INFA-2013.09.30-10Q
Table of Contents

 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
___________________
 
þ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2013
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.)
 
2100 Seaport Boulevard
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 Securities Exchange Act of 1934 (the "Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes þ   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 þ   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 þ    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 ¨  No þ
As of October 31, 2013, there were approximately 108,513,000 shares of the registrant’s Common Stock outstanding.


 
 
 
 
 



INFORMATICA CORPORATION
TABLE OF CONTENTS

 
 
 Page No. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

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,
2013
 
December 31,
2012
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
280,355

 
$
190,127

Short-term investments
340,263

 
345,478

Accounts receivable, net of allowances of $4,691 and $5,460, respectively
162,405

 
171,893

Deferred tax assets
23,768

 
23,350

Prepaid expenses and other current assets
29,035

 
29,396

Total current assets
835,826

 
760,244

Property and equipment, net
150,772

 
145,474

Goodwill
522,124

 
510,121

Other intangible assets, net
48,349

 
67,260

Long-term deferred tax assets
30,713

 
24,087

Other assets
6,382

 
5,031

Total assets
$
1,594,166

 
$
1,512,217

Liabilities and Equity
 
 
 
Current liabilities:
 

 
 

Accounts payable
$
7,952

 
$
8,885

Accrued liabilities
59,033

 
64,475

Accrued compensation and related expenses
57,620

 
55,382

Income taxes payable
2,418

 

Deferred revenues
253,798

 
241,968

Total current liabilities
380,821

 
370,710

Long-term deferred revenues
9,487

 
8,807

Long-term deferred tax liabilities
2,850

 
2,523

Long-term income taxes payable
26,394

 
21,195

Other liabilities
557

 
3,459

Total liabilities
420,109

 
406,694

Commitments and contingencies (Note 12)


 


Equity:
 

 
 

Common stock, $0.001 par value; 200,000 shares authorized; 108,449 shares and
 
 
 
107,301 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively
108

 
107

Additional paid-in capital
789,058

 
764,298

Accumulated other comprehensive loss
(8,316
)
 
(8,030
)
Retained earnings
393,207

 
346,730

Total Informatica Corporation stockholders’ equity
1,174,057

 
1,103,105

Noncontrolling interest

 
2,418

Total equity
1,174,057

 
1,105,523

Total liabilities and equity
$
1,594,166

 
$
1,512,217

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,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Software
$
99,826

 
$
73,850

 
$
279,160

 
$
237,347

Service
135,568

 
116,468

 
392,973

 
339,483

Total revenues
235,394

 
190,318

 
672,133

 
576,830

Cost of revenues:
 

 
 

 
 
 
 
Software
2,710

 
1,511

 
7,353

 
5,779

Service
37,221

 
30,069

 
109,714

 
90,195

Amortization of acquired technology
5,625

 
5,172

 
16,970

 
16,164

Total cost of revenues
45,556

 
36,752

 
134,037

 
112,138

Gross profit
189,838

 
153,566

 
538,096

 
464,692

Operating expenses:
 

 
 

 
 
 
 
Research and development
42,167

 
35,998

 
123,358

 
105,561

Sales and marketing
94,160

 
73,239

 
267,727

 
213,615

General and administrative
23,159

 
15,692

 
60,827

 
46,369

Amortization of intangible assets
1,893

 
1,462

 
5,881

 
4,690

Facilities restructuring and facility lease termination costs

 

 

 
710

Acquisitions and other charges
1,253

 
2,036

 
2,467

 
2,389

Total operating expenses
162,632

 
128,427

 
460,260

 
373,334

Income from operations
27,206

 
25,139

 
77,836

 
91,358

Interest income
805

 
987

 
2,588

 
3,342

Interest expense
(121
)
 
(126
)
 
(369
)
 
(379
)
Other expense, net
(295
)
 
(533
)
 
(754
)
 
(1,257
)
Income before income taxes
27,595

 
25,467

 
79,301

 
93,064

Income tax provision
17,191

 
9,966

 
32,824

 
30,948

Net income
$
10,404

 
$
15,501

 
$
46,477

 
$
62,116

Basic net income per common share
$
0.10

 
$
0.14

 
$
0.43

 
$
0.58

Diluted net income per common share
$
0.09

 
$
0.14

 
$
0.42

 
$
0.55

Shares used in computing basic net income per common share
108,305

 
108,091

 
108,039

 
107,957

Shares used in computing diluted net income per common share
111,501

 
111,776

 
111,372

 
112,518

See accompanying notes to condensed consolidated financial statements.


