INFA-2011.09.30-10Q
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 September 30, 2011
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
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
100 Cardinal Way
Redwood City, California 94063
(Address of principal executive offices and 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 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.  
R Yes  £ No
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes R No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer R    Accelerated filer £     Non-accelerated filer £     Smaller reporting company £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  £ Yes R No
As of October 31, 2011, there were approximately 106,347,000 shares of the registrant’s Common Stock outstanding.


 
 
 
 
 

INFORMATICA CORPORATION
TABLE OF CONTENTS

 
 
 Page No. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents


PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INFORMATICA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
 
September 30,
2011
 
December 31,
2010
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
248,714

 
$
208,899

Short-term investments
305,173

 
262,047

Accounts receivable, net of allowances of $3,589 and $4,289, respectively
129,372

 
147,534

Deferred tax assets
18,868

 
22,664

Prepaid expenses and other current assets
36,340

 
32,321

Total current assets
738,467

 
673,465

Property and equipment, net
13,886

 
9,866

Goodwill
428,033

 
400,726

Other intangible assets, net
68,782

 
77,927

Long-term deferred tax assets
24,838

 
18,314

Other assets
6,061

 
9,343

Total assets
$
1,280,067

 
$
1,189,641

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 

 
 

Accounts payable
$
7,046

 
$
5,948

Accrued liabilities
47,495

 
50,199

Accrued compensation and related expenses
43,328

 
56,315

Accrued facilities restructuring charges
20,314

 
18,498

Deferred revenues
193,373

 
172,559

Convertible senior notes

 
200,693

Total current liabilities
311,556

 
504,212

Accrued facilities restructuring charges, less current portion
8,453

 
20,410

Long-term deferred revenues
6,505

 
6,987

Long-term deferred tax liabilities
172

 
311

Long-term income taxes payable
16,663

 
12,739

Other liabilities
7,376

 

Total liabilities
350,725

 
544,659

Commitments and contingencies (Note 12)


 


Stockholders’ equity:
 

 
 

Common stock, $0.001 par value; 200,000 shares authorized; 106,058 shares and
 
 
 
94,461 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
106

 
94

Additional paid-in capital
725,008

 
514,365

Accumulated other comprehensive loss
(6,934
)
 
(5,530
)
Retained earnings
211,162

 
136,053

Total stockholders’ equity
929,342

 
644,982

Total liabilities and stockholders’ equity
$
1,280,067

 
$
1,189,641

See accompanying notes to condensed consolidated financial statements.

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INFORMATICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Revenues:
 
 
 
 
 
 
 
License
$
83,736

 
$
69,829

 
$
241,580

 
$
194,892

Service
112,151

 
91,421

 
315,066

 
257,149

Total revenues
195,887

 
161,250

 
556,646

 
452,041

Cost of revenues:
 

 
 

 
 
 
 
License
1,011

 
1,124

 
3,669

 
3,232

Service
30,432

 
25,304

 
87,111

 
73,402

Amortization of acquired technology
5,156

 
3,445

 
14,334

 
9,833

Total cost of revenues
36,599

 
29,873

 
105,114

 
86,467

Gross profit
159,288

 
131,377

 
451,532

 
365,574

Operating expenses:
 

 
 

 
 
 
 
Research and development
34,577

 
26,269

 
98,093

 
76,648

Sales and marketing
70,437

 
60,854

 
200,962

 
172,326

General and administrative
14,516

 
11,346

 
40,507

 
33,619

Amortization of intangible assets
1,886

 
2,280

 
5,959

 
7,345

Facilities restructuring charges (benefit)
(282
)
 
553

 
704

 
1,545

Acquisitions and other charges (benefit)
917

 
(2,323
)
 
(5
)
 
1,326

Total operating expenses
122,051

 
98,979

 
346,220

 
292,809

Income from operations
37,237

 
32,398

 
105,312

 
72,765

Interest income
1,185

 
1,002

 
3,374

 
2,802

Interest expense
(105
)
 
(1,575
)
 
(2,006
)
 
(4,731
)
Other income (expense), net
685

 
(229
)
 
(795
)
 
1,784

Income before income taxes
39,002

 
31,596

 
105,885

 
72,620

Income tax provision
12,012

 
9,125

 
30,776

 
20,928

Net income
$
26,990

 
$
22,471

 
$
75,109

 
$
51,692

Basic net income per common share
$
0.25

 
$
0.24

 
$
0.73

 
$
0.56

Diluted net income per common share
$
0.24

 
$
0.21

 
$
0.67

 
$
0.50

Shares used in computing basic net income per common share
106,274

 
92,794

 
103,080

 
91,746

Shares used in computing diluted net income per common share
112,406

 
109,494

 
112,655

 
108,283

See accompanying notes to condensed consolidated financial statements.


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INFORMATICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
September 30,
 
2011
 
2010
Operating activities:
 
 
 
Net income
$
75,109

 
$
51,692

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
4,303

 
4,614

Recovery of doubtful accounts
(488
)
 
(27
)
Gain on sale of investment in equity interest
(706
)
 
(1,824
)
Stock-based compensation
24,300

 
17,017

Deferred income taxes
633

 
2,113

Tax benefits from stock-based compensation
20,088

 
15,159

Excess tax benefits from stock-based compensation
(19,795
)
 
(14,389
)
Amortization of intangible assets and acquired technology
20,293

 
17,178

Non-cash facilities restructuring charges
704

 
1,545

Other non-cash items
(1,702
)
 
(2,146
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
18,910

 
23,240

Prepaid expenses and other assets
(10,615
)
 
(2,307
)
Accounts payable and accrued liabilities
(14,104
)
 
(12,575
)
Income taxes payable
3,793

 
(13,285
)
Accrued facilities restructuring charges
(10,723
)
 
(11,143
)
Deferred revenues
20,247

 
13,060

Net cash provided by operating activities
130,247

 
87,922

Investing activities:
 

 
 

Purchases of property and equipment
(8,502
)
 
(4,584
)
Purchases of investments
(304,871
)
 
(211,977
)
Purchase of investment in equity interest
(164
)
 
(1,500
)
Sale of investment in equity interest
706

 
4,824

Maturities of investments
102,524

 
220,390

Sales of investments
158,647

 
98,566

Business acquisitions, net of cash acquired
(27,969
)
 
(168,777
)
Net cash used in investing activities
(79,629
)
 
(63,058
)
Financing activities:
 

 
 

Net proceeds from issuance of common stock
45,457

 
44,807

Repurchases and retirement of common stock
(70,111
)
 
(10,651
)
Redemption of convertible senior notes
(4
)
 

Withholding taxes related to restricted stock units net share settlement
(5,701
)
 
(1,713
)
Payment of issuance costs on credit facility

 
(1,881
)
Excess tax benefits from stock-based compensation
19,795

 
14,389

Net cash provided by (used in) financing activities
(10,564
)
 
44,951

Effect of foreign exchange rate changes on cash and cash equivalents
(239
)
 
(1,696
)
Net increase in cash and cash equivalents
39,815

 
68,119

Cash and cash equivalents at beginning of period
208,899

 
159,197

Cash and cash equivalents at end of period
$
248,714

 
$
227,316

See accompanying notes to condensed consolidated financial statements.

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INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 normal and recurring adjustments that are necessary to fairly present the results of the interim periods presented. All of the amounts included in this Quarterly Report on Form 10-Q related to the condensed consolidated financial statements and notes thereto as of and for the three and nine months ended September 30, 2011 and 2010 are unaudited. The interim results presented are not necessarily indicative of results for any subsequent interim period, the year ending December 31, 2011, or any other 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 instances that management's judgment in selecting an available alternative would not produce a materially different result.
These unaudited, condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2010 included in the Company's Annual Report on Form 10-K filed with the SEC. The condensed consolidated balance sheet as of December 31, 2010 has been derived from the audited consolidated financial statements of the Company.
The Company's significant accounting policies are described in Note 2 to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010. As discussed below, on January 1, 2011, the Company adopted an accounting pronouncement on multiple-deliverable revenue arrangements that are outside the scope of industry-specific revenue recognition guidance. There have been no other changes in our significant accounting policies since the end of fiscal year 2010.
Revenue Recognition
The Company derives its revenues from software license fees, maintenance fees, professional services, consisting of consulting and education services, and other revenues, primarily consisting of subscriptions for address validation and cloud services. The Company recognizes revenue in accordance with ASC 985-605, Software Revenue Recognition, ASC 605-35, Revenue Recognition for Construction-Type and Production-Type Contracts, the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 (“SAB 104”), Revenue Recognition, and other authoritative accounting literature.
Under ASC 985-605-25, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable.
Persuasive evidence of an arrangement exists.  The Company determines that persuasive evidence of an arrangement exists when it has a written contract, signed by both the customer and the Company, and written purchase authorization.
Delivery has occurred.  Software is considered delivered when title to the physical software media passes to the customer or, in the case of electronic delivery, when the customer has been provided with the access codes to download and operate the software.
Fee is fixed or determinable.  The Company considers arrangements with extended payment terms not to be fixed or determinable. If the license fee in an arrangement is not fixed or determinable, revenue is recognized as payments become due. The Company’s standard agreements do not contain product return rights.
Collection is probable.  The Company first assesses the credit-worthiness and collectability at a country level based on the country’s overall economic climate and general business risk. Then, for the customers in the countries that are deemed credit-

