form10q_063008.htm Table of Contents




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 June 30, 2008

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition 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 July 31, 2008, there were approximately 89,016,000 shares of the registrant’s common stock outstanding.







INFORMATICA CORPORATION
 
Table of Contents

   
 Page No.
 
     
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    54  
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    57  
    58  
 EXHIBIT 2.1        
 EXHIBIT 31.1        
 EXHIBIT 31.2        
 EXHIBIT 32.1        

2


PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INFORMATICA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
   
June 30,
2008
   
December 31,
2007
 
   
(Unaudited)
       
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 235,154     $ 203,661  
Short-term investments
    227,289       281,197  
Accounts receivable, net of allowances of $1,818 and $1,299, respectively
    62,649       72,643  
Deferred tax assets
    19,671       18,294  
Prepaid expenses and other current assets
    29,357       14,693  
Total current assets
    574,120       590,488  
                 
Restricted cash
          12,122  
Property and equipment, net
    9,389       10,124  
Goodwill
    216,209       166,916  
Other intangible assets, net
    36,751       12,399  
Other assets
    9,723       6,595  
Total assets
  $ 846,192     $ 798,644  
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable
  $ 7,779     $ 4,109  
Accrued liabilities
    25,781       25,381  
Accrued compensation and related expenses
    30,851       33,053  
Income taxes payable
          248  
Accrued facilities restructuring charges
    19,336       18,007  
Deferred revenues
    110,262       99,415  
Total current liabilities
    194,009       180,213  
                 
Convertible senior notes
    230,000       230,000  
Accrued facilities restructuring charges, less current portion
    50,656       56,235  
Long-term deferred revenues
    11,549       13,686  
Long-term income taxes payable
    7,449       5,968  
Total liabilities
    493,663       486,102  
                 
Commitments and contingencies (Note 10)
               
                 
Stockholders’ equity:
               
Common stock
    89       87  
Additional paid-in capital
    393,289       377,277  
Accumulated other comprehensive income
    6,886       5,640  
Accumulated deficit
    (47,735 )     (70,462 )
Total stockholders’ equity
    352,529       312,542  
Total liabilities and stockholders’ equity
  $ 846,192     $ 798,644  

See accompanying notes to condensed consolidated financial statements.

3


INFORMATICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

 

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Revenues:
                       
License
  $ 48,523     $ 41,838     $ 92,732     $ 79,400  
Service
    65,237       52,424       124,738       101,976  
Total revenues
    113,760       94,262       217,470       181,376  
                                 
Cost of revenues:
                               
License
    897       943       1,590       1,748  
Service
    21,380       16,945       41,165       33,259  
Amortization of acquired technology
    951       727       1,571       1,449  
Total cost of revenues
    23,228       18,615       44,326       36,456  
                                 
Gross profit
    90,532       75,647       173,144       144,920  
                                 
Operating expenses:
                               
Research and development
    18,497       16,949       36,221       34,973  
Sales and marketing
    45,966       39,103       88,753       74,214  
General and administrative
    9,146       9,134       17,515       16,859  
Amortization of intangible assets
    993       362       1,355       718  
Facilities restructuring charges
    921       1,026       1,868       2,075  
Purchased in-process research and development
    390             390        
Total operating expenses
    75,913       66,574       146,102       128,839  
                                 
Income from operations
    14,619       9,073       27,042       16,081  
                                 
Interest income
    3,650       5,371       8,507       10,420  
Interest expense
    (1,799 )     (1,796 )     (3,601 )     (3,600 )
Other income (expense), net
    (86 )     (218 )     417       (304 )
Income before provision for income taxes
    16,384       12,430       32,365       22,597  
Provision for income taxes
    4,881       1,974       9,638       3,047  
Net income
  $ 11,503     $ 10,456     $ 22,727     $ 19,550  
Basic net income per common share
  $ 0.13     $ 0.12     $ 0.26     $ 0.23  
Diluted net income per common share
  $ 0.12     $ 0.11     $ 0.24     $ 0.21  
Shares used in computing basic net income per common share
    88,565       87,293       88,347       86,863  
Shares used in computing diluted net income per common share
    104,457       103,206       104,403       102,778  


See accompanying notes to condensed consolidated financial statements.


4


INFORMATICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Six Months Ended
June 30,
 
   
2008
   
2007
 
Operating activities:
           
Net income
  $ 22,727     $ 19,550  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    2,813       5,427  
Allowance for doubtful accounts and sales returns allowance
    215       37  
Share-based payments
    7,946       7,918  
Deferred income taxes
    (1,377 )      
Tax benefits from stock option plans
    5,124        
Excess tax benefits from share-based payments
    (4,375 )      
Amortization of intangible assets and acquired technology
    2,926       2,167  
In-process research and development
    390        
Non-cash facilities restructuring charges
    1,868       2,075  
Other non-cash items
    (128 )      
Changes in operating assets and liabilities:
               
Accounts receivable
    14,618       10,383  
Prepaid expenses and other assets
    (14,718 )     (3,279 )
Accounts payable and other current liabilities
    645       (4,824 )
Income taxes payable
    1,309       (2,246 )
Accrued facilities restructuring charges
    (6,036 )     (7,667 )
Deferred revenues
    7,891       4,486  
Net cash provided by operating activities
    41,838       34,027  
Investing activities:
               
Purchases of property and equipment
    (1,921 )     (3,442 )
Purchases of investments
    (152,784 )     (230,880 )
Purchase of investment in equity interest
    (3,000 )      
Maturities of investments
    168,368       178,835  
Sales of investments
    38,257       29,003  
Business acquisition, net of cash acquired
    (79,844 )      
Transfer from restricted cash
    12,016        
Net cash used in investing  activities
    (18,908 )     (26,484 )
Financing activities:
               
Net proceeds from issuance of common stock
    18,782       15,349  
Repurchases and retirement of common stock
    (15,838 )     (5,993 )
Excess tax benefits from share-based payments
    4,375        
Net cash provided by financing activities
    7,319       9,356  
Effect of foreign exchange rate changes on cash and cash equivalents
    1,244       704  
Net increase in cash and cash equivalents
    31,493       17,603  
Cash and cash equivalents at beginning of period
    203,661       120,491  
Cash and cash equivalents at end of period
  $ 235,154     $ 138,094  


See accompanying notes to condensed consolidated financial statements.


INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1. Summary of Significant Accounting Policies

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 six months ended June 30, 2008 and 2007 are unaudited. The interim results presented are not necessarily indicative of results for any subsequent interim period, the year ending December 31, 2008, 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 are 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 areas in which management’s judgment in selecting any 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, 2007 included in the Company’s Annual Report on Form 10-K filed with the SEC. The condensed consolidated balance sheet as of December 31, 2007 has been derived from the audited consolidated financial statements of the Company.
 
Certain reclassifications have been made to the prior year consolidated financial statements to conform to the current year presentation.
 
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 AICPA SOP 97-2, Software Revenue Recognition, as amended and modified by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, SOP 81-1, Accounting for Performance of Construction-type and Certain Production-type Contracts, the Securities and Exchange Commission’s Staff Accounting Bulletin SAB 104, Revenue Recognition, and other authoritative accounting literature.

Under SOP 97-2, 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 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. Credit worthiness and collectibility are first assessed at a country level based on the country’s overall economic climate and general business risk. For customers in the countries that are deemed credit-worthy, credit and collectibility are then assessed based on their payment history and credit profile. When a customer is not deemed credit-worthy, revenue is recognized when payment is received.

The Company also enters into OEM arrangements that provide for license fees based on inclusion of our technology and/or products in the OEM’s products. These arrangements provide for fixed, irrevocable royalty payments. Royalty payments are recognized as revenues based on the activity in the royalty report that the Company receives from the OEM. In 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 are 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 undelivered elements, all revenue is deferred and recognized as delivery occurs or when VSOE is established. Consulting services, if included as part of the software arrangement, generally do not require significant modification or customization of the software. 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 revenue. For customers not deemed credit-worthy, the Company’s practice is to net unpaid deferred revenue for that customer against the related receivable balance.

Fair Value Measurement of Financial Assets and Liabilities

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), which defines fair value and establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), including an amendment of FASB Statement No. 115, which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities under an instrument-by-instrument election. At January 1, 2008, the Company adopted SFAS No. 157 and SFAS No. 159, which address aspects of the expanding application of fair value accounting. The company has elected not to use fair value for any of its investments held as of the beginning of the quarter ended March 31, 2008.
 
SFAS No. 157 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.

 
 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
SFAS 157 allows the Company to measure the fair value of its financial assets and liabilities based on one or more of 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).

The following table summarizes the fair value measurement classification of Informatica as of June 30, 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
  $ 29,743     $ 29,743     $     $  
Marketable securities
    313,340             313,340        
Total money market funds and marketable securities
    343,083       29,743       313,340        
Investment in equity interest
    3,000                   3,000  
Total
  $ 346,083     $ 29,743     $ 313,340     $ 3,000  
Liabilities:
                               
Convertible senior notes
  $ 235,175     $ 235,175     $     $  

Informatica uses a market approach for determining the fair value of all its Level 1 and Level 2 financial assets and liabilities. The Company also held a $3 million investment in the preferred stock of a privately held company at June 30, 2008, which was classified as Level 3 for value measurement purposes. In determining the fair value of this investment, the Company considered the price paid by other third party investors purchasing preferred stock in the same privately held company during the second quarter of 2008. Further, there was an investment by a third party with similar terms and for the same amount and percentage of ownership interest during the first quarter of 2008.

Share-Based Payments

Summary of Assumptions

The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model that uses the assumptions noted in the following table. 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 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. Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-based Payment (“SFAS No. 123(R)”) also requires the Company to estimate forfeitures at the time of grant and revise 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 to determine its forfeiture rate.

8

Table of Contents
 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company estimated the fair value of its share-based payment awards with no expected dividends using the following assumptions:

 
 
Three Months Ended
         June 30,                             
   
 
Six Months Ended
         June 30,                             
   
 
2008               
   
2007               
   
2008               
   
2007               
   
Option Grants:
                       
Expected volatility
38
 %  
37
 %  
38 – 41
 %  
37 – 41
 %  
Weighted-average volatility
38
 %  
37
 %  
38
 %  
39
 %  
Expected dividends
   
   
   
   
Expected term of options (in years)
3.3
   
3.3
   
3.3
   
3.3
   
Risk-free interest rate
2.8
 %  
4.7
 %  
2.7
 %  
4.7
 %  
ESPP: *
                       
Expected volatility
   
   
38
 %  
34
 %  
Weighted-average volatility
   
   
38
 %  
34
 %  
Expected dividends
   
   
   
   
Expected term of ESPP (in years)
   
   
0.5
   
0.5
   
Risk-free interest rate — ESPP
   
   
2.2
 %  
5.2
 %  

____________

*
ESPP purchases are made on the last day of January and July of each year.

The allocation of share-based payments for the three and six months ended June 30, 2008 and 2007 is as follows (in thousands):

 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Cost of service revenues
  $ 493     $ 421     $ 1,039     $ 890  
Research and development
    966       933       2,030       1,837  
Sales and marketing
    1,230       1,387       2,603       3,031  
General and administrative
    1,143       1,136       2,274       2,160  
Total share-based payments
  $ 3,832     $ 3,877     $ 7,946     $ 7,918  
Tax benefit of share-based payments
    (694 )     (832 )     (1,496 )     (1,699 )
Total share-based payments, net of tax benefit
  $ 3,138     $ 3,045     $ 6,450     $ 6,219  


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 stockholders’ equity, net of tax. Realized gains and losses and permanent declines in value, if any, on available-for-sale securities are reported in other income or expense as incurred.