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INFORMATICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
10,404

 
$
15,501

 
$
46,477

 
$
62,116

Other comprehensive income:
 
 
 
 
 
 
 
Change in foreign currency translation adjustment, net of tax benefit (expense) of $(317), $(50), $(74) and $23
7,370

 
3,378

 
1,202

 
(1
)
Available-for-sale investments:
 
 
 
 
 
 
 
Change in net unrealized gain (loss), net of tax benefit (expense) of $(187), $(117), $183 and $(322)
304

 
191

 
(300
)
 
526

Less: reclassification adjustment for net loss included in net income, net of tax benefit of $12, $1, $22 and $—
19

 
2

 
36

 

Net change, net of tax benefit (expense) of $(199), $(118), $161 and $(322)
323

 
193

 
(264
)
 
526

Cash flow hedges:
 
 
 
 
 
 
 
Change in unrealized gain (loss), net of tax benefit (expense) of $455, $(135), $1,149 and $24
(744
)
 
218

 
(1,875
)
 
(41
)
Less: reclassification adjustment for net loss included in net income, net of tax benefit of $349, $328, $398 and $624
571

 
536

 
651

 
1,019

Net change, net of tax benefit (expense) of $106, $(463), $751 and $(600)
(173
)
 
754

 
(1,224
)
 
978

Total other comprehensive income (loss), net of tax effect
7,520

 
4,325

 
(286
)
 
1,503

Total comprehensive income, net of tax effect
$
17,924

 
$
19,826

 
$
46,191

 
$
63,619

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,
 
2013
 
2012
Operating activities:
 
 
 
Net income
$
46,477

 
$
62,116

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

 
 

Depreciation and amortization
10,773

 
8,709

Share-based compensation
44,248

 
31,583

Deferred income taxes
(4,730
)
 
(1,830
)
Tax benefits from share-based compensation
5,312

 
12,577

Excess tax benefits from share-based compensation
(6,982
)
 
(12,470
)
Amortization of intangible assets and acquired technology
22,851

 
20,854

Other operating activities, net
(352
)
 
939

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
9,960

 
54,083

Prepaid expenses and other assets
2,893

 
12,626

Accounts payable and accrued liabilities
(8,002
)
 
(30,616
)
Income taxes payable
4,588

 
(1,894
)
Accrued facilities restructuring charges

 
(23,977
)
Deferred revenues
11,688

 
12,152

Net cash provided by operating activities
138,724

 
144,852

Investing activities:
 

 
 

Purchases of property and equipment
(16,059
)
 
(137,599
)
Purchases of investments
(267,618
)
 
(204,515
)
Investment in equity interest, net
(2,001
)
 
(257
)
Maturities of investments
145,971

 
47,051

Sales of investments
125,576

 
98,558

Business acquisitions, net of cash acquired
(7,464
)
 
(8,438
)
Net cash used in investing activities
(21,595
)
 
(205,200
)
Financing activities:
 

 
 

Net proceeds from issuance of common stock
46,661

 
38,555

Repurchases and retirement of common stock
(63,936
)
 
(58,709
)
Withholding taxes related to restricted stock units net share settlement
(6,412
)
 
(6,243
)
Payment of contingent consideration
(3,670
)
 
(4,440
)
Excess tax benefits from share-based compensation
6,982

 
12,470

Purchase of acquiree stock
(6,365
)
 

Net cash used in financing activities
(26,740
)
 
(18,367
)
Effect of foreign exchange rate changes on cash and cash equivalents
(161
)
 
