notes as
of September 30, 2009 and December 31, 2008 resulting from the repurchase
activities in the respective periods (in thousands):
Balance
at January 1, 2008
|
|
$ |
230,000 |
|
Face
amount of Notes repurchased during the fourth quarter of
2008
|
|
|
(9,000 |
) |
Balance
at December 31, 2008
|
|
|
221,000 |
|
Face
amount of Notes repurchased during the first three quarters of
2009
|
|
|
(20,000 |
) |
Balance
at September 30, 2009
|
|
$ |
201,000 |
|
The
Company has classified its convertible debt as Level I, according to FASB
Fair Value Measurements and
Disclosures (ASC 820-10-35) since it has quoted prices available in
active markets for identical assets. The estimated fair value of the Company’s
Convertible Senior Notes as of September 30, 2009, based on the closing price as
of September 30, 2009 (the last trading day of the respective period) at the
Over-the-Counter market, was $251.9 million.
Note 5. Other Comprehensive
Income
Other
comprehensive income refers to gains and losses that, under GAAP, are recorded
as an element of stockholders’ equity and are excluded from net income, net of
tax. Other comprehensive income activity consisted of the following items (in
thousands):
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
income, as reported
|
|
$ |
16,192 |
|
|
$ |
13,381 |
|
|
$ |
39,240 |
|
|
$ |
36,108 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on investments (1)
|
|
|
111 |
|
|
|
(293 |
) |
|
|
(72 |
) |
|
|
(335 |
) |
Cumulative
translation adjustments (2)
|
|
|
1,934 |
|
|
|
(7,266 |
) |
|
|
4,765 |
|
|
|
(5,978 |
) |
Derivative
gain (loss) (3)
|
|
|
17 |
|
|
|
— |
|
|
|
(41 |
) |
|
|
— |
|
Comprehensive
income
|
|
$ |
18,254 |
|
|
$ |
5,822 |
|
|
$ |
43,892 |
|
|
$ |
29,795 |
|
_________
|
(1)
|
The
tax effects on unrealized gain (loss) on investments were $(71,000) and
$187,000 for the three-month periods ended September 30, 2009 and 2008,
respectively, and $46,000 and $214,000 for the nine-month periods ended
September 30, 2009 and 2008, respectively.
|
|
|
|
|
(2)
|
The
tax effects on cumulative translation adjustments were $(73,000) and
$182,000 for the three-month periods ended September 30, 2009 and 2008,
respectively, and $(106,000) and $29,000 for the nine-month periods ended
September 30, 2009 and 2008, respectively.
|
|
|
|
|
(3)
|
The
tax effects on cash flow hedging gain (loss) for the three-month and
nine-month periods ended September 30, 2009 were $11,000 and $(26,000),
respectively.
|
Ending
balance of accumulated other comprehensive income (loss) as of September 30,
2009 and December 31, 2008 consisted of the following (in
thousands):
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
Net
unrealized gain on available-for-sale investments
|
|
$ |
807 |
|
|
$ |
879 |
|
Cumulative
translation adjustments
|
|
|
94 |
|
|
|
(4,671 |
) |
Derivatives
gain
|
|
|
10 |
|
|
|
51 |
|
Accumulated
other comprehensive income (loss)
|
|
$ |
911 |
|
|
$ |
(3,741 |
) |
Informatica
did not have any other-than-temporary gain or loss reflected in accumulated
other comprehensive income (loss) as of September 30, 2009 and December 31,
2008.
Informatica
determines the basis of the cost of a security sold and the amount reclassified
out of other comprehensive income into statement of income based on specific
identification.
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
following table reflects the change in accumulated investment unrealized gain
(loss) included in other comprehensive income for the nine months ended
September 30, 2009 (in thousands):
|
|
September
30,
2009
|
|
Net
unrealized investment gain balance, net of tax effects at December 31,
2008
|
|
$ |
879 |
|
Investment
unrealized loss, net of tax effects
|
|
|
(72 |
) |
Net
unrealized investment gain balance, net of tax effects at September 30,
2009
|
|
$ |
807 |
|
The
following table reflects the change in accumulated derivatives gain (loss)
included in other comprehensive income for the nine months ended September 30,
2009 (in thousands):
|
|
September
30,
2009
|
|
Net
unrealized derivatives gain balance, net of tax effects at December 31,
2008
|
|
$ |
50 |
|
Reclassified
to the statements of income, net of tax effects
|
|
|
108 |
|
Derivatives
loss for hedging transactions, net of tax effects
|
|
|
(148 |
) |
Net
unrealized derivatives gain balance, net of tax effects at September 30,
2009
|
|
$ |
10 |
|
See Note
1. Summary of Significant
Accounting Policies, Note 6. Derivative Financial
Instruments, and Note 12. Commitments and
Contingencies, of Notes to Condensed Consolidated Financial Statements
for a further discussion.
Note 6.
Derivative Financial Instruments
The
functional currency of Informatica’s foreign subsidiaries is their local
currencies, except for Informatica Cayman Ltd., which is in euros. The Company
translates all assets and liabilities of its foreign subsidiaries into
U.S. dollars at current exchange rates as of the applicable balance sheet
date. Revenues and expenses are translated at the average exchange rate
prevailing during the period, and the gains and losses resulting from the
translation of the foreign subsidiaries’ financial statements are reported in
accumulated other comprehensive income (loss), as a separate component of
stockholders’ equity. Net gains and losses resulting from foreign exchange
transactions are included in other income or expense, net in the condensed
consolidated statements of income.
Informatica’s
results of operations and cash flows are subject to fluctuations due to changes
in foreign currency exchange rates, particularly changes in the Indian rupee,
Israeli shekel, euro,
British pound sterling, Canadian dollar, Japanese yen, Brazilian real, and
Australian dollar. In the fourth quarter of 2008, the Company initiated certain
cash flow hedge programs in an attempt to reduce the impact of certain foreign
currency fluctuations. The purpose of these programs is to reduce the volatility
of identified cash flow and expenses caused by movement in certain foreign
currency exchange rates, in particular, the Indian rupee and Israeli
shekel.Informatica
is currently using foreign exchange forward contracts to hedge certain
non-functional currency anticipated expenses which result in intercompany
transactions between Informatica U.S. and its two subsidiaries in India and
Israel. Exposures resulting from fluctuations in the foreign currency exchange
rates applicable to these foreign denominated expenses are covered through the
Company’s cash flow hedge programs. The Company releases the amounts accumulated
in other comprehensive income into income when the anticipated expenses are
incurred.
Informatica
has forecasted the amount of its anticipated foreign currency expenses based on
its historical performance and its 2009 financial plan. As of September 30,
2009, these foreign exchange contracts, carried at fair value, have a maturity
of less than two months. The Company enters into approximately two forward
exchange contracts ranging between $352,000 and $641,000 per month. The Company
closes out approximately two foreign exchange contracts per month when the
foreign currency denominated expenses are paid and any gain or loss is offset
against income.
Informatica
and its subsidiaries do not enter into derivative contracts for speculative
purposes.
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of
September 30, 2009, a derivative gain of $10,000 was included in accumulated
other comprehensive income, net of applicable taxes. The Company expects to
reflect this amount in its condensed consolidated statements of income during
the remaining duration of its foreign exchange forward contracts that expire on
November 16, 2009.
Informatica
evaluates the effectiveness of its hedge programs using statistical analysis at
the inception of the hedge prospectively as well as retrospectively. Informatica
excludes the time value of derivative instruments for hedge accounting
purposes.
The
effect of derivative instruments designated as cash flow hedges on the
accumulated other comprehensive income and condensed consolidated statements of
income for the three and nine months ended September 30, 2009 is as follows (in
thousands):
|
|
Three
Months Ended September 30, 2009
|
|
|
Nine Months Ended September 30, 2009
|
|
|
|
(Gain)
Loss Recognized
(1)
|
|
|
(Gain)
Loss
Reclassified
(2)
|
|
|
Gain
Recognized
(3)
|
|
|
Loss
Recognized
(1)
|
|
|
Loss
Reclassified
(2)
|
|
|
Gain
Recognized
(3)
|
|
Indian
rupee
|
|
$ |
4 |
|
|
$ |
(5 |
) |
|
$ |
32 |
|
|
$ |
109 |
|
|
$ |
61 |
|
|
$ |
210 |
|
Israeli
shekel
|
|
|
(35 |
) |
|
|
2 |
|
|
|
3 |
|
|
|
133 |
|
|
|
115 |
|
|
|
17 |
|
Total
|
|
$ |
(31 |
) |
|
$ |
(3 |
) |
|
$ |
35 |
|
|
$ |
242 |
|
|
$ |
176 |
|
|
$ |
227 |
|
|
(1)
|
Amount
of gain and loss recognized in accumulated other comprehensive income
(effective portion).
|
|
|
|
|
(2)
|
Amount
of gain and loss reclassified from accumulated other comprehensive income
into the operating expenses of condensed consolidated statements of income
(effective portion).
|
|
(3)
|
Amount
of gain recognized in income on derivative for the amount excluded from
effectiveness testing located in operating expenses (mostly impacted the
research and development expenses) of condensed consolidated statements of
income. The Company did not have any ineffective portion of the derivative
recorded in condensed consolidated statements of
income.
|
See Note
1. Summary of Significant Accounting
Policies, Note 5. Other
Comprehensive Income, and Note 12. Commitments and
Contingencies, of Notes to Condensed Consolidated Financial Statements
for a further discussion.
The
following tables reflect the amounts of derivative assets for designated and not
designated hedging instruments at September 30, 2009 and the gain recognized in
other income, net for non designated foreign currency forward contracts for the
three and nine months ended September 30, 2009 (in thousands):
Derivatives
Designated as Hedging Instruments under SFAS No. 133:
|
|
Derivative
Assets
at
September
30,
2009 (1)
|
|
Indian
rupee
|
|
$ |
56 |
|
Israeli
shekel
|
|
|
8 |
|
Total
|
|
$ |
64 |
|
Derivatives
Not Designated as Hedging Instruments:
|
|
Derivative
Assets
at
September
30,
2009 (1)
|
|
Indian
rupee
|
|
$ |
54 |
|
Israeli
shekel
|
|
|
8 |
|
Total
|
|
$ |
62 |
|
|
(1)
|
Included
in prepaid expenses and other current assets on the condensed consolidated
balance sheets.
|
There was
no derivative liabilities for designated and not designated hedging instruments
at September 30, 2009.
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gain
Recognized in Other income, Net for Derivatives Not Designated as Hedging
Instruments:
|
|
Three
Months
Ended
September
30,
2009
|
|
|
Nine
Months
Ended
September
30,
2009
|
|
Indian
rupee
|
|
$ |
19 |
|
|
$ |
73 |
|
Israeli
shekel
|
|
|
14 |
|
|
|
116 |
|
Total
|
|
$ |
33 |
|
|
$ |
189 |
|
Note 7. Stock Repurchases and
Retirement of Convertible
Senior Notes
The
purpose of Informatica’s stock repurchase program is, among other things, to
help offset the dilution caused by the issuance of stock under its employee
stock option and employee stock purchase plans. The number of shares acquired
and the timing of the repurchases are based on several factors, including
general market conditions and the trading price of the Company’s common stock.
These repurchased shares are retired and reclassified as authorized and unissued
shares of common stock. These purchases can be made from time to time in the
open market and are funded from available working capital.
In April
2007, Informatica’s Board of Directors authorized a stock repurchase program for
up to an additional $50 million of its common stock. Under this program, the
Company repurchased 1,869,000 of its common stocks for $27.6 million in 2007. In
April 2008, Informatica’s Board of Directors authorized an additional
$75 million of its common stock for the stock repurchase program. In
October 2008, Informatica’s Board of Directors authorized the repurchase of a
portion of its outstanding Convertible Senior Notes (“Notes”) due in 2026 in
privately negotiated transactions with holders of the Notes. During the year
ended December 31, 2008, the Company repurchased 3,797,000 shares of its common
stock at a cost of $57.0 million and $9.0 million of its outstanding Notes at a
cost of $7.8 million.
During
the first quarter ended March 31, 2009, the Company repurchased 457,000 shares
of its common stock at a cost of $5.9 million and an additional $20.0 million of
its outstanding Notes at a cost of $19.4 million, including $0.2 million accrued
interest. During the second quarter ended June 30, 2009, the Company repurchased
an additional 203,000 shares of its common stock at a cost of $3.1 million.
During the third quarter ended September 30, 2009, there was no repurchase of
shares. There was no repurchase of the Notes during the second and third
quarters of 2009.
The
Company has approximately $4.1 million available to repurchase additional shares
and Notes under this program as of September 30, 2009. This repurchase program
does not have an expiration date.
The
repurchased shares are retired and reclassified as authorized and unissued
shares of common stock. The Company may continue to repurchase shares from time
to time, as determined by management under programs approved by the Board of
Directors.
Note 8. Share-Based
Payments
The
Company’s stockholders approved the 2009 Equity Incentive Plan (the “2009
Incentive Plan”) in April 2009 under which 9,000,000 shares have been reserved
for issuance. Under the 2009 Incentive Plan, eligible employees, officers, and
directors may be granted stock options (incentive and non-qualified), stock
appreciation rights, restricted stock, restricted stock units, performance
shares and performance units. The exercise price for incentive stock options and
non-qualified options may not be less than 100% and 85%, respectively, of the
fair value of the Company’s common stock at the option grant date.
Options
granted are exercisable over a maximum term of seven to ten years from the date
of the grant and generally vest ratably over a period of four years, with
options for new employees generally including a 1-year cliff period. The options
granted to the directors of the Company generally vest between one and three
years. The Company also issues Restricted Stock Units (“RSUs”) to its employees.
The RSUs granted to employees generally vest over four years with four annual
vesting dates. The RSUs granted to the directors of the Company vest in one
year. These awards are valued at the time of grant using the existing current
market prices.
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
It is the
current practice of the Board to limit option grants under this plan to 7-year
terms and to issue only non-qualified stock options and RSUs. As of September
30, 2009, the Company had approximately 8,289,000 authorized shares available
for grant and 503,000 options and RSUs outstanding under the 2009 Incentive
Plan. Informatica granted 510,000 RSUs under its 1999 Stock Incentive Plan to
its executives and certain key employees of the Company and an additional
400,000 RSUs to certain employees and directors of the Company under its 2009
Stock Incentive Plan during the nine months ended September 30, 2009.
Informatica granted 204,000 options under its 1999 Stock Incentive Plan and
103,000 options under its 2009 Incentive Plan during the nine months ended
September 30, 2009.
Informatica
uses the Black-Scholes-Merton option pricing model to determine the fair value
of option awards granted. The Company is using a blend of average historical and
market-based implied volatilities for calculating the expected volatilities for
employee stock options and market-based implied volatilities for its Employee
Stock Purchase Plan (“ESPP”). The expected term of employee stock options
granted is derived from historical exercise patterns of the options while the
expected term of the ESPP is based on the contractual terms. The risk-free
interest rate for the expected term of the option and ESPP is based on the U.S.
Treasury yield curve in effect at the time of grant. The Company records
share-based payments for RSUs and options granted net of estimated forfeiture
rates.
FASB
Share-Based Payment
(ASC 718) also requires the Company to estimate forfeiture rates at the time of
grant and record share-based payments net of estimated forfeiture rates.
Further, the Company is also required to revise and true-up those estimates in
subsequent periods if actual forfeitures differ from those estimates. The
Company is using an average of the past four quarters of actual forfeited
options for new employees to determine its forfeiture rate for stock options
granted. Further, Informatica uses an average of the past four quarters of
actual forfeited option awards to determine its forfeiture rate for RSUs
grants.
The
Company estimated the fair value of its share-based payment awards related to
stock options granted with no expected dividends using the following
assumptions:
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Option
Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
37 |
% |
|
|
39 |
% |
|
|
37
– 48 |
% |
|
|
38
– 41 |
% |
Weighted-average
volatility
|
|
|
37 |
% |
|
|
39 |
% |
|
|
44 |
% |
|
|
38 |
% |
Expected
dividends
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Expected
term of options (in years)
|
|
|
3.6 |
|
|
|
3.3 |
|
|
|
3.6 |
|
|
|
3.3 |
|
Risk-free
interest rate
|
|
|
2.2 |
% |
|
|
3.0 |
% |
|
|
1.7 |
% |
|
|
2.7 |
% |
ESPP:*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
34 |
% |
|
|
42 |
% |
|
|
34
– 51 |
% |
|
|
38
– 42 |
% |
Weighted-average
volatility
|
|
|
34 |
% |
|
|
42 |
% |
|
|
44 |
% |
|
|
40 |
% |
Expected
dividends
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Expected
term of ESPP (in years)
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.5 |
|
Risk-free
interest rate — ESPP
|
|
|
0.3 |
% |
|
|
1.9 |
% |
|
|
0.3 |
% |
|
|
1.9 – 2.2 |
% |
____________
*
|
ESPP
purchases are made on the last day of January and July of each
year.
|
The
allocations of share-based payments for the three and nine months ended
September 30, 2009 and 2008 are as follows (in thousands):
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Cost
of service revenues
|
|
$ |
510 |
|
|
$ |
495 |
|
|
$ |
1,624 |
|
|
$ |
1,534 |
|
Research
and development
|
|
|
1,177 |
|
|
|
1,013 |
|
|
|
3,468 |
|
|
|
3,043 |
|
Sales
and marketing
|
|
|
1,452 |
|
|
|
1,332 |
|
|
|
4,397 |
|
|
|
3,935 |
|
General
and administrative
|
|
|
1,230 |
|
|
|
1,198 |
|
|
|
3,643 |
|
|
|
3,472 |
|
Total
share-based payments
|
|
$ |
4,369 |
|
|
$ |
4,038 |
|
|
$ |
13,132 |
|
|
$ |
11,984 |
|
Tax
benefit of share-based payments
|
|
|
(940 |
) |
|
|
(748 |
) |
|
|
(2,787 |
) |
|
|
(2,244 |
) |
Total
share-based payments, net of tax benefit
|
|
$ |
3,429 |
|
|
$ |
3,290 |
|
|
$ |
10,345 |
|
|
$ |
9,740 |
|
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9. Facilities Restructuring
Charges
2004
Restructuring Plan
In
October 2004, the Company announced a restructuring plan (“2004 Restructuring
Plan”) related to the December 2004 relocation of the Company’s corporate
headquarters within Redwood City, California. In 2005, the Company subleased the
available space at the Pacific Shores Center under the 2004 Restructuring Plan.
The Company recorded restructuring charges of approximately $103.6 million,
consisting of $21.6 million in leasehold improvement and asset write-offs and
$82.0 million related to estimated facility lease losses, which consist of the
present value of lease payment obligations for the remaining four-year lease
term of the previous corporate headquarters, net of actual and estimated
sublease income. The Company has actual and estimated sublease income, including
the reimbursement of certain property costs such as common area maintenance,
insurance, and property tax, net of estimated broker commissions of $1.9 million
for the remainder of 2009, $5.2 million in 2010, $5.4 million in 2011, $5.5
million in 2012, and $0.9 million in 2013.
Subsequent
to 2004, the Company continued to record accretion on the cash obligations
related to its 2004 Restructuring Plan. Accretion represents imputed interest,
which is the difference between the Company’s non-discounted future cash
obligations and the discounted present values of these cash obligations. As of
September 30, 2009, the Company will recognize approximately $5.9 million of
accretion as a restructuring charge over the remaining term of the lease, or
approximately four years, as follows: $0.6 million for the remainder of 2009,
$2.3 million in 2010, $1.7 million in 2011, $1.0 million in 2012, and $0.3
million in 2013.
2001
Restructuring Plan
During
2001, the Company announced a restructuring plan (“2001 Restructuring Plan”) and
recorded restructuring charges of approximately $12.1 million, consisting of
$1.5 million in leasehold improvement and asset write-offs and $10.6 million
related to the consolidation of excess leased facilities in the San Francisco
Bay Area and Texas.
During
2002, the Company recorded additional restructuring charges of approximately
$17.0 million, consisting of $15.1 million related to estimated facility lease
losses and $1.9 million in leasehold improvement and asset write-offs. The
Company calculated the estimated costs for the additional restructuring charges
based on current market information and trend analysis of the real estate market
in the respective area.
In
December 2004, the Company recorded additional restructuring charges of $9.0
million related to estimated facility lease losses. The restructuring accrual
adjustments recorded in the third and fourth quarters of 2004 were the result of
the relocation of its corporate headquarters within Redwood City, California in
December 2004, an executed sublease for the Company’s excess facilities in Palo
Alto, California during the third quarter of 2004, and an adjustment to
management’s estimate of occupancy of available vacant facilities. In 2005, the
Company subleased the available space at the Pacific Shores Center under the
2001 Restructuring Plan through May 2013, which was subsequently subleased until
July 2013 under a December 2007 sublease agreement.
A summary
of the activity of the accrued restructuring charges for the nine months ended
September 30, 2009 is as follows (in thousands):
|
|
Accrued
Restructuring
Charges
at
December
31,
|
|
|
Restructuring
|
|
|
Net Cash
|
|
|
Non-cash
|
|
|
Accrued
Restructuring
Charges
at
September
30,
|
|
|
|
2008
|
|
|
Charges
|
|
|
Adjustments
|
|
|
Payment
|
|
|
Reclassification
|
|
|
2009
|
|
2004
Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
lease facilities
|
|
$ |
56,356 |
|
|
$ |
2,161 |
|
|
$ |
89 |
|
|
$ |
(8,627 |
) |
|
$ |
(123 |
) |
|
$ |
49,856 |
|
2001
Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
lease facilities
|
|
|
8,112 |
|
|
|
— |
|
|
|
(289 |
) |
|
|
(1,139 |
) |
|
|
— |
|
|
|
6,684 |
|
|
|
$ |
64,468 |
|
|
$ |
2,161 |
|
|
$ |
(200 |
) |
|
$ |
(9,766 |
) |
|
$ |
(123 |
) |
|
$ |
56,540 |
|
For the
nine months ended September 30, 2009, the Company recorded $2.2 million of
restructuring charges from accretion charges related to the 2004 Restructuring
Plan. Actual future cash requirements may differ from the restructuring
liability balances as of September 30, 2009 if the Company is unable to sublease
the excess leased facilities after the expiration of the subleases, there are
changes to the time period that facilities are vacant, or the actual sublease
income is different from current estimates. If the subtenants
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
do not
extend their subleases and the Company is unable to sublease any of the related
Pacific Shores facilities during the remaining lease terms through 2013,
restructuring charges could increase by approximately $3.9 million.
Inherent
in the estimation of the costs related to the restructuring efforts are
assessments related to the most likely expected outcome of the significant
actions to accomplish the restructuring. The estimates of sublease income may
vary significantly depending, in part, on factors that may be beyond the
Company’s control, such as the time periods required to locate and contract with
suitable sublessees when the Company’s existing sublessees vacate as well as the
market rates at the time of entering into new sublease agreements.