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INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


worthy, it assesses credit and collectability based on their payment history and credit profile. When a customer is not deemed credit-worthy, revenue is recognized at the time that payment is received.
The Company requires evidence of sell-through from resellers and distributors for order acceptance. The Company then recognizes revenue from resellers and distributors upon shipment if all other revenue recognition criteria are met, which in substantially all cases is when cash is collected or when the reseller or distributor is deemed credit-worthy based on their payment history and credit profile to conclude that collectability is probable.
The Company also enters into Original Equipment Manufacturer (“OEM”) arrangements that provide for license fees based on inclusion of technology and/or products in the OEM’s products. These arrangements provide for fixed and irrevocable royalty payments. The Company recognizes royalty payments as revenues based on the royalty report that it receives from the OEMs. In the case of OEMs with fixed royalty payments, revenue is recognized upon execution of the agreement, delivery of the software, and when all other criteria for revenue recognition have been met.
Multiple contracts with a single counterparty executed within close proximity of each other are evaluated to determine if the contracts should be combined and accounted for as a single arrangement. The Company recognizes revenues net of applicable sales taxes, financing charges absorbed by the Company, and amounts retained by our resellers and distributors, if any.
The Company’s software license arrangements include the following multiple elements: license fees from our core software products and/or product upgrades that are not part of post-contract services, maintenance fees, consulting, and/or education services. The Company uses the residual method to recognize license revenue when the license arrangement includes elements to be delivered at a future date and vendor-specific objective evidence (“VSOE”) of fair value exists to allocate the fee to the undelivered elements of the arrangement. VSOE is based on the price charged when an element is sold separately. If VSOE does not exist for any undelivered software product element of the arrangement, all revenue is deferred until all elements have been delivered or VSOE is established. If VSOE does not exist for any undelivered services elements of the arrangement, all revenue is recognized ratably over the period that the services are expected to be performed. If the software arrangement includes significant modification or customization of the software, software license revenue is recognized as the consulting services revenue is recognized.
The Company recognizes maintenance revenues, which consist of fees for ongoing support and product updates, ratably over the term of the contract, typically one year.
Consulting revenues are primarily related to implementation services and product configurations performed on a time-and-materials basis and, occasionally, on a fixed fee basis. Education services revenues are generated from classes offered at both Company and customer locations. Revenues from consulting and education services are recognized as the services are performed.
Other revenues, primarily consisting of subscriptions for address validation and cloud services (which are not material for any period presented), are generally recognized as the services are delivered.
Deferred revenues include deferred license, maintenance, consulting, education, and other services revenues. For customers not deemed credit-worthy, the Company’s practice is to net unpaid deferred revenue for that customer against the related receivable balance.
Multiple Element Arrangements - Nonsoftware Arrangements or Arrangements with Software and Nonsoftware Elements
In October 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, which amended the accounting standards applicable to revenue recognition for multiple-deliverable revenue arrangements that are outside the scope of industry-specific software revenue recognition guidance. The new guidance amends the criteria for allocating the consideration in multiple-deliverable revenue arrangements by establishing a selling price hierarchy. The selling price used for each deliverable will be based on VSOE if available, third-party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available. The guidance also eliminates the use of the residual method of allocation and requires that the arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method.
The Company adopted this guidance on a prospective basis on January 1, 2011, and therefore, is applicable to relevant revenue arrangements entered into or materially modified on or after that date.
The Company's multiple-element arrangements are primarily software or software-related, which are excluded from the new guidance. Multiple-element arrangements that include non-software related elements and software or software-related elements, which are included in the new guidance, are not material to date.

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INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



For multiple element arrangements that include software and non-software related elements, for example, on-site software licenses sold together with subscriptions for the Company's cloud and hosted address validation services, the Company allocates revenue to each software and non-software element as a group based upon the relative selling price of each in accordance with the selling price hierarchy, which includes (i) VSOE if available, (ii) TPE if VSOE is not available, and (iii) ESP if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for each element. The manner in which the Company accounts for multiple element arrangements that contain only software and software-related elements remains unchanged.
In certain limited instances, the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements. This may be due to the infrequent selling of each element separately, not pricing products or services within a narrow range, or only having a limited sales history. When VSOE cannot be established, the Company attempts to establish a selling price based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately.
When the Company is unable to establish a selling price using VSOE or TPE, the Company uses ESP in its allocation of the arrangement consideration. The Company determines ESP for a product or service by considering both market conditions and entity-specific factors. This includes, but is not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, and pricing practices.
Given the nature of the Company's transactions, which are primarily software or software-related, the adoption of this new accounting guidance did not have a significant impact on the timing and pattern of revenue recognition when applied to multiple-element arrangements. Total net revenue as reported during the nine months ended September 30, 2011 is materially consistent with total net revenue that would have been reported if the transaction entered into or materially modified after December 31, 2010 were subject to previous accounting guidance. The new accounting guidance for revenue recognition, if applied in the same manner to the year ended December 31, 2010, would not have had a material impact on total net revenues for the fiscal year 2010.
Fair Value Measurement of Financial Assets and Liabilities
The following table summarizes financial assets and financial liabilities that the Company measures at fair value on a recurring basis as of September 30, 2011 (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 (i)
$
58,953

 
$
58,953

 
$

 
$

Time deposits (ii)
12,081

 
12,081

 

 

Marketable debt securities (ii)
294,242

 

 
294,242

 

Total money market funds, time deposits, and marketable debt securities
365,276

 
71,034

 
294,242

 

Foreign currency derivatives (iii)
322

 

 
322

 

Total assets
$
365,598

 
$
71,034

 
$
294,564

 
$

Liabilities:
 

 
 

 
 

 
 

Foreign currency derivatives (iv)
$
603

 
$

 
$
603

 
$

Total liabilities
$
603

 
$

 
$
603

 
$


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INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The following table summarizes financial assets and financial liabilities that the Company measures at fair value on a recurring basis as of December 31, 2010 (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 (i)
$
2,231

 
$
2,231

 
$

 
$

Marketable debt securities (ii)
271,546

 

 
271,546

 

Total money market funds and marketable debt securities
273,777

 
2,231

 
271,546

 

Foreign currency derivatives (iii)
152

 

 
152

 

Total assets
$
273,929

 
$
2,231

 
$
271,698

 
$

Liabilities:
 

 
 

 
 

 
 

Foreign currency derivatives (iv)
$
569

 
$

 
$
569

 
$

Convertible senior notes
452,663

 
452,663

 

 

Total liabilities
$
453,232

 
$
452,663

 
$
569

 
$

____________________
(i)
Included in cash and cash equivalents on the condensed consolidated balance sheets.
(ii)
Included in either cash and cash equivalents or short-term investments on the condensed consolidated balance sheets.
(iii)
Included in prepaid expenses and other current assets on the condensed consolidated balance sheets.
(iv)
Included in accrued liabilities on the condensed consolidated balance sheets.
Money Market Funds, Time Deposits, Marketable Securities, and Convertible Senior Notes
The Company uses a market approach for determining the fair value of all its Level 1 and Level 2 money market funds, time deposits, marketable securities, and Convertible Senior Notes.
To value its money market funds and time deposits, the Company values the funds at $1 stable net asset value, which is the market pricing convention for identical assets that the Company has the ability to access.
The Company's marketable securities consist of certificates of deposit, commercial paper, corporate notes and bonds, municipal securities, and U.S. government and agency notes and bonds. To value its certificates of deposit and commercial paper, the Company uses mathematical calculations to arrive at fair value for these securities, which generally have short maturities and infrequent secondary market trades. For example, in the absence of any observable transactions, the Company may accrete from purchase price at purchase date to face value at maturity. In the event that a transaction is observed on the same security in the marketplace, and the price on that subsequent transaction clearly reflects the market price on that day, the Company will adjust the price in the system to the observed transaction price and follow a revised accretion schedule to determine the daily price.
To determine the fair value of its corporate notes and bonds, municipal securities, and U.S. government and agency notes and bonds, the Company uses a “consensus price” or a weighted average price for each security. Market prices for these securities are received from a variety of industry standard data providers (e.g., Bloomberg), security master files from large financial institutions, and other third-party sources. These multiple prices are used as inputs into a distribution-curve-based algorithm to determine the daily market value.
On March 18, 2011, the Company completed the redemption of its Convertible Senior Notes. The Company classified its convertible debt as Level 1 since it had quoted prices available in active markets. The estimated fair value of the Company’s Convertible Senior Notes as of December 31, 2010 was based on the Over-the-Counter market closing price of the Notes as of December 23, 2010 (the last trading day of the period), which was $452.7 million or $45.11 per share on an as converted basis.

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INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Foreign Currency Derivatives and Hedging Instruments
The Company uses the income approach to value the derivatives using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present value amount, assuming that participants are motivated but not compelled to transact. Level 2 inputs are limited to quoted prices that are observable for the assets and liabilities, which include interest rates and credit risk. The Company uses mid-market pricing as a practical expedient for fair value measurements. Key inputs for currency derivatives are the spot rates, forward rates, interest rates, and credit derivative markets. The spot rate for each currency is the same spot rate used for all balance sheet translations at the measurement date and is sourced from the Federal Reserve Bulletin. The following values are interpolated from commonly quoted intervals available from Bloomberg: forward points and the London Interbank Offered Rate ("LIBOR") used to discount and determine the fair value of assets and liabilities. One-year credit default swap spreads identified per counterparty at month end in Bloomberg are used to discount derivative assets for counterparty non-performance risk, all of which have terms of four months or less. The Company discounts derivative liabilities to reflect the Company’s own potential non-performance risk to lenders and has used the spread over LIBOR on its most recent corporate borrowing rate.
The counterparties associated with the Company’s foreign currency forward contracts are large credit-worthy financial institutions, and the derivatives transacted with these entities are relatively short in duration; therefore, the Company does not consider counterparty concentration and non-performance to be material risks at this time. Both the Company and the counterparties are expected to perform under the contractual terms of the instruments.
See Note 5. Other Comprehensive Income, Note 6. Derivative Financial Instruments, and Note 12. Commitments and Contingencies of Notes to Condensed Consolidated Financial Statements for a further discussion.

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 or losses and other-than-temporary impairments, if any, on available-for-sale securities are reported in other income or expense as incurred. Realized gains recognized for the three months ended September 30, 2011 and 2010 were not significant. Realized gains recognized for the nine months ended September 30, 2011 and 2010 were approximately $0.3 million and $0.2 million, respectively. The cost of securities sold was determined based on the specific identification method.