(729
)
Net increase (decrease) in cash and cash equivalents
90,228

 
(79,444
)
Cash and cash equivalents at beginning of period
190,127

 
316,835

Cash and cash equivalents at end of period
$
280,355

 
$
237,391

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

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, 2013 and 2012 are unaudited. The interim results presented are not necessarily indicative of results for any subsequent interim period, the year ending December 31, 2013, 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 where management's judgment in selecting an available alternative would not produce a materially different result.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
In October 2012, the Company announced its decision to make a voluntary public takeover offer to acquire all the outstanding shares of Heiler Software AG ("Heiler"). In November 2012, the Company acquired a majority interest in the shares of Heiler at the end of the initial acceptance period of the takeover offer. The squeeze-out of the remaining shareholders was effective in the second quarter of 2013, increasing the Company's ownership in Heiler to 100 percent. The noncontrolling interest position is reported as a separate component of consolidated equity from the equity attributable to the Company's stockholders for the period ended December 31, 2012. The noncontrolling interest in the Company's net income was not significant to consolidated results for the nine months ended September 30, 2013 and therefore has been included as a component of other income (expense), net in the condensed consolidated statements of income.
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, 2012 included in the Company's Annual Report on Form 10-K filed with the SEC. The consolidated balance sheet as of December 31, 2012 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 year ended December 31, 2012.
Certain reclassifications have been made within the condensed consolidated statement of cash flows to conform to the current year presentation. In addition, during the first quarter of 2013, the Company performed a review of the presentation of certain of its revenue categories and adopted a revised presentation, which the Company believes more accurately reflects its evolving product and service offerings. A change was made to rename other revenues to subscription revenues and to present subscription revenues and license revenues as software revenues. Other revenues were previously presented in services revenues. A corresponding change was made to present cost of license revenues and cost of other revenues as cost of software revenues. This change in presentation will not affect total revenues, total cost of revenues or total gross margin. Conforming changes have been made for all prior periods presented. Subscription revenues of $8.0 million and $20.4 million for the three and nine months ended September 30, 2012, respectively were reclassified from service revenues to software revenues. Cost of subscription revenues of $0.6 million and $2.6 million for the three and nine months ended September 30, 2012, respectively were reclassified from cost of service revenues to cost of software revenues.

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


Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-11, Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities, that requires an entity to disclose additional information about offsetting and related arrangements to enable users of the financial statements to understand the effect of those arrangements on the financial position. In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 clarifies that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. The Company adopted both standards as required on January 1, 2013. Adoption of ASU 2011-11 and ASU 2013-01 did not impact the Company's condensed consolidated financial statements.
In July 2012, the FASB issued ASU No. 2012-02 Testing Indefinite-Lived Intangible Assets, to simplify how entities test indefinite-lived intangible assets other than goodwill for impairment. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued standards. ASU 2012-02 is effective for the Company's impairment test in October 2013 and early adoption is permitted. The Company does not expect its adoption of ASU 2012-02 to have an impact on the condensed consolidated financial statements and disclosures.
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified Out Of Accumulated Other Comprehensive Income. ASU 2013-02 requires an entity to present, either parenthetically on the face of its statement where net income is presented or in a note, the effect of significant reclassifications out of accumulated other comprehensive income by the respective income statement line items if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference to the other disclosures where additional details about the effect of the reclassifications are disclosed. The Company adopted ASU 2013-02 prospectively as required on January 1, 2013. The Company has elected to present the required information in a single footnote as this will provide a clearer presentation of the items reclassified from accumulated other comprehensive income to net income. Adoption of this new amended guidance did not have a material impact on the Company's disclosures to its financial statements.
In March 2013, the FASB issued ASU 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. ASU 2013-05 clarifies that the cumulative translation adjustment (“CTA”) should be released into net income upon the occurrence of certain qualifying events. ASU 2013-05 will be effective for the Company in 2014 with early adoption permitted, which will be applied prospectively. The Company is currently evaluating the impact of its pending adoption of ASU 2013-05 on its consolidated financial statements and disclosures.

There have been no other changes in our critical accounting policies since the end of 2012.

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


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, 2013 (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)
$
12,551

 
$
12,551

 
$

 
$

Time deposits (ii)
18,196

 
18,196

 

 

Marketable debt securities (ii)
322,067

 

 
322,067

 

Foreign currency derivatives (iii)
4

 

 
4

 

Total assets
$
352,818

 
$
30,747

 
$
322,071

 
$

Liabilities:
 

 
 

 
 

 
 

Foreign currency derivatives (iv)
$
2,304

 
$

 
$
2,304

 
$

Acquisition-related contingent consideration (iv)
3,579

 

 

 
3,579

Total liabilities
$
5,883

 
$

 
$
2,304

 
$
3,579

The following table summarizes financial assets and financial liabilities that the Company measures at fair value on a recurring basis as of December 31, 2012 (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)
$
18,565

 
$
18,565

 
$

 
$

Time deposits (ii)
17,437

 
17,437

 

 

Marketable debt securities (ii)
328,041

 

 
328,041

 

Total assets
$
364,043

 
$
36,002

 
$
328,041

 
$

Liabilities:
 

 
 

 
 

 
 

Foreign currency derivatives (iv)
$
408

 
$

 
$
408

 
$

Acquisition-related contingent consideration (v)
9,230

 

 

 
9,230

Total liabilities
$
9,638

 
$

 
$
408

 
$
9,230

____________________
(i)
Included in cash and cash equivalents on the condensed consolidated balance sheets.
(ii)
Included in 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.
(v)
Included in accrued and other liabilities on the condensed consolidated balance sheets.