Note 10. Income
Taxes
The
Company’s effective tax rates were 27% and 30% for the three-month periods ended
September 30, 2009 and 2008, respectively, and 29% and 30% for the nine-month
periods ended September 30, 2009 and 2008, respectively. The effective tax rates
differed from the federal statutory rate of 35% primarily due to benefits of
certain earnings from operations in lower-tax jurisdictions throughout the
world, the recognition of current year research and development credits and
previously unrealized foreign tax credits and a prior year tax return true-up
offset by compensation expense related to non-deductible share-based payments,
and agreed upon audit assessments with the Internal Revenue Service, as well as
the accrual of reserves related to uncertain tax positions. The Company has not
provided for residual U.S. taxes in any of these lower-tax jurisdictions since
it intends to indefinitely reinvest these earnings offshore.
In
assessing the need for any additional valuation allowance in the quarter ended
September 30, 2009, the Company considered all available evidence both positive
and negative, including historical levels of income, legislative developments,
expectations and risks associated with estimates of future taxable income, and
ongoing prudent and feasible tax planning strategies.
As a
result of this analysis for the quarter ended September 30, 2009, consistent
with prior quarters it was considered more likely than not that the Company’s
non share-based payments related deferred tax assets would be realized. As a
result, the remaining valuation allowance is primarily related to the
share-based payments deferred tax assets. The benefit of these deferred tax
assets will be recorded in the stockholders’ equity as realized, and as such,
they will not impact the Company’s effective tax rate.
The
unrecognized tax benefits related to FASB Income Taxes (ASC 740), if
recognized, would impact the income tax provision by $9.3 million and $7.1
million as of September 30, 2009 and 2008, respectively. The unrecognized tax
benefits were $10.6 million and $20.2 million as of September 30, 2009 and
December 31, 2008, respectively. The change was primarily due to the agreement
with the Internal Revenue Service on certain audit issues, the expiration of
certain statute of limitations and the accrual for uncertain tax positions. The
Company has elected to include interest and penalties as a component of tax
expense. Accrued interest and penalties as of September 30, 2009 and 2008 were
approximately $2.2 million and $0.6 million, respectively.
The
Company files U.S. federal income tax returns as well as income tax returns in
various states and foreign jurisdictions. Informatica was under examination by
the Internal Revenue Service for fiscal years 2005 and 2006. Due to net
operating loss carry-forwards, substantially all of our tax years remained open
for tax examination. During the three months ended June 30, 2009, the Company
reached an agreement with the Internal Revenue Service to settle certain
matters, including cost sharing and buy-in amounts for tax years ended December
31, 2001 through 2006. The tax provision impact as a result of the settlement
was $7.0 million of which $6.1 million was accrued for previously.
The
Company has been informed by certain state and foreign taxing authorities that
it was selected for examination. Most state and foreign jurisdictions have three
or four open tax years at any point in time. The field work for certain state
audits has commenced and is at various stages of completion as of September 30,
2009.
Although
the outcome of any tax audit is uncertain, the Company believes that it has
adequately provided in its financial statements for any additional taxes that it
may be required to pay as a result of such examinations. The Company regularly
assesses the likelihood of outcomes resulting from these examinations to
determine the adequacy of its provision for income taxes, and believes its
current reserve to be reasonable. If tax payments ultimately prove to be
unnecessary, the reversal of these tax liabilities would result in tax benefits
in the period that the Company determined such liabilities were no longer
necessary. However, if an ultimate tax assessment exceeds its estimate of tax
liabilities, an additional tax provision might be required.
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note
11. Net Income per Common Share
Under the
provisions of FASB Earnings
per Share (ASC 260),
basic net income per share is computed using the weighted-average number
of common shares outstanding during the period. Diluted net income per share
reflects the potential dilution of securities by adding other common stock
equivalents, primarily stock options and common shares potentially issuable
under the terms of the Convertible Senior Notes, to the weighted-average number
of common shares outstanding during the period, if dilutive. Potentially
dilutive securities have been excluded from the computation of diluted net
income per share if their inclusion is anti-dilutive.
The
calculation of basic and diluted net income per common share is as follows (in
thousands, except per share amounts):
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$ |
16,192 |
|
|
$ |
13,381 |
|
|
$ |
39,240 |
|
|
$ |
36,108 |
|
Effect
of convertible senior notes, net of related tax effects
|
|
|
961 |
|
|
|
1,100 |
|
|
|
3,061 |
|
|
|
3,300 |
|
Net
income adjusted
|
|
$ |
17,153 |
|
|
$ |
14,481 |
|
|
$ |
42,301 |
|
|
$ |
39,408 |
|
Weighted-average
shares of common stock used to compute basic net income per share
(excluding unvested restricted stock)
|
|
|
88,283 |
|
|
|
88,570 |
|
|
|
87,837 |
|
|
|
88,422 |
|
Effect
of dilutive common stock equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of unvested
restricted stock units
|
|
|
232 |
|
|
|
— |
|
|
|
105 |
|
|
|
— |
|
Dilutive effect of employee
stock options
|
|
|
4,951 |
|
|
|
3,670 |
|
|
|
4,328 |
|
|
|
3,813 |
|
Dilutive effect of convertible
senior notes
|
|
|
10,050 |
|
|
|
11,500 |
|
|
|
10,237 |
|
|
|
11,500 |
|
Shares
used in computing diluted net income per common share
|
|
|
103,516 |
|
|
|
103,740 |
|
|
|
102,507 |
|
|
|
103,735 |
|
Basic
net income per common share
|
|
$ |
0.18 |
|
|
$ |
0.15 |
|
|
$ |
0.45 |
|
|
$ |
0.41 |
|
Diluted
net income per common share
|
|
$ |
0.17 |
|
|
$ |
0.14 |
|
|
$ |
0.41 |
|
|
$ |
0.38 |
|
Diluted
net income per common share is calculated according to Earnings per Share (ASC
260), which requires
the dilutive effect of convertible securities to be reflected in the diluted net
income per share by application of the “if-converted” method. This method
assumes an add-back of interest and amortization of issuance cost, net of income
taxes, to net income if the securities are converted. The Company determined
that for the three and nine months ended September 30, 2009 and 2008, the
Convertible Senior Notes had a dilutive effect on diluted net income per share,
and as such, it had an add-back of $1.0 million and $3.1 million for the three
and nine months ended September 30, 2009, respectively, and $1.1 million and
$3.3 million for the same periods in 2008 in interest and issuance cost
amortization, net of income taxes, to net income for the diluted net income per
share calculation.
In
calculating its diluted net income per common share, the Company excluded 1.4
million and 5.4 million of its options for the three months ended September 30,
2009 and 2008, respectively, and 4.4 million and 4.5 million of its options for
the nine months ended September 30, 2009 and 2008, respectively since the
inclusion of these options would have been anti-dilutive.
Note 12. Commitments and
Contingencies
Lease
Obligations
In
December 2004, the Company relocated its corporate headquarters within Redwood
City, California and entered into a new lease agreement. The initial lease term
was from December 15, 2004 to December 31, 2007 with a three-year option to
renew to December 31, 2010 at fair market value. In May 2007, the Company
exercised its renewal option to extend the office lease term to December 31,
2010. In May 2009, the Company executed the lease amendment to further extend
the lease term for another 3 years to December 31, 2013. The future minimum
contractual lease payments are $1.0 million for the remainder of 2009, $2.6
million, $3.4 million, $3.5 million and $3.6 million for the years ending
December 31, 2010, 2011, 2012, and 2013, respectively.
The
Company entered into two lease agreements in February 2000 for two office
buildings at the Pacific Shores Center in Redwood City, California, which were
used as its former corporate headquarters from August 2001 through December
2004. The leases expire in July 2013.
The
Company leases certain office facilities under various non-cancelable operating
leases, including those described above, which expire at various dates through
2013 and require the Company to pay operating costs, including property taxes,
insurance, and
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
maintenance.
Operating lease payments in the table below include approximately $64.6 million
for operating lease commitments for facilities that are included in
restructuring charges. See Note 9. Facilities Restructuring
Charges, above, for a further discussion.
Future
minimum lease payments as of September 30, 2009 under non-cancelable operating
leases with original terms in excess of one year are summarized as follows (in
thousands):
|
|
Operating
Leases
|
|
|
Sublease
Income
|
|
|
Net
|
|
Remaining 2009
|
|
$ |
6,699 |
|
|
$ |
581 |
|
|
$ |
6,118 |
|
2010
|
|
|
24,531 |
|
|
|
2,380 |
|
|
|
22,151 |
|
2011
|
|
|
23,819 |
|
|
|
2,422 |
|
|
|
21,397 |
|
2012
|
|
|
23,814 |
|
|
|
2,468 |
|
|
|
21,346 |
|
2013
|
|
|
15,969 |
|
|
|
1,263 |
|
|
|
14,706 |
|
Thereafter
|
|
|
1,238 |
|
|
|
— |
|
|
|
1,238 |
|
|
|
$ |
96,070 |
|
|
$ |
9,114 |
|
|
$ |
86,956 |
|
Of these
future minimum lease payments, the Company has accrued $56.5 million in the
facilities restructuring accrual at September 30, 2009. This accrual includes
the minimum lease payments of $64.6 million and an estimate for operating
expenses of $19.5 million and sublease commencement costs associated with excess
facilities and is net of estimated sublease income of $21.7 million and a
present value discount of $5.9 million recorded in accordance with FASB Exit or Disposal Cost
Obligations (ASC 420).
Warranties
The
Company generally provides a warranty for its software products and services to
its customers for a period of three to six months and accounts for its
warranties under the FASB Contingencies (ASC 450). The Company’s software
products’ media are generally warranted to be free from defects in materials and
workmanship under normal use, and the products are also generally warranted to
substantially perform as described in certain Company documentation and the
product specifications. The Company’s services are generally warranted to be
performed in a professional manner and to materially conform to the
specifications set forth in a customer’s signed contract. In the event there is
a failure of such warranties, the Company generally will correct or provide a
reasonable work-around or replacement product. The Company has provided a
warranty accrual of $0.2 million as of September 30, 2009 and December 31, 2008.
The Company’s product warranty expense has not been significant in the
past.
Indemnification
The
Company sells software licenses and services to its customers under contracts,
which the Company refers to as the License to Use Informatica Software (“License
Agreement”). Each License Agreement contains the relevant terms of the
contractual arrangement with the customer and generally includes certain
provisions for indemnifying the customer against losses, expenses, liabilities,
and damages that may be awarded against the customer in the event the Company’s
software is found to infringe upon a patent, copyright, trademark, or other
proprietary right of a third party. The License Agreement generally limits the
scope of and remedies for such indemnification obligations in a variety of
industry-standard respects, including but not limited to certain time and scope
limitations and a right to replace an infringing product with a non-infringing
product.
The
Company believes its internal development processes and other policies and
practices limit its exposure related to the indemnification provisions of the
License Agreement. In addition, the Company requires its employees to sign a
proprietary information and inventions agreement, which assigns the rights to
its employees’ development work to the Company. To date, the Company has not had
to reimburse any of its customers for any losses related to these
indemnification provisions, and no material claims against the Company are
outstanding as of September 30, 2009. For several reasons, including the lack of
prior indemnification claims and the lack of a monetary liability limit for
certain infringement cases under the License Agreement, the Company cannot
determine the maximum amount of potential future payments, if any, related to
such indemnification provisions.
In
addition, the Company indemnifies its officers and directors under the terms of
indemnity agreements entered into with them, as well as pursuant to our
certificate of incorporation, bylaws, and applicable Delaware law. To date, the
Company has not incurred any costs related to these
indemnifications.
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
Company accrues for loss contingencies when available information indicates that
it is probable that an asset has been impaired or a liability has been incurred
and the amount of the loss can be reasonably estimated, in accordance with FASB
Contingencies (ASC
450).
Derivative
Financial Instruments
Informatica
uses foreign exchange forward contracts to hedge certain operational (“cash
flow”) exposures resulting from changes in foreign currency exchange rates. Such
cash flow exposures result from portions of its forecasted expenditures
denominated in currencies other than the U.S. dollar, primarily the Indian rupee
and Israeli shekel. These foreign exchange contracts, carried at fair value,
have a maturity of 12 months or less. Informatica enters into these foreign
exchange contracts to hedge forecasted operating expenditures in the normal
course of business, and accordingly, they are not speculative in nature.
As of
September 30, 2009, the notional amounts of the foreign exchange forward
contracts that the Company committed to purchase in the fourth quarter of 2008
for the Indian rupees and the Israeli shekels were $1.3 million and $0.7
million, respectively.
See Note
1. Summary of Significant Accounting
Policies, Note 5. Other
Comprehensive Income, and Note 6. Derivative Financial
Instruments, of Notes to Condensed
Consolidated Financial Statements for a further discussion.
Litigation
On
November 8, 2001, a purported securities class action complaint was filed in the
U.S. District Court for the Southern District of New York. The case is entitled
In re Informatica Corporation
Initial Public Offering Securities Litigation, Civ. No.
01-9922 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities
Litigation, 21 MC 92 (SAS) (S.D.N.Y.). Plaintiffs’ amended complaint was
brought purportedly on behalf of all persons who purchased our common stock from
April 29, 1999 through December 6, 2000. It names as defendants Informatica
Corporation, two of our former officers (the “Informatica defendants”), and
several investment banking firms that served as underwriters of our April 29,
1999 initial public offering (IPO) and September 28, 2000 follow-on public
offering. The complaint alleges liability as to all defendants under Sections 11
and/or 15 of the Securities Act of 1933 and Sections 10(b) and/or 20(a) of the
Securities Exchange Act of 1934, on the grounds that the registration statements
for the offerings did not disclose that: (1) the underwriters had agreed to
allow certain customers to purchase shares in the offerings in exchange for
excess commissions paid to the underwriters; and (2) the underwriters had
arranged for certain customers to purchase additional shares in the aftermarket
at predetermined prices. The complaint also alleges that false analyst reports
were issued. No specific damages are claimed.
Similar
allegations were made in other lawsuits challenging more than 300 other initial
public offerings and follow-on offerings conducted in 1999 and 2000. The cases
were consolidated for pretrial purposes. On February 19, 2003, the Court ruled
on all defendants’ motions to dismiss. The Court denied the motions to dismiss
the claims under the Securities Act of 1933. The Court denied the motion to
dismiss the Section 10(b) claim against Informatica and 184 other issuer
defendants. The Court denied the motion to dismiss the Section 10(b) and 20(a)
claims against the Informatica defendants and 62 other individual
defendants.
The
Company accepted a settlement proposal presented to all issuer defendants. In
this settlement, plaintiffs will dismiss and release all claims against the
Informatica defendants, in exchange for a contingent payment by the insurance
companies collectively responsible for insuring the issuers in all of the IPO
cases, and for the assignment or surrender of control of certain claims we may
have against the underwriters. The Informatica defendants will not be required
to make any cash payments in the settlement, unless the pro rata amount paid by
the insurers in the settlement exceeds the amount of the insurance coverage, a
circumstance that we do not believe will occur. Any final settlement will
require approval of the Court after class members are given the opportunity to
object to the settlement or opt out of the settlement.
All
parties in all lawsuits have reached a settlement which will not require the
Company to contribute cash. The Court gave preliminary approval to the
settlement on June 10, 2009 and gave final approval on October 6,
2009.
On
July 15, 2002, the Company filed a patent infringement lawsuit against Acta
Technology, Inc., now known as Business Objects Data Integration, Inc. (“BODI”)
and the final judgment in the Company’s favor included a permanent injunction
preventing BODI from shipping the infringing technology which remains in effect
until the patent expires in 2019.
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On
August 21, 2007, JuxtaComm Technologies (“JuxtaComm”) filed a complaint in
the Eastern District of Texas against the Company and 20 other defendants,
including Microsoft, IBM and Business Objects, for infringement of JuxtaComm’s
US patent 6,195,662 (“System for Transforming and Exchanging Data Between
Distributed Heterogeneous Computer Systems”). In its complaint, JuxtaComm
sought unspecified monetary damages and permanent injunctive relief. This matter
was settled in August 2009.
On
November 24, 2008, Data Retrieval Technologies LLC (“Data Retrieval”) filed a
complaint in the Western District of Washington against the Company and Sybase,
Inc., alleging patent infringement of U.S. Patent Nos. 6,026,392 (the “392
patent”) and 6,631,382 (the “382 patent”). On December 5, 2008,
the Company and Sybase filed an action in the Northern District of California
against Data Retrieval, Timeline, Inc. (“Timeline”) and TMLN Royalty, LLC
(“TMLN Royalty”), asserting declaratory relief claims for non-infringement and
invalidity of the ’392 and ’382 patents. On January 15, 2009, we filed an
answer to the complaint in the Western District of Washington and asserted
declaratory relief counterclaims for non-infringement and invalidity of the ’392
and ’382 patents. In addition, on January 15, 2009, Informatica and
Sybase filed a voluntary dismissal without prejudice of Timeline and TMLN
Royalty in the Northern District of California action. On April 1,
2009, in the Northern District of California action, Data Retrieval filed an
answer and asserted counterclaims for patent infringement of the ’382 and
’392 patents. On April 8, 2009, the Court in the Western District of
Washington transferred that action to the Northern District of California.
On April 21, 2009, the Company filed its reply to Data Retrieval’s
counterclaims in the Northern District of California. Following Data
Retrieval’s service of its Disclosure of Asserted Claims and
Preliminary Infringement Contentions on June 8, 2009, on June 18, 2009,
the Company filed a motion for partial summary judgment of the following claims
and issues: (1) non-infringement of the ’382 patent; (2) non-infringement of the
unasserted claims (claims 2-25) of the ‘392 patent; and (3) no infringement of
either patent-in-suit by the Informatica PowerCenter product. On September 11,
2009, the U.S. District Court granted the Company’s motion for partial summary
judgment on all of the claims and issues requested by the
Company. The case is currently in the discovery phase and no
trial date has been set. The Company intends to vigorously defend
itself.
The
Company is also a party to various legal proceedings and claims arising from the
normal course of business activities.
Based on
current available information, Informatica does not expect that the ultimate
outcome of these unresolved matters, individually or in the aggregate, will have
a material adverse effect on its results of operations, cash flows, or financial
position. However, litigation is subject to inherent uncertainties and the
Company’s view of these matters may change in the future. In addition, given
such uncertainties, the Company has from time to time discussed settlement in
the context of litigation and has accrued, based on FASB Contingencies (ASC 450), for
estimates of settlement. Were an unfavorable outcome to occur, there exists the
possibility of a material adverse impact on the Company’s financial position and
results of operation for the period in which the unfavorable outcome occurred,
and potentially in future periods.
Note 13. Significant Customer
Information and Segment Reporting
FASB
Segment Reporting (ASC
280) establishes standards for the manner in which public companies report
information about operating segments in their annual and interim financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The method for determining
the information to report is based on the way management organizes the operating
segments within the Company for making operating decisions and assessing
financial performance.
The
Company is organized and operates in a single segment: the design, development,
marketing, and sales of software solutions. The Company’s chief operating
decision maker is its Chief Executive Officer, who reviews financial information
presented on a consolidated basis for purposes of making operating decisions and
assessing financial performance.
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
following table presents geographic information (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$ |
77,754 |
|
|
$ |
68,005 |
|
|
$ |
227,179 |
|
|
$ |
215,601 |
|
Europe
|
|
|
33,810 |
|
|
|
33,288 |
|
|
|
86,649 |
|
|
|
88,228 |
|
Other
|
|
|
11,830 |
|
|
|
12,524 |
|
|
|
35,968 |
|
|
|
27,458 |
|
|
|
$ |
123,394 |
|
|
$ |
113,817 |
|
|
$ |
349,796 |
|
|
$ |
331,287 |
|
|
|
September
30, 2009
|
|
|
December
31,
2008
|
|
Long-lived
assets (excluding assets not allocated):
|
|
|
|
|
|
|
North
America
|
|
$ |
60,696 |
|
|
$ |
36,285 |
|
Europe
|
|
|
14,606 |
|
|
|
6,664 |
|
Other
|
|
|
1,548 |
|
|
|
1,643 |
|
|
|
$ |
76,850 |
|
|
$ |
44,592 |
|
No
customer accounted for more than 10% of the Company’s total revenues in the
three and nine months ended September 30, 2009 and 2008. At September 30, 2009
and 2008, no single customer accounted for more than 10% of the accounts
receivable balance.
Note 14. Recent Accounting
Pronouncements
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161 (“SFAS
No. 161”), Disclosures about
Derivative Instruments and Hedging Activities (ASC 815-10). This statement requires
companies with derivative instruments to disclose information that should enable
financial statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FASB Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, and how derivative instruments impact
the financial statements of the companies. The Company adopted SFAS No. 161
in the first quarter of fiscal 2009. The adoption of this statement did not
impact the condensed consolidated financial statements of the Company since SFAS
No. 161 only required additional disclosures.
In April
2008, the FASB issued FASB Staff Position No. 142-3 (“FSP No. 142-3”), Determination of the Useful Life of
Intangible Assets (ASC 350 and 275). FSP No. 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, Goodwill
and Other Intangible Assets. This FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. The Company adopted this FSP
effective January 1, 2009, and its adoption did not impact the condensed
consolidated financial statements of the Company.
In June
2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) 03-6-1 (“FSP
EITF 03-6-1”), Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
(ASC 260-10). FSP EITF 03-6-1 clarifies that share-based payment awards
that entitle their holders to receive nonforfeitable dividends or dividend
equivalents before vesting should be considered participating securities. None
of the RSUs and stock options granted under the 1999 Stock Incentive Plan and
2009 Incentive Plan were entitled to receive nonforfeitable dividends or
dividend equivalents. FSP EITF 03-6-1 is effective for fiscal years
beginning after December 15, 2008 on a retrospective basis. The Company
adopted this FSP effective January 1, 2009, and its adoption did not impact its
calculation of earnings per share.
In April
2009, the FASB issued FASB Staff Position No. 141(R)-1 (“FSP No. 141(R)-1”),
Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from
Contingencies (ASC 805). FSP No. 141(R)-1 amends and clarifies SFAS No.
141(R) to address issues related to initial recognition and measurement, and
subsequent measurement and accounting, and disclosure of assets and liabilities
arising from contingencies in a business combination. This FSP covers the
contingent consideration arrangements of an acquiree assumed by the acquirer as
well as contingencies arisen due to business combinations. FSP No. 141(R)-1 is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company adopted this FSP effective January 1,
2009.
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In April
2009, the FASB issued FASB Staff Position No. 115-2 (“FSP No. 115-2”) and 124-2,
Recognition and Presentation
of Other-Than-Temporary Impairments (ASC 320-10). This FSP amends FASB SFAS
No. 115, FSP SFAS No. 115-1 and SFAS No. 124-1 and its scope is limited to
other-than-temporary guidance of these pronouncements for debt securities
classified as available-for-sale or held-to maturity. The Board believes it is
more operational for an entity to assess whether the entity has the intent to
sell the debt security or more likely than not will be required to sell the debt
security before its anticipated recovery. Further, this FSP requires new
disclosures to help users of financial statements understand the significant
inputs used in determining a credit loss, as well as a rollforward of that
amount each period. This FSP is effective for interim and annual reporting
periods ending after June 15, 2009. The Company adopted this FSP in its quarter
ended June 30, 2009, and its adoption did not impact the condensed consolidated
financial statements of the Company.
In April
2009, the FASB issued FASB Staff Position No. 157-4 (“FSP No. 157-4”), Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are not Orderly (ASC 820-10).
This FSP is effective for interim and annual reporting periods ending after June
15, 2009, and shall be applied prospectively. Informatica adopted this FSP for
its second quarter ended June 30, 2009, and its adoption did not impact the
condensed consolidated financial statements of the Company.