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INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The following table summarizes the Company’s cash, cash equivalents, and short-term investments as of September 30, 2011 (in thousands):
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Cash
$
188,611

 
$

 
$

 
$
188,611

Cash equivalents:
 

 
 

 
 

 
 

Money market funds
58,953

 

 

 
58,953

Federal agency notes and bonds
600

 

 

 
600

U.S. government notes and bonds
550

 

 

 
550

Total cash equivalents
60,103

 

 

 
60,103

Total cash and cash equivalents
248,714

 

 

 
248,714

Short-term investments:
 

 
 

 
 

 
 

Certificates of deposit
4,762

 
5

 

 
4,767

Commercial paper
7,993

 

 

 
7,993

Corporate notes and bonds
158,459

 
189

 
(679
)
 
157,969

Federal agency notes and bonds
96,300

 
161

 
(67
)
 
96,394

Time deposits
12,081

 

 

 
12,081

U.S. government notes and bonds
2,894

 
22

 

 
2,916

Municipal notes and bonds
23,006

 
47

 

 
23,053

Total short-term investments
305,495

 
424

 
(746
)
 
305,173

Total cash, cash equivalents, and short-term investments (i)
$
554,209

 
$
424

 
$
(746
)
 
$
553,887

____________________
(i)
Total estimated fair value above included $365.3 million comprised of cash equivalents and short-term investments at September 30, 2011.


11

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


The following table summarizes the Company’s cash, cash equivalents, and short-term investments as of December 31, 2010 (in thousands):
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Cash
$
197,169

 
$

 
$

 
$
197,169

Cash equivalents:
 

 
 

 
 

 
 

Money market funds
2,231

 

 

 
2,231

Federal agency notes and bonds
9,499

 

 

 
9,499

Total cash equivalents
11,730

 

 

 
11,730

Total cash and cash equivalents
208,899

 

 

 
208,899

Short-term investments:
 

 
 

 
 

 
 

Certificates of deposit
14,437

 

 

 
14,437

Commercial paper
10,977

 

 

 
10,977

Corporate notes and bonds
97,899

 
444

 
(86
)
 
98,257

Federal agency notes and bonds
105,120

 
40

 
(140
)
 
105,020

U.S. government notes and bonds
10,156

 
19

 
(10
)
 
10,165

Municipal notes and bonds
23,205

 
5

 
(19
)
 
23,191

Total short-term investments
261,794

 
508

 
(255
)
 
262,047

Total cash, cash equivalents, and short-term investments (i)
$
470,693

 
$
508

 
$
(255
)
 
$
470,946

____________________
(i)
Total estimated fair value above included $273.8 million comprised of cash equivalents and short-term investments at December 31, 2010.

See Note 1. Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements for further information regarding the fair value of the Company's financial instruments.
The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category that have been in a continuous unrealized loss position for less than twelve months, at September 30, 2011 (in thousands):
 
Less Than 12 months
 
 
 
 
Fair Value
 
Gross
Unrealized
Losses
Corporate notes and bonds
$
103,894

 
$
679

Federal agency notes and bonds
48,027

 
67

Total
$
151,921

 
$
746

As of September 30, 2011, the Company did not have any investments that were in a continuous unrealized loss position for periods greater than 12 months. The changes in value of these investments are primarily related to changes in interest rates and are considered to be temporary in nature.

12

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


The following table summarizes the cost and estimated fair value of the Company’s short-term investments by contractual maturity at September 30, 2011 (in thousands):
 
Cost
 
Fair Value
Due within one year
$
137,057

 
$
136,919

Due in one year to two years
124,291

 
124,004

Due after two years
44,147

 
44,250

Total
$
305,495

 
$
305,173


Note 3.  Intangible Assets and Goodwill
The carrying amounts of the intangible assets other than goodwill as of September 30, 2011 and December 31, 2010 are as follows (in thousands, except years):
 
Intangible Assets, Gross
 
Accumulated Amortization
 
Intangible Assets, Net
 
Weighted
 
 
 
December 31,
2010
 
Additions
 
September 30,
2011
 
December 31,
2010
 
Expense
 
September 30,
2011
 
December 31,
2010
 
September 30,
2011
 
Average Useful Life
(Years)
Developed and core technology
$
90,497

 
$
9,569

 
$
100,066

 
$
(35,254
)
 
$
(14,319
)
 
$
(49,573
)
 
$
55,243

 
$
50,493

 
6
Customer relationships
33,501

 
642

 
34,143

 
(20,811
)
 
(3,960
)
 
(24,771
)
 
12,690

 
9,372

 
6
Vendor relationships
7,908

 

 
7,908

 
(2,659
)
 
(1,165
)
 
(3,824
)
 
5,249

 
4,084

 
5
Other:


 


 


 


 


 


 


 
 
 

Trade names
2,494

 

 
2,494

 
(1,286
)
 
(269
)
 
(1,555
)
 
1,208

 
939

 
5
Covenants not to compete
2,000

 

 
2,000

 
(1,617
)
 
(300
)
 
(1,917
)
 
383

 
83

 
5
Patents
3,720

 

 
3,720

 
(566
)
 
(280
)
 
(846
)
 
3,154

 
2,874

 
10
Total intangible assets subject to amortization
140,120

 
10,211

 
150,331

 
(62,193
)
 
(20,293
)
 
(82,486
)
 
77,927

 
67,845

 
 
In-process research and development

 
937

 
937

 

 

 

 

 
937

 
N.A.
Total intangible assets, net
$
140,120

 
$
11,148

 
$
151,268

 
$
(62,193
)
 
$
(20,293
)
 
$
(82,486
)
 
$
77,927

 
$
68,782

 
 
Total amortization expense related to intangible assets was $7.0 million and $5.7 million for the three months ended September 30, 2011 and 2010, respectively, and $20.3 million and $17.2 million for the nine months ended September 30, 2011 and 2010, respectively. Certain intangible assets were recorded in foreign currencies; and therefore, the gross carrying amount and accumulated amortization are subject to foreign currency translation adjustments.

13

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


As of September 30, 2011, the amortization expense related to identifiable intangible assets in future periods is expected to be as follows (in thousands):
 
 
 
Acquired
Technology
 
Other
Intangible
Assets
 
Total
Intangible
Assets
Remaining 2011
$
5,139

 
$
1,750

 
$
6,889

2012
20,460

 
5,876

 
26,336

2013
15,914

 
5,118

 
21,032

2014
5,752

 
2,421

 
8,173

2015
2,055

 
726

 
2,781

Thereafter
1,173

 
1,461

 
2,634

Total intangible assets subject to amortization
$
50,493

 
$
17,352

 
$
67,845

In the second quarter of 2011, in conjunction with our acquisition of WisdomForce, the Company recorded in-process research and development (IPR&D) of $1.6 million. The IPR&D capitalized costs were associated with software development efforts in process at the time of the business combination that had not yet achieved technological feasibility and no future alternative uses had been identified. Technological feasibility was achieved in August 2011 for a portion of the IPR&D valued at $0.7 million, which was reclassified to developed technology and is being amortized over its useful life.
The changes in the carrying amount of goodwill for the nine months ended September 30, 2011 are as follows (in thousands):
 
September 30,
2011
Beginning balance as of December 31, 2010
$
400,726

Goodwill from acquisitions
33,230

Subsequent goodwill adjustments
(5,923
)
Ending balance as of September 30, 2011
$
428,033

Subsequent goodwill adjustments of $5.9 million for the nine months ended September 30, 2011 include income tax related balance sheet adjustments within the measurement period related to the Siperian, 29West, ActiveBase, and WisdomForce acquisitions and foreign currency translation adjustments. See Note 15. Acquisitions for a further discussion of goodwill from acquisitions.

Note 4.  Borrowings
Convertible Senior Notes
On March 8, 2006, the Company issued and sold Convertible Senior Notes (the "Notes") with an aggregate principal amount of $230.0 million due 2026. The Company paid 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 was initially convertible, at the option of the holders, into 50 shares of the Company's common stock prior to the earlier of the maturity date (March 15, 2026) or the redemption or repurchase of the Notes. The initial conversion price represented a premium of 29.28% relative to the last reported sale price of common stock of the Company on the NASDAQ National Market of $15.47 on March 7, 2006. The conversion rate initially represented a conversion price of $20.00 per share. The balance of the Notes at December 31, 2010 was $200.7 million.
On February 14, 2011, the Company notified the holders of its Notes that it would exercise its option to redeem the principal amount outstanding on March 18, 2011. On or prior to the close of business on March 17, 2011, the holders had the option to convert their Notes into shares of the Company's common stock at a price of approximately $20 per share, or 50 shares of the Company's common stock per $1,000 principal amount of Notes. Holders of approximately $200.7 million in aggregate principal amount of the Notes converted their notes into approximately 10.0 million shares of the Company's common stock prior to the close of business on March 17, 2011. On March 18, 2011, the Company redeemed $4,000 principal amount of Notes not surrendered for conversion prior to the redemption date. As of March 31, 2011, none of the Notes were outstanding. From the second quarter of 2011 and beyond, the shares of the Company's common stock issued upon conversion are included in the denominator for both basic and diluted net income per common share, and there is no interest or amortization of issuance costs.

14

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


Credit Agreement
On September 29, 2010, the Company entered into a Credit Agreement (the "Credit Agreement") that matures on September 29, 2014. The Credit Agreement provides for an unsecured revolving credit facility in an amount of up to $220.0 million, with an option for the Company to request to increase the revolving loan commitments by an aggregate amount of up to $30.0 million with new or additional commitments, for a total credit facility of up to $250.0 million. No amounts were outstanding under the Credit Agreement as of September 30, 2011, and a total of $220.0 million remained available for borrowing.
Revolving loans accrue interest at a per annum rate based on either, at our election, (i) the base rate plus a margin ranging from 1.00% to 1.75% depending on the Company's consolidated leverage ratio, or (ii) LIBOR (based on 1-, 2-, 3-, or 6-month interest periods) plus a margin ranging from 2.00% to 2.75% depending on the Company's consolidated leverage ratio. The base rate is equal to the highest of (i) JPMorgan Chase Bank, N.A.'s prime rate, (ii) the federal funds rate plus a margin equal to 0.50%, and (iii) LIBOR for a 1-month interest period plus a margin equal to 1.00%. Revolving loans may be borrowed, repaid and reborrowed until September 29, 2014, at which time all amounts borrowed must be repaid. Accrued interest on the revolving loans is payable quarterly in arrears with respect to base rate loans and at the end of each interest rate period (or at each 3- month interval in the case of loans with interest periods greater than 3 months) with respect to LIBOR loans. The Company is also obligated to pay other customary closing fees, arrangement fees, administrative fees, commitment fees, and letter of credit fees. A quarterly commitment fee is applied to the average daily unborrowed amount under the credit facility at a per annum rate ranging from 0.35% to 0.50% depending on the Company's consolidated leverage ratio. The Company may prepay the loans or terminate or reduce the commitments in whole or in part at any time, without premium or penalty, subject to certain conditions including minimum amounts in the case of commitment reductions and reimbursement of certain costs in the case of prepayments of LIBOR loans.
The Credit Agreement contains customary representations and warranties, covenants, and events of default, including the requirement to maintain a maximum consolidated leverage ratio of 2.75 to 1.00 and a minimum consolidated interest coverage ratio of 3.50 to 1.00. The occurrence of an event of default could result in the acceleration of the obligations under the Credit Agreement. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Credit Agreement at a per annum rate equal to 2.00% above the applicable interest rate for any overdue principal and 2.00% above the rate applicable for base rate loans for any other overdue amounts. The Company was in compliance with all covenants under the Credit Agreement as of September 30, 2011.