Realized gains recognized for the three and six months ended June 30, 2008 were $26,000 and $81,000, respectively. There were no realized gains or losses recognized for the three and six months ended June 30, 2007. The realized gains are included in other income of the consolidated results of operations 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 June 30, 2008 and December 31, 2007 (in thousands):

   
June 30, 2008
 
   
 
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
 
Cash
  $ 119,360     $     $     $ 119,360  
Cash equivalents:
                               
 Money market funds
    29,743                   29,743  
 Commercial paper
    55,089                   55,089  
 Federal agency notes and bonds
    27,970             (5 )     27,965  
 U.S. government notes and bonds
    2,997                   2,997  
 Total cash equivalents
    115,799             (5 )     115,794  
 Total cash and cash equivalents
    235,159             (5 )     235,154  
Short-term investments:
                               
 Commercial paper
    27,152       31             27,183  
 Corporate notes and bonds
    40,523       129       (46 )     40,606  
 Federal agency notes and bonds
    129,451       405       (109 )     129,747  
 U.S. government notes and bonds
    29,774       2       (23 )     29,753  
 Total short-term investments
    226,900       567       (178 )     227,289  
Total cash, cash equivalents, and short-term investments *
  $ 462,059     $ 567     $ (183 )   $ 462,443  
___________

*
Total estimated fair value above included $343,083 comprised of cash equivalents and short-term investments at June 30, 2008.

   
December 31, 2007
 
   
 
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
 
Cash
  $ 102,939     $     $     $ 102,939  
Cash equivalents:
                               
 Money market funds
    35,240                   35,240  
 Commercial paper
    24,448       1             24,449  
 Federal agency notes and bonds
    41,037             (4 )     41,033  
 Total cash equivalents
    100,725       1       (4 )     100,722  
Total cash and cash equivalents
    203,664       1       (4 )     203,661  
Short-term investments:
                               
 Commercial paper
    51,642       7       (4 )     51,645  
 Corporate notes and bonds
    51,308       103       (25 )     51,386  
 Federal agency notes and bonds
    150,049       371       (12 )     150,408  
 U.S. government notes and bonds
    5,494       8       (1 )     5,501  
 Municipal notes and bonds
    1,200       7             1,207  
 Auction rate securities
    21,050                   21,050  
 Total short-term investments
    280,743       496       (42 )     281,197  
Total cash, cash equivalents, and short-term investments
  $ 484,407     $ 497     $ (46 )   $ 484,858  

In accordance with FASB Staff Position No. FAS 115-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments, 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 June 30, 2008  (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
  $ 13,007     $ (46 )   $     $     $ 13,007     $ (46 )
Federal agency notes and bonds
    85,871       (114 )                 85,871       (114 )
U.S. government notes and bonds
    29,509       (23 )                 29,509       (23 )
Total
  $ 128,387     $ (183 )   $     $     $ 128,387     $ (183 )
 
 
 
 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
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 June 30, 2008 (in thousands):

   
Cost
   
Fair Value
 
Due within one year
  $ 317,874     $ 318,289  
Due one year to two years
    24,825       24,794  
Due after two years
           
    $ 342,699     $ 343,083  


Note 3. Goodwill and Intangible Assets

The carrying amounts of intangible assets other than goodwill as of June 30, 2008 and December 31, 2007 are as follows (in thousands):

   
June 30, 2008
   
December 31, 2007
 
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Amount
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Amount
 
Developed and core technology
  $ 32,792     $ (11,662 )   $ 21,130     $ 18,135     $ (10,091 )   $ 8,044  
Customer relationships
    16,796       (2,950 )     13,846       4,175       (1,895 )     2,280  
Other:
                                               
Trade names
    700       (308 )     392       700       (208 )     492  
Covenant not to compete
    2,000       (617 )     1,383       2,000       (417 )     1,583  
    $ 52,288     $ (15,537 )   $ 36,751     $ 25,010     $ (12,611 )   $ 12,399  

Amortization expense of intangible assets was approximately $1.9 million and $1.1 million for the three months ended June 30, 2008 and 2007, respectively, and $2.9 million and $2.2 million for the six months ended June 30, 2008 and 2007, respectively. The weighted-average amortization period of the Company’s developed and core technology, customer relationships, trade names, and covenants not to compete are 5 years, 5 years, 3.5 years, and 5 years, respectively. The amortization expense related to identifiable intangible assets as of June 30, 2008 is expected to be $5.5 million for the remainder of 2008, $10.2 million, $7.5 million, $6.4 million, $4.4 million, and $2.8 million for the years ending December 31, 2009, 2010, 2011, 2012, and thereafter, respectively.

The increase in the gross carrying amount of developed and core technology for $14.6 million as well as customer relationships for $12.6 million is due to acquisition of Identity Systems discussed in Note 13. Acquisition, of Notes to Condensed Consolidated Financial Statements. Developed and core technology of $7.7 million and customer relationships of $0.1 million at June 30, 2008 related to the Identity Systems acquisition, were recorded in a European local currency; therefore, the gross carrying amount and accumulated amortization are subject to periodic translation adjustments.

The change in the carrying amount of goodwill for the six months ended June 30, 2008 is as follows (in thousands):

   
June 30,
2008
 
Beginning balance as of December 31, 2007
  $ 166,916  
Goodwill recorded in acquisition
    49,316  
Subsequent goodwill adjustments:
       
    Tax benefits from exercise of non-qualified stock options granted as part of prior acquisitions
    (76 )
     Local currency translation adjustments
    53  
Ending balance as of June 30, 2008
  $ 216,209  


 
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 with an aggregate principal amount of $230 million due 2026 (“Notes”). 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 of the Notes. The initial conversion price represented a premium of approximately 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 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 SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and Emerging Issues Task Force (“EITF”) No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, 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. 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 expense related to the issuance costs was $78,000 for both of the three-month periods ended June 30, 2008 and 2007, and $156,000 for both of the six-month periods ended June 30, 2008 and 2007. Interest expense on the Notes was $1.7 million for both of the three-month periods ended June 30, 2008 and 2007, and $3.5 million for both of the six-month periods ended June 30, 2008 and 2007. Interest payment of $3.5 million was made in both of the six-month periods ended June 30, 2008 and 2007.

   The Company has classified its convertible debt as Level I, according to SFAS No. 157 since it has quote prices available in active markets for identical assets. Informatica has determined that the current market value of its convertible senior notes as of June 30, 2008 is $235.2 million.