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


Money Market Funds, Time Deposits, and Marketable Securities
The Company uses a market approach for determining the fair value of all its Level 1 and Level 2 money market funds, time deposits, and marketable securities.
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 third party pricing source for each security. If the market price is not available from the third party source, pricing from the Company's investment custodian is used.
Foreign Currency Derivatives and Hedging Instruments
The Company uses the income approach to value the derivatives using observable Level 2 market inputs 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 derivative assets and liabilities. The Company uses mid-market pricing as a practical expedient for fair value measurements. Key inputs for currency derivatives include spot and forward rates, interest rates, and credit derivative market rates. 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. Credit default swap spread curves 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 twelve 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.
There were no transfers between Level 1 and Level 2 categories during the three and nine months ended September 30, 2013 and 2012.
See Note 5. Accumulated Other Comprehensive Income (Loss), Note 6. Derivative Financial Instruments, and Note 12. Commitments and Contingencies of Notes to Condensed Consolidated Financial Statements for a further discussion.
Acquisition-related Contingent Consideration
The Company estimated the fair value of the acquisition-related contingent consideration using a probability-weighted discounted cash flow model. This fair value measure was based on significant inputs not observed in the market and thus represented a Level 3 instrument. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect our own assumptions in measuring fair value. There were no transfers into or out of the Level 3 category during the three and nine months ended September 30, 2013 and 2012. The change in fair value of acquisition-related contingent consideration is included in acquisitions and other charges in the condensed consolidated statements of income.

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


The changes in the acquisition-related contingent consideration liability for the nine months ended September 30, 2013 consisted of the following (in thousands):
 
September 30,
2013
Beginning balance as of December 31, 2012
$
9,230

Change in fair value of contingent consideration
(1,981
)
Payment of contingent consideration
(3,670
)
Ending balance as of September 30, 2013
$
3,579


See Note 14. Acquisitions 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 and nine months ended September 30, 2013 and 2012 were negligible. The cost of securities sold was determined based on the specific identification method.
The following table summarizes the Company’s cash, cash equivalents, and short-term investments as of September 30, 2013 (in thousands):
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Cash
$
267,804

 
$

 
$

 
$
267,804

Cash equivalents:
 

 
 

 
 

 
 

Money market funds
12,551

 

 

 
12,551

Total cash equivalents
12,551

 

 

 
12,551

Total cash and cash equivalents
280,355

 

 

 
280,355

Short-term investments:
 

 
 

 
 

 
 

Certificates of deposit
1,200

 

 

 
1,200

Commercial paper
10,663

 

 

 
10,663

Corporate notes and bonds
166,424

 
134

 
(268
)
 
166,290

Federal agency notes and bonds
72,568

 
56

 
(53
)
 
72,571

Time deposits
18,196

 

 

 
18,196

U.S. government notes and bonds
1,999

 
2

 

 
2,001

Municipal notes and bonds
69,248

 
100

 
(6
)
 
69,342

Total short-term investments
340,298

 
292

 
(327
)
 
340,263

Total cash, cash equivalents, and short-term investments (i)
$
620,653

 
$
292

 
$
(327
)
 
$
620,618

____________________
(i)
Total estimated fair value above included $352.8 million comprised of cash equivalents and short-term investments at September 30, 2013.


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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 December 31, 2012 (in thousands):
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Cash
$
171,562

 
$

 
$

 
$
171,562

Cash equivalents:
 

 
 

 
 

 
 

Money market funds
18,565

 

 

 
18,565

Total cash equivalents
18,565

 

 

 
18,565

Total cash and cash equivalents
190,127

 

 

 
190,127

Short-term investments:
 

 
 

 
 

 
 

Certificates of deposit
2,246

 
3

 

 
2,249

Commercial paper
6,294

 

 

 
6,294

Corporate notes and bonds
151,133

 
322

 
(56
)
 
151,399

Federal agency notes and bonds
104,961

 
128

 
(10
)
 
105,079

Time deposits
17,437

 

 

 
17,437

U.S. government notes and bonds
7,094

 
18

 

 
7,112

Municipal notes and bonds
55,922

 
18

 
(32
)
 
55,908

Total short-term investments
345,087

 
489

 
(98
)
 
345,478

Total cash, cash equivalents, and short-term investments (i)
$
535,214

 
$
489

 
$
(98
)
 
$
535,605

____________________
(i)
Total estimated fair value above included $364.0 million comprised of cash equivalents and short-term investments at December 31, 2012.