Note 5.  Other Comprehensive Income
The components of other comprehensive income ("OCI"), net of taxes, for the three and nine months ended September 30, 2011 and 2010 were as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Net income, as reported
$
26,990

 
$
22,471

 
$
75,109

 
$
51,692

Other comprehensive income (loss):
 
 
 
 
 
 
 
 Unrealized gain (loss) on investments
(445
)
 
308

 
(357
)
 
210

 Cumulative translation adjustments
(9,805
)
 
9,315

 
(961
)
 
(2,336
)
 Derivative gain (loss)
416

 
115

 
(86
)
 
164

Total other comprehensive income (loss)
(9,834
)
 
9,738

 
(1,404
)
 
(1,962
)
Total comprehensive income, net of taxes
$
17,156

 
$
32,209

 
$
73,705

 
$
49,730

The change in cumulative translation adjustments for the three months ended September 30, 2011 compared to the same period in 2010 was primarily due to the strengthening of the U.S. dollar against the euro.

15

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


Accumulated other comprehensive loss, net of taxes, as of September 30, 2011 and December 31, 2010 consisted of the following (in thousands):
 
September 30,
2011
 
December 31,
2010
Net unrealized gain (loss) on available-for-sale investments
$
(200
)
 
$
157

Cumulative translation adjustments
(6,364
)
 
(5,403
)
Derivative loss
(370
)
 
(284
)
Accumulated other comprehensive loss, net of taxes
$
(6,934
)
 
$
(5,530
)
The Company did not have any other-than-temporary gain or loss reflected in accumulated other comprehensive income (loss) as of September 30, 2011 and December 31, 2010.
See Note 1. Summary of Significant Accounting Policies, Note 6. Derivative Financial Instruments, and Note 12. Commitments and Contingencies of Notes to Condensed Consolidated Financial Statements for a further discussion.

Note 6.  Derivative Financial Instruments
The Company’s earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. The Company uses derivative instruments to manage its exposures to fluctuations in certain foreign currency exchange rates which exist as part of ongoing business operations. The Company and its subsidiaries do not enter into derivative contracts for speculative purposes.
Cash Flow Hedges
The Company enters into certain cash flow hedge programs in an attempt to reduce the impact of certain foreign currency fluctuations. These contracts are designated and documented as cash flow hedges. The purpose of these programs is to reduce the volatility of identified cash flow and expenses caused by movement in certain foreign currency exchange rates, in particular, the euro, Indian rupee and Israeli shekel. The Company is currently using foreign exchange forward contracts to hedge certain non-functional currency anticipated expenses and revenue reflected in the intercompany accounts between Informatica U.S. and its subsidiaries in Cayman, India, Israel, and the Netherlands. In December 2010, the Company entered into additional foreign exchange forward contracts with monthly expiration dates through January 17, 2012. The Company releases the amounts accumulated in other comprehensive income into earnings in the same period or periods during which the forecasted hedge transaction affects earnings.
The Company has forecasted the amount of its anticipated foreign currency expenses and intercompany revenue based on its historical performance and its 2011 financial plan. As of September 30, 2011, these foreign exchange contracts, carried at fair value, have a maturity of four months or less. During the nine months ended September 30, 2011, the Company did not enter into any new forward exchange contracts. The Company closes out approximately three foreign exchange contracts per month when the foreign currency denominated expenses are paid or intercompany revenue is received and any gain or loss is offset against expense.
The notional amount of these foreign exchange forward contracts was $20.4 million and $51.0 million as of September 30, 2011 and December 31, 2010, respectively.
Balance Sheet Hedges
In the second quarter of 2011, the Company also entered into foreign exchange contracts to hedge monetary assets and liabilities that are denominated in currencies other than the functional currency of its subsidiaries. These foreign exchange contracts are carried at fair value and do not qualify for hedge accounting treatment and are not designated as hedging instruments. Changes in the value of the foreign exchange contracts are recognized in other income (expense) and offset the foreign currency gain or loss on the underlying monetary assets or liabilities. The notional amounts of foreign currency contracts were $5.0 million at September 30, 2011.

16

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


The following table reflects the fair value amounts for the foreign exchange contracts designated and not designated as hedging instruments at September 30, 2011 and December 31, 2010 (in thousands):
 
September 30, 2011
 
December 31, 2010
 
Fair Value
Derivative
Assets
(i)
 
Fair Value
Derivative
Liabilities
(ii)
 
Fair Value
Derivative
Assets
(i)
 
Fair Value
Derivative
Liabilities
(ii)
Derivatives designated as hedging instruments
$

 
$
452

 
$
102

 
$
569

Derivatives not designated as hedging instruments
322

 
151

 
50

 

Total fair value of derivative instruments
$
322

 
$
603

 
$
152

 
$
569

____________________
(i)
Included in prepaid expenses and other current assets on the condensed consolidated balance sheets.
(ii)
Included in accrued liabilities on the condensed consolidated balance sheets.
As of September 30, 2011, a derivative loss of $0.4 million was included in accumulated other comprehensive income, net of applicable taxes. The Company expects to reflect this amount in its condensed consolidated statements of income during the next three months.
The Company evaluates prospectively as well as retrospectively the effectiveness of its hedge programs using statistical analysis at the inception of the hedge. Informatica uses the spot price method and excludes the time value of derivative instruments for determination of hedge effectiveness.  
The effects of derivative instruments designated as cash flow hedges on the accumulated other comprehensive income and condensed consolidated statements of income for the three and nine months ended September 30, 2011 and 2010 are as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
Amount of gain (loss) recognized in other comprehensive income (effective portion)
$
15

 
$
154

 
$
(1,750
)
 
$
265

Amount of gain (loss) reclassified from accumulated other comprehensive income to operating expenses (effective portion)
$
(654
)
 
$
(36
)
 
$
(1,610
)
 
$
(5
)
Amount of gain (loss) recognized in income on derivatives for the amount excluded from effectiveness testing located in operating expenses
$
20

 
$
84

 
$
483

 
$
61

The Company did not have any ineffective portion of the derivative recorded in the condensed consolidated statements of income.
The gain recognized in other income (expense), net for non-designated foreign currency forward contracts for the three and nine months ended September 30, 2011 and 2010 is as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2011
 
2010
 
2011
 
2010
Gain recognized in interest and other income (expense), net
$
928

 
$
77

 
$
1,728

 
$
106

See Note 1. Summary of Significant Accounting Policies and Note 5. Other Comprehensive Income of Notes to Condensed Consolidated Financial Statements for a further discussion.


17

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


Note 7.  Stock Repurchase Program
The Company's Board of Directors has approved a stock repurchase program for the Company to repurchase its common stock. The primary purpose of the program is to enhance shareholder value, including to offset the dilutive impact of stock based incentive plans. The number of shares to be purchased and the timing of the purchases are based on several factors, including the price of the Company's common stock, the Company's liquidity and working capital needs, general business and market conditions, and other investment opportunities. These purchases can be made from time to time in the open market and are funded from the Company’s available working capital.
This repurchase program does not have an expiration date. Repurchased shares are retired and reclassified as authorized and unissued shares of common stock. The Company may continue to repurchase shares from time to time, as determined by management under programs approved by the Board of Directors.
During the three months ended September 30, 2011, the Company repurchased approximately 1,110,000 shares of its common stock at a cost of $50.5 million. The Company did not repurchase any shares of its common stock during the three months ended September 30, 2010. During the nine months ended September 30, 2011 and 2010, the Company repurchased approximately 1,475,000 shares of its common stock at a cost of $70.1 million and approximately 435,000 shares of its common stock at a cost of $10.7 million, respectively. There were no repurchases of the Notes during the nine months ended September 30, 2011 and 2010. The Notes were redeemed on March 18, 2011. See Note 4. Borrowings - Convertible Senior Notes of Notes to Condensed Consolidated Financial Statements for a further discussion.
As of September 30, 2011, $6.4 million remained available for repurchase under this program.
Note 8.  Stock-Based Compensation
The Company grants restricted stock units (“RSUs”) and stock options under its 2009 Employee Stock Incentive Plan. The Company uses the Black-Scholes-Merton option pricing model to determine the fair value of each option award on the date of grant. The Company uses a blend of average historical and market-based implied volatilities for calculating the expected volatilities for employee stock options, and it uses 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, and the expected term of ESPP is based on the contractual terms. The risk-free interest rate for the expected term of the options and ESPP is based on the U.S. Treasury yield curve in effect at the time of grant.
The Company records stock-based compensation for RSUs and options granted net of estimated forfeiture rates. The Company estimates forfeiture rates at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical forfeitures to estimate its future forfeiture rates.
The fair value of the Company’s stock-based awards was estimated based on the following assumptions:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Option grants:
 
 
 
 
 
 
 
Expected volatility
38
%
 
37
%
 
35 - 38%

 
34 - 38%

Weighted-average volatility
38
%
 
37
%
 
36
%
 
35
%
Expected dividends

 

 

 

Expected term of options (in years)
3.8

 
3.7

 
3.8

 
3.7

Risk-free interest rate
0.9
%
 
1.3
%
 
1.5
%
 
1.9
%
ESPP:*
 
 
 
 
 
 
 
Expected volatility
38
%
 
36
%
 
35 - 38%

 
34
%
Weighted-average volatility
38
%
 
36
%
 
36
%
 
34
%
Expected dividends

 

 

 

Expected term of ESPP (in years)
0.5

 
0.5

 
0.5

 
0.5

Risk-free interest rate
0.2
%
 
0.2
%
 
0.2
%
 
0.2
%
____________________
*
ESPP purchases are made on the last day of January and July of each year.