 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 5. Other Comprehensive Income

Other comprehensive income refers to gains and losses that are recorded as an element of stockholders’ equity under GAAP and are excluded from net income. Other comprehensive income consisted of the following items (in thousands):

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Net income, as reported
  $ 11,503     $ 10,456     $ 22,727     $ 19,550  
Other comprehensive income:
                               
Unrealized loss on investments *
    (615 )     (190 )     (42 )     (96 )
Cumulative translation adjustment *
    (775 )     611       1,288       833  
Comprehensive income
  $ 10,113     $ 10,877     $ 23,973     $ 20,287  
_________

*
The tax benefits and losses on investments and cumulative translation adjustments were $0.3 million benefits  and $0.1 million losses for the three and six months ended June 30, 2008, respectively, and negligible for the three and six months ended June 30, 2007.

Accumulated other comprehensive income as of June 30, 2008 and December 31, 2007 consisted of the following (in thousands):

   
June 30,
2008
   
December 31,
2007
 
Unrealized gain on available-for-sale investments
  $ 179     $ 221  
Cumulative translation adjustment
    6,707       5,419  
    $ 6,886     $ 5,640  


Note 6. Stock Repurchases

The purpose of Informatica’s stock repurchase program is, among other things, to help offset the dilution caused by the issuance of stock under our 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 our 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 2006, Informatica’s Board of Directors authorized a stock repurchase program for a one-year period for up to $30 million of our common stock. As of April 30, 2007, the Company repurchased 2,238,000 shares at a cost of $30 million.

In April 2007, Informatica’s Board of Directors authorized a stock repurchase program for up to an additional $50 million of our common stock. In April 2008, Informatica’s Board of Directors authorized a stock repurchase program for up to an additional $75 million of our common stock. Repurchases can be made from time to time in the open market and will be funded from available working capital. As of June 30, 2008, the Company repurchased 2,795,000 shares at cost of $43.4 million (under April 2007 approval), including 576,000 shares at a cost of $9.5 million during the three months ended June 30, 2008. The Company has $6.6 million (under April 2007 approval) and $75 million (under April 2008 approval) remaining available to repurchase shares under this program.  Neither of these two repurchase programs have expiration dates.


Note 7. 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 with two subleases expiring in 2008 and 2009 with rights to extend for a period of one and four years, respectively. The Company recorded restructuring charges of approximately $103.6 million,
 
 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
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 five-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 $2.3 million for the remainder of 2008, $2.6 million in 2009, $1.2 million in 2010, $3.8 million in 2011, $4.4 million in 2012, and $2.4 million in 2013.

Subsequent to 2004, the Company continued to record accretion on the cash obligations related to the 2004 Restructuring Plan. Accretion represents imputed interest and is the difference between our non-discounted future cash obligations and the discounted present value of these cash obligations. As of June 30, 2008, the Company will recognize approximately $9.7 million of accretion as a restructuring charge over the remaining term of the lease, or approximately five years, as follows: $1.7 million for the remainder of 2008, $3.0 million in 2009, $2.3 million in 2010, $1.6 million in 2011, $0.9 million in 2012, and $0.2 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.

A summary of the activity of the accrued restructuring charges for the six months ended June 30, 2008 is as follows (in thousands):

   
Accrued
Restructuring
Charges at
December 31,
   
 
 
Restructuring
   
 
 
Net Cash
   
 
 
Non-cash
   
Accrued
Restructuring
Charges at
June 30,
 
   
2007
   
Charges
   
Adjustments
   
Payment
   
Reclass
   
  2008
 
2004 Restructuring Plan
                                   
Excess lease facilities
  $ 64,446     $ 1,786     $ 82     $ (5,346 )   $ (82 )   $ 60,886  
2001 Restructuring Plan
                                               
Excess lease facilities
    9,796                   (690 )           9,106  
    $ 74,242     $ 1,786     $ 82     $ (6,036 )   $ (82 )   $ 69,992  

For the six months ended June 30, 2008, the Company recorded restructuring charges of $1.8 million from accretion charges related to the 2004 Restructuring Plan. Actual future cash requirements may differ from the restructuring liability balances as of June 30, 2008 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 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 $9.8 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 suitable subleases should the Company’s existing subleases elect to terminate their sublease agreements in 2008 and 2009 and the market rates at the time of entering into new sublease agreements.

 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8. Income Taxes

In the quarter ended September 30, 2007, the Company released its valuation allowance for its non-stock option related deferred tax assets. The remaining valuation allowance is related to Informatica’s stock option 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 reduce the Company’s effective tax rate.  Prior to September 30, 2007, the Company’s effective tax rate was primarily based on federal alternative minimum taxes, state minimum taxes, and income and withholding taxes attributable to foreign operations. The Company’s effective tax rates were 29.8% and 15.9% for the three months ended June 30, 2008 and 2007, respectively, and 29.8% and 13.5% for the six months ended June 30, 2008 and 2007, respectively. The effective tax rates for the three and six-months period ended June 30, 2008 differed from the federal statutory rate of 35% primarily due to the non-deductibility of share-based payments, as well as the accrual of reserves related to uncertain tax positions offset by the tax rate benefits for certain earnings from Informatica’s operations in lower-tax jurisdictions throughout the world. The Company has not provided for residual U.S. taxes in any of these jurisdictions since it intends to reinvest such earnings indefinitely. As discussed above, the 15.9% and 13.5% effective tax rates for the three and six months ended June 30, 2007, respectively, represented primarily federal alternative minimum taxes, state minimum taxes, and income and withholding taxes attributable to foreign operations.

In assessing the need for any additional non-stock valuation allowance in the quarter ended June 30, 2008, the Company considered all available evidence both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income, ongoing prudent and feasible tax planning strategies and the deductibility of a capital loss, and recorded a valuation allowance to reduce its deferred tax assets to the amount it believed was more likely than not to be realized based on such available evidence.  As a result of this analysis, the Company determined that it needed to increase its valuation allowance for non-stock option related deferred tax assets by approximately $0.3 million resulting from a nondeductible capital loss.

The FIN No. 48 unrecognized tax benefits, if recognized, would impact the income tax provision by $6.8 million and $6.0 million as of June 30, 2008 and 2007, respectively. The Company has elected to include interest and penalties as a component of tax expense. Accrued interest and penalties at June 30, 2008 and 2007 were approximately $484,000 and $225,000, respectively. The Company does not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months.