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 the Company’s short-term investments, aggregated by investment category that have been in a continuous unrealized loss position for less than twelve months, at September 30, 2013 (in thousands):
 
Less Than 12 months
 
 
 
 
Fair
Value
 
Gross
Unrealized
Losses
Corporate notes and bonds
$
100,336

 
$
(264
)
Federal agency notes and bonds
31,684

 
(53
)
Municipal notes and bonds
4,991

 
(6
)
Total
$
137,011

 
$
(323
)

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


The following table summarizes the fair value and gross unrealized losses related to the Company’s short-term investments, aggregated by investment category that have been in a continuous unrealized loss position for greater than twelve months, at September 30, 2013 (in thousands):
 
Greater Than 12 months
 
 
 
 
Fair
Value
 
Gross
Unrealized
Losses
Corporate notes and bonds
$
2,180

 
$
(4
)
Total
$
2,180

 
$
(4
)
The changes in value of these investments are primarily related to changes in interest rates and are considered to be temporary in nature.
The following table summarizes the cost and estimated fair value of the Company’s short-term investments by contractual maturity at September 30, 2013 (in thousands):
 
Cost
 
Fair Value
Due within one year
$
152,300

 
$
152,419

Due in one year to two years
105,671

 
105,686

Due after two years
82,327

 
82,158

Total
$
340,298

 
$
340,263


Note 3.  Intangible Assets and Goodwill
The carrying amounts of the intangible assets other than goodwill as of September 30, 2013 and December 31, 2012 are as follows (in thousands, except years):
 
September 30, 2013
 
December 31, 2012
 
Weighted Average Useful Life
(Years)
 
Cost
 
Accumulated Amortization
 
Net
 
Cost
 
Accumulated Amortization
 
Net
 
Developed and core technology
$
130,291

 
$
(93,690
)
 
$
36,601

 
$
123,221

 
$
(76,721
)
 
$
46,500

 
6
Other Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
41,675

 
(34,013
)
 
7,662

 
40,952

 
(30,063
)
 
10,889

 
6
All other (i)
17,205

 
(13,119
)
 
4,086

 
17,208

 
(11,187
)
 
6,021

 
4-11
Total other intangible assets
58,880

 
(47,132
)
 
11,748

 
58,160

 
(41,250
)
 
16,910

 
 
Total intangible assets subject to amortization
189,171

 
(140,822
)
 
48,349

 
181,381

 
(117,971
)
 
63,410

 
 
In-process research and development

 

 

 
3,850

 

 
3,850

 
N.A.
Total intangible assets, net
$
189,171

 
$
(140,822
)
 
$
48,349

 
$
185,231

 
$
(117,971
)
 
$
67,260

 
 
____________________
(i)
All other includes vendor relationships, trade names, covenants not to compete, and patents.

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


Total amortization expense related to intangible assets was $7.5 million and $6.6 million for the three months ended September 30, 2013 and 2012, respectively, and $22.9 million and $20.9 million for the nine months ended September 30, 2013 and 2012, 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.
As of September 30, 2013, 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 2013
$
5,337

 
$
1,848

 
$
7,185

2014
12,931

 
4,728

 
17,659

2015
8,530

 
2,094

 
10,624

2016
5,006

 
1,298

 
6,304

2017
3,090

 
862

 
3,952

Thereafter
1,707

 
918

 
2,625

Total intangible assets subject to amortization
$
36,601

 
$
11,748

 
$
48,349

In the fourth quarter of 2012, the Company recorded in-process research and development (IPR&D) of $3.8 million associated with the acquisition of a majority interest in Heiler. 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 during the first nine months of 2013 for the IPR&D from the acquisition, which was reclassified to developed technology and will be amortized over the expected useful life of the technology. See Note 14. Acquisitions for further discussion of intangible assets from acquisitions.
The changes in the carrying amount of goodwill for the nine months ended September 30, 2013 are as follows (in thousands):
 
September 30,
2013
Beginning balance as of December 31, 2012
$
510,121

Goodwill from acquisitions
7,110

Subsequent goodwill adjustments
4,893

Ending balance as of September 30, 2013
$
522,124

During the nine months ended September 30, 2013, the Company recorded subsequent goodwill adjustments of $4.9 million which consist of a $2.8 million measurement period adjustment related to Heiler accrued liabilities and foreign currency translation adjustments of $2.3 million, partially offset by income tax related balance sheet adjustments of $(0.2) million within the measurement period related to prior acquisitions. The goodwill is partially deductible for tax purposes. See Note 14. Acquisitions for a further discussion of goodwill from acquisitions.
Note 4.  Borrowings
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, 2013, 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

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


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, 2013.