In May
2009, the FASB issued Statement of Financial Accounting Standards No. 165 (“SFAS
No. 165”), Subsequent
Events (ASC 855-10) to establish principles
and requirements for subsequent events. Subsequent events are events
or transactions that occur after the balance sheet date but before financial
statements are issued or are available to be issued. There are two types of
subsequent events: (i) The first type consists of events or transactions that
provide additional evidence about conditions that existed at the date of the
balance sheet, (ii) The second type consists of events that provide evidence
about conditions that did not exist at the date of the balance sheet but arose
after that date. An entity shall recognize in its financial statements the
effects of all subsequent events that provide additional evidence about
conditions that existed at the date of the balance sheet, including the
estimates inherent in the process of preparing financial statements. This Statement is effective
for interim or annual financial periods ending after June 15,
2009. The Company adopted this statement in its quarter ended June 30,
2009.
In
October 2009, the FASB issued an Accounting Standards Update (“ASU 2009-13”) or
(“EITF 08-01”) which requires a vendor to allocate revenue to each unit of
accounting in many arrangements involving multiple deliverables based on the
relative selling price of each deliverable. It also changes the level of
evidence of standalone selling price required to separate deliverables by
allowing a vendor to make its best estimate of the standalone selling price of
deliverables when more objective evidence of selling price is not available. The
best estimate of selling price can be used when VSOE or third party evidence
(“TPE”) of fair value are not available. Software as a Service (“SaaS”) as a
model of software deployment whereby a vendor licenses an application to
customers for use as a service on demand is within the scope of this ASU.
Informatica is currently using this revenue model on a limited basis and the
amount of revenue generated from this model is not material at this time. This
ASU is effective for the arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Informatica will adopt this
ASU as required and the Company expects that its adoption will not impact the
condensed consolidated financial statements.
Note
15. Acquisitions
Agent
Logic
On
September 1, 2009, the Company acquired Agent Logic, Inc. (Agent Logic), a
privately held company incorporated in Delaware. Agent Logic specializes in the
development and marketing of complex event processing software which supports
security initiatives in highly complex environments. Informatica acquired all of
the capital stock of Agent Logic in a cash merger transaction for $35 million of
which $6.1 million is held in an escrow fund as security for losses accrued by
Informatica in the event of certain breaches of the merger agreement by Agent
Logic. The escrow fund will remain in place for a period of eighteen months,
although 50% of the escrow funds will be paid out 12 months subsequent to
the date of acquisition.
Informatica
incurred $0.5 million of acquisition-related costs for the three months ended
September 30, 2009. These expenses are reflected as general and administrative
expenses in the condensed consolidated statements of income for the respective
periods.
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
allocation of the purchase price for this acquisition, as of the date of the
acquisition, is as follows (in thousands):
Goodwill
|
|
$ |
24,403 |
|
Developed
and core technology
|
|
|
10,970 |
|
Customer
relationships
|
|
|
1,380 |
|
Trade
names
|
|
|
670 |
|
Assumed
assets, net of liabilities
|
|
|
1,776 |
|
Total
purchase price
|
|
$ |
39,199 |
|
The
Company assigned fair values to the identified intangible assets acquired in
accordance with the guidelines under FASB Business Combination (ASC
805).
Informatica
is obligated to pay certain employees of Agent Logic retention bonuses of
approximately $0.8 million if they continue to provide their employment services
for a certain period of time. Informatica will record these expenses as the
services are performed between 12 to 24 months subsequent to the acquisition
date.
Informatica
is obligated to pay certain variable and deferred earn-out payments based if
certain license order targets are achieved. The Company has determined that the
fair market value of such earn-outs at the time of acquisition was $2.6 million.
Informatica will reflect any excess or shortfall from this estimate on its
statement of income as it occurs based on FASB Business Combination (ASC
805).
The
excess of the purchase price over the identified tangible and intangible assets
was recorded as goodwill. The Company believes that the investment value of the
synergy created as a result of this acquisition, due to future product
offerings, has principally contributed to a purchase price that resulted in the
recognition of $24.4 million of goodwill, which is not deductible for tax
purposes. At the time of acquisition, Agent Logic had recently had a major
product release and as a result, no material in-process research and development
was identified. The trade names and developed and core technology will be
amortized over five years on a straight line basis and customer relationships
will be amortized over six years on an accelerated basis consistent with
expected benefits.
AddressDoctor
GmbH
On June
2, 2009, Informatica GmbH, a wholly owned subsidiary of Informatica, acquired
AddressDoctor GmbH (AddressDoctor), a limited liability company duly organized
and existing under the laws of the Federal Republic of Germany. AddressDoctor is
a leading provider of international address verification and cleaning solutions
that enables users to validate and correct postal addresses and assists in the
data capturing process. Informatica acquired all of the capital stock of
AddressDoctor for $27.8 million of which $4.5 million is held in an escrow fund
as security for losses incurred by Informatica in the event of certain breaches
of the acquisition agreement by AddressDoctor. The escrow fund will remain
in place for a period of eighteen months, although 50% of the escrow funds
will be paid out 12 months subsequent to the date of
acquisition.
Informatica
incurred $0.5 million of acquisition-related costs for the three months ended
June 30, 2009. These expenses are reflected as general and administrative
expenses in the condensed consolidated statements of income for the respective
periods.
The
allocation of the purchase price for this acquisition, as of the date of the
acquisition, is as follows (in thousands):
Goodwill
|
|
$ |
23,019 |
|
Developed
and core technology
|
|
|
960 |
|
Vendor
relationships
|
|
|
7,200 |
|
Customer
relationships
|
|
|
1,320 |
|
Trade
names
|
|
|
230 |
|
Assumed
liabilities, net of assets
|
|
|
(4,977 |
) |
Total
purchase price
|
|
$ |
27,752 |
|
The
Company assigned fair values to the identified intangible assets acquired in
accordance with the guidelines established in SFAS No. 141(R) FASB Business Combination (ASC
805).
INFORMATICA
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
excess of the purchase price over the identified tangible and intangible assets
was recorded as goodwill. The Company believes that the investment value of the
synergy created as a result of this acquisition, due to future product
offerings, has principally contributed to a purchase price that resulted in the
recognition of $23.0 million of goodwill, which is not deductible for tax
purposes. At the time of acquisition, AddressDoctor had recent releases of its
major products and as a result, no material in-process research and development
was identified at the time of acquisition. The trade names and the developed and
core technology will be amortized over five years on a straight line basis,
vendor relationships will be amortized over five years on a straight line basis
and customer relationships will be amortized over six years on an accelerated
basis consistent with expected benefits.
Applimation
On
February 13, 2009, the Company acquired Applimation, Inc. (Applimation), a
privately held company incorporated in Delaware, providing application
Information Lifecycle Management (ILM) technology. The acquisition extends the
Company's data integration software to include Applimation’s technology. The
Company acquired all of the capital stock of Applimation in a cash merger
transaction valued at approximately $37.2 million, including $1.6 million
retention bonuses payable three to eighteen months subsequent to acquisition
date. As a result of this acquisition, the Company also assumed certain facility
leases and certain liabilities and commitments. As part of the merger agreement,
$6.0 million of the merger consideration was placed into an escrow fund and held
as security for losses incurred by the Company in the event of certain breaches
of the merger agreement by Applimation. The escrow fund will remain in
place until August 13, 2010, although 50% of the escrow funds will be
distributed to the Applimation stockholders on February 13,
2010.
Informatica
incurred $718,000 and $116,000 of acquisition-related costs for the three months
ended March 31, 2009 and December 31, 2008, respectively. These expenses are
reflected as general and administrative expenses in the condensed consolidated
statements of income for the respective periods.
The
allocation of the purchase price for this acquisition, as of the date of the
acquisition, is as follows (in thousands):
Goodwill
|
|
$ |
19,740 |
|
Developed
and core technology
|
|
|
10,730 |
|
Customer
relationships
|
|
|
8,330 |
|
Trade
names
|
|
|
880 |
|
Assumed
liabilities, net of assets
|
|
|
(4,084 |
) |
Total
purchase price
|
|
$ |
35,596 |
|
The
Company assigned fair values to the identified intangible assets acquired in
accordance with the guidelines established in SFAS No. 141(R) FASB Business Combination (ASC
805).
Informatica
is obligated to reimburse certain employees of Applimation for an approximate
bonus of $1.6 million if they continue to provide their employment services for
a certain period of time. If they discontinue their services for any reason,
these amounts are payable to original shareholders of Applimation. Informatica
will record these expenses as the services are performed between three to
eighteen months subsequent to the acquisition date.
The
excess of the purchase price over the identified tangible and intangible assets
was recorded as goodwill. The Company believes that the investment value of the
synergy created as a result of this acquisition, due to future product
offerings, has principally contributed to a purchase price that resulted in the
recognition of $19.7 million of goodwill, which is not deductible for tax
purposes. Since Applimation had recently released major versions of its products
just prior to acquisition, no material in-process research and development was
identified. The trade names and developed and core technology will be amortized
over five years on a straight line basis, and customer relationships will be
amortized over six years on an accelerated basis consistent with expected
benefits.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
This
Quarterly Report on Form 10-Q includes “forward-looking statements” within the
meaning of the federal securities laws, particularly statements referencing our
expectations relating to license revenues, service revenues, international
revenues, deferred revenues, cost of license revenues, cost of service revenues,
operating expenses, amortization of acquired technology, share-based payments,
interest income or expense, and provision for income taxes; deferred taxes;
international expansion; the ability of our products to meet customer demand;
continuing impacts from our 2004 and 2001 Restructuring Plans; the sufficiency
of our cash balances and cash flows for the next 12 months; our stock repurchase
programs; investment and potential investments of cash or stock to acquire or
invest in complementary businesses, products, or technologies; the impact of
recent changes in accounting standards; the acquisitions of Agent Logic,
AddressDoctor, and Applimation; and assumptions underlying any of the foregoing.
In some cases, forward-looking statements can be identified by the use of
terminology such as “may,” “will,” “expects,” “intends,” “plans,” “anticipates,”
“estimates,” “potential,” or “continue,” or the negative thereof, or other
comparable terminology. Although we believe that the expectations reflected in
the forward-looking statements contained herein are reasonable, these
expectations or any of the forward-looking statements could prove to be
incorrect, and actual results could differ materially from those projected or
assumed in the forward-looking statements. Our future financial condition and
results of operations, as well as any other forward-looking statements, are
subject to risks and uncertainties, including but not limited to the factors set
forth under Part II, Item 1A. Risk Factors. All forward-looking statements and
reasons why results may differ included in this Report are made as of the date
hereof, and we assume no obligation to update any such forward-looking
statements or reasons why actual results may differ.
The
following discussion should be read in conjunction with our condensed
consolidated financial statements and notes thereto appearing elsewhere in this
Report.
Overview
We are
the leading independent provider of enterprise data integration software. We
generate revenues from sales of software licenses for our enterprise data
integration software products, including product upgrades that are not part of
post-contract services, and from sales of services, which consist of
maintenance, consulting, and education services.
We
receive revenues from licensing our products under perpetual licenses directly
to end users and indirectly through resellers, distributors, and OEMs in the
United States and internationally. We also receive a small amount of revenues
under subscription-based licenses for on-demand offerings from customers and
partners. We receive service revenues from maintenance contracts, consulting
services, and education services that we perform for customers that license our
products either directly or indirectly. Most of our international sales have
been in Europe, and revenues outside of Europe and North America have comprised
8% or less of total consolidated revenues during the past three
years.
We
license our software and provide services to many industry sectors, including,
but not limited to, energy and utilities, financial services, government and
public agencies, healthcare, high technology, insurance, manufacturing, retail,
services, telecommunications, and transportation.
Despite
the uncertainty in the financial markets and the weak macroeconomic environment
in the United States and many foreign economies, we were able to grow our total
revenues in the third quarter of 2009 by 8% to $123.4 million compared to $113.8
million from the same period in 2008. License revenues increased by 9% to $50.0
million for the third quarter of 2009 compared to $45.8 million in the same
period in 2008. This increase was due to an increase in both the number of
license transactions and the average sales price of these transactions. Services
revenues increased by 8% due to 13% growth in maintenance revenues partially
offset by a 4% decrease in consulting, education, and other revenues. The
maintenance revenue growth is attributable to the increased size of our
installed customer base and the decline in consulting and education service
revenues reflects our customers’ trend toward deferring spending and reducing
education and consulting budgets. Because our revenues have grown at a faster
pace than the increase in our operating expenses, our operating income as a
percentage of revenues grew from 16% to 18% for the quarters ended September 30,
2008 and 2009, respectively.
On
February 13, 2009, we acquired Applimation, a private company incorporated in
Delaware, providing application Information Lifecycle Management (ILM)
technology. The acquisition extends our data integration software to include
Applimation’s technology. We acquired all of the capital stock of Applimation in
a cash merger transaction valued at approximately $37.2 million (including $1.6
million retention bonuses payable three to eighteen months subsequent to the
acquisition date). As a result of this acquisition, we also assumed certain
facility leases and certain liabilities and commitments. As part of the merger
agreement, $6.0 million of the merger
consideration
was placed into an escrow fund and held as security for losses incurred by us in
the event of certain breaches of the merger agreement by
Applimation.
On June
2, 2009, Informatica GmbH, our wholly owned subsidiary, acquired AddressDoctor,
a limited liability company duly organized and existing under the laws of the
Federal Republic of Germany. AddressDoctor is a leading provider of
international address verification and cleaning solutions which enables users to
validate and correct postal addresses and assists in the data capturing process.
We acquired all of the capital stock of AddressDoctor for $27.8 million of which
$4.5 million is held in an escrow fund as security for losses incurred by us in
the event of certain breaches of the merger agreement by AddressDoctor. The
escrow fund will remain in place for a period of eighteen months,
although 50% of the escrow funds will be paid out 12 months subsequent to
the date of acquisition.
On
September 1, 2009, we acquired Agent Logic, a privately held company
Incorporated in Delaware. Agent Logic specializes in the development and
marketing of complex event processing software which supports security
initiatives in highly complex environments. We acquired all of the capital stock
of Agent Logic for $35 million of which $6.1 million is held in an escrow fund
as security for losses accrued by Informatica in the event of certain breaches
of the merger agreement by Agent Logic. The escrow fund will remain in place for
a period of eighteen months, although 50% of the escrow funds will be paid
out 12 months subsequent to the date of acquisition. In addition, we are
obligated to pay certain variable and deferred earn-out payments based on the
percentage of license revenues recognized subsequent to the
acquisition.
Due to
our dynamic market, we face both significant opportunities and challenges, and
as such, we focus on the following key factors:
|
|
Macroeconomic
Conditions: The United States and many foreign economies continue
to experience significant adversity driven by varying macroeconomic
conditions including the uncertainty in the credit markets and financial
markets, instability of major financial institutions, deterioration in the
housing and labor markets and volatility in fuel prices. As a result of
these conditions, the United States and global economies reflect a weak
macroeconomic environment, which is expected to continue. While we have
seen some improvement in the economy in the United States and parts of
Europe, the adverse conditions, which are beyond our control, are likely
to continue to have an adverse effect on our business. As a result, we
have reduced expenses in certain areas and have tempered our hiring
plans.
|
|
|
Competition:
Inherent in our industry are risks arising from competition with
existing software solutions, including solutions from IBM, Oracle, and
SAP, technological advances from other vendors, and the perception of cost
savings by solving data integration challenges through customer
hand-coding development resources. Our prospective customers may view
these alternative solutions as more attractive than our offerings.
Additionally, the consolidation activity in our industry (including
Oracle’s acquisition of BEA Systems, Sunopsis, Hyperion Solutions, and
GoldenGate Software and proposed acquisition of Sun Microsystems, IBM’s
acquisition of DataMirror and Cognos, and SPSS, and SAP’s acquisition of
Business Objects, which had previously acquired FirstLogic) could pose
challenges as competitors market a broader suite of software products or
solutions to our prospective
customers.
|
|
|
New Product
Introductions: To address the expanding data integration and data
integrity needs of our customers and prospective customers, we continue to
introduce new products and technology enhancements on a regular basis. In
June 2008, we delivered a version upgrade to our entire data integration
platform by delivering the generally available version of PowerCenter 8.6,
PowerExchange 8.6, and Informatica Data Quality 8.6 including identity
resolution. In August 2009, we delivered the PowerCenter Cloud Edition to
enable our customers to procure PowerCenter functionality from Amazon Web
Services by the hour. In addition, we plan to release Informatica 9 in the
future. New product introductions and/or enhancements have inherent risks
including, but not limited to, product availability, product quality and
interoperability, and customer adoption or the delay in customer
purchases. Given these risks and the recent introduction of these
products, we cannot predict their impact on our overall sales and
revenues.
|
|
|
Quarterly
and Seasonal Fluctuations: Historically, purchasing patterns in the
software industry have followed quarterly and seasonal trends and are
likely to do so in the future. Specifically, it is normal for us to
recognize a substantial portion of our new license orders in the last
month of each quarter and sometimes in the last few weeks or days of each
quarter, though such fluctuations are mitigated somewhat by recognition of
backlog orders. In recent years, the fourth quarter has had the highest
level of license revenues and order backlog, although the increase was
less pronounced at the end of 2008, and we generally have weaker demand
for our software products and services in the first and third quarters of
the year. The current macroeconomic conditions make our historical
seasonal trends more difficult to
predict.
|
To
address these potential risks, we have focused on a number of key initiatives,
including certain cost containment measures, the strengthening of our
partnerships, the broadening of our distribution capability worldwide, the
targeting of our sales force and distribution channel on new products, and
strategic acquisitions of complementary businesses, products, and
technologies.
We are
concentrating on maintaining and strengthening our relationships with our
existing strategic partners and building relationships with additional strategic
partners. These partners include systems integrators, resellers and
distributors, and strategic technology partners, including enterprise
application providers, database vendors, and enterprise information integration
vendors, in the United States and internationally. In February 2008, we launched
our new worldwide partner program, INFORM, which is comprised of a set of
programs and services to help partners develop and promote solutions in
conjunction with Informatica. In September 2009, we announced an expanded
partnership with Hewlett Packard. In September 2009, we also announced that
Intel will embed Informatica B2B Data Transformation in its Intel SOA Expressway
offering. We are partners with FAST (acquired by Microsoft), SAP, Oracle,
Hyperion Solutions (acquired by Oracle), and salesforce.com. See “Risk
Factors—We rely on our relationships with our
strategic partners. If we do not maintain and strengthen these relationships, our
ability to generate revenue and control expenses could be adversely affected, which
could cause a decline in the price of our common stock” in Part II, Item
1A.
We have
broadened our distribution efforts, and we have continued to expand our sales
both in terms of selling data warehouse products to the enterprise level and of
selling more strategic data integration solutions beyond data warehousing,
including data quality, data migrations, data consolidations, data
synchronizations, data hubs, information life cycle management, complex event
processing, cross-enterprise data integration and cloud integration to our
customers’ enterprise architects and chief information officers. We have
expanded our international sales presence in recent years by opening new
offices, increasing headcount, and through acquisitions. As a result of this
international expansion, as well as the increase in our direct sales headcount
in the United States, our sales and marketing expenses have increased. In the
long term, we expect these investments to result in increased revenues and
productivity and ultimately higher profitability, although we experienced a
tougher than expected selling environment in Europe in 2009. If we experience an
increase in sales personnel turnover, do not achieve expected increases in our
sales pipeline, experience a decline in our sales pipeline conversion ratio, or
do not achieve increases in sales productivity and efficiencies from our new
sales personnel as they gain more experience, then it is unlikely that we will
achieve our expected increases in revenue, sales productivity, or profitability
from our international operations. We have experienced some increases in
revenues and sales productivity in the United States in the past few years. In
2008, we experienced increases in revenues internationally, but we have not yet
achieved the same level of sales productivity internationally as
domestically.
To
address the risks of introducing new products, we have continued to invest in
programs to help train our internal sales force and our external distribution
channel on new product functionalities, key differentiations, and key business
values. These programs include user conferences for customers and partners, our
annual sales kickoff conference for all sales and key marketing personnel in
January, “Webinars” for our direct sales force and indirect distribution
channel, in-person technical seminars for our pre-sales consultants, the
building of product demonstrations, and creation and distribution of targeted
marketing collateral. We have also invested in partner enablement programs,
including product-specific briefings to partners and the inclusion of several
partners in our beta programs.
Critical
Accounting Policies and Estimates
In
preparing our condensed consolidated financial statements, we make assumptions,
judgments, and estimates that can have a significant impact on amounts reported
in our condensed consolidated financial statements. We base our assumptions,
judgments, and estimates on historical experience and various other factors that
we believe to be reasonable under the circumstances. Actual results could differ
materially from these estimates under different assumptions or conditions. On a
regular basis we evaluate our assumptions, judgments, and estimates and make
changes accordingly. We also discuss our critical accounting estimates with the
Audit Committee of the Board of Directors. We believe that the assumptions,
judgments, and estimates involved in the accounting for revenue recognition,
facilities restructuring charges, income taxes, impairment of goodwill,
acquisitions, share-based payments, and allowance for doubtful accounts have the
greatest potential impact on our condensed consolidated financial statements, so
we consider these to be our critical accounting policies. We discuss below the
critical accounting estimates associated with these policies. Historically, our
assumptions, judgments, and estimates relative to our critical accounting
policies have not differed materially from actual results. For further
information on our significant accounting policies, see the discussion in Note
1. Summary of Significant
Accounting Policies and Note 14. Recent Accounting Pronouncements, of Notes to
Condensed Consolidated Financial Statements in Part I, Item 1 of this
Report.
Revenue
Recognition
We follow
detailed revenue recognition guidelines, which are discussed below. We recognize
revenue in accordance with generally accepted accounting principles (“GAAP”) in
the United States that have been prescribed for the software industry. The
accounting rules related to revenue recognition are complex and are affected by
interpretations of the rules, which are subject to change. Consequently, the
revenue recognition accounting rules require management to make significant
judgments, such as determining if collectibility is probable.
We derive
revenues from software license fees, maintenance fees (which entitle the
customer to receive product support and unspecified software updates), and
professional services, consisting of consulting and education services. We
follow the appropriate revenue recognition rules for each type of revenue. The
basis for recognizing software license revenue is determined by FASB Software Revenue Recognition (ASC
985-605-25), FASB Revenue
Recognition for Construction-Type and Production-Type Contracts (ASC
605-35), and the
Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 104, Revenue Recognition, which
is discussed in the subsection
Revenue Recognition in Note 1. Summary of Significant Accounting
Policies of Notes to Condensed Consolidated Financial Statements in
Part I, Item 1 of this Report. Substantially all of our software
licenses are perpetual licenses under which the customer acquires the perpetual
right to use the software as provided and subject to the conditions of the
license agreement. We recognize revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collection is probable. In applying these criteria to revenue transactions, we
must exercise judgment and use estimates to determine the amount of software,
maintenance, and professional services revenue to be recognized at each
period.