The Company files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The Company is currently under examination by the Internal Revenue Service for fiscal years 2005 and 2006. Due to net operating loss carry-forwards, substantially all of the Company’s tax years, from 1995 through 2006, remain open to tax examination. Recently the Company has also been informed by certain state 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 the state audits has commenced and is at various stages of completion as of June 30, 2008. 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. If the payment ultimately proves to be unnecessary, the reversal of these tax liabilities would result in tax benefits in the period that the Company had 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.


Note 9. Net Income per Common Share

Under the provisions of Statement of Financial Accounting Standard No. 128, Earnings per Share (“SFAS No. 128”), 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 antidilutive.

 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The calculation of basic and diluted net income per common share is as follows (in thousands, except per share amounts):

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Net income
  $ 11,503     $ 10,456     $ 22,727     $ 19,550  
Effect of convertible senior notes, net of related tax effects
    1,100       1,100       2,200       2,200  
Net income adjusted
  $ 12,603     $ 11,556     $ 24,927     $ 21,750  
Weighted-average shares outstanding
    88,565       87,293       88,347       86,863  
Shares used in computing basic net income per common share
    88,565       87,293       88,347       86,863  
Dilutive effect of employee stock options, net of related tax benefits
    4,392       4,413       4,556       4,415  
Dilutive effect of convertible senior notes
    11,500       11,500       11,500       11,500  
Shares used in computing diluted net income per common share
    104,457       103,206       104,403       102,778  
Basic net income per common share
  $ 0.13     $ 0.12     $ 0.26     $ 0.23  
Diluted net income per common share
  $ 0.12     $ 0.11     $ 0.24     $ 0.21  


Diluted net income per common share is calculated according to SFAS No. 128, 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 six months ended June 30, 2008 and 2007, the convertible senior notes had a dilutive effect on diluted net income per share, and as such, it had an add-back of $1.1 million for both three-month periods and $2.2 million for both six-month periods in interest and issuance cost amortization, net of income taxes, to net income for the diluted net income per share calculation for both periods.


Note 10. 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. The future minimum contractual lease payments are $1.9 million for the remainder of 2008, and $4.0 million and $4.2 million for the years ending December 31, 2009 and 2010, 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 was used as its former corporate headquarters from August 2001 through December 2004. The leases expire in July 2013. In 2001, a financial institution issued a $12.0 million letter of credit which required us to maintain certificates of deposits as collateral until the leases expire in 2013. As of June 2008, however, we are no longer required to maintain certificates of deposits for this letter of credit, which is for our former corporate headquarters leases at the Pacific Shores Center in Redwood City, California.

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 maintenance. Operating lease payments in the table below include approximately $84.4 million for operating lease commitments for facilities that are included in restructuring charges. See Note 7. Facilities Restructuring Charges, above, for a further discussion.


 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Future minimum lease payments as of June 30, 2008 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 2008
  $ 12,323     $ (1,496 )   $ 10,827  
2009
    24,827       (1,719 )     23,108  
2010
    24,153       (219 )     23,934  
2011
    19,207       (2,094 )     17,113  
2012
    19,549       (2,628 )     16,921  
Thereafter
    12,674       (1,345 )     11,329  
    $ 112,733     $ (9,501 )   $ 103,232  

Of these future minimum lease payments, the Company has accrued $70.0 million in the facilities restructuring accrual at June 30, 2008. This accrual includes the minimum lease payments of $84.4 million and an estimate for operating expenses of $15.9 million and sublease commencement costs associated with excess facilities and is net of estimated sublease income of $20.6 million and a present value discount of $9.7 million recorded in accordance with FASB Statement No. 146 (As Amended), Accounting for Costs Associated with Exit or Disposal Activities, (“SFAS No. 146”).

In December 2005, the Company subleased 35,000 square feet of office space at the Pacific Shores Center, its former corporate headquarters in Redwood City, California through May 2013. In June 2005, the Company subleased 51,000 square feet of office space at the Pacific Shores Center, its previous corporate headquarters, in Redwood City, California through August 2008 with an option to renew through July 2013. The lessee has exercised its option and renewed this lease through August 2009. In February 2005, the Company subleased 187,000 square feet of office space at the Pacific Shores Center for the remainder of the lease term through July 2013 with a right of termination by the subtenant that is exercisable prior to October 2008 effective as of July 2009.

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 SFAS No. 5, Accounting for Contingencies. 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 June 30, 2008 and December 31, 2007. To date, the Company’s product warranty expense has not been significant.

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 June 30, 2008. 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.

 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
In addition, we indemnify our 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, we have not incurred any costs related to these indemnifications.

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 SFAS No. 5, Accounting for Contingencies.

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 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 over 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.

In September 2005, the Court granted preliminary approval of the settlement. The Court held a hearing to consider final approval of the settlement on April 24, 2006, and took the matter under submission. In the interim, the Second Circuit reversed the class certification of plaintiffs’ claims against the underwriters. Miles v. Merrill Lynch & Co. (In re Initial Public Offering Securities Litigation), 471 F.3d 24 (2d Cir. 2006). On April 6, 2007, the Second Circuit denied plaintiffs’ petition for rehearing, but clarified that the plaintiffs may seek to certify a more limited class in the district court. Accordingly, the parties withdrew the prior settlement, and plaintiffs filed amended complaints in focus or test cases in an attempt to comply with the Second Circuit’s ruling. On March 26, 2008, the District Court issued an order granting in part and denying in part motions to dismiss the amended complaints in the focus cases, on substantially the same grounds as its February 2003 ruling on the prior motion to dismiss.

On July 15, 2002, the Company filed a patent infringement action in U.S. District Court in Northern California against Acta Technology, Inc. (“Acta”), now known as Business Objects Data Integration, Inc. (“BODI”), asserting that certain Acta products infringe on three of our patents: U.S. Patent `No. 6,014,670, entitled “Apparatus and Method for Performing Data Transformations in Data Warehousing,” U.S. Patent No. 6,339,775, entitled “Apparatus and Method for Performing Data Transformations in Data Warehousing” (this patent is a continuation in part of and claims the benefit of U.S. Patent No. 6,014,670), and U.S. Patent No. 6,208,990, entitled “Method and Architecture for Automated Optimization of ETL Throughput in Data Warehousing Applications.”  In the suit, we sought an injunction against future sales of the infringing Acta/BODI products, as well as damages for past sales of
 
 
 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
the infringing products. On February 26, 2007, as stipulated by both parties, the Court dismissed the infringement claims on U.S. Patent No. 6,208,990 as well as BODI’s counterclaims on this patent.
 