Note 5.  Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated balances for each component of other comprehensive income (loss) for the three months ended September 30, 2013, net of taxes (in thousands):
 
 
Cumulative Translation Adjustments
 
Net Unrealized Gain (Loss) on Available-for-Sale Investments
 
Net Unrealized Loss on Cash Flow Hedges
 
Total
Accumulated other comprehensive loss as of June 30, 2013
 
$
(14,180
)
 
$
(345
)
 
$
(1,311
)
 
$
(15,836
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications, net of tax benefit (expense) of $(317), $(187) and $455
 
7,370

 
304

 
(744
)
 
6,930

Net loss reclassified from accumulated other comprehensive income (loss), net of tax benefit of $ —, $12 and $349
 

 
19

(i) 
571

(ii) 
590

Total other comprehensive income (loss), net of tax effect
 
7,370

 
323

 
(173
)
 
7,520

Accumulated other comprehensive loss as of September 30, 2013
 
$
(6,810
)
 
$
(22
)
 
$
(1,484
)
 
$
(8,316
)

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


The following table summarizes the changes in accumulated balances for each component of other comprehensive income (loss) for the nine months ended September 30, 2013, net of taxes (in thousands):
 
 
Cumulative Translation Adjustments
 
Net Unrealized Gain (Loss) on Available-for-Sale Investments
 
Net Unrealized Loss on Cash Flow Hedges
 
Total
Accumulated other comprehensive income (loss) as of December 31, 2012
 
$
(8,012
)
 
$
242

 
$
(260
)
 
$
(8,030
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications, net of tax benefit (expense) of $(74), $183 and $1,149
 
1,202

 
(300
)
 
(1,875
)
 
(973
)
Net loss reclassified from accumulated other comprehensive income (loss), net of tax benefit of $ —, $22 and $398
 

 
36

(i) 
651

(ii) 
687

Total other comprehensive income (loss), net of tax effect
 
1,202

 
(264
)
 
(1,224
)
 
(286
)
Accumulated other comprehensive loss as of September 30, 2013
 
$
(6,810
)
 
$
(22
)
 
$
(1,484
)
 
$
(8,316
)
____________________
(i)
Included in other income (expense), net on the condensed consolidated income statements.
(ii)
Included in operating expenses on the condensed consolidated income statements.
The Company did not have any other-than-temporary gain or loss reflected in accumulated other comprehensive income (loss) as of September 30, 2013 and December 31, 2012.
The Company determines the basis of the cost of a security sold and the amount reclassified out of other comprehensive income into statement of income based on specific identification.
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 Indian rupee. The Company is currently using foreign exchange forward contracts to hedge certain non-functional currency anticipated expenses for its subsidiary in India.
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 will reclassify all amounts accumulated in other comprehensive income into earnings within the next 12 months.
The Company has forecasted the amount of its anticipated foreign currency expenses based on its historical performance and its projected financial plan. As of September 30, 2013, the remaining open foreign exchange contracts, carried at fair value, are

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


hedging Indian rupee expenses and have a maturity of twelve months or less. These foreign exchange contracts mature monthly as the foreign currency denominated expenses are paid and any gain or loss is offset against operating expense. Once the hedged item is recognized, the cash flow hedge is de-designated and subsequent changes in value are recognized in other income (expense) to offset changes in the value of the resulting non-functional currency monetary liabilities.
The notional amounts of these foreign exchange forward contracts in U.S. dollar equivalents were $20.8 million and $23.6 million as of September 30, 2013 and December 31, 2012, respectively.
Balance Sheet Hedges
Balance Sheet hedges consist of cash flow hedge contracts that have been de-designated and non-designated balance sheet hedges. These foreign exchange contracts are carried at fair value and either did not or no longer 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 open at period end in US dollar equivalents were $2.6 million and $2.7 million to buy at September 30, 2013 and December 31, 2012, respectively.
The following table reflects the fair value amounts for the foreign exchange contracts designated and not designated as hedging instruments at September 30, 2013 and December 31, 2012 (in thousands):
 
September 30, 2013
 
December 31, 2012
 
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
$
4

 
$
2,046

 
$

 
$
224

Derivatives not designated as hedging instruments

 
258

 