We assess
whether fees are fixed or determinable prior to recognizing revenue. We must
make interpretations of our customer contracts and exercise judgments in
determining if the fees associated with a license arrangement are fixed or
determinable. We consider factors including extended payment terms, financing
arrangements, the category of customer (end-user customer or reseller), rights
of return or refund, and our history of enforcing the terms and conditions of
customer contracts. If the fee due from a customer is not fixed or determinable
due to extended payment terms, revenue is recognized when payment becomes due or
upon cash receipt, whichever is earlier. If we determine that a fee due from a
reseller is not fixed or determinable upon shipment to the reseller, we do not
recognize the revenue until the reseller provides us with evidence of
sell-through to an end-user customer and/or upon cash receipt. Further, we make
judgments in determining the collectibility of the amounts due from our
customers that could possibly impact the timing of revenue recognition. We
assess credit worthiness and collectibility, and when a customer is not deemed
credit worthy, revenue is recognized when payment is received.
Our
software license arrangements include the following multiple elements: license
fees from our core software products and/or product upgrades that are not part
of post-contract services, maintenance fees, consulting, and/or education
services. We use the residual method to recognize license revenue upon delivery
when the arrangement includes elements to be delivered at a future date and
vendor-specific objective evidence (“VSOE”) of fair value exists to allocate the
fee to the undelivered elements of the arrangement. VSOE is based on the price
charged when an element is sold separately. If VSOE does not exist for any
undelivered software product element of the arrangement, all revenue is deferred
until all elements have been delivered, or VSOE is established. If VSOE does not
exist for any undelivered services elements of the arrangement, all revenue is
recognized ratably over the period that the services are expected to be
performed. We are required to exercise judgment in determining if VSOE exists
for each undelivered element.
Consulting
services, if included as part of the software arrangement, generally do not
require significant modification or customization of the software. If, in our
judgment, the software arrangement includes significant modification or
customization of the software, then software license revenue is recognized as
the consulting services revenue is recognized.
Consulting
revenues are primarily related to implementation of services and product
configurations. These services are performed on a time-and-materials basis and,
occasionally, on a fixed-fee basis. Revenue is generally recognized as these
services are performed. If uncertainty exists about our ability to complete the
project, our ability to collect the amounts due, or in the case of fixed-fee
consulting arrangements, our ability to estimate the remaining costs to be
incurred to complete the project, revenue is deferred until the uncertainty is
resolved.
Multiple
contracts with a single counterparty executed within close proximity of each
other are evaluated to determine if the contracts should be combined and
accounted for as a single arrangement.
We
recognize revenues net of applicable sales taxes, financing charges that we have
absorbed, and amounts retained by our resellers and distributors, if any. Our
agreements do not permit returns, and historically we have not had any
significant returns or refunds; therefore, we have not established a sales
return reserve at this time.
Facilities
Restructuring Charges
During
the fourth quarter of 2004, we recorded significant charges (2004 Restructuring
Plan) related to the relocation of our corporate headquarters, to take advantage
of more favorable lease terms and reduce our operating expenses. The accrued
restructuring charges represent net present value of lease obligations and
estimated commissions and other costs (principally leasehold improvements and
asset write-offs), offset by actual and estimated gross sublease income, which
is net of estimated broker commissions and tenant improvement allowances,
expected to be received over the remaining lease terms. In addition, we
significantly increased the 2001 restructuring charges (2001 Restructuring Plan)
in the third and fourth quarters of 2004 due to changes in our assumptions used
to calculate the original charges as a result of our decision to relocate our
corporate headquarters.
These
liabilities include management’s estimates pertaining to sublease activities.
Inherent in the assessment of the costs related to our restructuring efforts are
estimates related to the probability weighted outcomes of the significant
actions to accomplish the restructuring. We will continue to evaluate the
commercial real estate market conditions periodically to determine if our
estimates of the amount and timing of future sublease income are reasonable
based on current and expected commercial real estate market conditions. Our
estimates of sublease income may vary significantly depending, in part, on
factors that may be beyond our control, such as the global economic downturn,
time periods required to locate and contract suitable subleases, and market
rates at the time of subleases. Currently, we have subleased our excess
facilities in connection with our 2004 and 2001 facilities restructuring but for
durations that are generally less than the remaining lease terms.
If we
determine that there is a change in the estimated sublease rates or in the
expected time it will take us to sublease our vacant space, we may incur
additional restructuring charges in the future and our cash position could be
adversely affected. See Note 9. Facilities Restructuring
Charges, of
Notes to Condensed Consolidated Financial Statements in Part I, Item 1
of this Report. Future adjustments to the charges could result from a change in
the time period that the buildings will be vacant, expected sublease rates,
expected sublease terms, and the expected time it will take to
sublease.
Accounting
for Income Taxes
We use
the asset and liability method of accounting for income taxes in accordance with
FASB Income Taxes (ASC
740). Under this
method, income tax expenses or benefits are recognized for the amount of taxes
payable or refundable for the current year and for deferred tax liabilities and
assets for the future tax consequences of events that have been recognized in
our condensed consolidated financial statements or tax returns. We account for
any income tax contingencies in accordance with ASC 740. The measurement of
current and deferred tax assets and liabilities is based on provisions of
currently enacted tax laws. The effects of any future changes in tax laws or
rates have not been taken into account.
As part
of the process of preparing consolidated financial statements, we estimate our
income taxes and tax contingencies in each of the tax jurisdictions in which we
operate prior to the completion and filing of tax returns for such periods. This
process involves estimating actual current tax expense together with assessing
temporary differences resulting from differing treatment of items, such as
deferred revenue, for tax and accounting purposes. These differences result in
net deferred tax assets and liabilities. We must then assess the likelihood that
the deferred tax assets will be realizable, and to the extent we believe that
realizability is not likely, we must establish a valuation
allowance.
In
assessing the need for any additional valuation allowance in the quarter ended
September 30, 2009, we considered all the evidence available to us, both
positive and negative, including historical levels of income, legislative
developments, expectations and risks associated with estimates of future taxable
income, and ongoing prudent and feasible tax planning strategies.
As a
result of this analysis for the quarter ended September 30, 2009, it was
considered more likely than not that our non-share-based related deferred tax
assets would be realized. As such, the remaining valuation allowance is
primarily related to our share-based payments deferred tax assets. The benefit
of these deferred tax assets will be recorded in the stockholders’ equity as
realized, and as such, they will not impact our effective tax rate.
Accounting
for Impairment of Goodwill
We assess
goodwill for impairment in accordance with FASB Intangibles – Goodwill and Other
(ASC 350), which requires that goodwill is tested for impairment at the
“reporting unit level” (“Reporting Unit”) at least annually and more frequently
upon the occurrence of certain events, as defined by ASC 350. Consistent with
our determination that we have only one reporting segment, we have determined
that there is only one Reporting Unit. We tested goodwill for impairment in our
annual impairment test on October 31, 2008, using the two-step process required
by ASC 350. First, we review the carrying amount of the Reporting Unit compared
to the “fair value” of the Reporting Unit based on quoted market prices of our
common stock. Second, if such comparison reflects potential impairment, we would
then perform the discounted cash flow analyses. These analyses are based on cash
flow assumptions that are consistent with the plans and estimates being used to
manage our business. An excess carrying value to fair value would indicate that
goodwill may be impaired. Finally, if we determine that goodwill may be
impaired, then we would compare the “implied fair value” of the goodwill, as
defined by ASC 350, to its carrying amount to determine the impairment loss, if
any.
We
determined in our annual impairment test on October 31, 2008 that the fair value
of the Reporting Unit exceeded the carrying amount and, accordingly, goodwill
had not been impaired. Assumptions and estimates about future values and
remaining useful lives are complex and often subjective. They can be affected by
a variety of factors, including external factors such as industry and economic
trends and internal factors such as changes in our business strategy and our
internal forecasts. Although we believe the assumptions and estimates we have
made in the past have been reasonable and appropriate, different assumptions and
estimates could materially impact our reported financial results.
Acquisitions
In
accordance with FASB Business
Combinations (ASC 805), we are required to allocate the purchase price of
acquired companies to the tangible and intangible assets acquired, liabilities
assumed, as well as to in-process research and development (IPR&D) based on
their estimated fair values at the acquisition date. The purchase price
allocation process requires management to make significant estimates and
assumptions, especially at the acquisition date with respect to intangible
assets, support obligations assumed, estimated restructuring liabilities, and
pre-acquisition contingencies.
A number
of events could potentially affect the accuracy of our assumptions and
estimates. Although we believe the assumptions and estimates that we have made
are reasonable and appropriate, nevertheless a level of uncertainty is inherent
in all such decisions. The following are some of the examples of
critical accounting estimates that we have applied in our
acquisitions:
|
|
future
expected cash flows from software license sales, support agreements,
consulting contracts, other customer contracts, and acquired developed
technologies and patents;
|
|
|
|
|
|
expected
costs to develop the in-process research and development into commercially
viable products and estimated cash flows from the projects when
completed;
|
|
|
|
|
|
the
acquired company’s brand and competitive position, as well as assumptions
about the period of time the acquired brand will continue to be used in
the combined company’s product portfolio; and
|
|
|
|
|
|
discount
rates.
|
In
connection with the purchase price allocations for our acquisitions, we estimate
the fair value of the support obligations assumed. The estimated fair value of
the support obligations is determined utilizing a cost build-up approach. The
cost build-up approach determines fair value by estimating the costs related to
fulfilling the obligations plus a normal profit margin. The estimated costs to
fulfill the support obligations are based on the historical direct costs related
to providing the support services and to correct any errors in the software
products acquired. The sum of these costs and operating profit approximates, in
theory, the amount that we would be required to pay a third party to assume the
support obligation. We do not include any costs associated with selling efforts
or research and development or the related fulfillment margins on these costs.
Profit associated with any selling efforts is excluded because the acquired
entities would have concluded those selling efforts on the support contracts
prior to the acquisition date. We also do not include the estimated research and
development costs to provide product upgrades on a “when and if available to”
basis in our fair value determinations, as these costs are not deemed to
represent a legal obligation at the time of acquisition.
Accounting
for business combinations has been impacted by ASC 805. Under the new accounting
pronouncement, we expense transaction costs and restructuring expenses related
to the acquisition as incurred. In contrast, we treated transaction costs and
restructuring expenses as part of the cost of the acquired business previously,
thus effectively capitalizing those amounts within the basis of the acquired
assets. Further, pursuant to ASC 805, we identify pre-acquisition contingencies
and determine their respective fair values as of the end of the purchase price
allocation period. We will adjust the amounts recorded as pre-acquisition
contingencies in our operating results in the period in which the adjustment is
determined. Furthermore, any adjustment applicable to acquisition related tax
contingencies estimates will be reflected in our operating results in the period
in which the adjustment is determined. Moreover, we identify the in-process
research and development costs and determine their respective fair values and
reflect them as part of the purchase price allocation. In-process research and
development costs, under the new guidance, meet the definition of asset and we
classify them as an indefinite lived intangible asset until the asset is put to
use or deemed to be impaired.
Share-Based
Payments
We
account for share-based payments related to share-based transactions in
accordance with the provisions of FASB Share-Based Payments (ASC
718). Accordingly, share-based payment is estimated at the grant date based on
the fair value of the award and is recognized as an expense ratably on a
straight line basis over its requisite service period. It requires a certain
amount of judgment to select the appropriate fair value model and calculate the
fair value of share-based awards, including estimating stock price volatility
and expected life. Further, estimates of forfeiture rates could shift the
share-based payments from one period to the next.
We have
estimated the expected volatility as an input into the Black-Scholes-Merton
valuation formula when assessing the fair value of options granted. Our current
estimate of volatility was based upon a blend of average historical and
market-based implied volatilities of our stock price that we have used
consistently since the adoption of SFAS No. 123(R) in 2006. Our volatility rates
were 37% and 44% for the three and nine months ended September 30, 2009,
compared to 39% for both the three and nine months ended September 30, 2008. To
the extent that the volatility rate in our stock price increases in the future,
our estimates of the fair value of options granted will increase accordingly. We
do not expect that changes in the volatility rates impact our future share-based
payments materially due to the limited amount of recent option
grants.
We
derived our expected life of the options that we granted in 2009 from the
historical option exercises, post-vesting cancellations, and estimates
concerning future exercises and cancellations for vested and unvested options
that remain outstanding. We increased our expected life estimate from 3.3 years
in 2008 to 3.6 years in 2009. The higher expected life of options was mainly due
to lower exercises in 2008 by our executive officers and other key employees. We
do not expect that changes in the expected life will impact our future
share-based payments materially due to the limited amount of recent option
grants.
In
addition, we apply an expected forfeiture rate in determining the amount of
share-based payments. Our estimate of the forfeiture rate is based on an average
of actual forfeited options granted to new employees for the past four quarters.
We lowered our forfeiture rate, for the quarter ended March 31, 2009, from 10%
to 8%, which increased our share-based payments in the first quarter of 2009 by
approximately $177,000. The forfeiture rate for the quarters ended September 30,
2009 and June 30, 2009 remained unchanged from the first quarter of
2009.
We have
granted Restricted Stock Units (“RSUs”) to our executive officers, certain
employees, and directors during the nine months ended September 30, 2009. We
have recorded the share-based payment for RSUs net of the 10% forfeiture
estimate. We estimate our forfeiture rate for RSUs based on an average of actual
forfeited option awards for the past four quarters.
We
believe that the estimates that we have used for the calculation of the
variables to arrive at share-based payments are accurate. We will, however,
continue to monitor the historical performance of these variables and will
modify our methodology and assumptions in the future as needed.
Allowances
for Doubtful Accounts
We
establish allowances for doubtful accounts based on our review of credit
profiles of our customers, contractual terms and conditions, current economic
trends and historical payment, and return and discount experiences. We reassess
the allowances for doubtful accounts each quarter. However, unexpected events or
significant future changes in trends could result in a material impact to our
future statements of income and cash flows. Our allowance for doubtful accounts
at September 30, 2009 and December 31, 2008 was $3.5 million and $2.6 million,
respectively.
Recent
Accounting Pronouncements
For
recent accounting pronouncements see Note 14. Recent Accounting Pronouncements, of Notes to Condensed
Consolidated Financial Statements under Part I, Item 1 of this
Report.
Results
of Operations
The
following table presents certain financial data for the three and nine months
ended September 30, 2009 and 2008 as a percentage of total
revenues:
|
|
Three
Months
Ended September 30,
|
|
|
Nine
Months
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
|
41 |
% |
|
|
40 |
% |
|
|
41 |
% |
|
|
42 |
% |
Service
|
|
|
59 |
|
|
|
60 |
|
|
|
59 |
|
|
|
58 |
|
Total
revenues
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Service
|
|
|
15 |
|
|
|
18 |
|
|
|
16 |
|
|
|
18 |
|
Amortization
of acquired technology
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Total
cost of revenues
|
|
|
17 |
|
|
|
20 |
|
|
|
18 |
|
|
|
20 |
|
Gross
profit
|
|
|
83 |
|
|
|
80 |
|
|
|
82 |
|
|
|
80 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
16 |
|
|
|
16 |
|
|
|
16 |
|
|
|
16 |
|
Sales
and marketing
|
|
|
39 |
|
|
|
38 |
|
|
|
39 |
|
|
|
40 |
|
General
and administrative
|
|
|
7 |
|
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
Amortization
of intangible assets
|
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
Facilities
restructuring charges
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Purchased
in-process research and development
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
operating expenses
|
|
|
65 |
|
|
|
64 |
|
|
|
66 |
|
|
|
66 |
|
Income
from operations
|
|
|
18 |
|
|
|
16 |
|
|
|
16 |
|
|
|
14 |
|
Interest
income
|
|
|
1 |
|
|
|
3 |
|
|
|
1 |
|
|
|
4 |
|
Interest
expense
|
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
Other
income, net
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Income
before provision for income taxes
|
|
|
18 |
|
|
|
17 |
|
|
|
16 |
|
|
|
16 |
|
Provision
for income taxes
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
Net
income
|
|
|
13 |
% |
|
|
12 |
% |
|
|
11 |
% |
|
|
11 |
% |
Revenues
Our total
revenues increased to $123.4 million for the three months ended September 30,
2009 from $113.8 million for the three months ended September 30, 2008,
representing an increase of $9.6 million (or 8%). Total revenues increased to
$349.8 million for the nine months ended September 30, 2009 from $331.3 million
for the nine months ended September 30, 2008, representing an increase of $18.5
million (or 6%). The increase is due to a growing customer install
base, an increase in the number of license transactions, the average sales price
of those transactions, and strategic acquisitions of complementary businesses
and products during the last 12 months. See Note 15 Acquisitions of Notes to
Condensed Consolidated Financial Statements.
The
following table sets forth, for the periods indicated, our revenues (in
thousands, except percentages):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
License
revenues
|
|
$ |
49,981 |
|
|
$ |
45,846 |
|
|
|
9 |
% |
|
$ |
142,770 |
|
|
$ |
138,578 |
|
|
|
3 |
% |
Service
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance
|
|
|
55,221 |
|
|
|
48,994 |
|
|
|
13 |
% |
|
|
156,249 |
|
|
|
135,884 |
|
|
|
15 |
% |
Consulting,
education, and other
|
|
|
18,192 |
|
|
|
18,977 |
|
|
|
(4 |
)% |
|
|
50,777 |
|
|
|
56,825 |
|
|
|
(11 |
)% |
Total
service revenues
|
|
|
73,413 |
|
|
|
67,971 |
|
|
|
8 |
% |
|
|
207,026 |
|
|
|
192,709 |
|
|
|
7 |
% |
|
|
$ |
123,394 |
|
|
$ |
113,817 |
|
|
|
8 |
% |
|
$ |
349,796 |
|
|
$ |
331,287 |
|
|
|
6 |
% |
License
Revenues
Our
license revenues increased to $50.0 million (or 41% of total revenues) and
$142.8 million (or 41% of total revenues) for the three and nine months ended
September 30, 2009, respectively, from $45.8 million (or 40% of total revenues)
and $138.6 million (or 42% of total revenues) for the three and nine months
ended September 30, 2008, respectively. The increase in license revenues of $4.1
million (or 9%) for the three months ended September 30, 2009, and $4.2 million
(or 3%) for the nine months ended September 30, 2009, compared to the same
periods in 2008, was primarily due to an increase in both the number of license
transactions and the average sales price of those transactions, resulting in
growth of license revenues primarily in North America.
We have two types of
upgrades: (1) upgrades that are not part of the post-contract services for which
we charge customers an additional fee, and (2) upgrades that are part of the
post-contract services that we provide to our customers at no additional charge,
when and if available. The average transaction amount for orders greater
than $100,000 in the third quarter of 2009, including upgrades, for which we
charge customers an additional fee, increased to $365,000 from $299,000 in the
third quarter of 2008. The average transaction amount for orders greater than
$100,000 in the nine-month period ended September 30, 2009, including upgrades,
for which we charge customers an additional fee, increased to $336,000 from
$303,000 in the comparative nine-month period in 2008, The number of
transactions greater than $1.0 million increased to five in the third quarter of
2009 from four in the third quarter of 2008. The number of transactions greater
than $1.0 million increased to 16 in the nine-month period ended September 30,
2009 from 13 in the comparative nine-month period in 2008.
Services
Revenues
Maintenance
Revenues
Maintenance
revenues increased to $55.2 million (or 45% of total revenues) for the three
months ended September 30, 2009, compared to $49.0 million (or 43% of total
revenues) for the three months ended September 30, 2008. The $6.2 million (or
13%) increase in the three months ended September 30, 2009, compared to the same
period in 2008, was primarily due to the increasing size of our customer base.
Maintenance revenues increased to $156.2 million (or 45% of total revenues) for
the nine months ended September 30, 2009, compared to $135.9 million (or 41% of
total revenues) for the nine months ended September 30, 2008. The $20.4 million
(or 15%) increase in the nine months ended September 30, 2009, compared to the
same period in 2008, was primarily due to an increase in the size of our
customer base.
For the
fourth quarter of 2009, based on our growing
installed customer base, we expect maintenance revenues to increase from
the comparable 2008 levels. As our customer
base continues to grow, we expect that maintenance revenues continue to increase
compared to prior periods.
Consulting,
Education, and Other Services Revenues
Consulting,
education, and other services revenues decreased slightly to $18.2 million (or
15% of total revenues) for the three months ended September 30, 2009, compared
to $19.0 million (or 17% of total revenues) for the three months ended September
30, 2008. The $0.8 million (or 4%) decrease in the three months ended September
30, 2009, compared to the same period in 2008, was primarily due to lower
demand for our consulting and education services. Consulting, education,
and other services revenues decreased to $50.8 million (or 15% of total
revenues) for the nine months ended September 30, 2009, compared to $56.8
million (or 17% of total revenues) for the nine months ended September 30, 2008.
The $6.0 million (or 11%) decrease in the nine months ended September 30, 2009,
compared to the same period in 2008, was primarily due to
our customers’ trend toward deferring spending and reducing education and
consulting budgets.
For the
fourth quarter of 2009, we expect our revenues from consulting, education, and
other services to remain the same or possibly increase slightly compared to the
same period in 2008.
International
Revenues
Our
international revenues were $45.6 million (or 37% of total revenues) and $45.8
million (or 40% of total revenues) for the three months ended September 30, 2009
and 2008, respectively. International revenues remained essentially flat for the
three months ended September 30, 2009, compared to the same period in 2008, as
the increase in international maintenance revenue, was offset by a decrease in
international license revenues in Europe and Asia Pacific. International
revenues were $122.6 million (or 35% of total
revenues)
for the nine months ended September 30, 2009, compared to $115.7 million (or 35%
of total revenues) for the nine months ended September 30, 2008. The $6.9
million (or 6%) increase for the nine months ended September 30, 2009, compared
to the same period in 2008, was primarily due to an increase in international
maintenance revenue as a result of a larger and growing installed base, and an
increase in international license and service revenues in Latin America,
partially offset by declines in license revenues in Europe.
For the
fourth quarter of 2009, we expect the amount of international revenues, as a
percentage of total revenues, to be relatively consistent with 2008.
Future
Revenues (New Orders, Backlog, and Deferred Revenues)
Our
future revenues include (1) backlog consisting primarily of product license
orders that have not shipped as of the end of a given quarter, (2) orders
received from certain distributors, resellers, and OEMs, not included in
deferred revenues, where revenue is recognized based on cash receipt
(collectively (1) and (2) above are referred as “aggregate backlog”),
and (3) deferred revenues. Our deferred revenues consist primarily of the
following: (1) maintenance revenues that we recognize over the term of the
contract, typically one year, (2) license product orders that have shipped
but where the terms of the license agreement contain acceptance language or
other terms that require that the license revenues be deferred until all revenue
recognition criteria are met or recognized ratably over an extended period, and
(3) consulting and education services revenues that have been prepaid but
for which services have not yet been performed.
We
typically ship products shortly after the receipt of an order, which is common
in the software industry, and historically our backlog of license orders
awaiting shipment at the end of any given quarter has varied. However, our
backlog typically decreases from the prior quarter at the end of the first and
third quarters, remains relatively flat with some variation at the end of the
second quarter, and increases at the end of the fourth quarter although the
increase was less pronounced at the end of 2008. Aggregate backlog and deferred
revenues were approximately $144.8 million at September 30, 2009, compared to
$133.7 million at September 30, 2008, and $148.1 million at December 31, 2008.
Aggregate backlog
and deferred revenues as of any particular date are not necessarily indicative
of our future results.