18

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


The allocations of the stock-based compensation, net of income tax benefit, for the three and nine months ended September 30, 2011 and 2010 are as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Cost of service revenues
$
874

 
$
641

 
$
2,599

 
$
1,956

Research and development
2,825

 
1,925

 
7,878

 
5,285

Sales and marketing
2,616

 
1,817

 
7,503

 
5,383

General and administrative
2,318

 
1,573

 
6,320

 
4,393

Total stock-based compensation
8,633

 
5,956

 
24,300

 
17,017

Tax benefit of stock-based compensation
(2,219
)
 
(1,263
)
 
(6,169
)
 
(3,558
)
Total stock-based compensation, net of tax benefit
$
6,414

 
$
4,693

 
$
18,131

 
$
13,459


Note 9.  Facilities Restructuring Charges
2004 Restructuring Plan
In October 2004, the Company announced a restructuring plan (“2004 Restructuring Plan”) related to the December 2004 relocation of the Company’s corporate headquarters within Redwood City, California. In 2005, the Company subleased the available space at the Pacific Shores Center under the 2004 Restructuring Plan. The Company recorded restructuring charges of approximately $103.6 million, consisting of $21.6 million in leasehold improvement and asset write-offs and $82.0 million related to estimated facility lease losses, which consist of the present value of lease payment obligations for the remaining 21 months lease term of the previous corporate headquarters, net of actual and estimated sublease income. The Company has actual and estimated sublease income, including the reimbursement of certain property costs such as common area maintenance, insurance, and property tax, net of estimated broker commissions, of $1.6 million for the remainder of 2011, $4.2 million in 2012, and $2.7 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 the non-discounted future cash obligations and the discounted present value of these cash obligations. At September 30, 2011, the Company will recognize approximately $1.6 million of accretion as a restructuring charge over the remaining 21 months lease term as follows: $0.4 million for the remainder of 2011, $1.0 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, which was subsequently subleased until July 2013 under a December 2007 sublease agreement.

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INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


A summary of the activity of the accrued restructuring charges for the nine months ended September 30, 2011 is as follows (in thousands):
 
Accrued
Restructuring
Charges at
 
 
 
 Restructuring
 
 
 
 
 
Accrued
Restructuring
Charges at
 
December 31,
2010
 
Charges
 
Adjustments
 
Net Cash
Payment
 
Non-Cash
Reclass
 
September 30,
2011
2004 Restructuring Plan
 
 
 
 
 
 
 
 
 
 
 
Excess lease facilities
$
33,791

 
$
1,304

 
$
(600
)
 
$
(9,325
)
 
$
(122
)
 
$
25,048

2001 Restructuring Plan
 
 
 
 
 
 
 
 
 
 
 

Excess lease facilities
5,117

 

 

 
(1,398
)
 

 
3,719

Total restructuring plans
$
38,908

 
$
1,304

 
$
(600
)
 
$
(10,723
)
 
$
(122
)
 
$
28,767

For the nine months ended September 30, 2011, the Company recorded $0.7 million of restructuring charges related to the 2004 Restructuring Plan. These charges consist of accretion charges and amortization of tenant improvements and are included in facilities restructuring charges on the condensed consolidated statement of income. Net cash payments for the nine months ended September 30, 2011 for facilities included in the 2004 and 2001 Restructuring Plans amounted to $9.3 million and $1.4 million, respectively.
Inherent in the assessment of the costs related to our restructuring efforts are estimates related to the probability weighted outcomes of the significant actions to accomplish the restructuring. The estimates of sublease income may vary significantly depending, in part, on factors that may be beyond our control, such as the global economic downturn, time periods required to locate and contract suitable subleases, and market rates at the time of subleases. Currently, the Company has subleased its excess facilities in connection with its 2004 and 2001 facilities restructuring for durations through the end of the master lease in 2013. Future adjustments to the charges could result from any default by a sublessor, which could impact the time period that the buildings will be vacant, expected sublease rates, expected sublease terms, and the expected time it will take to sublease.

Note 10.  Income Taxes
The Company's effective tax rates were 31% and 29% for the three months ended September 30, 2011 and 2010, respectively, and 29% for both the nine months ended September 30, 2011 and 2010. The effective tax rates differed from the federal statutory rate of 35% primarily due to benefits of certain earnings from operations in lower-tax jurisdictions throughout the world, the impact of Section 199 of the Internal Revenue Code, and the recognition of current year research and development credits offset by compensation expense related to non-deductible stock-based compensation, acquisition related costs, and the accrual of reserves related to uncertain tax positions. The Company has not provided for residual U.S. taxes in almost all of these lower-tax jurisdictions since it intends to indefinitely reinvest these earnings offshore with the exception of Israel.
 ASC 740, Income Taxes, provides for the recognition of deferred tax assets if realization of such assets is more likely than not. In assessing the need for any additional valuation allowance in the quarter ended September 30, 2011, the Company considered all available evidence both positive and negative, including historical levels of income, legislative developments, expectations and risks associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies. As a result of this analysis for the quarter ended September 30, 2011, consistent with prior quarters, it was considered more likely than not that the Company's non-stock-based payments related deferred tax assets would be realized. As a result, the remaining valuation allowance is primarily related to deferred tax assets that were created through the benefit from stock option deductions on a “with” and “without” basis and recorded on the balance sheet with a corresponding valuation allowance prior to the Company’s adoption of ASC 718, Stock Compensation. Pursuant to ASC 718-740-25-10, the benefit of these deferred tax assets will be recorded in stockholders’ equity when they are utilized on an income tax return to reduce the Company’s taxes payable, and as such, they will not impact the Company’s effective tax rate.
The unrecognized tax benefits related to ASC 740, if recognized, would impact the income tax provision by $15.2 million and $12.7 million as of September 30, 2011 and 2010, respectively. The Company has elected to include interest and penalties as a component of tax expense. Accrued interest and penalties as of September 30, 2011 and 2010 were approximately $2.3 million and $1.7 million, respectively. As of September 30, 2011, the gross uncertain tax position was approximately $16.1 million.

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INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The Company files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The Company has been informed by certain state and foreign taxing authorities that it was selected for examination. Most state and foreign jurisdictions have three or four open tax years at any point in time. The field work for certain state and foreign audits has commenced and is at various stages of completion as of September 30, 2011.
Although the outcome of any tax audit is uncertain, the Company believes that it has adequately provided in its financial statements for any additional taxes that it may be required to pay as a result of such examinations. The Company regularly assesses the likelihood of outcomes resulting from these examinations to determine the adequacy of its provision for income taxes, and believes its current reserve to be reasonable. If tax payments ultimately prove to be unnecessary, the reversal of these tax liabilities would result in tax benefits in the period that the Company had determined such liabilities were no longer necessary. However, if an ultimate tax assessment exceeds its estimate of tax liabilities, an additional tax provision might be required.

Note 11.  Net Income per Common Share
The following table sets forth the calculation of basic and diluted net income per share for the three and nine months ended September 30, 2011 and 2010 (in thousands, except per share amounts):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Net income
$
26,990

 
$
22,471

 
$
75,109

 
$
51,692

Effect of convertible senior notes, net of related tax effects

 
961

 
811

 
2,884

Net income adjusted
$
26,990

 
$
23,432

 
$
75,920

 
$
54,576

Weighted-average shares of common stock used to compute basic net income per share (excluding unvested restricted stock)
106,274

 
92,794

 
103,080

 
91,746

Effect of dilutive common stock equivalents:
 
 
 
 
 
 
 
Dilutive effect of unvested restricted stock units
458

 
422

 
545

 
374

Dilutive effect of employee stock options
5,674

 
6,228

 
6,283

 
6,113

Dilutive effect of convertible senior notes

 
10,050

 
2,747

 
10,050

Shares used in computing diluted net income per common share
112,406

 
109,494

 
112,655

 
108,283

Basic net income per common share
$
0.25

 
$
0.24

 
$
0.73

 
$
0.56

Diluted net income per common share
$
0.24

 
$
0.21

 
$
0.67

 
$
0.50

Weighted average stock options and restricted stock units excluded from calculation due to anti-dilutive effect
1,730

 
864

 
1,213

 
1,690

The diluted net income per common share calculation 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 the Notes had a dilutive effect on diluted net income per share for the nine months ended September 30, 2011 and for the three and nine months ended September 30, 2010. As such, the Company had an add-back of $0.8 million for the nine months ended September 30, 2011, and $1.0 million and $2.9 million for the three and nine months ended September 30, 2010, respectively, in interest and issuance cost amortization, net of income taxes, to net income for the diluted net income per share calculation. The impact of the Notes for the nine months ended September 30, 2011 represents interest and issuance cost amortization until the redemption of the Notes on March 18, 2011. See Note 4. Borrowings - Convertible Senior Notes of Notes to Condensed Consolidated Financial Statements for a further discussion.
Note 12.  Commitments and Contingencies
Lease Obligations
In December 2004, the Company relocated its corporate headquarters within Redwood City, California and entered into a new lease agreement. The initial lease term was from December 15, 2004 to December 31, 2007 with a three-year option to renew to December 31, 2010 at fair market value. In May 2007, the Company exercised its renewal option to extend the office lease term to December 31, 2010. In May 2009, the Company executed the lease amendment to further extend the lease term for another