 
184

Total fair value of derivative instruments
$
4

 
$
2,304

 
$

 
$
408

____________________
(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.
The Company presents its derivative assets and derivative liabilities at gross fair values in the condensed consolidated balance sheets. However, under the master netting agreements with the respective counterparties of the foreign exchange contracts, subject to applicable requirements, the Company is allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. As of September 30, 2013, the potential effect of rights to offset the gross derivative asset against the gross derivative liability for the foreign exchange contracts would result in a negligible net derivative liability associated with one counterparty. As of December 31, 2012, there was no potential effect of rights of offset associated with the above foreign exchange contracts that would result in a net derivative asset or net derivative liability. The Company is not required to pledge nor is entitled to receive cash collateral related to the above contracts.
The Company evaluates prospectively as well as retrospectively the effectiveness of its hedge programs using statistical analysis. Prospective testing is performed at the inception of the hedge relationship and quarterly thereafter. Retrospective testing is performed on a quarterly basis. Informatica uses a change in spot price method and excludes the time value of derivative instruments for determination of hedge effectiveness.  

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


The effects of derivative instruments designated as cash flow hedges on the accumulated other comprehensive loss and condensed consolidated statements of income for the three and nine months ended September 30, 2013 and 2012 are as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Amount of gain (loss) recognized in other comprehensive income (effective portion)
$
(1,199
)
 
$
353

 
$
(3,024
)
 
$
(65
)
Amount of loss reclassified from accumulated other comprehensive income to operating expenses (effective portion)
$
(920
)
 
$
(864
)
 
$
(1,049
)
 
$
(1,643
)
Amount of gain recognized in income on derivatives for the amount excluded from effectiveness testing located in operating expenses
$
151

 
$
213

 
$
728

 
$
1,018

The Company did not have any ineffective portion of the derivative recorded in the condensed consolidated statements of income.
The gain (loss) recognized in other income, net for non-designated foreign currency forward contracts for the three and nine months ended September 30, 2013 and 2012 are as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2013
 
2012
 
2013
 
2012
Gain (loss) recognized in interest and other income, net
$
(46
)
 
$
80

 
$
(237
)
 
$
(663
)
See Note 1. Summary of Significant Accounting Policies, Note 5. Accumulated Other Comprehensive Income (Loss), and Note 12. Commitments and Contingencies of Notes to Condensed Consolidated Financial Statements for a further discussion.

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 partially offsetting 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. In July 2012, the Board of Directors approved the repurchase of up to an additional $100.0 million of the Company's outstanding common stock.
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 and nine months ended September 30, 2013, the Company repurchased approximately 557,000 shares of its common stock at a cost of $21.0 million and approximately 1,761,000 shares of its common stock at a cost of $63.9 million, respectively. During the three and nine months ended September 30, 2012, the Company repurchased approximately 915,000 shares of its common stock at a cost of $29.1 million and approximately 1,603,000 shares of its common stock at a cost of $58.7 million, respectively.
As of September 30, 2013, $32.1 million remained available for share repurchases under this program.
Note 8.  Share-Based Compensation
The Company grants restricted stock units (“RSUs”) and stock options under its 2009 Equity 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

18

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


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 share-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 share-based awards was estimated based on the following assumptions:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Option grants:
 
 
 
 
 
 
 
Expected volatility
41
%
 
47
%
 
41 - 43%

 
39 - 47%

Weighted-average volatility
41
%
 
47
%
 
41
%
 
43
%
Expected dividends

 

 

 

Expected term of options (in years)
3.3

 
3.3

 
3.3

 
3.3

Risk-free interest rate
1.1
%
 
0.5
%
 
0.7
%
 
0.5
%
ESPP: (i)
 
 
 
 
 
 
 
Expected volatility
37
%
 
53
%
 
37 - 42%

 
43 - 53%

Weighted-average volatility
37
%
 
53
%
 
40
%
 
49
%
Expected dividends

 

 

 

Expected term of ESPP (in years)
0.5

 
0.5

 
0.5

 
0.5

Risk-free interest rate
0.1
%
 
0.1
%
 
0.1
%
 
0.1
%
____________________
(i)
ESPP purchases are made on the last day of January and July of each year.
The allocations of the share-based compensation, net of income tax benefit, for the three and nine months ended September 30, 2013 and 2012 are as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Cost of service revenues
$
1,283

 
$
1,061

 
$
4,046

 
$
3,171

Research and development
5,347

 
3,861

 
14,765

 
10,824

Sales and marketing
5,002

 
3,599

 
15,377

 
10,078

General and administrative
3,237

 
2,435

 
10,060

 
7,510

Total share-based compensation
14,869

 
10,956

 
44,248

 
31,583

Tax benefit of share-based compensation
(4,238
)
 