Cost
of Revenues
The
following table sets forth, for the periods indicated, our cost of revenues (in
thousands, except percentages):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
Cost
of license revenues
|
|
$ |
648 |
|
|
$ |
722 |
|
|
|
(10 |
)% |
|
$ |
2,024 |
|
|
$ |
2,312 |
|
|
|
(12 |
)% |
Cost
of service revenues
|
|
|
18,759 |
|
|
|
20,404 |
|
|
|
(8 |
)% |
|
|
55,605 |
|
|
|
61,569 |
|
|
|
(10 |
)% |
Amortization
of acquired technology
|
|
|
2,081 |
|
|
|
1,283 |
|
|
|
62 |
% |
|
|
5,497 |
|
|
|
2,854 |
|
|
|
93 |
% |
Total
cost of revenues
|
|
$ |
21,488 |
|
|
$ |
22,409 |
|
|
|
(4 |
)% |
|
$ |
63,126 |
|
|
$ |
66,735 |
|
|
|
(5 |
)% |
Cost
of license revenues, as a percentage of license revenues
|
|
|
1 |
% |
|
|
2 |
% |
|
|
(1 |
)% |
|
|
1 |
% |
|
|
2 |
% |
|
|
(1 |
)% |
Cost
of service revenues, as a percentage of service revenues
|
|
|
26 |
% |
|
|
30 |
% |
|
|
(4 |
)% |
|
|
27 |
% |
|
|
32 |
% |
|
|
(5 |
)% |
Cost
of License Revenues
Our cost
of license revenues consists primarily of software royalties, product packaging,
documentation, and production costs. Cost of license revenues decreased slightly
to $0.6 million (or 1% of license revenues) for the three-month periods ended
September 30, 2009 from $0.7 million (or 2% of license revenues) for the same
period in 2008. Cost of license revenues decreased slightly to $2.0 million (or
1% of license revenues) for the nine months ended September 30, 2009 from $2.3
million (or 2% of license revenues) for the nine months ended September 30,
2008. The decrease of $0.1 million (or 10%) and $0.3 million (or 12%) in cost of
license revenues for the three and nine months ended September 30, 2009,
compared to the same periods in 2008, was due to the smaller proportion of
royalty based products being shipped in the first nine months of
2009.
For the
fourth quarter of 2009, we expect the cost of license revenues, as a percentage
of license revenues, to be relatively consistent with the first three quarters
of 2009.
Cost
of Service Revenues
Our cost
of service revenues is a combination of costs of maintenance, consulting,
education, and other services revenues. Our cost of maintenance revenues
consists primarily of costs associated with customer service personnel expenses
and royalty fees for maintenance related to third-party software providers. Cost
of consulting revenues consists primarily of personnel costs and expenses
incurred in providing consulting services at customers’ facilities. Cost of
education services revenues consists primarily of the costs of providing
education classes and materials at our headquarters, sales and training offices,
and customer locations. Cost of other services revenue consists primary of fees
paid to postal authorities and other third parties for content. Cost of service
revenues decreased to $18.8 million (or 26% of services revenues) for the three
months ended September 30, 2009 from $20.4 million (or 30% of service revenues)
for the three months ended September 30, 2008. The $1.6 million (or 8%) decline
was primarily due to a $1.4 million reduction in personnel related costs. Cost
of service revenues decreased to $55.6 million (or 27% of service revenues) for
the nine months ended September 30, 2009 from $61.6 million (or 32% of service
revenues) for the nine months ended September 30, 2008. The decrease of $6.0
million (or 10%) for the nine months ended September 30, 2009, compared to the
same period in 2008, was primarily due to a $4.1 million reduction in personnel
related costs and a $1.6 million reduction in subcontractor fees.
For the
fourth quarter of 2009, we expect our cost of service revenues, as a percentage
of service revenues, to be relatively consistent with the first three quarters
of 2009.
Amortization
of Acquired Technology
The
following table sets forth, for the periods indicated, our amortization of
acquired technology (in thousands, except percentages):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
Amortization
of acquired technology
|
|
$ |
2,081 |
|
|
$ |
1,283 |
|
|
|
62 |
% |
|
$ |
5,497 |
|
|
$ |
2,854 |
|
|
|
93 |
% |
Amortization
of acquired technology is the amortization of technologies acquired through
business acquisitions and technology licenses. Amortization of acquired
technology increased to $2.1 million for the three months ended September 30,
2009, compared to $1.3 million for the three months ended September 30, 2008.
Amortization of acquired technology increased to $5.5 million for the nine
months ended September 30, 2009, compared to $2.9 million for the nine months
ended September 30, 2008. The increases of $0.8 million (or 62%) and $2.6
million (or 93%) for the three and nine months ended September 30, 2009,
respectively compared to the same periods in the prior year, are the result of
amortization of certain technologies that we acquired in May 2008, October 2008,
February 2009, June 2009 and September 2009 in connection with the acquisitions
of Identity Systems, PowerData, Applimation, AddressDoctor, and Agent Logic,
respectively.
For the
fourth quarter of 2009, we expect amortization of other acquired technology to
be approximately $2.5 million before the effect of any potential future
acquisitions subsequent to September 30, 2009.
Operating
Expenses
Research
and Development
The
following table sets forth, for the periods indicated, our research and
development expenses (in thousands, except percentages):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
Research
and development
|
|
$ |
19,978 |
|
|
$ |
18,263 |
|
|
|
9 |
% |
|
$ |
57,089 |
|
|
$ |
54,484 |
|
|
|
5 |
% |
Our
research and development expenses consist primarily of salaries and other
personnel-related expenses, consulting services, facilities, and related
overhead costs associated with the development of new products, the enhancement
and localization of existing products, and quality assurance and development of
documentation for our products. Our research and development expenses increased
slightly to $20.0 million (or 16% of total revenues) and $57.1 million (or 16%
of total revenues) for the three and nine months ended September 30, 2009,
respectively, up from $18.3 million (or 16% of total revenues) and $54.5 million
(or 16% of total revenues) for the same periods in 2008. The increase of $1.7
million for the three months ended September 30, 2009 compared to
the
same
period in 2008, was due to a $1.8 million increase in personnel-related costs,
as a result of a headcount increase from 433 in September 2008 to 520 in
September 2009 partially offset by a reduction of $0.1 million in overhead
costs. The increase of $2.6 million for the nine months ended September 30, 2009
compared to the same period in 2008, was due to a $3.9 million increase in
personnel related costs partially offset by a $1.3 million reduction in overhead
costs. All software and development costs have been expensed in the period
incurred because the costs incurred subsequent to the establishment of
technological feasibility have not been significant.
For the
fourth quarter of 2009, we expect research and development expenses, as a
percentage of total revenues, to be relatively consistent with or slightly
decrease from the first three quarters of 2009.
Sales
and Marketing
The
following table sets forth, for the periods indicated, our sales and marketing
expenses (in thousands, except percentages):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
Sales
and marketing
|
|
$ |
47,484 |
|
|
$ |
43,667 |
|
|
|
9 |
% |
|
$ |
135,366 |
|
|
$ |
132,420 |
|
|
|
2 |
% |
Our sales
and marketing expenses consist primarily of personnel costs, including
commissions, as well as costs of public relations, seminars, marketing programs,
lead generation, travel, and trade shows. Sales and marketing expenses increased
to $47.5 million (or 39% of total revenues) for the three months ended September
30, 2009 from $43.7 million (or 38% of total revenues) for the three months
ended September 30, 2008. The $3.8 million (or 9%) increase for the three months
ended September 30, 2009, compared to the same period in 2008, was primarily due
to a $3.4 million increase in personnel related costs. Sales and marketing
expenses increased to $135.4 million (or 39% of total revenues) for the nine
months ended September 30, 2009 from $132.4 million (or 40% of total revenues)
for the nine months ended September 30, 2008. The increase of $2.9 million (or
2%) for the nine months ended September 30, 2009, compared to the same period in
2008, was primarily due to a $1.5 million increase in personnel related costs, a
$0.6 million increase in outside services, and a $0.4 million increase in
facilities related costs. The sales and marketing expenses as a percentage of
total revenues declined by 1% for the nine months ended September 30, 2009,
compared to the same period in 2008, mainly due to implementation of certain
cost containment programs as well as benefits of scale, as our revenues have
increased proportionately more than our sales and marketing
expenses.
For the
fourth quarter of 2009, we expect sales and marketing expenses, as a percentage
of total revenues, to be relatively consistent with the first three quarters of
2009.
General
and Administrative
The
following table sets forth, for the periods indicated, our general and
administrative expenses (in thousands, except percentages):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
General
and administrative
|
|
$ |
8,845 |
|
|
$ |
9,412 |
|
|
|
(6 |
)% |
|
$ |
30,646 |
|
|
$ |
26,927 |
|
|
|
14 |
% |
Our
general and administrative expenses consist primarily of personnel costs for
finance, human resources, legal, and general management, as well as professional
service expenses associated with recruiting, legal, and accounting services.
General and administrative expenses decreased slightly to $8.8 million (or 7% of
total revenues) for the three months ended September 30, 2009, compared to $9.4
million (or 8% of total revenues) for the three months ended September 30, 2008.
The $0.6 million (or 6%) decrease in general and administrative expenses was
primarily due to a $0.7 million increase in personnel related costs offset by a
$0.7 million decrease in outside services and a $0.6 million decrease in bad
debt expense. General and administrative expenses increased to $30.6 million (or
8% of total revenues) for the nine months ended September 30, 2009, compared to
$26.9 million (or 8% of total revenues) for the nine months ended September 30,
2008. The increase of $3.7 million (or 14%) for the nine months ended September
30, 2009, compared to the same period in 2008, was primarily due to an increase
of $1.4 million in personnel related costs and a $2.9 million increase in
outside services as a result of legal fees for patent litigation and acquisition
related costs. This increase was offset by a $0.5 million decrease in bad debt
expense.
The
general and administrative expenses, as a percentage of total revenues may
fluctuate depending on the level of litigation expenses and acquisitions related
costs.
Amortization
of Intangible Assets
The
following table sets forth, for the periods indicated, our amortization of
intangible assets (in thousands, except percentages):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
Amortization
of intangible assets
|
|
$ |
2,754 |
|
|
$ |
1,502 |
|
|
|
83 |
% |
|
$ |
7,239 |
|
|
$ |
2,857 |
|
|
|
153 |
% |
Amortization
of intangible assets is the amortization of customer relationships and vendor
relationships acquired, trade names, and covenants not to compete through prior
business acquisitions. Amortization of intangible assets increased to $2.8
million and $7.2 million for the three and nine months ended September 30, 2009,
respectively, from $1.5 million and $2.9 million for the three and nine months
ended September 30, 2008, respectively. The increase of $1.3 million (or 83%)
and $4.4 million (or 153%) for the three and nine months ended September 30,
2009, respectively, compared to the same periods in 2008 are the result of
amortization of intangibles that we acquired in May and October 2008, and
February, June and September 2009 in connection with the Identity Systems, Inc.,
PowerData, Applimation, Inc., AddressDoctor and Agent Logic acquisitions,
respectively.
For the
fourth quarter of 2009, we expect amortization of the remaining intangible
assets to be approximately $2.8 million before the impact of any amortization
for any possible intangible assets acquired as part of the pending or any future
acquisitions subsequent to September 30, 2009.
Facilities
Restructuring Charges
The
following table sets forth, for the periods indicated, our facilities
restructuring and excess facilities charges (in thousands, except
percentages):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
Facilities
restructuring charges
|
|
$ |
557 |
|
|
$ |
896 |
|
|
|
(38 |
)% |
|
$ |
1,961 |
|
|
$ |
2,764 |
|
|
|
(29 |
)% |
For the
three and nine months ended September 30, 2009, we recorded $0.6 million and
$2.0 million of restructuring charges from accretion charges related to the 2004
Restructuring Plan, respectively. Comparatively, for the three and nine months
ended September 30, 2008, we recorded $0.9 million and $2.8 million of
restructuring charges from accretion charges related to the 2004 Restructuring
Plan, respectively.
As of
September 30, 2009, $56.5 million of total lease termination costs, net of
actual and expected sublease income, less broker commissions and tenant
improvement costs related to facilities to be subleased, was included in accrued
restructuring charges and is expected to be paid by 2013.
2004
Restructuring Plan
Net cash
payments related to the consolidation of excess facilities under the 2004
Restructuring Plan amounted to $3.1 million and $2.8 million for the three
months ended September 30, 2009 and 2008, respectively, and $8.6 million and
$8.1 million for the nine months ended September 30, 2009 and 2008,
respectively. Actual future cash requirements may differ from the restructuring
liability balances as of September 30, 2009 if there are changes to the time
period that facilities are expected to be vacant or if the actual sublease
income differs from our current estimates.
2001
Restructuring Plan
Net cash
payments related to the consolidation of excess facilities under the 2001
Restructuring Plan amounted to $0.4 million for both of the three-month periods
ended September 30, 2009 and 2008, and $1.1 million for both of the nine-month
periods ended September 30, 2009 and 2008. Actual future cash requirements may
differ from the restructuring liability balances as of September 30, 2009 if
there are changes to the time period that facilities are vacant or the actual
sublease income is different from current estimates.
In
addition, we will continue to evaluate our current facilities requirements to
identify facilities that are in excess of our current and estimated future
needs. We will also evaluate the assumptions related to estimated future
sublease income for excess facilities. Accordingly, any changes to these
estimates of excess facilities costs could result in additional charges that
could materially affect our consolidated financial position and results of
operations. See Note 9. Facilities Restructuring
Charges, of Notes to Condensed
Consolidated Financial Statements in Part I, Item 1 of this Report.
Interest
Income, Expense, and Other
The
following table sets forth, for the periods indicated, our interest income,
expense, and other (in thousands, except percentages):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
Interest
income
|
|
$ |
1,295 |
|
|
$ |
3,191 |
|
|
|
(59 |
)% |
|
$ |
4,651 |
|
|
$ |
11,698 |
|
|
|
(60 |
)% |
Interest
expense
|
|
|
(1,611 |
) |
|
|
(1,830 |
) |
|
|
(12 |
)% |
|
|
(4,863 |
) |
|
|
(5,431 |
) |
|
|
(10 |
)% |
Other
income, net
|
|
|
189 |
|
|
|
139 |
|
|
|
36 |
% |
|
|
964 |
|
|
|
556 |
|
|
|
73 |
% |
|
|
$ |
(127 |
) |
|
$ |
1,500 |
|
|
|
(108 |
)% |
|
$ |
752 |
|
|
$ |
6,823 |
|
|
|
(89 |
)% |
Interest
income, expense, and other consist primarily of interest income earned on our
cash, cash equivalents, and short-term investments; as well as foreign exchange
transaction gains and losses and interest expense. The decrease of $1.6 million
(or 108%) in the three months ended September 30, 2009, compared to the same
period in 2008, was primarily due to a $1.9 million decrease in interest
income due to lower investment yields which was partially offset by a $0.2
million decrease in interest expense. The decrease of $6.1 million (or 89%) in
the nine months ended September 30, 2009, compared to the same period in 2008,
was primarily due to a $7.0 million decrease in interest income due to lower
investment yields which was partially offset by a $0.3 million gain on early
extinguishment of debt and $0.6 million decrease in interest expense due to the
$29 million redemption of our convertible senior notes during the fourth quarter
of 2008 and the first quarter of 2009.
We expect
lower interest income in the future if the current depressed yields in the
credit market continue or decline in the future.
In 2003,
we made a minority equity investment in a privately held company that was
carried at a cost basis of $0.5 million and was included in other assets.
We evaluated this investment in December 2004 and determined that the carrying
value of this investment was impaired. In December 2007, this privately held
company was acquired, and as a result of this acquisition, we received $125,000
and $883,700 cash proceeds for our share in the equity of the company in 2008
and 2007, respectively. We have recorded these amounts as other income for the
years ended December 31, 2008 and 2007.
Provision
for Income Taxes
The
following table sets forth, for the periods indicated, our provision for income
taxes (in thousands, except percentages):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
Provision
for income taxes
|
|
$ |
5,969 |
|
|
$ |
5,787 |
|
|
|
3 |
% |
|
$ |
15,881 |
|
|
$ |
15,425 |
|
|
|
3 |
% |
Effective
tax rate
|
|
|
27 |
% |
|
|
30 |
% |
|
|
(3 |
)% |
|
|
29 |
% |
|
|
30 |
% |
|
|
(1 |
)% |
Our
effective tax rates were 27% and 30% for the three-month periods ended September
30, 2009 and 2008, respectively, and 29% and 30% for the nine-month periods
ended September 30, 2009 and 2008, respectively. The effective tax rates
differed from the federal statutory rate of 35% primarily due to benefits of
certain earnings from operations in lower-tax jurisdictions throughout the
world, the recognition of current year research and development credits and
previously unrealized foreign tax credits and a prior year tax return true-up
offset by compensation expense related to non-deductible share-based payments,
and agreed upon audit assessments with the Internal Revenue Service, as well as
the accrual of reserves related to uncertain tax positions. We have not provided
for residual U.S. taxes in any of these lower-tax jurisdictions since we intend
to indefinitely reinvest these earnings offshore.
In
assessing the need for any additional valuation allowance in the quarter ended
September 30, 2009, we considered all available evidence both positive and
negative, including historical levels of income, legislative developments,
expectations and risks associated with estimates of future taxable income, and
ongoing prudent and feasible tax planning strategies.
As a
result of this analysis for the quarter ended September 30, 2009, consistent
with prior quarters it was considered more likely than not that our non
share-based-payment related deferred tax assets would be realized. As a result,
the remaining valuation allowance is primarily related to our share-based
payments deferred tax assets. The benefit of these deferred tax assets will be
recorded in the stockholders’ equity as realized, and as such, they will not
impact our effective tax rate.
The
unrecognized tax benefits related to FASB Income Taxes (ASC 740), if
recognized, would impact the income tax provision by $9.3 million and $7.1
million as of September 30, 2009 and 2008, respectively. The unrecognized tax
benefits were $10.6 million and $20.2 million as of September 30, 2009 and
December 31, 2008, respectively. The change was primarily due to the agreement
with the Internal Revenue Service on certain audit issues, the expiration of
certain statute of limitations and the accrual for uncertain tax positions. We
have elected to include interest and penalties as a component of tax expense.
Accrued interest and penalties at September 30, 2009 and 2008 were approximately
$2.2 million and $0.6 million, respectively.
We file
U.S. federal income tax returns as well as income tax returns in various states
and foreign jurisdictions. We were under examination by the Internal Revenue
Service for fiscal years 2005 and 2006. Due to net operating loss
carry-forwards, substantially all of our tax years remained open for tax
examination. During the three months ended June 30, 2009, we reached an
agreement with the Internal Revenue Service to settle certain matters, including
cost sharing and buy-in amounts for tax years ended December 31, 2001 through
2006. The tax provision impact as a result of the settlement was $7.0 million of
which $6.1 million was accrued for previously.
We have
been informed by certain state and foreign taxing authorities that we were
selected for examination. Most state and foreign jurisdictions have three or
four open tax years at any point in time. The field work for certain state
audits has commenced and is at various stages of completion as of September 30,
2009.
Although
the outcome of any tax audit is uncertain, we believe that we have adequately
provided in our financial statements for any additional taxes that we may be
required to pay as a result of such examinations. We regularly assess the
likelihood of outcomes resulting from these examinations to determine the
adequacy of our provision for income taxes, and believe our current reserve to
be reasonable. If tax payments ultimately prove to be unnecessary, the reversal
of these tax liabilities would result in tax benefits in the period that we
determined such liabilities were no longer necessary. However, if an ultimate
tax assessment exceeds our estimate of tax liabilities, an additional tax
provision might be required.
Our
statutory tax rate of 35% is generally affected by lower tax rates in applicable
foreign jurisdictions, accrual of reserves related to uncertain tax positions,
domestic tax credits and discrete items such as the results of tax audits and
prior year tax return true-ups. We expect to maintain an effective tax rate
before discrete items in the near term similar to the rate in the third quarter
of 2009; however, this rate is highly dependent on our geographic mix of
earnings. In addition, our overall effective tax rate may be impacted by
discrete items such as the results of tax audits.
Liquidity
and Capital Resources
We have
funded our operations primarily through cash flows from operations and public
offerings of our common stock in the past. As of September 30, 2009, we had
$423.4 million in available cash and cash equivalents and short-term
investments. Our primary sources of cash are the collection of accounts
receivable from our customers and proceeds from the exercise of stock options
and stock purchased under our employee stock purchase plan. Our uses of cash
include payroll and payroll-related expenses and operating expenses such as
marketing programs, travel, professional services, and facilities and related
costs. We have also used cash to purchase property and equipment, repurchase
common stock from the open market to reduce the dilutive impact of stock option
issuances, repurchase our Convertible Senior Notes, and acquire businesses and
technologies to expand our product offerings.
Operating Activities: Cash
provided by operating activities for the nine months ended September 30, 2009
was $47.5 million, representing a decline of $4.6 million from the nine months
ended September 30, 2008 for $52.1 million. This decline was primarily due to
the $14.6 million decrease in liabilities, $8.7 million decrease in cash
collections against accounts receivable partially offset by a $9.7 million
decrease in prepaid accounts and other current assets, $3.1 million increase in
net income and $5.9 million adjustments for non-cash expenses.
We
recognized $2.8 million and $5.2 million in excess tax benefits from share-based
payments during the nine months ended September 30, 2009 and 2008, respectively.
These amounts were recorded as a use of operating activities and the offsetting
amounts were recorded as a provision by financing activities. We made cash
payments for taxes in different jurisdictions for $9.8 million and $23.3 million
during the nine months ended September 30, 2009 and 2008,
respectively.
Our “Days
Sales Outstanding” in accounts receivable increased from 48 days at September
30, 2008 to 62 days at September 30, 2009 due to higher amount of billings which
occurred during the last month of the third quarter of 2009 compared to 2008,
higher sales to international customers who tend to pay slower than domestic
customers, and in general customers’ slower payment patterns as a result of weak
economic conditions. Cash provided by operating activities for the nine months
ended September 30, 2008 was
$52.1
million, representing an increase of $9.3 million from the nine months ended
September 30, 2007. This increase primarily resulted from a $2.1 million
increase in net income, after adjusting for non-cash expenses, an increase in
cash collections against accounts receivable, and an increase in accounts
payable, partially offset by payments to reduce our accrual for excess
facilities, excess tax benefits from share-based payments, and accrued
liabilities. Our operating cash flows will also be impacted in the future by the
timing of payments to our vendors and payments for taxes.
Investing Activities: We
acquire property and equipment in the normal course of our business. The amount
and timing of these purchases and the related cash outflows in future periods
depend on a number of factors, including the hiring of employees, the rate of
upgrade of computer hardware and software used in our business, as well as our
business outlook.
We have
identified our investment portfolio as “available for sale,” based on Statement
of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and our investment objectives are to preserve principal and
provide liquidity while maximizing yields without significantly increasing risk.
We may sell an investment at any time if the quality rating of the investment
declines, the yield on the investment is no longer attractive, or we need
additional cash. Since we invest only in money market funds and short-term
marketable securities, we believe that the purchase, maturity, or sale of our
investments has no material impact on our overall liquidity. Our revised and
more conservative investment strategy has not impacted our
liquidity.