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INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


three years to December 31, 2013. The future minimum contractual lease payments are $0.9 million for the remainder of 2011, and $3.5 million and $3.6 million for the years ending December 31, 2012 and 2013, respectively.
The Company entered into two lease agreements in February 2000 for two office buildings at the Pacific Shores Center in Redwood City, California, which was used as its former corporate headquarters from August 2001 through December 2004. The leases will expire in July 2013.
The Company leases certain office facilities under various non-cancelable operating leases, including those described above, which expire at various dates through 2021 and require the Company to pay operating costs, including property taxes, insurance, and maintenance. Operating lease payments in the table below include approximately $32.5 million for operating lease commitments for facilities that are included in restructuring charges. See Note 9. Facilities Restructuring Charges of Notes to Condensed Consolidated Financial Statements for a further discussion.
Future minimum lease payments as of September 30, 2011 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 2011
$
7,169

 
$
858

 
$
6,311

2012
29,878

 
3,464

 
26,414

2013
21,544

 
1,786

 
19,758

2014
5,403

 

 
5,403

2015
4,407

 

 
4,407

Thereafter
2,389

 

 
2,389

Total future minimum operating lease payments
$
70,790

 
$
6,108

 
$
64,682

Of these future minimum lease payments, the Company has accrued $28.8 million in the facilities restructuring accrual at September 30, 2011. This accrual, in addition to minimum lease payments of $32.5 million, includes estimated operating expenses of $8.2 million and sublease commencement costs associated with excess facilities and is net of estimated sublease income of $10.3 million and a present value discount of $1.6 million recorded in accordance with ASC 420, Exit or Disposal Cost Obligations.
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. 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. To date, the Company’s product warranty expense has not been significant. The warranty accrual as of September 30, 2011 and December 31, 2010 was not material.
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

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INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


claims against the Company are outstanding as of September 30, 2011. 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.
As permitted under Delaware law, the Company has agreements whereby the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request, in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has director and officer insurance coverage that reduces the Company's exposure and enables the Company to recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.
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 ASC 450, Contingencies.
Derivative Financial Instruments
The Company uses derivative instruments to manage its exposure to fluctuations in certain foreign currency exchange rates which exist as part of ongoing business operations. See Note 1. Summary of Significant Accounting Policies, Note 5. Other Comprehensive Income, and Note 6. Derivative Financial Instruments of Notes to Condensed Consolidated Financial Statements for a further discussion.
Litigation
IPO Class Action. 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 (together with the Company, the "Informatica defendants"), and several investment banking firms that served as underwriters of our April 29, 1999 initial public offering (IPO) and September 28, 2000 follow-on public offering. The complaint alleges liability as to all defendants under Sections 11 and/or 15 of the Securities Act of 1933 and Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934, on the grounds that the registration statements for the offerings did not disclose that: (1) the underwriters had agreed to allow certain customers to purchase shares in the offerings in exchange for excess commissions paid to the underwriters; and (2) the underwriters had arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The complaint also alleges that false analyst reports were issued. No specific damages are claimed.
Similar allegations were made in other lawsuits challenging more than 300 other initial public offerings and follow-on offerings conducted in 1999 and 2000. The cases were consolidated for pretrial purposes. On February 19, 2003, the Court ruled on all defendants' motions to dismiss. The Court denied the motions to dismiss the claims under the Securities Act of 1933. The Court denied the motion to dismiss the Section 10(b) claim against Informatica and 184 other issuer defendants. The Court denied the motion to dismiss the Section 10(b) and 20(a) claims against the Informatica defendants and 62 other individual defendants.
The Company accepted a settlement proposal presented to all issuer defendants. In this settlement, plaintiffs will dismiss and release all claims against the Informatica defendants, in exchange for a contingent payment by the insurance companies collectively responsible for insuring the issuers in all of the IPO cases, and for the assignment or surrender of control of certain claims we may have against the underwriters. The Informatica defendants will not be required to make any cash payments in the settlement, unless the pro rata amount paid by the insurers in the settlement exceeds the amount of the insurance coverage. Any final settlement will require approval of the Court after class members are given the opportunity to object to the settlement or opt out of the settlement.
All parties in all lawsuits have reached a settlement, which, as noted above, will not require the Company to contribute cash unless the pro rata amount paid by the insurers in the settlement exceeds the amount of the insurance coverage. The Court gave preliminary approval to the settlement on June 10, 2009 and gave final approval on October 6, 2009. Several objectors have filed notices of appeals of the final judgment dismissing the cases upon the settlement. The Company has not paid, and does not expect to pay in the future, any amount towards the settlement. As of September 30, 2011, the Company has not accrued or disclosed any amounts because further losses are not considered probable or reasonably possible.

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INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Data Retrieval. In November 2008, Data Retrieval Technologies LLC ("Data Retrieval") filed a complaint in the Western District of Washington against the Company and another defendant, alleging patent infringement. In January 2010, Data Retrieval initiated another action for patent infringement against the Company and another defendant in the United States District Court for the Northern District of California. In June 2011, the Company entered into a confidential settlement agreement that settled both Data Retrieval actions.
The Company is also a party to various legal proceedings and claims arising from the normal course of its business activities, including proceedings and claims related to patents and other intellectual property related matters. The Company reviews the status of each matter and records a provision for a liability when it is considered both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed quarterly and adjusted as additional information becomes available. If both of the criteria are not met, the Company assesses whether there is at least a reasonable possibility that a loss, or additional losses, may be incurred. If there is a reasonable possibility that a material loss may be incurred, the Company discloses the estimate of the possible loss, range of loss, or a statement that such an estimate cannot be made.
Litigation is subject to inherent uncertainties. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the Company's financial position and results of operation for the period in which the unfavorable outcome occurred, and potentially in future periods.

Note 13.  Significant Customer Information and Segment Information
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. The Company markets its products and services in the United States and in foreign countries through its direct sales force and indirect distribution channels.
No customer accounted for more than 10% of revenue in the three and nine months ended September 30, 2011 and 2010. At September 30, 2011 and 2010, no customer accounted for more than 10% of the accounts receivable balance. North America revenues include the United States and Canada. Revenue from international customers (defined as those customers outside of North America) accounted for 32% and 28% of total revenues in the third quarter of 2011 and 2010, respectively, and 34% and 32% of total revenues for the nine months ended September 30, 2011 and 2010, respectively.
Total revenue by geographic region is summarized as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Revenues:
 
 
 
 
 
 
 
North America
$
132,282

 
$
116,559

 
$
370,076

 
$
308,628

Europe
46,663

 
30,487

 
136,113

 
101,871

Other
16,942

 
14,204

 
50,457

 
41,542

Total revenues
$
195,887

 
$
161,250

 
$
556,646

 
$
452,041

Long-lived assets by geographic region are summarized as follows (in thousands):
 
September 30,
2011
 
December 31,
2010
Long-lived assets, net (excluding assets not allocated):
 
 
 
North America
$
71,586

 
$
81,762

Europe
3,341

 
4,145

Other
7,741

 
1,886

Total long-lived assets
$
82,668

 
$
87,793



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INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Note 14.  Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2011-04, Financial Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs ("ASU 2011-04"). ASU 2011-04 provides a consistent definition of fair value and aligns the fair value measurement and disclosure requirements between U.S. GAAP and International Financial Reporting Standards ("IFRS"). ASU 2011-04 clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This ASU will be effective for the Company's first quarter of 2012 and should be applied prospectively. Early adoption is not permitted. The Company is currently evaluating the impact of its pending adoption of ASU 2011-04 on the consolidated financial statements.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present other comprehensive income as part of the statement of stockholders' equity. This ASU will be effective for the Company's first quarter of 2012 and should be applied retrospectively. Early adoption is permitted. The Company does not expect its adoption of ASU 2011-05 to have an impact to the consolidated financial statements.
In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 allows an entity to use a qualitative approach to test goodwill for impairment. This ASU permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for the Company's impairment test in 2012 and early adoption is permitted. The Company does not expect its adoption of ASU 2011-08 to have an impact to the consolidated financial statements.

Note 15.  Acquisitions
ActiveBase
On July 13, 2011, the Company acquired all of the outstanding securities of ActiveBase Ltd. (“ActiveBase”), a privately-held company, for approximately $6.0 million in cash. ActiveBase provides dynamic data masking technology. As a result of this acquisition, the Company also assumed certain liabilities and commitments. Approximately $1.2 million of the consideration otherwise payable to former ActiveBase stockholders was placed into an escrow fund and held as partial security for the indemnification obligations of the former ActiveBase stockholders. The escrow fund will remain in place until July 14, 2013.
The Company is obligated to pay up to an additional $4.0 million for certain variable and deferred earn-out payments based upon the achievement of certain performance targets. The Company determined the fair market value of these earn-outs based on probability analysis. At the time of acquisition, the fair market value and gross amount of these earn-out payments were $3.3 million and $4.0 million, respectively.
The following table summarizes the fair value of assets acquired and liabilities assumed of $8.3 million and the acquiree's transaction related costs and debt settlement of $1.0 million (in thousands):
Goodwill
$
7,042

Developed and core technology
2,080

Customer relationships
120

Assumed liabilities, net of assets
(968
)
Total purchase price allocation
8,274

Acquiree's transaction related costs and debt settlement
974

Total
$
9,248

The acquiree's transaction related costs consist of legal and accounting fees and certain employee related compensation as of the date of this acquisition. The goodwill is not deductible for tax purposes.
 

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INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


WisdomForce Technologies, Inc.
On June 28, 2011, the Company acquired all of the outstanding securities of WisdomForce Technologies, Inc. (“WisdomForce”), a privately-held company, and certain assets of its two affiliated companies for approximately $25.0 million in cash. WisdomForce develops and markets software that helps improve the quality, availability and continuity of data within information technology systems. As a result of this acquisition, the Company also assumed certain liabilities and commitments. Approximately $5.0 million of the consideration otherwise payable to former WisdomForce stockholders was placed into an escrow fund and held as partial security for the indemnification obligations of the former WisdomForce stockholders. The escrow fund will remain in place until December 28, 2012.
Informatica is obligated to pay up to an additional $10.0 million for certain variable and deferred earn-out payments based upon the achievement of certain performance targets. The Company determined the fair market value of these earn-outs based on probability analysis. At the time of acquisition, the fair market value and gross amount of these earn-out payments were $7.3 million and $10.0 million, respectively.