The trial began on March 12, 2007 on the two remaining patents (U.S. Patent No. 6,014,670 and U.S. Patent No. 6,339,775) originally asserted in 2002 and a verdict was reached on April 2, 2007. During the trial, the judge determined that, as a matter of law, BODI and its customers’ use of the Acta/BODI products infringe on our asserted patents. The jury unanimously determined that our patents are valid, that BODI’s infringement on our patents was done willfully and that a reasonable royalty for BODI’s infringement is $25.2 million.  On May 16, 2007, the judge issued a permanent injunction preventing BODI from shipping the infringing technology now and in the future.

As a result of post-trial motions, the judge has asked the parties to brief the issue of whether the damages award should be reduced in light of the United States Supreme Court’s April 30, 2007 AT&T Corp. v. Microsoft Corp. decision (which examines the territorial reach of U.S. patents). The post-trial motions filed focused on the amount of damages awarded and did not alter the jury’s determination of validity or willful infringement or the judge’s grant of the permanent injunction. The court issued and we accepted a damage award of $12.2 million in light of AT&T Corp. v. Microsoft Corp. On October 29, 2007, the court entered final judgment on the case for that amount and on December 18, 2007, the Court awarded us an additional amount of $1.7 million for prejudgment interest.  On November 28, 2007, BODI filed its Notice of Appeal and on December 12, 2007, we filed our Notice of Cross Appeal.  The parties have filed appeal briefs, including responses and replies. Oral arguments on the appeal will likely be heard in late 2008 with a decision from the United States Circuit Court of Appeals for the Federal Circuit expected in late 2008 or early 2009. The permanent injunction remains in effect pending the appeal.

On August 21, 2007, Juxtacomm Technologies (“Juxtacomm”) filed a complaint in the Eastern District of Texas against 21 defendants, including us, alleging patent infringement. We filed an answer to the complaint on October 10, 2007. It is Informatica’s current assessment that our products do not infringe Juxtacomm’s patent and that potentially the patent itself is invalid due to significant prior art. Informatica intends to vigorously defend itself. This case is currently in the discovery phase.

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. 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 11. Significant Customer Information and Segment Reporting

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for the manner in which public companies report information about operating segments in 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
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Revenues:
                       
North America
  $ 78,237     $ 65,590     $ 147,596     $ 130,802  
Europe
    27,611       22,383       54,940       41,075  
Other
    7,912       6,289       14,934       9,499  
    $ 113,760     $ 94,262     $ 217,470     $ 181,376  

   
June 30,
2008
   
December 31,
2007
 
Long-lived assets (excluding assets not allocated):
           
North America
  $ 35,507     $ 19,247  
Europe
    9,226       1,769  
Other
    1,407       1,507  
    $ 46,140     $ 22,523  


No customer accounted for more than 10% of the Company’s total revenues in the three and six months ended June 30, 2008 and 2007. At June 30, 2008 and 2007, no single customer accounted for more than 10% of the accounts receivable balance.


Note 12. Recent Accounting Pronouncements

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“SFAS No. 157”), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the Board decided to issue Staff Position (“FSP FAS No. 157-2”) that (1) partially deferred the effective date of SFAS No. 157, for one year for certain nonfinancial assets and nonfinancial liabilities, and (2) removed certain leasing transactions from the scope of FAS 157. This FSP effectively delays the implementation of this pronouncement for certain nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company adopted SFAS No. 157, except as it applies to those nonfinancial assets and nonfinancial liabilities as noted in FSP FAS No. 157-2. The partial adoption of SFAS No. 157 did not have a material impact on our consolidated financial position, results of operations or cash flows. The Company is currently evaluating the accounting and disclosure requirements of SFAS No. 157 for its nonfinancial assets and liabilities.
 
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), including an amendment of FASB Statement No. 115, which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to fair value will be recognized in earnings. Statement No. 159 also establishes additional disclosure requirements. Statement No. 159 is effective for fiscal years beginning after November 15, 2007, and its adoption is not expected to have an impact on the consolidated financial statements since the Company has not elected to use fair value to measure any of its existing financial assets and liabilities.

In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations (“SFAS No. 141(R)”), which addresses the accounting and reporting standards for the business combinations. This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company will adopt this statement as required, and is currently evaluating the related accounting and disclosure requirements.

In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS No. 160”), which addresses accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This pronouncement also amends certain elements of ARB No. 51’s consolidation procedures for consistency with requirements of FASB No. 141 (revised 2007). This statement is effective for fiscal
 
 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company will adopt this consensus as required, and its adoption is not expected to have an impact on the consolidated financial statements.

  In March 2008, the FASB issued FASB Statement No. 161 (SFAS No. 161), Disclosures about Derivative Instruments and Hedging Activities. SFAS 161 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 No. 133, Accounting for Derivative Instruments and Hedging Activities and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will adopt this consensus as required, and its adoption is not expected to have an impact on the consolidated financial statements.

In April 2008, the FASB issued FSAB Staff Position No. 142-3 (“FSP No. 142-3”), Determination of the Useful Life of Intangible Assets. 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 shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company will adopt this FSP as required, and is currently evaluating the related accounting and disclosure requirements.

In May 2008, the FASB issued Staff Position No. APB No. 14-1 (“FSP No. 14-1”), Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement). This FSP clarifies that (1) convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, are not considered debt instruments within the scope of APB Opinion No. 14, Accounting for Convertible Debt and Debt and Debt Issued with Stock Purchase Warrants (“APBO No. 14”), and (2) issuers of such instruments should separately account for the liability and equity components of those instruments by allocating the proceeds from issuance of the instrument between the liability component and the embedded conversion option (i.e., equity component). This FSP shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company will adopt this FSP as required, and its adoption is not expected to have an impact on the consolidated financial statements.