We have
used cash to acquire businesses and technologies that enhance and expand our
product offerings, and we anticipate that we will continue to do so in the
future. In March 2008, we invested $3.0 million in the preferred stock of a
privately held company that we will account for on a cost basis. On May 15,
2008, we acquired all of the issued and outstanding shares of Identity Systems,
Inc., a Delaware corporation and a wholly-owned subsidiary of Intellisync
Corporation, for $85.6 million in cash, including transaction costs of $0.9
million and acquired cash of $5.8 million.
On
February 13, 2009, we acquired all the capital stock of Applimation, Inc.,
a privately held company incorporated in Delaware, in a cash merger transaction
valued at approximately $37.2 million (including $1.6 million retention bonuses
payable three to eighteen months subsequent to acquisition date). Six million
dollars of the merger consideration will be placed into an escrow fund and held
as security for losses incurred by us in the event of certain breaches of the
merger agreement by Applimation. The escrow fund will remain in place until
August 13, 2010, although 50% of the escrow funds will be distributed to
the Applimation stockholders on February 13, 2010. On June 2, 2009, we
acquired all of the capital stock of AddressDoctor for $27.8 million of which
$4.5 million is held in an escrow fund as security for losses incurred by us in
the event of certain breaches of the merger agreement by AddressDoctor. The
escrow fund will remain in place for a period of eighteen months,
although 50% of the escrow funds will be paid out 12 months subsequent to
the date of acquisition. As part of the acquisition purchase price, we wrote off
$250,000 in prepaid royalties to AddressDoctor. On September 1, 2009, we
acquired Agent Logic which specializes in the development and marketing of
complex event processing software which supports security initiatives in highly
complex environments. Informatica acquired all of the capital stock of Agent
Logic for $35 million of which $6.1 million is held in an escrow fund as
security for losses accrued by Informatica in the event of certain breaches of
the merger agreement by Agent Logic. The escrow fund will remain in place for a
period of eighteen months, although 50% of the escrow funds will be paid
out 12 months subsequent to the date of acquisition. In addition, we are
obligated to pay certain variable and deferred earn-out payments if certain
license order targets are achieved.
Due to
the nature of mergers and acquisitions, it is difficult to predict the amount
and timing of cash requirements to complete such transactions. We may be
required to raise additional financing to complete future
acquisitions.
As of
June 2008, we are no longer required to maintain certificates of deposits for
the $12.0 million letter of credit that a financial institution issued in 2001
for our former corporate headquarters leases at the Pacific Shores Center in
Redwood City, California. Accordingly, we classified the release of such
restricted cash associated with these certificates of deposits from investing
activities to operating activities.
Financing Activities: We
receive cash from the exercise of common stock options and the sale of common
stock under our employee stock purchase plan (“ESPP”). Net cash provided by
financing activities for the nine months ended September 30, 2009 was $3.4
million due to the repurchases and retirement of our Convertible Senior Notes
and our common stock for $19.2 million, and $9.0 million, respectively. These
amounts were partially offset by the proceeds we received from the issuance of
common stock to option holders and participants of our ESPP program for $28.8
million and $2.8 million of excess tax benefits for share-based
payments.
Net cash
used in financing activities for the nine months ended September 30, 2008 was
$5.9 million due to the repurchase and retirement of common stock for $37.3
million which was partially offset by the issuance of common stock to option
holders and to participants of our ESPP program for $26.1 million and $5.2
million of excess tax benefits from share-based payments.
Although
we expect to continue to receive some proceeds from the issuance of common stock
to option holders and participants of ESPP in future periods, the timing and
amount of such proceeds are difficult to predict and are contingent on a number
of factors, including the price of our common stock, the number of employees
participating in our stock option plans and our employee stock purchase plan,
and overall market conditions.
In March
2006, we issued and sold Convertible Senior Notes (“Notes”) with an aggregate
principal amount of $230 million due in 2026. We used approximately $50 million
of the net proceeds from the offering to fund the purchase of 3,232,000 shares
of our common stock concurrently with the offering of the Notes. We intend to
use the balance of the net proceeds for working capital and general corporate
purposes, which may include the acquisition of businesses, products, product
rights or technologies, strategic investments, or additional purchases of common
stock or Convertible Senior Notes.
In April
2006, our Board of Directors authorized a stock repurchase program of up to
$30 million of our common stock at any time until April 2007. As of
April 30, 2007, we repurchased 2,238,000 shares of our common stock
for $30 million. In April 2007, our Board of Directors authorized an
additional repurchase of $50 million of our common stock under the existing
stock repurchase program. As of March 31, 2008, we repurchased 2,219,000 shares
of our common stock for $33.9 million. We repurchased the remaining
985,000 shares of our common stock for $16.1 million during the
six-month period ended September 30, 2008.
Further,
in April 2008, our Board of Directors authorized an additional repurchase of $75
million of our common stock under the stock repurchase program. In October 2008,
our Board of Directors authorized, under the existing stock repurchase program,
the repurchase of a portion of our outstanding Notes due in 2026 in privately
negotiated transactions with holders of the Notes. As of December 31, 2008,
we repurchased 3,797,000 shares of our stock at a cost of
$57.0 million, and we retired $9.0 million of our Convertible Senior
Notes at a cost of $7.8 million. During the quarter ended March 31, 2009,
we repurchased 457,000 shares of our stock at a cost of $5.9 million,
and we retired $20.0 million of our Convertible Senior Notes at a cost of
$19.4 million, including $0.2 million accrued interest. During the second
quarter ended June 30, 2009, we repurchased 203,000 shares of our common stock
at a cost of $3.1 million. There was no repurchase of our shares of common stock
during the third quarter ended September 30, 2009. There was no repurchase of
the Notes in the second and third quarters of 2009. We have approximately $4.1
million remaining available to repurchase shares of our common stock or
Convertible Senior Notes under this program as of September 30,
2009.
Purchases
can be made from time to time in the open market and will be funded from our
available cash. The primary purpose of these programs is to enhance shareholder
value by partially offsetting the dilutive impact of stock-based incentive
plans. The number of shares to be purchased and the timing of purchases are
based on several factors, including the price of our common stock, our liquidity
and working capital needs, general business and market conditions, and other
investment opportunities. The repurchased shares are retired and reclassified as
authorized and unissued shares of common stock. See Part II, Item 2 of this
Report for more information regarding the stock and Convertible Senior Notes
repurchase programs. We may continue to repurchase shares and Convertible Senior
Notes from time to time, as determined by management under programs approved by
the Board of Directors.
We
believe that our cash balances and the cash flows generated by operations will
be sufficient to satisfy our anticipated cash needs for working capital and
capital expenditures for at least the next 12 months. However, we may be
required to raise or desire additional funds for selective purposes, such as
acquisitions, and may raise such additional funds through public or private
equity or debt financing or from other sources. Beginning on March 15, 2011
and then upon March 15, 2016, and March 15, 2021, or upon the
occurrence of certain events including a change in control, holders of the Notes
may require the Company to repurchase all or a portion of their Notes at a
purchase price in cash equal to the full principal amount of the Notes plus any
accrued and unpaid interest as of the relevant date. If the holders of the Notes
require us to repurchase all or a portion of their Notes, we may also be
required to raise additional financing to complete future
acquisitions.
Contractual
Obligations
The
following table summarizes our significant contractual obligations, including
future minimum lease payments as of September 30, 2009, under non-cancelable
operating leases with original terms in excess of one year, and the effect of
such obligations on our liquidity and cash flows in the future periods (in
thousands):
|
|
Payment Due by Period
|
|
|
|
Total
|
|
|
Remaining
2009
|
|
|
2010
and
2011
|
|
|
2012
and
2013
|
|
|
2014
and
Beyond
|
|
Operating
lease obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease payments
|
|
$ |
96,070 |
|
|
$ |
6,699 |
|
|
$ |
48,350 |
|
|
$ |
39,783 |
|
|
$ |
1,238 |
|
Future
sublease income
|
|
|
(9,114 |
) |
|
|
(581 |
) |
|
|
(4,802 |
) |
|
|
(3,731 |
) |
|
|
— |
|
Net
operating lease obligations
|
|
|
86,956 |
|
|
|
6,118 |
|
|
|
43,548 |
|
|
|
36,052 |
|
|
|
1,238 |
|
Debt
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
payments (1)
|
|
|
201,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
201,000 |
|
Interest
payments
|
|
|
99,495 |
|
|
|
— |
|
|
|
12,060 |
|
|
|
12,060 |
|
|
|
75,375 |
|
Other
obligations (2)
|
|
|
4,750 |
|
|
|
234 |
|
|
|
2,662 |
|
|
|
1,854 |
|
|
|
— |
|
|
|
$ |
392,201 |
|
|
$ |
6,352 |
|
|
$ |
58,270 |
|
|
$ |
49,966 |
|
|
$ |
277,613 |
|
____________
(1)
|
Holders
of the Notes may require us to repurchase all or a portion of their Notes
at a purchase price in cash equal to the full principle amount of the
Notes plus any accrued and unpaid interest on March 15, 2011, March 15,
2016, and March 15, 2021, or upon the occurrence of certain events
including a change in control. We have the right to redeem some or all of
the Notes after March 15, 2011.
|
(2)
|
Other
purchase obligations and commitments include minimum royalty payments
under license agreements and do not include purchase obligations discussed
below.
|
Our
contractual obligations at September 30, 2009 include the lease term for our
headquarters office in Redwood City, California, which is from December 15, 2004
to December 31, 2013. Minimum contractual lease payments are $1.0 million for
the remainder of 2009 and $2.6 million, $3.4 million, $3.5 million, and $3.6
million for the years ending December 31, 2010, 2011, 2012, and 2013,
respectively.
The above
commitment table does not include approximately $10.6 million of long-term
income tax liabilities recorded in accordance with FASB Income Taxes (ASC 740). We
adopted FIN No. 48 (ASC 740) effective January 1, 2007. We are
unable to make a reasonably reliable estimate of the timing of these potential
future payments in individual years beyond 12 months due to uncertainties
in the timing of tax audit outcomes. As a result, this amount is not included in
the table above. For further information, see Note 10. Income Taxes, of Notes to
Condensed Consolidated Financial Statements in Part I, Item 1 of this
Report.
Purchase
orders or contracts for the purchase of certain goods and services are not
included in the preceding table. We cannot determine the aggregate amount of
such purchase orders that represent contractual obligations because purchase
orders may represent authorizations to purchase rather than binding agreements.
For the purposes of this table, contractual obligations for purchase of goods or
services are defined as agreements that are enforceable and legally binding and
that specify all significant terms, including fixed or minimum quantities to be
purchased; fixed, minimum, or variable price provisions; and the approximate
timing of the transaction. Our purchase orders are based on our current needs
and are fulfilled by our vendors within short time horizons. We also enter into
contracts for outsourced services; however, the obligations under these
contracts were not significant and the contracts generally contain clauses
allowing for cancellation without significant penalty. Contractual obligations
that are contingent upon the achievement of certain milestones are not included
in the table above.
We
estimate the expected timing of payment of the obligations discussed above on
current information. Timing of payments and actual amounts paid may be different
depending on the time of receipt of goods or services or changes to agreed-upon
amounts for some obligations.
Operating
Leases
We lease
certain office facilities and equipment under non-cancelable operating leases.
During 2004, we recorded restructuring charges related to the consolidation of
excess leased facilities in Redwood City, California. Operating lease payments
in the table above include approximately $64.6 million, net of actual sublease
income, for operating lease commitments for those facilities that
are
included
in accrued facilities restructuring charges. See Note 9. Facilities Restructuring Charges
and Note 12. Commitments and
Contingencies, of Notes to Condensed Consolidated Financial Statements in
Part I, Item 1 of this Report.
Of these
future minimum lease payments, we have $56.5 million recorded in accrued
facilities restructuring charges at September 30, 2009. This accrual, in
addition to minimum lease payment of $64.6 million, includes estimated operating
expenses of $19.5 million, is net of estimated sublease income of $21.7 million,
and is net of the present value impact of $5.9 million recorded in accordance
with FASB Exit or Disposal
Obligations (ASC 420-10). We estimated sublease income and the related
timing thereof based on existing sublease agreements and current market
conditions, among other factors. Our estimates of sublease income may vary
significantly from actual amounts realized depending, in part, on factors that
may be beyond our control, such as the time periods required to locate and
contract suitable subleases and the market rates at the time of such
subleases.
In
relation to our excess facilities, we may decide to negotiate and enter into
lease termination agreements, if and when the circumstances are appropriate.
These lease termination agreements would likely require that a significant
amount of the remaining future lease payments be paid at the time of execution
of the agreement, but would release us from future lease payment obligations for
the abandoned facility. The timing of a lease termination agreement and the
corresponding payment could materially affect our cash flows in the period of
payment.
The
expected timing of payment of the obligations discussed above is estimated based
on current information. Timing of payments and actual amounts paid may be
different.
We have
sublease agreements for leased office space at the Pacific Shores Center in
Redwood City, California. In the event the sublessees are unable to fulfill
their obligations, we would be responsible for rent due under the leases. We
expect at this time that the sublessees will fulfill their obligations under the
terms of the current lease agreements.
In
February 2000, we entered into two lease agreements for two buildings at the
Pacific Shores Center in Redwood City, California (our former corporate
headquarters), which we occupied from August 2001 through December 2004. These
two lease agreements will expire in July 2013.
Off-Balance-Sheet
Arrangements
We do not
have any off-balance-sheet financing arrangements, transactions, or
relationships with “special purpose entities.”
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Foreign
Currency Exchange Rate Risk
We market
and sell our software and services through our direct sales force and indirect
channel partners in North America, Europe, Asia-Pacific, and Latin America.
Accordingly, we are subject to exposure from adverse movements in foreign
currency exchange rates. The functional currency of our foreign subsidiaries is
their local currency, except for Informatica Cayman Ltd., which is in euros. Our
exposure to foreign exchange risk is related to the magnitude of foreign net
profits and losses denominated in foreign currencies, in particular the euro and
British pound sterling, as well as our net position of monetary assets and
monetary liabilities in those foreign currencies. These exposures have the
potential to produce either gains or losses within our consolidated results. Our
foreign operations, however, in most instances act as a natural hedge since both
operating expenses as well as revenues are generally denominated in their
respective local currency. In these instances, although an unfavorable change in
the exchange rate of foreign currencies against the U.S. dollar will result in
lower revenues when translated into U.S. dollars, the operating expenditures
will be lower as well.
Our results of operations and cash
flows are subject to fluctuations due to changes in foreign currency exchange
rates, particularly changes in the Indian rupee, Israeli shekel, euro, British pound sterling,
Canadian dollar, Japanese yen, Brazilian real, and Australian
dollar.
Cash
Flow Hedge Activities
Since the
fourth quarter of 2008, we have attempted to minimize the impact of certain
foreign currency fluctuations through initiation of certain cash flow hedge
programs. The purpose of these programs is to reduce volatility in cash flows
and expenses caused by movement in certain foreign currency exchange rates, in
particular the Indian rupee and Israeli shekel. Any gains or losses from
settling these contracts are offset by the gains or losses derived from the
underlying balance sheet exposure upon payment.
The table
below presents the notional amounts of the foreign exchange forward contracts
that we committed to purchase in the fourth quarter of 2008 for Indian rupees
and Israeli shekels, which were still outstanding as of September 30, 2009 (in
thousands):
Functional
currency
|
|
Foreign
Amount
|
|
|
USD
Equivalent
|
|
|
Weighted
Average
Rate
|
|
Indian
rupee
|
|
|
66,800 |
|
|
$ |
1,281 |
|
|
|
52.16 |
|
Israeli
shekel
|
|
|
2,714 |
|
|
|
707 |
|
|
|
3.84 |
|
|
|
|
|
|
|
$ |
1,988 |
|
|
|
|
|
See Note
1. Summary of Significant
Accounting Policies, Note 5. Other Comprehensive Income,
Note 6. Derivative Financial
Instruments, and Note 12. Commitments and
Contingencies, of Notes to Condensed Consolidated Financial Statements
for a further discussion.
Interest
Rate Risk
Our
exposure to market risk for changes in interest rates relates primarily to our
investment portfolio. We do not use derivative financial instruments in our
investment portfolio. The primary objective of our investment activities is to
preserve principal while maximizing yields without significantly increasing
risk. Our investment policy specifies credit quality standards for our
investments and limits the amount of credit exposure to any single issue,
issuer, or type of investment. Our investments consist primarily of U.S.
government notes and bonds, corporate bonds, commercial paper, and municipal
securities. All investments are carried at market value, which approximates
cost. See Note 2. Cash, Cash
Equivalents, and Short-Term Investments, of Notes to Condensed
Consolidated Financial Statements in Part I, Item 1 of this Report.
For the
nine months ended September 30, 2009, the average annual rate of return on our
investments was 1.5%. Our cash equivalents and short-term investments are
subject to interest rate risk and will decline in value if market interest rates
increase. As of September 30, 2009, we had net unrealized gains of $1.3 million
associated with these securities. If market interest rates were to increase
immediately and uniformly by 100 basis points from levels as of September 30,
2009, the fair market value of the portfolio would decrease by approximately
$2.0 million. Additionally, we have the intention to hold our investments until
maturity and, therefore, we would not necessarily expect to realize an adverse
impact on income or cash flows.
Evaluation of Disclosure Controls
and Procedures. Our management evaluated, with the participation of our
Chief Executive Officer and our Chief Financial Officer, the effectiveness of
our disclosure controls and procedures as of the end of the period covered by
this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief
Executive Officer and our Chief Financial Officer have concluded that our
disclosure controls and procedures are effective to ensure that information we
are required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934 (i) is recorded, processed, summarized, and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and (ii) is accumulated and communicated to Informatica’s management,
including our Chief Executive Officer and our Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. Our
disclosure controls and procedures are designed to provide reasonable assurance
that such information is accumulated and communicated to our management. Our
disclosure controls and procedures include components of our internal control
over financial reporting. Management’s assessment of the effectiveness of our
internal control over financial reporting is expressed at the level of
reasonable assurance because a control system, no matter how well designed and
operated, can provide only reasonable, but not absolute, assurance that the
control system’s objectives will be met.
Changes in Internal Control over
Financial Reporting. There was no change in our system of internal
control over financial reporting during the three months ended September 30,
2009 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
The
information set forth in Note 12. Commitments and Contingencies –
Litigation of Notes to Condensed Consolidated Financial Statements in
Part I, Item 1 of this Report is incorporated herein by
reference.
In
addition to the other information contained in this Form 10-Q, we have
identified the following risks and uncertainties that may have a material
adverse effect on our business, financial condition, or results of operation.
Investors should carefully consider the risks described below before making an
investment decision. The trading price of our common stock could decline due to
any of these risks, and investors may lose all or part of their investment. In
assessing these risks, investors should also refer to the other information
contained in our other SEC filings, including our Form 10-K for the year ended
December 31, 2008.
Adverse
conditions in the U.S. or global economies could negatively affect sales
of our products and
services, and could harm our operating results, which could result in a decline in
the price of our common stock.
As our
business has grown, we have become increasingly subject to the risks arising
from adverse changes in the domestic and global economies. We have experienced
the adverse effect of economic slowdowns in the past, which resulted in a
significant reduction in capital spending by our customers, as well as longer
sales cycles, and the deferral or delay of purchases of our
products.
The
current weak macroeconomic environment and associated global economic conditions
have resulted in a tightening of the credit markets, low levels of liquidity in
many financial markets, and extreme volatility in credit, equity and foreign
currency markets. These conditions have affected the buying patterns of our
customers and prospects and have adversely affected our overall pipeline
conversion rate as well as our revenue growth expectations. If the conditions do
not improve or should conditions worsen, our results of operations would
continue to be adversely affected and we could fail to meet the expectations of
stock analysts and investors, which could cause the price of our common stock to
decline.
We have
made incremental investments in Asia-Pacific and Latin America and have
maintained a high level of investments in EMEA. There are significant risks with
overseas investments and our growth prospects in these regions are uncertain. In
addition, we could experience delays in the payment obligations of our worldwide
reseller customers if they experience weakness in the end-user market, which
would increase our credit risk exposure and harm our financial
condition.
If we do not
compete effectively with companies selling data integration products,
our
revenues may not grow and could decline.
The
market for our products is highly competitive, quickly evolving, and subject to
rapidly changing technology. In addition, consolidation among vendors in the
software industry continues at a rapid pace with Oracle’s recent proposed
acquisition of Sun Microsystems creating a large integrated supplier of
enterprise software on hardware optimized for its software products which could
accelerate further consolidation in the industry. Our competition consists of
hand-coding, custom-built data integration solutions developed in-house by
various companies in the industry segments that we target, as well as other
vendors of integration software products, including IBM (which acquired
Ascential Software, DataMirror, and Cognos), Microsoft, Oracle (which acquired
BEA Systems, Sunopsis, Hyperion Solutions, Siebel, and GoldenGate Software), SAP
(which acquired Business Objects which had acquired FirstLogic), and certain
privately held companies. In the past, we have competed with business
intelligence vendors that currently offer, or may develop, products with
functionalities that compete with our products, such as Business Objects, and to
a lesser degree, Cognos, and certain privately held companies. With regard to
data quality, we compete against SAP, Trillium (which is part of Harte-Hanks),
and SAS Institute, as well as various other privately held companies. Many of
these competitors have longer operating histories, substantially greater
financial, technical, marketing, and other resources, and greater name
recognition than we do and may be able to exert greater influence on customer
purchase decisions. Our competitors may be able to respond more quickly than we
can to new or emerging technologies and changes in customer requirements. Our
current and potential competitors may develop and market new technologies that
render our existing or future products obsolete, unmarketable, or less
competitive.
We
believe we currently compete on the basis of the breadth and depth of our
products’ functionality, as well as on the basis of price. We may have
difficulty competing on the basis of price in circumstances where our
competitors develop and market products with similar or superior functionality
and pursue an aggressive pricing strategy or bundle data integration technology
and data quality at no cost to the customer or at deeply discounted prices.
These difficulties may increase as larger companies target the data
integration
and data quality markets. As a result, increased competition and bundling
strategies could seriously impede our ability to sell additional products and
services on terms favorable to us.
Our
current and potential competitors may make strategic acquisitions, consolidate
their operations, or establish cooperative relationships among themselves or
with other solution providers, thereby increasing their ability to provide a
broader suite of software products or solutions and more effectively address the
needs of our prospective customers. Such acquisitions could cause customers to
defer their purchasing decisions. Our current and potential competitors may
establish or strengthen cooperative relationships with our current or future
strategic partners, thereby limiting our ability to sell products through these
channels. If any of this were to occur, our ability to market and sell our
software products would be impaired. In addition, competitive pressures could
reduce our market share or require us to reduce our prices, either of which
could harm our business, results of operations, and financial
condition.
Our international
operations expose us to greater risks, including but not limited to those regarding
intellectual property, collections, exchange rate fluctuations, and regulations,
which could limit our future growth.