The following table summarizes the fair value of assets acquired and liabilities assumed of $32.1 million and the acquiree's transaction related costs of $0.2 million (in thousands):
Goodwill
$
26,188

Developed and core technology
6,910

Customer relationships
500

In-process research and development
1,632

Assumed liabilities, net of assets
(3,180
)
Total purchase price allocation
32,050

Acquiree's transaction related costs
231

Total
$
32,281

The acquiree's transaction related costs consist of legal, accounting, and consulting fees as of the date of this acquisition. The goodwill is not deductible for tax purposes.
Siperian, Inc.
On January 28, 2010, the Company acquired Siperian, Inc. (“Siperian”), a privately-held company. Siperian provides an integrated model-driven master data management (“MDM”) platform that adapts to most business requirements. The Company acquired Siperian in a cash merger transaction valued at approximately $130.0 million. As a result of this acquisition, the Company also assumed certain facility leases and certain liabilities and commitments. Approximately $18.3 million of the consideration otherwise payable to former Siperian stockholders, vested option holders, and participants in Siperian's Management Acquisition Bonus Plan was placed into an escrow fund and held as partial security for the indemnification obligations of the former Siperian stockholders, vested option holders, and participants in Siperian's Management Acquisition Bonus Plan set forth in the merger agreement and for purposes of the working capital adjustment stated in the contract. The escrow period terminated and the remaining funds were subsequently paid out in the third quarter of 2011.
The following table summarizes the fair value of assets acquired and liabilities assumed of $102.9 million and the acquiree's transaction related costs and debt settlement of $27.1 million, which were paid by the Company on January 28, 2010 or shortly thereafter (in thousands):
Goodwill
$
78,360

Developed and core technology
21,340

Customer relationships
1,630

In-process research and development
1,920

Assumed liabilities, net of assets
(333
)
Total purchase price allocation
102,917

Acquiree's transaction related costs and debt settlement
27,083

Total
$
130,000



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INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The acquiree's transaction related costs consist of investment banker, legal and accounting fees and certain employee related compensation as of the date of this acquisition. The goodwill is not deductible for tax purposes.
At the time of acquisition, the Company finalized plans to terminate certain employees and vacate certain facilities of Siperian. The cost associated with such exit activities, which are reflected in Acquisitions and Other Charges (Benefit) on the condensed consolidated statement of income, is as follows (in thousands):
Termination of certain employees
$
326

Vacating certain facilities of Siperian
1,121

Total
$
1,447


The following table presents the unaudited pro forma results of Informatica (including Siperian) for the nine months ended September 30, 2010 (in thousands, except per share amounts). The unaudited pro forma financial information combines the results of operations of Informatica and Siperian as though the companies had been combined as of the beginning of the fiscal period presented. The unaudited 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 fiscal 2010. The unaudited pro forma results presented include amortization charges for acquired intangible assets, eliminations of intercompany transactions, adjustments to interest expense and interest income, adjustment of deferred revenues to its estimated fair values, and tax adjustments and tax benefits related to the acquisition.
 
Nine Months Ended
September 30,
 
2010
Pro forma total revenues
$
452,960

Pro forma net income
$
45,466

Pro forma net income per share - basic
$
0.50

Pro forma net income per share - diluted
$
0.45

Pro forma weighted-average basic shares
91,746

Pro forma weighted-average diluted shares
108,283

See Note 11. Net Income per Common Share of Notes to Condensed Consolidated Financial Statements for a discussion of the calculation of basic and diluted net income per share.
In the first quarter of 2011, the Company recorded a benefit of $1.7 million for the difference between estimates of liabilities and assets recorded at the time of acquisition and the actual amounts. This change in estimate is included in Acquisition and Other Charges (Benefit) for the nine months ended September 30, 2011 on the condensed consolidated statement of income.
29West Inc.
On March 22, 2010, the Company acquired all of the outstanding securities of 29West Inc. (“29West”), a privately-held company, for approximately $50.0 million in cash. 29West develops high-speed messaging software, known as Ultra Messaging. This software is used for distribution of data, streaming market data, and proprietary trading and market making, and is sold to banks, hedge funds, exchanges, and software application vendors worldwide. As a result of this acquisition, the Company also assumed certain facility leases, liabilities, and commitments. Approximately $7.0 million of the consideration otherwise payable to former 29West stockholders and vested option holders was placed into an escrow fund and held as partial security for the indemnification obligations of the former 29West stockholders and vested option holders. The escrow period terminated and the remaining funds were subsequently paid out in the third quarter of 2011.

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INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The following table summarizes the fair value of assets acquired and liabilities assumed of $47.0 million and the acquiree's transaction related costs of $3.0 million (in thousands):
Goodwill
$
36,397

Developed and core technology
9,750

Customer relationships
590

Acquired assets, net of liabilities
262

Total purchase price allocation
46,999

Acquiree's transaction related costs
3,001

Total
$
50,000

The acquiree's transaction related costs consist of investment banker, legal and accounting fees and certain employee related compensation as of the date of this acquisition. The goodwill is not deductible for tax purposes.

Note 16.  Subsequent Event
In October 2011, our Board of Directors authorized the repurchase of up to an additional $75.0 million of our outstanding common stock under the repurchase program.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of the federal securities laws, particularly statements referencing our expectations relating to license revenues, service revenues, international revenues, deferred revenues, cost of license revenues, cost of service revenues, operating expenses, amortization of acquired technology, stock-based compensation, and provision for income taxes; the growth of our customer base and customer demand for our products and services, 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; market risk sensitive instruments, contractual obligations; 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 in this Report 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 of the filing of this Report, 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 in Part I, Item 1 of this Report.
Overview
We are the leading independent provider of enterprise data integration and data quality software and services. We generate revenues from sales of software licenses for our enterprise data integration software products, including product upgrades that are not part of post-contract services, and from sales of services, which consist of maintenance, consulting, education, and subscription 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 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 also receive a small but increasing amount of revenues from our customers and partners under subscription-based licenses for a variety of cloud and address validation offerings. Most of our international sales have been in Europe, and revenues outside of Europe and North America have comprised less than 10% of total consolidated revenues during the past three years.
We license our software and provide services to many industry sectors, including, but not limited to, energy and utilities, financial services, government and public agencies, healthcare, high technology, insurance, manufacturing, retail, services, telecommunications, and transportation.
We grew our total revenues in the third quarter of 2011 by 21% to $195.9 million compared to $161.3 million for the same period in 2010. License revenues grew by 20% to $83.7 million in the third quarter of 2011 compared to $69.8 million for the same period in 2010. In the nine-month period ended September 30, 2011, we grew our total revenues by 23% to $556.6 million from $452.0 million in the comparable period a year ago, and license revenues grew by 24% to $241.6 million from $194.9 million on a year-over-year basis. Our growth in license revenues reflects the continued market acceptance of our products for broader data integration projects, growth in our core data warehousing business, and growth in our ongoing compliance program. Services revenues increased by 23% in the third quarter of 2011 from the same period in 2010 due to a 24% growth in maintenance revenues and an 18% increase in consulting, education, and subscription services. Service revenues increased by 23% for the nine months ended September 30, 2011 compared to the same period in 2010 due to a 24% growth in maintenance revenues and an 18% increase in consulting, education, and subscription services. The maintenance revenue growth was attributable to the increased size of our installed customer base, and the increase in consulting, education, and subscription services was due to higher customer demand and increased subscriptions. Our operating income as a percentage of revenues was 19% in the third quarter of 2011 and the nine-month period ended September 30, 2011 compared to 20% and 16% in the third quarter of 2010 and the nine-month period ended September 30, 2010, respectively.

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Due to our dynamic market, we face both significant opportunities and challenges, and as such, we focus on the following key factors:
Macroeconomic Conditions:  The United States and many foreign economies continue to experience uncertainty driven by varying macroeconomic conditions. Although some of these economies have shown signs of improvement, macroeconomic recovery remains uneven. Uncertainty in the macroeconomic environment and associated global economic conditions have resulted in extreme volatility in credit, equity, and foreign currency markets, particularly with respect to the European sovereign debt markets and potential ramifications of the recent U.S. debt issues, budget concerns, and potential delays in approving the U.S. budget. Such uncertainty and associated conditions have also resulted in volatility in various vertical markets, particularly the financial services and public sectors, which are typically two of the larger vertical segments that we serve. Furthermore, we have made incremental investments in Asia-Pacific and Latin America, and have maintained a high level of investments in Europe, the Middle East, and Africa ("EMEA"). There are significant risks with overseas investments, and our growth prospects in these regions are uncertain.
Competition:  Inherent in our industry are risks arising from competition with existing software solutions, including solutions from IBM, Oracle, and SAP, technological advances from other vendors, and the perception of cost savings by solving data integration challenges through customer hand-coding development resources. Our prospective customers may view these alternative solutions as more attractive than our offerings. Additionally, the consolidation activity in our industry (including Oracle’s acquisition of BEA Systems, GoldenGate, Hyperion Solutions, Siebel, SilverCreek, Sun Microsystems, Sunopsis, and its proposed acquisition of Endeca; IBM’s acquisition of Ascential Software, Cast Iron Systems, Cognos, DataMirror, Initiate Systems, and SPSS; and SAP’s acquisition of Business Objects, which had previously acquired FirstLogic, and Sybase; and Tibco Software's acquisition of Netrics) pose challenges as competitors market a broader suite of software products or solutions to our existing or prospective customers.
Product Introductions and Enhancements:  To address the expanding data integration and data quality needs of our customers and prospective customers, we introduce new products and technology enhancements on a regular basis, including products we acquire. For example, in July 2011, we extended our data masking offerings through the acquisition of ActiveBase. The introduction of new products, integration of acquired products and enhancement of existing products, is a complex process involving inherent risks, and to which we devote significant resources. We cannot predict the impact of new or enhanced products on our overall sales and we may not generate sufficient revenues to justify their costs.
Quarterly and Seasonal Fluctuations:  Historically, purchasing patterns in the software industry have followed quarterly and seasonal trends and are likely to do so in the future. Specifically, it is normal for us to recognize a substantial portion of our new license orders in the last month of each quarter and sometimes in the last few weeks or days of each quarter, though such fluctuations are mitigated somewhat by recognition of backlog orders. In recent years, the fourth quarter has had the highest level of license revenues and order backlog, and we generally have weaker demand for our software products and services in the first and third quarters of the year. The first three quarters of 2011 and the first, second, and fourth quarters of 2010 followed these seasonal trends. However, license revenues in the third quarter of 2010 were essentially flat with the second quarter. The continued uncertain macroeconomic conditions make our historical seasonal trends more difficult to predict.
To address these potential risks, we have focused on a number of key initiatives, including certain cost containment measures, the strengthening of our partnerships, the broadening of our distribution capability worldwide, the targeting of our sales force and distribution channel on new products, and strategic acquisitions of complementary businesses, products, and technologies. If we are unable to execute these key initiatives successfully, we may not be able to sustain the growth rates we have experienced recently. As a result of improvements in our business prospects and with the expectation of uneven yet continued progress towards macroeconomic recovery, we have increased our hiring and expect to continue hiring through the remainder of 2011.
We concentrate 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. For example, we are partners with Cloudera, Dun & Bradstreet, EMC, Hewlett-Packard, Intel, Microsoft, NetSuite, Oracle, salesforce.com, SAP, and Symantec, among others. 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 of this Report.
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 enterprise data integration, data quality, master data management, B2B data exchange, application information lifecycle management,