In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles. This statement identifies the sources of accounting principles and the framework for selecting the principles used in preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. This statement shall be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of Present Fairly in Conformity with GAAP. The Company will adopt this consensus as required, and its adoption is not expected to have an impact on the consolidated financial statements.


Note 13. Acquisition

On May 15, 2008, Informatica Corporation 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. The preliminary allocation of the purchase price is based upon a preliminary valuation and our estimates and assumptions are subject to change.

 The allocation of the purchase price for this acquisition, as of the date of the acquisition, is as follows (in thousands):

Developed and core technology
  $ 14,570  
Customer relationships
    12,620  
In-process research and development
    390  
Goodwill
    49,316  
Assumed assets, net of liabilities
    8,735  
Total purchase price
  $ 85,631  


 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
The identified intangible assets acquired were assigned fair values in accordance with the guidelines established in Statement of Financial Accounting Standards No. 141, Business Combinations, Financial Accounting Standards Board Interpretations No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method, and other relevant guidance. The excess of the purchase price over the identified tangible and intangible assets was recorded as goodwill. The Company believes that none of the identified intangible assets has any residual value. Further, management 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 goodwill for $49.3 million. The developed and core technology is amortized over 5.5 years on a straight line basis and customer relationships over 5 years on an accelerated basis consistent with expected benefits.


 In connection with the purchase price allocations, Informatica estimated the fair value of the support obligations assumed in connection with acquisitions. 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 that the Company has acquired.

Unaudited Pro Forma Financial Information

 
The unaudited financial information in the table below summarizes the combined results of operations of Identity Systems, acquired during the second quarter of 2008, on a pro forma basis, as though it had been combined as of the beginning of each of the periods presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of each of the periods presented.

The unaudited pro forma financial information for the three and six months ended June 30, 2008 and 2007 combines the historical results of Informatica and Identity Systems for the three and six months ended June 30, 2008 and 2007.


   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Revenues
  $ 115,397     $ 98,200     $ 222,916     $ 188,699  
Net income
  $ 9,347     $ 9,693     $ 19,552     $ 18,006  
Basic net income per common share
  $ 0.11     $ 0.11     $ 0.22     $ 0.21  
Diluted net income per common share
  $ 0.10     $ 0.10     $ 0.21     $ 0.20  
Shares used in computing basic net income per common share
    88,565       87,293       88,347       86,863  
Shares used in computing diluted net income per common share
    104,457       103,206       104,403       102,778  



 
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, deferred revenues, cost of license revenues as a percentage of license revenues, cost of service revenues as a percentage of service revenues, and operating expenses as a percentage of total revenues; the recording of amortization of acquired technology: share-based payments; interest income or expense; 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 acquisition of Identity Systems; 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 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 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. Our software license revenues also include software upgrades, which are not part of post-contract services. Most of our international sales have been in Europe, and revenues outside of Europe and North America has comprised 6% or less of total consolidated revenues during the last three years. 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.

We license our software and provide services to many industry sectors, including, but not limited to, energy and utilities, financial services, insurance, government and public agencies, healthcare, high technology, manufacturing, retail, services, telecommunications, and transportation.

Despite the uncertainties in the financial markets, and the slowdown in certain sectors of the United States economy, we were able to grow our revenues in the second quarter of 2008 such that our total revenues increased 21% to $113.8 million compared to $94.3 million in the second quarter of 2007. License revenues increased 16% year-over-year, primarily as a result of increases in the volume of our transactions, and growth in international revenues. Services revenues increased 24% due to 23% growth in maintenance revenues which is attributable to the increased size of our installed customer base. Additionally, broader use of our existing products resulted in a 28% increase in our training and consulting revenues. Since our revenues has grown at a faster pace than the increase in our operating expenses, our operating income as a percentage of revenues has grown from 10% to 13% and from 9% to 12% for the three and six months ended June 30, 2008, respectively, compared to the same periods in 2007.


23


 
 Due to our dynamic market, we face both significant opportunities and challenges, and as such, we focus on the following key factors:

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-coded 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 and Hyperion Solutions, IBM’s acquisition of DataMirror and Cognos, and SAP’s acquisition of Business Objects, which had previously acquired First Logic) 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 October 2007, we delivered the generally available release of PowerCenter 8.5, PowerExchange 8.5, and Informatica Data Quality 8.5. In June 2008, we delivered the generally available version of PowerCenter 8.6, PowerExchange 8.6, and Informatica Data Quality 8.6 and the Informatica On Demand Data Loader, a version upgrade to our entire data integration platform. 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 the risks and new nature of the 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 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 revenue and order backlog, and we have generally had weaker demand for our software products and services in the first and third quarters.

To address these potential risks, we have focused on a number of key initiatives, including the strengthening of our partnerships, the broadening of our distribution capability worldwide, and the targeting of our sales force and distribution channel on new products.

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 March 2008, we announced that Wipro Technologies selected Informatica Data Migration Suite to power its Data Migration Services. Since January 2007, we signed OEM agreements with Cognos (acquired by IBM), FAST (acquired by Microsoft), and other vendors. These are in addition to our global OEM partnerships with Oracle (Hyperion Solutions and Siebel), and our partnership with 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, and cross-enterprise data integration to our customers’ enterprise architects and chief information officers. We have expanded our international sales presence 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. We expect these investments to result in increased revenues and productivity and ultimately higher 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 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. We have experienced some increases in revenues and sales productivity in the United States in the past few years. During the past year, we have also experienced increases in revenues and sales productivity internationally, but we have not yet achieved the same level of sales productivity internationally as domestically.

24

 
 
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 Informatica World 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, accounting for impairment of goodwill, acquisitions, and share-based payments 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 12. 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 the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2 Software Revenue Recognition, together with other authoritative literature including, but not limited to, the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 104, Revenue Recognition. Other authoritative literature 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 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.

25

 
 
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 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 absorbed by Informatica, 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 reduced operating expenses. 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. The accrued restructuring charges represent gross 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.

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 most likely expected outcome 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 time periods required to locate and contract suitable subleases and the market rates at the time of such 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 7. 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. We will periodically assess the need to update the original restructuring charges based on current real estate market information, trend analysis, and executed sublease agreements.