We have
significant operations outside the United States, including software development
centers in Australia, India, Ireland, Israel, the Netherlands, and the United
Kingdom, sales offices in Europe, including France, Germany, the Netherlands,
Switzerland, and the United Kingdom, as well as in countries in Asia-Pacific,
and customer support centers in India, Brazil, the Netherlands, and the United
Kingdom. Additionally, since 2005 we have opened sales offices in Brazil, China,
India, Italy, Japan, Mexico, Portugal, South Korea, Spain, and Taiwan, and we
plan to continue to expand our international operations. Our international
operations face numerous risks. For example, to sell our products in certain
foreign countries, our products must be localized, that is, customized to meet
local user needs and to meet the requirements of certain markets, particularly
some in Asia, where our product must be enabled to support Asian language
characters. Developing internationalized versions of our products for foreign
markets is difficult, requires us to incur additional expenses, and can take
longer than we anticipate. We currently have limited experience in
internationalizing products and in testing whether these internationalized
products will be accepted in the target countries. We cannot ensure that our
internationalization efforts will be successful.
In
addition, we have only a limited history of marketing, selling, and supporting
our products and services internationally. As a result, we must hire and train
experienced personnel to staff and manage our foreign operations. However, we
have experienced difficulties in recruiting, training, managing, and retaining
an international staff, in particular related to sales management and sales
personnel, which have affected our ability to increase sales productivity, and
related to turnover rates and wage inflation in India, which have increased
costs. We may continue to experience such difficulties in the
future.
We must
also be able to enter into strategic distributor relationships with companies in
certain international markets where we do not have a local presence. If we are
not able to maintain successful strategic distributor relationships
internationally or recruit additional companies to enter into strategic
distributor relationships, our future success in these international markets
could be limited.
Business
practices in the international markets that we serve may differ from those in
North America and may require us to include terms in our software license
agreements, such as extended payment or warranty terms, or performance
obligations that may require us to defer license revenues and recognize them
ratably over the warranty term or contractual period of the agreement. Although
historically we have infrequently entered into software license agreements that
require ratable recognition of license revenue, we may enter into software
license agreements in the future that may include non-standard terms related to
payment, maintenance rates, warranties, or performance obligations.
Our
software development centers in Australia, India, Ireland, Israel, the
Netherlands, and the United Kingdom also subject our business to certain risks,
including the following:
|
|
greater
difficulty in protecting our ownership rights to intellectual property
developed in foreign countries, which may have laws that materially differ
from those in the United States;
|
|
|
communication
delays between our main development center in Redwood City, California and
our development centers in Australia, India, Ireland, Israel, the
Netherlands, and the United Kingdom as a result of time zone differences,
which may delay the development, testing, or release of new
products;
|
|
|
greater
difficulty in relocating existing trained development personnel and
recruiting local experienced personnel, and the costs and expenses
associated with such activities;
and
|
|
|
increased
expenses incurred in establishing and maintaining office space and
equipment for the development
centers.
|
Additionally,
our international operations as a whole are subject to a number of risks,
including the following:
|
|
fluctuations
in exchange rates between the U.S. dollar and foreign currencies in
markets where we do business;
|
|
|
higher
risk of unexpected changes in regulatory practices, tariffs, and tax laws
and treaties;
|
|
|
greater
risk of a failure of our foreign employees to comply with both
U.S. and foreign laws, including antitrust regulations, the
U.S. Foreign Corrupt Practices Act, and any trade regulations
ensuring fair trade practices;
|
|
|
potential
conflicts with our established distributors in countries in which we elect
to establish a direct sales
presence;
|
|
|
our
limited experience in establishing a sales and marketing presence and the
appropriate internal systems, processes, and controls in Asia-Pacific,
especially China, Singapore, South Korea, and
Taiwan; and
|
|
|
general
economic and political conditions in these foreign
markets.
|
For
example, an increase in international sales would expose us to foreign currency
fluctuations where an unfavorable change in the exchange rate of foreign
currencies against the U.S. dollar would result in lower revenues when
translated into U.S. dollars although operating expenditures would be lower
as well. Historically, the effect of changes in foreign currency exchange rates
on revenues and operating expenses has been immaterial although in the fourth
quarter of 2008 and the first half of 2009, the decline in the U.S. dollar and
the increased volatility in currency markets caused a greater than historical
impact. Beginning in the fourth quarter of 2008, we have attempted to reduce the
impact of certain foreign currency fluctuations through hedging programs for the
foreign subsidiaries where we do not have a natural hedge. However, as our
international operations grow, or if the current dramatic fluctuations in
foreign currency exchange rates continue or increase or if our hedging programs
become ineffective, the effect of changes in the foreign currency exchange rates
could become material to revenue, operating expenses, and income. These factors
and other factors could harm our ability to gain future international revenues
and, consequently, materially impact our business, results of operations, and
financial condition. The expansion of our existing international operations and
entry into additional international markets will require significant management
attention and financial resources. Our failure to manage our international
operations and the associated risks effectively could limit the future growth of
our business.
New product
introductions and product enhancements may impact market acceptance of
our
products and affect our results of operations.
We
believe that the introduction and market acceptance of new products and the
enhancement of existing products are important to our continued success. New
product introductions and product enhancements have inherent risks including,
but not limited to, delayed product availability, product quality and
interoperability, and customer adoption or the delay in customer purchases. In
June 2008, we delivered the generally available version of PowerCenter 8.6,
PowerExchange 8.6, Informatica Data Quality 8.6, and the Informatica On Demand
Data Loader, a version upgrade to our entire data integration platform. In
August 2009, we delivered the PowerCenter Cloud Edition to enable customers to
procure PowerCenter functionality from Amazon Web Services by the hour. In
addition we plan to release Informatica 9 in the future. New product
introductions and/or enhancements such as these have inherent risks, including
but not limited to the following:
|
|
delay
in completion, launch, delivery, or
availability;
|
|
|
delay
in customer purchases in anticipation of new products not yet
released;
|
|
|
product
quality issues, including the possibility of
defects;
|
|
|
market
confusion based on changes to the product packaging and pricing as a
result of a new product release;
|
|
|
interoperability
issues with third-party
technologies;
|
|
|
issues
with migration or upgrade paths from previous product
versions;
|
|
|
loss
of existing customers that choose a competitor’s product instead of
upgrading or migrating to the new
product; and
|
|
|
loss
of maintenance revenues from existing customers that do not upgrade or
migrate.
|
Given the
risks associated with the introduction of new products, we cannot predict their
impact on our overall sales and revenues.
We have
experienced and could continue to experience fluctuations in our
quarterly operating
results, especially the amount of license revenues we recognize each
quarter,
and such fluctuations have caused and could cause our stock price to
decline.
Our
quarterly operating results, particularly our license revenues, have fluctuated
in the past and may do so in the future. These fluctuations have caused our
stock price to experience declines in the past and could cause our stock price
to significantly fluctuate or experience declines in the future. One of the
reasons why our operating results have fluctuated is that our license revenues,
which are primarily sold on a perpetual license basis, are not predictable with
any significant degree of certainty and are vulnerable to short-term shifts in
customer demand. Also, we could experience customer order deferrals in
anticipation of future new product introductions or product enhancements, as
well as a result of particular budgeting and purchase cycles of our customers.
The continued global economic uncertainty is also likely to cause customer order
deferrals and adversely affect budgeting and purchase cycles. By comparison, our
short-term expenses are relatively fixed and based in part on our expectations
of future revenues.
Moreover,
our backlog of license orders at the end of a given fiscal period has tended to
vary. Historically, our backlog typically decreases from the prior quarter at
the end of the first and third quarters and increases from the prior quarter at
the end of the fourth quarter, although the increase was less pronounced at the
end of 2008.
Furthermore,
we generally recognize a substantial portion of our license revenues in the last
month of each quarter and, sometimes, in the last few weeks or days of each
quarter. As a result, we cannot predict the adverse impact caused by
cancellations or delays in orders until the end of each quarter. Moreover, the
likelihood of an adverse impact may be greater if we experience increased
average transaction sizes due to a mix of relatively larger deals in our sales
pipeline.
We have
expanded our international operations and have opened new sales offices in other
countries. As a result of this international expansion, as well as the increase
in our direct sales headcount in the United States, our sales and marketing
expenses have increased. We expect these investments to increase our revenues,
sales productivity, and eventually our profitability. However, if we experience
an increase in sales personnel turnover, do not achieve expected increases in
our sales pipeline, experience a decline in our sales pipeline conversion ratio,
or do not achieve increases in productivity and efficiencies from our new sales
personnel as they gain more experience, then we may not achieve our expected
increases in revenue, sales productivity, and profitability. We have experienced
some increases in revenue and sales productivity in the United States in the
past few years. While in the past year, we have experienced increases in revenue
and sales productivity internationally, we have not yet achieved the same level
of sales productivity internationally as domestically.
Due to
the difficulty we experience in predicting our quarterly license revenues, we
believe that quarter-to-quarter comparisons of our operating results are not
necessarily a good indication of our future performance. Furthermore, our future
operating results could fail to meet the expectations of stock analysts and
investors. If this happens, the price of our common stock could
fall.
If we are unable
to accurately forecast revenues, we may fail to meet stock analysts’
and
investors’ expectations of our quarterly operating results, which could
cause our stock price
to decline.
We use a
“pipeline” system, a common industry practice, to forecast sales and trends in
our business. Our sales personnel monitor the status of all proposals, including
the date when they estimate that a customer will make a purchase decision and
the potential dollar amount of the sale. We aggregate these estimates
periodically in order to generate a sales pipeline. We assess the pipeline at
various points in time to look for trends in our business. While this pipeline
analysis may provide us with some guidance in business planning and budgeting,
these pipeline estimates are necessarily speculative and may not consistently
correlate to revenues in a particular quarter or over a longer period of time,
particularly in the current global weak macroeconomic environment. Additionally,
because we have historically recognized a substantial portion of our license
revenues in the last month of each quarter and sometimes in the last few weeks
of each quarter, we may not be able to adjust our cost structure in a timely
manner in response to variations in the conversion of the sales pipeline into
license revenues. Any change in the conversion rate of the pipeline into
customer sales or in the pipeline itself could cause us to improperly budget for
future expenses that are in line with our expected future revenues, which would
adversely affect our operating margins and results of operations and could cause
the price of our common stock to decline.
We rely on our
relationships with our strategic partners. If we do not maintain and
strengthen
these relationships, our ability to generate revenue and control expenses
could be
adversely affected, which could cause a decline in the price of our
common stock.
We
believe that our ability to increase the sales of our products depends in part
upon maintaining and strengthening relationships with our current strategic
partners and any future strategic partners. In addition to our direct sales
force, we rely on established relationships with a variety of strategic
partners, such as systems integrators, resellers, and distributors, for
marketing, licensing, implementing, and supporting our products in the United
States and internationally. We also rely on relationships with strategic
technology partners, such as enterprise application providers, database vendors,
data quality vendors, and enterprise integrator vendors, for the promotion and
implementation of our products. Among others, we are partners with Cognos
(acquired by IBM), FAST (acquired by Microsoft), SAP, Oracle, Hyperion Solutions
(acquired by Oracle), salesforce.com, Hewlett Packard, and Intel.
Our
strategic partners offer products from several different companies, including,
in some cases, products that compete with our products. We have limited control,
if any, as to whether these strategic partners devote adequate resources to
promoting, selling, and implementing our products as compared to our
competitors’ products.
Although
our strategic partnership with IBM’s Business Consulting Services group has been
successful in the past, IBM’s acquisition of Ascential Software, DataMirror, and
Cognos has made it critical that we strengthen our relationships with our other
strategic partners. Business Objects’ acquisition of FirstLogic, a former
strategic partner, and SAP’s acquisition of Business Objects may also make such
strengthening with other strategic partners more critical. In addition, with
respect to our recent acquisition of AddressDoctor, we may need to maintain
AddressDoctor’s pre-existing supplier relationships and current partnership
relationships, some of which compete with other aspects of our business. We
cannot guarantee that we will be able to strengthen our relationships with our
strategic partners or that such relationships will be successful in generating
additional revenue.
We may
not be able to maintain our strategic partnerships or attract sufficient
additional strategic partners, who have the ability to market our products
effectively, are qualified to provide timely and cost-effective customer support
and service, or have the technical expertise and personnel resources necessary
to implement our products for our customers. In particular, if our strategic
partners do not devote sufficient resources to implement our products, we may
incur substantial additional costs associated with hiring and training
additional qualified technical personnel to implement solutions for our
customers in a timely manner. Furthermore, our relationships with our strategic
partners may not generate enough revenue to offset the significant resources
used to develop these relationships. If we are unable to leverage the strength
of our strategic partnerships to generate additional revenues, our revenues and
the price of our common stock could decline.
We have
experienced reduced sales pipeline and pipeline conversion rates in prior
years,
which have adversely affected the growth of our company and the price of
our common
stock.
In the
past, we have experienced a reduced conversion rate of our overall license
pipeline, primarily as a result of general economic slowdowns, which caused the
amount of customer purchases to be reduced, deferred, or cancelled. As such, we
have experienced uncertainty regarding our sales pipeline and our ability to
convert potential sales of our products into revenue. We experienced an increase
in the size of our sales pipeline and some increases in our pipeline conversion
rate subsequent to 2005 as a result of our increased investment in sales
personnel and a gradually improving IT spending environment. However, the size
of our sales pipeline and our conversion rate are not consistent on a
quarter-to-quarter basis. Our conversion rate declined in the third quarter of
2006, increased in the fourth quarter of 2006 and throughout 2007, declined in
2008, and has remained depressed in certain geographies in 2009. The global
economic recession has had and will likely continue to have an adverse effect on
our conversion rate in the near future. If we are unable to continue to increase
the size of our sales pipeline and our pipeline conversion rate, our results of
operations could fail to meet the expectations of stock analysts and investors,
which could cause the price of our common stock to decline.
As a result of
our products’ lengthy sales cycles, our expected revenues are susceptible to
fluctuations, which could cause us to fail to meet stock analysts’ and
investors’
expectations, resulting in a decline in the price of our common
stock.
Due to
the expense, broad functionality, and company-wide deployment of our products,
our customers’ decisions to purchase our products typically require the approval
of their executive decision makers. In addition, we frequently must educate our
potential customers about the full benefits of our products, which also can
require significant time. This trend toward greater customer executive level
involvement and customer education is likely to increase as we expand our market
focus to broader data integration initiatives. Further, our sales cycle may
lengthen, particularly in the current economic environment, as we continue to
focus our sales efforts on large corporations. As a result of these factors, the
length of time from our initial contact with a customer to the
customer’s
decision
to purchase our products typically ranges from three to nine months. We are
subject to a number of significant risks as a result of our lengthy sales cycle,
including:
|
|
our
customers’ budgetary constraints and internal acceptance review
procedures;
|
|
|
the
timing of our customers’ budget
cycles;
|
|
|
the
seasonality of technology purchases, which historically has resulted in
stronger sales of our products in the fourth quarter of the year,
especially when compared to lighter sales in the first quarter of the
year;
|
|
|
our
customers’ concerns about the introduction of our products or new products
from our competitors; or
|
|
|
potential
downturns in general economic or political conditions or potential
tightening of credit markets that could occur during the sales
cycle.
|
If our
sales cycles lengthen unexpectedly, they could adversely affect the timing of
our revenues or increase costs, which may independently cause fluctuations in
our revenues and results of operations. Finally, if we are unsuccessful in
closing sales of our products after spending significant funds and management
resources, our operating margins and results of operations could be adversely
impacted, and the price of our common stock could decline.
If our products
are unable to interoperate with hardware and software technologies developed and
maintained by third parties that are not within our control, our ability to
develop and sell our products to our customers could be adversely affected, which
would result in harm to our business and operating results.
Our
products are designed to interoperate with and provide access to a wide range of
third-party developed and maintained hardware and software technologies, which
are used by our customers. The future design and development plans of the third
parties that maintain these technologies are not within our control and may not
be in line with our future product development plans. We may also rely on such
third parties, particularly certain third-party developers of database and
application software products, to provide us with access to these technologies
so that we can properly test and develop our products to interoperate with the
third-party technologies. These third parties may in the future refuse or
otherwise be unable to provide us with the necessary access to their
technologies. In addition, these third parties may decide to design or develop
their technologies in a manner that would not be interoperable with our own. The
continued consolidation in the enterprise software market may heighten these
risks. Furthermore, our expanding product line makes maintaining
interoperability more difficult as various products may have different levels of
interoperability and compatibility, which may change from version to version. If
any of the situations described above were to occur, we would not be able to
continue to market our products as interoperable with such third-party hardware
and software, which could adversely affect our ability to successfully sell our
products to our customers.
The loss of our
key personnel, an increase in our sales force personnel turnover rate, or the
inability to attract and retain additional personnel could adversely
affect our
ability to grow our company successfully and may negatively impact our
results of
operations.
We
believe our success depends upon our ability to attract and retain highly
skilled personnel and key members of our management team. We continue to
experience changes in members of our senior management team. As new senior
personnel join our company and become familiar with our business strategy and
systems, their integration could result in some disruption to our ongoing
operations.
In the
past, we also experienced an increased level of turnover in our direct sales
force. Such increase in the turnover rate impacted our ability to generate
license revenues. Although we have hired replacements in our sales force and saw
the pace of voluntary turnover decrease in 2008 and the first three quarters of
2009, we typically experience lower productivity from newly hired sales
personnel for a period of 6 to 12 months. If we are unable to effectively
train such new personnel, or if we experience an increase in the level of sales
force turnover, our ability to generate license revenues may be negatively
impacted.
In
addition, we have experienced turnover in other areas of the business. As the
market becomes increasingly competitive and the hiring becomes more difficult
and costly, our personnel (including those with government security clearance
qualifications) become more attractive to other companies. Our plan for
continued growth requires us to add personnel to meet our growth objectives and
places increased importance on our ability to attract, train, and retain new
personnel. If we are unable to effectively attract and train new personnel, or
if we experience an increase in the level of turnover, our results of operations
may be negatively impacted.
We
currently do not have any key-man life insurance relating to our key personnel,
and the employment of the key personnel in the United States is at will and not
subject to employment contracts. We have relied on our ability to grant stock
options as one mechanism for recruiting and retaining highly skilled talent.
Accounting regulations requiring the expensing of stock options may impair our
future ability to provide these incentives without incurring significant
compensation costs. There can be no assurance that we will continue to
successfully attract and retain key personnel.
If the market in
which we sell our products and services does not grow as we anticipate, we
may not be able to increase our revenues at an acceptable rate of growth, and the
price of our common stock could decline.
The
market for software products that enable more effective business decision making
by helping companies aggregate and utilize data stored throughout an
organization continues to change. Substantially all of our historical revenues
have been attributable to the sales of products and services in the data
warehousing market. While we believe that this market is still growing, we
expect most of our growth to come from the emerging market for broader data
integration, which includes migration, data consolidation, data synchronization,
single-view projects, and data quality. The use of packaged software solutions
to address the needs of the broader data integration and data quality markets is
relatively new and is still emerging. Additionally, we expect growth in the
areas of on-demand software-as-a-service (SaaS) offerings. Our potential
customers may:
|
|
not
fully value the benefits of using our
products;
|
|
|
not
achieve favorable results using our
products;
|
|
|
defer
product purchases due to the current global economic
downturn;
|
|
|
experience
technical difficulties in implementing our
products; or
|
|
|
use
alternative methods to solve the problems addressed by our
products.
|
If this
market does not grow as we anticipate, we would not be able to sell as much of
our software products and services as we currently expect, which could result in
a decline in the price of our common stock.
We rely on the
sale of a limited number of products, and if these products do not achieve broad
market acceptance, our revenues would be adversely affected.
Historically,
a significant portion of our revenues have been derived from our data
integration products such as PowerCenter and PowerExchange and related services.
We expect sales of our data integration software and related services to
comprise a significant portion of our revenues for the foreseeable future. If
any of our products does not achieve market acceptance, our revenues and stock
price could decrease. Market acceptance for our current products could be
affected if, among other things, competition substantially increases in the
enterprise data integration market or transactional applications suppliers
integrate their products to such a degree that the utility of the data
integration functionality that our products provide is minimized or rendered
unnecessary.
Our effective tax
rate is difficult to project and changes in such tax rate or adverse results
of tax examinations could adversely affect our operating
results.
The
process of determining our anticipated tax liabilities involves many
calculations and estimates that are inherently complex and make the ultimate tax
obligation determination uncertain. As part of the process of preparing our
consolidated financial statements, we are required to estimate our income taxes
in each of the jurisdictions in which we operate prior to the completion and
filing of tax returns for such periods. This process requires estimating both
our geographic mix of income and our current tax exposures in each jurisdiction
where we operate. These estimates involve complex issues, require extended
periods of time to resolve, and require us to make judgments, such as
anticipating the outcomes of audits with tax authorities and the positions that
we will take on tax returns prior to our actually preparing the returns. We also
determine the need to record deferred tax liabilities and the recoverability of
deferred tax assets. A valuation allowance is established to the extent recovery
of deferred tax assets is not likely based on our estimation of future taxable
income and other factors in each jurisdiction.
Furthermore,
our overall effective income tax rate and tax expenses may be affected by
various factors in our business, including acquisitions, changes in our legal
structure, changes in the geographic mix of income and expenses, changes in
valuation allowances,
changes
in tax laws and applicable accounting pronouncements including: Business Combinations, Accounting for Uncertainty in Income
Taxes, Share-Based
Payment, and variations in the estimated and actual level of annual
pre-tax income. Recently, the Obama Administration has proposed legislation that
would fundamentally change how U.S. multinational corporations are taxed on
their global income. If such legislation is enacted, it may have a material
impact to our global tax expense. Further, the geographic mix of income and
expense is impacted by the fluctuation in exchange rates between the
U.S. dollar and the functional currencies of our subsidiaries.
From time
to time, we are under examination by the Internal Revenue Service and state and
foreign taxing authorities for various years. We may receive additional
assessments from domestic and foreign tax authorities that might exceed amounts
reserved by us. In the event we are unsuccessful in reducing the amount of such
assessment, our business, financial condition, or results of operations could be
adversely affected. Specifically, if additional taxes and/or penalties are
assessed as a result of these audits, there could be a material effect on our
income tax provision, operating expenses, and net income in the period or
periods for which that determination is made.
Although we
believe we currently have adequate internal control over financial reporting, we are
required to assess our internal control over financial reporting on an annual basis,
and any future adverse results from such assessment could result in a loss of
investor confidence in our financial reports and have an adverse effect
on our stock
price.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”), and the rules
and regulations promulgated by the SEC to implement SOX 404, we are required to
furnish an annual report in our Form 10-K regarding the effectiveness of
our internal control over financial reporting. The report’s assessment of our
internal control over financial reporting as of the end of our fiscal year must
include disclosure of any material weaknesses in our internal control over
financial reporting identified by management.
Management’s
assessment of internal control over financial reporting requires management to
make subjective judgments and some of our judgments will be in areas that may be
open to interpretation.
During
the past few years, our organizational structure has increased in complexity.
For example, we have expanded our presence in the Asia-Pacific region, where
business practices can differ from those in other regions of the world and can
create internal control risks. To address potential risks, we recognize revenue
on transactions derived in this region (except for direct sales in Japan and
Australia) only when the cash has been received and all other revenue
recognition criteria have been met. We also have provided business practices
training to our sales teams. While our organizational structure has increased in
complexity as a result of our international expansion, our capital structure has
also increased in complexity as a result of the issuance of the Convertible
Senior Notes in March 2006. Finally, our reorganization of various foreign
entities in April 2006, which required a change in some of our internal controls
over financial reporting, and the assessment of the impact for our adoption of
FIN No. 48 (ASC 740), further add to the reporting complexity and
increase the potential risks of our ability to maintain the effectiveness of our
internal controls. Overall, the combination of our increased complexity and the
ever-increasing regulatory complexity make it more critical for us to attract
and retain qualified and technically competent finance employees.