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complex event processing, ultra messaging, and cloud data integration to our customers’ enterprise architects and chief information officers. We also operate the Informatica Marketplace, which allows buyers and sellers to share and leverage data integration solutions. Additionally, we have expanded our international sales presence in recent years by opening new offices, increasing headcount, and through acquisitions. As a result of this international expansion, as well as the increase in our direct sales headcount in the United States, our sales and marketing expenses have increased. In the long term, we expect these investments to result in increased revenues and productivity and ultimately higher profitability. If we experience an increase in sales personnel turnover, do not achieve expected increases in our sales pipeline, experience a decline in our sales pipeline conversion ratio, or do not achieve increases in sales productivity and efficiencies from our new sales personnel as they gain more experience, then it is unlikely that we will achieve our expected increases in revenue, sales productivity, or profitability from our international operations. We experienced a continued increase in sales productivity in the United States in the nine months ended September 30, 2011. While we have not yet achieved the same level of sales productivity internationally as we have in the United States, we did experience a slight increase in international sales productivity in 2010 and the nine-month period ended September 30, 2011.
To address the risks of introducing new products, we have continued to invest in programs to help train our internal sales force and our external distribution channel on new product functionalities, key differentiations, and key business values. These programs include user conferences for customers and partners, our annual sales kickoff conference for all sales and key marketing personnel, “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.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States, which require us to make estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these assumptions, judgments, and estimates 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. Any material differences between these estimates and actual results will impact our consolidated financial statements. On a regular basis, we evaluate our estimates, judgments, and assumptions and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of the Board of Directors. We believe that the estimates, judgments, and assumptions involved in the accounting for revenue recognition, facilities restructuring charges, income taxes, impairment of goodwill and intangible assets, business combinations, stock-based compensation, and allowance for doubtful accounts have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. The critical accounting estimates associated with these policies are discussed in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. As discussed below, on January 1, 2011, we adopted an accounting pronouncement on multiple-deliverable revenue arrangements that are outside the scope of industry-specific revenue recognition guidance. There have been no other changes in our critical accounting policies since the end of fiscal year 2010.
Revenue Recognition
We recognize revenue in accordance with GAAP prescribed for the software industry. The accounting rules related to revenue recognition are complex and are affected by interpretations of such rules. These rules and their interpretations are often subject to change. Consequently, the revenue recognition process requires management to make significant judgments; for example, to determine if collectability is probable.
We derive revenues from software license fees, maintenance fees (which entitle the customer to receive product support and unspecified software updates), professional services, consisting of consulting and education services, and other revenues, primarily consisting of subscriptions for address validation and cloud services. We follow the appropriate revenue recognition rules for each type of revenue. The basis for recognizing software license revenue is determined by Software Revenue Recognition (ASC 985-605), Revenue Recognition for Construction-Type and Production-Type Contracts (ASC 605-35), and the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 104, Revenue Recognition, which is discussed in the subsection Revenue Recognition in Note 2. Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements in Part II, Item 8 of this Report. Substantially all of our software licenses are perpetual licenses under which the customer acquires the perpetual right to use the software as provided and subject to the conditions of the license agreement. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable. In applying these criteria to revenue transactions, we must exercise judgment and use estimates to determine the amount of software, maintenance, and professional services revenue to be recognized at each period.
We assess whether fees are fixed or determinable prior to recognizing revenue. We must make interpretations of our customer contracts and exercise judgments in determining if the fees associated with a license arrangement are fixed or determinable. We

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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. We require evidence of sell-through from resellers and distributors for order acceptance. We then recognize revenue from resellers and distributors upon shipment if all other revenue recognition criteria are met, which in substantially all cases is when cash is collected or when the reseller or distributor is deemed credit-worthy based on their payment history and credit profile to conclude that collectability is probable. Further, we make judgments in determining the collectability of the amounts due from our customers that could possibly impact the timing of revenue recognition. We assess credit worthiness and collectability, and when a customer is not deemed credit worthy, revenue is recognized when payment is received.
Our software license arrangements include the following multiple elements: license fees from our core software products and/or product upgrades that are not part of post-contract services, maintenance fees, consulting, and/or education services. We use the residual method to recognize license revenue upon delivery when the arrangement includes elements to be delivered at a future date and vendor-specific objective evidence (“VSOE”) of fair value exists to allocate the fee to the undelivered elements of the arrangement. VSOE is based on the price charged when an element is sold separately. If VSOE does not exist for any undelivered software product element of the arrangement, all revenue is deferred until all elements have been delivered, or VSOE is established. If VSOE does not exist for any undelivered services elements of the arrangement, all revenue is recognized ratably over the period that the services are expected to be performed. We are required to exercise judgment in determining if VSOE exists for each undelivered element.
Consulting services, if included as part of the software arrangement, generally do not require significant modification or customization of the software. If, in our judgment, the software arrangement includes significant modification or customization of the software, then software license revenue is recognized as the consulting services revenue is recognized.
Consulting revenues are primarily related to implementation of services and product configurations. These services are performed on a time-and-materials basis and, occasionally, on a fixed-fee basis. Revenue is generally recognized as these services are performed. If uncertainty exists about our ability to complete the project, our ability to collect the amounts due, or in the case of fixed-fee consulting arrangements, our ability to estimate the remaining costs to be incurred to complete the project, revenue is deferred until the uncertainty is resolved.
Other revenues, primarily consisting of subscriptions for address validation and cloud services, are recognized as the services are delivered.
Multiple contracts with a single counterparty executed within close proximity of each other are evaluated to determine if the contracts should be combined and accounted for as a single arrangement.
We recognize revenues net of applicable sales taxes, financing charges that we have absorbed, and amounts retained by our resellers and distributors, if any. Our agreements do not permit returns, and historically we have not had any significant returns or refunds; therefore, we have not established a sales return reserve at this time.
Multiple Element Arrangements - Nonsoftware Arrangements or Arrangements with Software and Nonsoftware Elements
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, which amended the accounting standards applicable to revenue recognition for multiple-deliverable revenue arrangements that are outside the scope of industry-specific software revenue recognition guidance. The new guidance amends the criteria for allocating the consideration in multiple-deliverable revenue arrangements by establishing a selling price hierarchy. The selling price used for each deliverable will be based on VSOE if available, third-party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available. The guidance also eliminates the use of the residual method of allocation and requires that the arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method.
We adopted this guidance on a prospective basis on January 1, 2011, and therefore, is applicable to relevant revenue arrangements entered into or materially modified on or after that date.
Our multiple-element arrangements are primarily software or software-related, which are excluded from the new guidance. Multiple-element arrangements that include non-software related elements and software or software-related elements, which are included in the new guidance, are not material to date.
For multiple element arrangements that include software and non-software related elements, for example, on-site software licenses sold together with subscriptions for our cloud and hosted address validation services, we allocate revenue to each software

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and non-software element as a group based upon the relative selling price of each in accordance with the selling price hierarchy, which includes (i) VSOE if available, (ii) TPE if VSOE is not available, and (iii) ESP if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for each element. The manner in which we account for multiple element arrangements that contain only software and software-related elements remains unchanged.
In certain limited instances, we are not able to establish VSOE for all deliverables in an arrangement with multiple elements. This may be due to the infrequent selling of each element separately, not pricing products or services within a narrow range, or only having a limited sales history. When VSOE cannot be established, we attempt to establish a selling price based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately.
When we are unable to establish a selling price using VSOE or TPE, we use ESP in our allocation of the arrangement consideration. We determine ESP for a product or service by considering both market conditions and entity-specific factors. This includes, but is not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, and pricing practices.
Given the nature of our transactions, which are primarily software or software-related, the adoption of this new accounting guidance did not have a significant impact on the timing and pattern of revenue recognition when applied to multiple-element arrangements. Total net revenue as reported during the nine months ended September 30, 2011 is materially consistent with total net revenue that would have been reported if the transaction entered into or materially modified after December 31, 2010 were subject to previous accounting guidance. The new accounting guidance for revenue recognition, if applied in the same manner to the year ended December 31, 2010, would not have had a material impact on total net revenues for the fiscal year 2010.
Recent Accounting Pronouncements
For recent accounting pronouncements, see Note 14. Recent Accounting Pronouncements of Notes to Condensed Consolidated Financial Statements in 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 nine months ended September 30, 2011 and 2010 as a percentage of total revenues:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Revenues:
 
 
 
 
 
 
 
License
43
 %
 
43
 %
 
43
 %
 
43
 %
Service
57

 
57

 
57

 
57

Total revenues
100

 
100

 
100

 
100

Cost of revenues:


 


 


 
 
License
1

 
1

 
1

 
1

Service
16

 
16

 
16

 
16

Amortization of acquired technology
2

 
2

 
2

 
2

Total cost of revenues
19

 
19

 
19

 
19

Gross profit
81