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   Accounting for Income Taxes

We use the asset and liability method of accounting for income taxes in accordance with Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes (“SFAS 109”). Under this method, income tax expense or benefit 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 consolidated financial statements or tax returns. Effective January 1, 2007, we adopted FIN No. 48 to account for any income tax contingencies. 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 are required to 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 the quarter ended September 30, 2007, we released our valuation allowance for our non-stock option related deferred tax assets.  The remaining valuation allowance is related to our stock option 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 reduce our effective tax rate.

 In assessing the need for any additional non-stock valuation allowance in the quarter ended June 30, 2008, we considered all the evidence available to us both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income, ongoing prudent and feasible tax planning strategies and the deductibility of a capital loss, and recorded a valuation allowance to reduce our deferred tax assets to the amount we believed was more likely than not to be realized based on such available evidence.  As a result of this analysis, we determined that we needed to increase our valuation allowance for non stock option related deferred tax assets by approximately $0.3 million resulting from a nondeductible capital loss.

Accounting for Impairment of Goodwill

We assess goodwill for impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets, which requires that goodwill be 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 SFAS No. 142. Consistent with our determination that we have only one reporting segment, we have determined that there is only one Reporting Unit. Goodwill was tested for impairment in our annual impairment tests on October 31 in each of the years 2007, 2006, and 2005 using the two-step process required by SFAS No. 142. First, we reviewed 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. If such comparison reflected potential impairment, we would then prepare the discounted cash flow analyses. Such analyses are based on cash flow assumptions that are consistent with the plans and estimates being used to manage the business. An excess carrying value compared to fair value would indicate that goodwill may be impaired. Finally, if we determined that goodwill may be impaired, then we would compare the “implied fair value” of the goodwill, as defined by SFAS No. 142, to its carrying amount to determine the impairment loss, if any.

Based on these estimates, we determined in our annual impairment tests at October 31, 2007 that the fair value of the Reporting Unit exceeded the carrying amount and, accordingly, goodwill was not 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 such external factors as industry and economic trends and such internal factors 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.

Accounting for impairment of goodwill will be impacted by certain elements of SFAS No. 157, Fair Value Measurements, related to FSP No. 157-2 for nonfinancial assets and liabilities which is both effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008. We will apply this pronouncement to our accounting for impairment of goodwill in 2009.


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Acquisitions

In accordance with Financial Accounting Standards Board (FASB) Statement No. 141, Business Combinations, we allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed as well as to in-process research and development based upon their estimated fair values at the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions, especially at 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 in our fair value determinations, as these costs are not deemed to represent a legal obligation at the time of acquisition.
 
In any acquisition, we may identify certain pre-acquisition contingencies. If we are able to determine the fair value of such contingencies during the purchase price allocation period, we will include that amount in the purchase price allocation. On the other hand, if as of the end of the purchase price allocation period, we are unable to determine the fair value of a pre-acquisition contingency, we will evaluate whether to include an amount in the purchase price allocation based on whether it is probable a liability had been incurred and whether an amount can be reasonably estimated. Under the provisions of SFAS No. 141, with the exception of unresolved income tax matters, after the end of the purchase price allocation period, any adjustment to amounts recorded for a pre-acquisition contingency will be included in our operating results in the period in which the adjustment is determined.

Accounting for business combinations will be impacted by certain elements of SFAS No. 157, Fair Value Measurements, related to FSP No. 157-2 for nonfinancial assets and liabilities and SFAS No. 141(R), Business Combinations, which are both effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008. We will apply these pronouncements to business combinations in 2009.
 
Share-Based Payments

We account for share-based payments related to share-based transactions in accordance with the provisions of SFAS No. 123(R). Under the fair value recognition provisions of SFAS No. 123(R), share-based payment is estimated at the grant date based on the fair value of the award and is recognized as an expense ratably over its requisite service period. Determining the appropriate fair value model and calculating the fair value of share-based awards requires judgment, including estimating stock price volatility, forfeiture rates, and expected life.

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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). Our historical volatility rates decreased in 2008 from 2007 primarily due to more stable stock prices in recent quarters and exclusion of more volatile years from the calculation of our historical volatility rates. Our implied volatility rates have remained relatively unchanged. Our weighted-average volatility rates were at 38% for both of the three and six months ended June 30, 2008, compared to 37% and 39% for the three and six months ended June 30, 2007, respectively. To the extent volatility of our stock price increases in the future, our estimates of the fair value of options granted in the future will increase accordingly. For instance, a 10 percentage point higher volatility would have resulted in a $1.6 million increase in the fair value of options granted during the second quarter of 2008.

Our expected life of options granted was derived from the historical option exercises, post-vesting cancellations, and estimates concerning future exercises and cancellations for vested and unvested options that remain outstanding. We assumed an expected life of 3.3 years in 2007 and the first two quarters of 2008.

In addition, we apply an expected forfeiture rate in determining the grant date fair value of our option grants. Our estimate of the forfeiture rate is based on an average of actual forfeited options for the past four quarters. During the quarter ended March 31, 2008, we lowered our forfeiture rate from 13% to 10% based on the average of actual forfeited options during the past four quarters, which increased our share-based payments in the first quarter of 2008 by approximately $0.5 million.

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.

Recent Accounting Pronouncements

For recent accounting pronouncements see Note 12. Recent Accounting Pronouncements, of Notes to Condensed Consolidated Financial Statements under Part I, Item 1 of this Report.

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Results of Operations

The following table presents certain financial data for the three and six months ended June 30, 2008 and 2007 as a percentage of total revenues:

   
Three Months
Ended June 30,
   
Six Months
Ended June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Revenues:
                       
License
    43 %     44 %     43 %     44 %
Service
    57       56       57       56  
Total revenues
    100       100       100       100  
Cost of revenues:
                               
License
    1       1       1       1  
Service
    19       18       19       18  
Amortization of acquired technology
    1       1       1       1  
Total cost of revenues
    21       20       21       20  
Gross profit
    79       80       79       80  
Operating expenses:
                               
Research and development
    16       18       17       19  
Sales and marketing
    40       41       41       41  
General and administrative
    8       10       8       9  
Amortization of intangible assets
    1                   1  
Facilities restructuring charges
    1       1       1       1  
Purchased in-process research and development
                       
Total operating expenses
    66       70       67       71