Although
we currently believe our internal control over financial reporting is effective,
the effectiveness of our internal controls in future periods is subject to the
risk that our controls may become inadequate or may not operate
effectively.
If we are
unable to assert that our internal control over financial reporting is effective
in any future period (or if our auditors are unable to provide an attestation
report regarding the effectiveness of our internal controls, or qualify such
report or fail to provide such report in a timely manner), we could lose
investor confidence in the accuracy and completeness of our financial reports,
which would have an adverse effect on our stock price.
We may not be
able to successfully manage the growth of our business if we are unable
to improve
our internal systems, processes, and controls.
We need
to continue to improve our internal systems, processes, and controls to
effectively (1) manage our operations and growth, including our
international growth into new geographies, particularly the Asia-Pacific and
Latin American markets, and (2) realign resources from time to time to more
efficiently address market or product requirements. To the extent any
realignment requires changes to our internal systems, processes, and controls or
organizational structure, we could experience disruption in customer
relationships, increases in cost, and increased employee turnover. In addition,
we may not be able to successfully implement improvements to these systems,
processes, and controls in an efficient or timely manner, and we may discover
deficiencies in existing systems, processes, and controls. We have licensed
technology from third parties to help us accomplish this objective. The
support
services
available for such third-party technology may be negatively affected by mergers
and consolidation in the software industry, and support services for such
technology may not be available to us in the future. We may experience
difficulties in managing improvements to our systems, processes, and controls or
in connection with third-party software, which could disrupt existing customer
relationships, causing us to lose customers, limit us to smaller deployments of
our products, or increase our technical support costs.
The price of our
common stock fluctuates as a result of factors other than our operating
results, such as volatility in the capital markets and the actions of our
competitors
and securities analysts, as well as developments in our industry and
changes in
accounting rules.
The
market price for our common stock has experienced significant fluctuations and
may continue to fluctuate significantly. The market price for our common stock
may be affected by a number of factors other than our operating results,
including:
|
|
volatility
in the capital markets;
|
|
|
the
announcement of new products or product enhancements by our
competitors;
|
|
|
quarterly
variations in our competitors’ results of
operations;
|
|
|
changes
in earnings estimates and recommendations by securities
analysts;
|
|
|
developments
in our industry; and
|
|
|
changes
in accounting rules.
|
After
periods of volatility in the market price of a particular company’s securities,
securities class action litigation has often been brought against that
particular company. We and certain of our former officers have been named as
defendants in a purported class action complaint, which was filed on behalf of
certain persons who purchased our common stock between April 29, 1999 and
December 6, 2000. Such actions could cause the price of our common stock to
decline.
We rely on a
number of different distribution channels to sell and market our products. Any
conflicts that we may experience within these various distribution channels could
result in confusion for our customers and a decrease in revenue and operating
margins.
We have a
number of relationships with resellers, systems integrators, and distributors
that assist us in obtaining broad market coverage for our products and services.
Although our discount policies, sales commission structure, and reseller
licensing programs are intended to support each distribution channel with a
minimum level of channel conflicts, we may not be able to minimize these channel
conflicts in the future. Any channel conflicts that we may experience could
result in confusion for our customers and a decrease in revenue and operating
margins.
Any significant
defect in our products could cause us to lose revenue and expose us to product
liability claims.
The
software products we offer are inherently complex and, despite extensive testing
and quality control, have in the past and may in the future contain errors or
defects, especially when first introduced. These defects and errors could cause
damage to our reputation, loss of revenue, product returns, order cancellations,
or lack of market acceptance of our products. We have in the past and may in the
future need to issue corrective releases of our software products to fix these
defects or errors, which could require us to allocate significant customer
support resources to address these problems.
Our
license agreements with our customers typically contain provisions designed to
limit our exposure to potential product liability claims. However, the
limitation of liability provisions contained in our license agreements may not
be effective as a result of existing or future national, federal, state, or
local laws or ordinances or unfavorable judicial decisions. Although we have not
experienced any product liability claims to date, the sale and support of our
products entail the risk of such claims, which could be substantial in light of
the use of our products in enterprise-wide environments. In addition, our
insurance against product liability may not be adequate to cover a potential
claim.
We are currently
facing and may face future intellectual property infringement claims that could
be costly to defend and result in our
loss of significant rights.
As is
common in the software industry, we have received and may continue from time to
time to receive notices from third parties claiming infringement by our products
of third-party patent and other proprietary rights. As the number of software
products in our target markets increases and the functionality of these products
further overlaps, we may become increasingly subject to claims by a third party
that our technology infringes such party’s proprietary rights. In addition,
there is a growing occurrence of patent suits being brought by organizations
that use patents to generate revenue without manufacturing, promoting, or
marketing products or investing in research and development in bringing products
to market. These organizations have been increasingly active in the enterprise
software market and have targeted whole industries as defendants. For example,
in August 2007, JuxtaComm Technologies filed a complaint in the Eastern District
of Texas alleging patent infringement against the following defendants,
including us: Ascential Software Corporation, Business Objects SA, Business
Objects America, CA, Inc., Cognos, Inc., Cognos Corporation, DataMirror, Inc.,
Fiorano Software, Inc., Hummingbird Ltd., International Business Machines
Corporation, Informatica Corporation, Information Builders, Inc., Intersystems,
Inc., Iway Software Company, Metastorm, Inc., Microsoft Corporation, Open Text
Corporation, Software AG, Software AG, Inc., Sybase, Inc., and Webmethods, Inc.
Some defendants have settled with JuxtaComm. More recently, in November 2008,
Data Retrieval Technologies LLC filed a complaint in the Western District of
Washington against Sybase, Inc. and us, alleging patent
infringement.
Any
claims, with or without merit, could be time consuming, result in costly
litigation, cause product shipment delays, or require us to enter into royalty
or licensing agreements, any of which could adversely affect our business,
financial condition, and operating results. Although we do not believe that we
are currently infringing any proprietary rights of others, additional legal
action claiming patent infringement could be commenced against us. We may not
prevail in such litigation given the complex technical issues and inherent
uncertainties in patent litigation. The potential effects on our business that
may result from third-party infringement claims, including those claims brought
by Data Retrieval Technologies LLC, include the following:
|
|
we
would be and have been forced to incur significant legal costs and
expenses defending the patent infringement
suit;
|
|
|
we
may be forced to enter into royalty or licensing agreements, which may not
be available on terms favorable to
us;
|
|
|
we
may be required to indemnify our customers or obtain replacement products
or functionality for our customers;
|
|
|
we
may be forced to significantly increase our development efforts and
resources to redesign our products as a result of these
claims; and
|
|
|
we
may be forced to discontinue the sale of some or all of our
products.
|
If we are not
able to adequately protect our proprietary rights, third parties could
develop and
market products that are equivalent to our own, which would harm our
sales
efforts.
Our
success depends upon our proprietary technology. We believe that our
product development, product enhancements, name recognition, and the
technological and innovative skills of our personnel are essential to
establishing and maintaining a technology leadership position. We rely on a
combination of patent, copyright, trademark, and trade secret rights,
confidentiality procedures, and licensing arrangements to establish and protect
our proprietary rights.
However,
these legal rights and contractual agreements may provide only limited
protection. Our pending patent applications may not be allowed or our
competitors may successfully challenge the validity or scope of any of our
issued patents or any future issued patents. Our patents alone may not provide
us with any significant competitive advantage, and third parties may develop
technologies that are similar or superior to our technology or design around our
patents. Third parties could copy or otherwise obtain and use our products or
technology without authorization or develop similar technology independently. We
cannot easily monitor any unauthorized use of our products, and, although we are
unable to determine the extent to which piracy of our software products exists,
software piracy is a prevalent problem in our industry in general.
The risk
of not adequately protecting our proprietary technology and our exposure to
competitive pressures may be increased if a competitor should resort to unlawful
means in competing against us. For example, in July 2003, we settled a complaint
against Ascential Software Corporation in which a number of former Informatica
employees recruited and hired by Ascential misappropriated our trade secrets,
including sensitive product and marketing information and detailed sales
information regarding existing and
potential
customers, and unlawfully used that information to benefit Ascential in gaining
a competitive advantage against us. Although we were ultimately successful in
this lawsuit, there are no assurances that we will be successful in protecting
our proprietary technology from competitors in the future.
We have
entered into agreements with many of our customers and partners that require us
to place the source code of our products into escrow. Such agreements generally
provide that such parties will have a limited, non-exclusive right to use such
code if: (1) there is a bankruptcy proceeding by or against us; (2) we
cease to do business; or (3) we fail to meet our support obligations.
Although our agreements with these third parties limit the scope of rights to
use of the source code, we may be unable to effectively control such third
parties’ actions.
Furthermore,
effective protection of intellectual property rights is unavailable or limited
in various foreign countries. The protection of our proprietary rights may be
inadequate and our competitors could independently develop similar technology,
duplicate our products, or design around any patents or other intellectual
property rights we hold.
We may be
forced to initiate litigation to protect our proprietary rights. For example, on
July 15, 2002, we filed a patent infringement lawsuit against Acta
Technology, Inc., now known as Business Objects Data Integration, Inc. (“BODI”)
(which was subsequently acquired by SAP as part of its acquisition of Business
Objects). We received a favorable verdict in the trial against BODI in April
2007 and after a finding by the appeals court in our favor in December 2008,
BODI/SAP paid to us the full judgment amount (including pre- and post-judgment
interest and a portion of the trial costs) of $14.5 million. See subsection
Litigation in
Note 12. Commitments
and Contingencies of Notes to Condensed Consolidated Financial Statements
in Part I, Item 1 of this Report. Litigating claims related to the
enforcement of proprietary rights is very expensive and can be burdensome in
terms of management time and resources, which could adversely affect our
business and operating results.
The recognition
of share-based payments for employee stock option, RSUs, and employee
stock purchase plans
has adversely impacted our results of operations.
The
adoption of Share-Based
Payment has had a significant adverse impact on our consolidated results
of operations as it has increased our operating expenses and reduced our
operating income, net income, number of basic and diluted shares outstanding,
and earnings per share. The effect of share-based payment on our operating
income, net income, and earnings per share is not predictable because the
underlying assumptions, including volatility, interest rate, and expected life,
of the Black-Scholes-Merton model could vary over time.
If we are unable
to successfully respond to technological advances and evolving industry
standards, we could experience a reduction in our future product sales,
which would
cause our revenues to decline.
The
market for our products is characterized by continuing technological
development, evolving industry standards, changing customer needs, and frequent
new product introductions and enhancements. The introduction of products by our
direct competitors or others embodying new technologies, the emergence of new
industry standards, or changes in customer requirements could render our
existing products obsolete, unmarketable, or less competitive. In particular, an
industry-wide adoption of uniform open standards across heterogeneous
applications could minimize the importance of the integration functionality of
our products and materially adversely affect the competitiveness and market
acceptance of our products. Our success depends upon our ability to enhance
existing products, to respond to changing customer requirements, and to develop
and introduce in a timely manner new products that keep pace with technological
and competitive developments and emerging industry standards. We have in the
past experienced delays in releasing new products and product enhancements and
may experience similar delays in the future. As a result, in the past, some of
our customers deferred purchasing our products until the next upgrade was
released. Future delays or problems in the installation or implementation of our
new releases may cause customers to forgo purchases of our products and purchase
those of our competitors instead. Additionally, even if we are able to develop
new products and product enhancements, we cannot ensure that they will achieve
market acceptance.
We recognize
revenue from specific customers at the time we receive payment for our
products,
and if these customers do not make timely payment, our revenues could
decrease.
Based on
limited credit history, we recognize revenue from direct end users, resellers,
distributors, and OEMs that have not been deemed creditworthy when we receive
payment for our products and when all other criteria for revenue recognition
have been met, rather than at the time of sale. We have seen certain customers
lengthen their payment cycles as a result of the continued
difficult
macroeconomic
environment. As our business grows, if these customers and partners do not make
timely payment for our products, our revenues could decrease. If our revenues
decrease, the price of our common stock may fall.
The conversion
provisions of our Convertible Senior Notes and the level of debt represented by
such notes will dilute the ownership interests of stockholders, could
adversely
affect our liquidity, and could impede our ability to raise additional
capital
which may also be affected by the tightening of the capital
markets.
In March
2006, we issued $230 million aggregate principal amount of Convertible
Senior Notes due 2026. As of September 30, 2009, $201 million of the Notes were
outstanding. The note holders can convert the Notes into shares of our common
stock at any time before the Notes mature or we redeem or repurchase them. Upon
certain dates (March 15, 2011, March 15, 2016, and March 15,
2021) or the occurrence of certain events including a change in control,
the note holders can require us to repurchase some or all of the Notes. Upon any
conversion of the Notes, our basic earnings per share would be expected to
decrease because such underlying shares would be included in the basic earnings
per share calculation. Given that events constituting a “change in control” can
trigger such repurchase obligations, the existence of such repurchase
obligations may delay or discourage a merger, acquisition, or other
consolidation. Our ability to meet our repurchase or repayment obligations of
the Notes will depend upon our future performance, which is subject to economic,
competitive, financial, and other factors affecting our industry and operations,
some of which are beyond our control. If we are unable to meet the obligations
out of cash flows from operations or other available funds, we may need to raise
additional funds through public or private debt or equity financings. We may not
be able to borrow money or sell more of our equity securities to meet our cash
needs for reasons including the tightening of the capital markets. Even if we
are able to do so, it may not be on terms that are favorable or reasonable to
us.
We may engage in
future acquisitions or investments that could dilute our existing stockholders or
could cause us to incur contingent liabilities, debt, or significant
expense or
could be difficult to integrate in terms of the acquired entity’s products,
personnel, and operations.
From time
to time, in the ordinary course of business, we may evaluate potential
acquisitions of, or investments in, related businesses, products, or
technologies. For example, in January 2006, we acquired Similarity Systems, in
December 2006, we acquired Itemfield, in May 2008, we acquired Identity Systems,
in October 2008, we acquired PowerData, in February 2009, we acquired
Applimation, in June 2009, we acquired AddressDoctor, and in September 2009, we
acquired Agent Logic. Future acquisitions and investments like these could
result in the issuance of dilutive equity securities, the incurrence of debt or
contingent liabilities, or the payment of cash to purchase equity securities
from third parties. There can be no assurance that any strategic acquisition or
investment will succeed. Risks include difficulties in the integration of the
products, personnel, and operations of the acquired entity, disruption of the
ongoing business, potential management distraction from the ongoing business,
difficulties in the retention of key partner alliances, potential product
liability issues related to the acquired products, potential decline in the fair
value of investments, potential impairment of goodwill, and potential impairment
of other intangible assets.
We may not
successfully integrate an acquired company’s technology, employees, or business
operations with our own. As a result, we may not achieve the anticipated
benefits of
our acquisition, which could adversely affect our operating results and
cause the
price of our common stock to decline.
In
September 2009, we acquired Agent Logic, a leading provider of complex event
processing software. In addition, in June 2009, we acquired AddressDoctor, a
leading provider of global address validation technology, and in February 2009,
we acquired Applimation, a provider of application Information Lifecycle
Management (ILM) technology. The successful integration of Agent Logic’s,
Applimation’s and AddressDoctor’s technologies, employees, and business
operations will place an additional burden on our management and infrastructure.
These acquisitions, and others we may make in the future, will subject us to a
number of risks, including:
|
|
the
failure to capture the value of the business we acquired, including the
loss of any key personnel, customers, and business relationships,
including strategic partnerships;
|
|
|
any
inability to generate revenue from the combined products that offsets the
associated acquisition and maintenance costs, including addressing issues
related to the availability of offerings on multiple platforms and from
cross-selling and up-selling our products to the acquired company’s
installed customer base or the acquired company’s products to our
installed customer base; and
|
|
|
the
assumption of any contracts or agreements from the acquired company that
contain terms or conditions that are unfavorable to
us.
|
There can
be no assurance that we will be successful in overcoming these risks or any
other problems encountered in connection with our recent acquisitions. To the
extent that we are unable to successfully manage these risks, our business,
operating results, or financial condition could be adversely affected, and the
price of our common stock could decline.
A
portion of our revenue is generated by sales to government entities, which are
subject to a number of challenges and risks.
Sales to
U.S. and foreign federal, state, and local governmental agency end-customers
have accounted for a portion of our revenue, and we may in the future increase
sales to government entities. Sales to government entities are subject to a
number of risks. Selling to government entities can be highly competitive,
expensive and time consuming, often requiring significant upfront time and
expense without any assurance that we will successfully sell our products to
such governmental entity. Government entities may require contract terms that
differ from our standard arrangements. Government contracts may require
the maintenance of certain security clearances for facilities and employees
which can entail administrative time and effort possibly resulting in additional
costs and delays. In addition, government demand and payment for our products
may be more volatile as they are affected by public sector budgetary cycles,
funding authorizations, and the potential for funding reductions or delays. Most
of our sales to government entities have been made indirectly through providers
that sell our products. Government entities may have contractual or other legal
rights to terminate contracts with our providers for convenience or due to a
default, and any such termination may adversely impact our future results of
operations. For example, if the provider receives a significant portion of its
revenue from sales to such governmental entity, the financial health of the
provider could be substantially harmed, which could negatively affect our future
sales to such provider. Governments routinely audit and
investigate government contractors, and we may be subject to such audits
and investigations. If an audit or investigation uncovers improper or
illegal activities, we may be subject to civil or criminal penalties and
administrative sanctions, including termination of contracts, forfeiture of
profits, suspension of payments, fines, and suspension or prohibition from doing
business with such government entity. In addition, we could suffer serious
reputational harm if allegations of impropriety were made against
us.
We have
substantial real estate lease commitments that are currently subleased to
third
parties, and if subleases for this space are terminated or cancelled, our
operating
results and financial condition could be adversely affected.
We have
substantial real estate lease commitments in the United States and
internationally. However, we do not occupy some of these leases with the most
significant portion of our unoccupied leases being located in Silicon Valley.
Currently, we have substantially subleased these unoccupied properties to third
parties. The terms of most of these sublease agreements account for only a
portion of the period of our master leases and contain rights of the subtenant
to extend the term of the sublease. In addition, the current economic downturn
has negatively impacted commercial lease rates and terms in the Silicon Valley
area and makes it more difficult to enter into agreements with existing
subtenants on sublease renewals or prospective subtenants with sublease rates or
terms comparable to those contracted for in the past. To the extent that
(1) our subtenants do not renew their subleases at the end of the initial
term and we are unable to enter into new subleases with other parties at
comparable rates, or (2) our subtenants are unable to pay the sublease rent
amounts in a timely manner, our cash flow would be negatively impacted and our
operating results and financial condition could be adversely affected. See
Note 9. Facilities
Restructuring Charges, of Notes to Condensed
Consolidated Financial Statements in Part I, Item 1 of this
Report.
Delaware law and
our certificate of incorporation and bylaws contain provisions that could deter
potential acquisition bids, which may adversely affect the market price
of our
common stock, discourage merger offers, and prevent changes in our
management or Board of
Directors.
Our basic
corporate documents and Delaware law contain provisions that might discourage,
delay, or prevent a change in the control of Informatica or a change in our
management. Our bylaws provide that we have a classified Board of Directors,
with each class of directors subject to re-election every three years. This
classified Board has the effect of making it more difficult for third parties to
elect their representatives on our Board of Directors and gain control of
Informatica. These provisions could also discourage proxy contests and make it
more difficult for our stockholders to elect directors and take other corporate
actions. The existence of these provisions could limit the price that investors
might be willing to pay in the future for shares of our common
stock.
In
addition, we have adopted a stockholder rights plan. Under the plan, we issued a
dividend of one right for each outstanding share of common stock to stockholders
of record as of November 12, 2001, and such rights will become exercisable
only upon the occurrence of certain events. Because the rights may substantially
dilute the stock ownership of a person or group attempting to take
us over
without the approval of our Board of Directors, the plan could make it more
difficult for a third party to acquire us or a significant percentage of our
outstanding capital stock without first negotiating with our Board of Directors
regarding such acquisition.
Business
interruptions could adversely affect our business.
Our
operations are vulnerable to interruption by fire, earthquake, power loss,
telecommunications or network failure, and other events beyond our control. We
have prepared a detailed disaster recovery plan and will continue to expand the
scope over time. Some of our facilities in Asia experienced disruption as a
result of the December 2006 earthquake off the coast of Taiwan, which caused a
major fiber outage throughout the surrounding regions. The outage affected
network connectivity, which has been restored to acceptable levels. Such
disruption can negatively affect our operations given necessary interaction
among our international facilities. In the event such an earthquake or any other
natural disaster reoccurs, it could again disrupt the operations of our affected
facilities. In addition, we do not carry sufficient business interruption
insurance to compensate us for losses that may occur, and any losses or damages
incurred by us could have a material adverse effect on our
business.
Repurchases
of Equity Securities
Pursuant
to our stock repurchase program, repurchases can be made from time to time in
the open market and will be funded from available working capital. There is no
expiration date for the repurchase program. The purpose of our stock repurchase
program is to enhance stockholder value, including offsetting dilution from our
stock-based incentive plans. The number of shares acquired and the timing of the
repurchases are based on several factors, including the price of our common
stock, the number of employees participating in our stock option plans and our
employee stock purchase plan, and overall market conditions. The repurchased
shares are retired and reclassified as authorized and unissued shares of common
stock.
In
October 2008, our Board of Directors authorized, under the existing stock
repurchase program, the repurchase of a portion of its outstanding Convertible
Senior Notes (the “Notes”) due in 2026 in privately negotiated transactions with
the holders of the Notes. As of September 30, 2009, Informatica repurchased
$29.0 million of its Convertible Senior Notes at a cost of
$27.2 million. See Note 4. Convertible Senior Notes and
Note 7. Stock Repurchases
and Retirement of Convertible Notes, of Notes to Condensed Consolidated
Financial Statements in Part I, Item 1 of this Report. There was no
repurchase of our common stock or the Notes during the three months ended
September 30, 2009.
ITEMS
3, 4 and 5 are not applicable and have been omitted.
Exhibit No.
|
|
Description
|
31.1
|
|
Certification
of the Chief Executive Officer pursuant to Rule
13a-14(a)/15d-15(a).
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to Rule
13a-14(a)/15d-15(a).
|
|
|
|
32.1
|
|
Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934 the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
November
5, 2009 |
INFORMATICA
CORPORATION |
|
|
|
|
|
|
|
|
/s/ EARL
FRY |
|
|
Earl
Fry |
|
|
Chief Financial Officer
(Duly Authorized Officer
and |
|
|
Principal Financial and
Accounting
Officer) |
|
INFORMATICA
CORPORATION
For
the Quarter Ended September 30, 2009
Exhibit No.
|
|
Description
|
31.1
|
|
Certification
of the Chief Executive Officer pursuant to Rule
13a-14(a)/15d-15(a).
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to Rule
13a-14(a)/15d-15(a).
|
|
|
|
32.1
|
|
Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350.
|