(2,815
)
 
(12,190
)
 
(8,066
)
Total share-based compensation, net of tax benefit
$
10,631

 
$
8,141

 
$
32,058

 
$
23,517


Note 9.  Facilities Restructuring Charges
In February 2000, the Company entered into lease agreements for two office buildings located at 2000 and 2100 Seaport Boulevard in Redwood City, California, which the Company occupied from August 2001 through December 2004 as its former corporate headquarters. These lease agreements had an original expiration date in July 2013. As a result of the 2004 Restructuring Plan, the Company relocated the corporate headquarters and subsequently entered into a series of sublease agreements with tenants to occupy a portion of the vacated space. These subleases expired in June and July 2013.
In February 2012, the Company purchased the two office buildings located at 2000 and 2100 Seaport Boulevard for approximately $148.6 million in cash, which reflects a purchase price of $153.2 million less a rent credit of $4.6 million. As a result of the transaction, the Company no longer has any further commitments relating to the original lease agreements. The

19

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


purchase of the buildings discharges the Company's future lease obligations that were previously accounted for under the 2001 and 2004 Restructuring Plans. The transaction has been accounted for as a purchase of an asset that was previously subject to an operating lease in accordance with ASC 840, Leases. The Company was the sole lessee of both of these buildings. During the first quarter of 2012 the Company reversed the existing accrued facilities restructuring liability of $20.6 million and recorded a corresponding facilities restructuring benefit on the Condensed Consolidated Statement of Income in accordance with ASC 420, Exit or Disposal Cost Obligations. The Company also recorded a charge of approximately $21.2 million representing the cost to terminate the operating lease included in facility lease termination costs, net in the Condensed Consolidated Statements of Income. The Company relocated its corporate headquarters to 2000 and 2100 Seaport Boulevard in the third quarter of 2013.
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 2000 and 2100 Seaport Boulevard 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.
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. In 2005, the Company subleased the available space at the 2000 and 2100 Seaport Boulevard under the 2001 Restructuring Plan through May 2013, which was subsequently subleased until July 2013 under a December 2007 sublease agreement.
For the three months ended March 31, 2012, prior to the purchase of the Company's former corporate headquarters, the Company recorded $0.1 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 three months ended March 31, 2012 for facilities included in the 2004 and 2001 Restructuring Plans amounted to $2.4 million and $0.3 million, respectively. There were no further charges after the close of the first quarter of 2012, and no accrued facilities restructuring charges recorded as of September 30, 2013.
Note 10.  Income Taxes
The Company's effective tax rates were 62% and 39% for the three months ended September 30, 2013 and 2012, respectively, and 41% and 33% for the nine months ended September 30, 2013 and 2012, respectively. The higher tax rates for the three and nine months ended September 30, 2013 were primarily attributable to acquisition integration-related income tax expenses incurred during the third quarter. These acquisition integration-related income tax expenses, together with non-deductible share-based compensation, state income taxes, nondeductible acquisition related costs, and the accrual of reserves related to uncertain tax positions, were partially offset by benefits of certain earnings from operations in lower-tax jurisdictions throughout the world, the impact of the domestic manufacturing deduction pursuant to Section 199 of the Internal Revenue Code, and the recognition of the 2012 and 2013 federal research and development credits. The Company's effective annual tax rate will continue to be very sensitive to the geographic mix of earnings. The effective tax rate for the three and nine months ended September 30, 2012 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 the domestic manufacturing deduction pursuant to Section 199 of the Internal Revenue Code, and the benefit of foreign tax credits partially offset by non-deductible share-based compensation, state income taxes, non-deductible acquisition related costs, and the accrual of reserves related to uncertain tax positions. As of September 30, 2013, the Company has not provided for residual U.S. taxes in any of these lower-tax jurisdictions since it intends to indefinitely reinvest the net undistributed earnings of its foreign subsidiaries offshore.
 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, 2013, 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, 2013, consistent with prior periods, it was considered more likely than not

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


that the Company's non-share-based payments related deferred tax assets would be realized except for any increase to the deferred tax asset related to the California research and development credit and certain operating losses incurred outside of the United States in the current year. A valuation allowance has been recorded against this portion of the credit, even though this attribute has an indefinite life. In addition, the Company recorded a valuation allowance related to the deferred tax asset that is attributable to the losses incurred outside of the United States in the current year. 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 $21.6 million and $17.9 million as of September 30, 2013 and 2012, respectively. The Company has elected to include interest and penalties as a component of income tax expenses. Accrued interest and penalties as of September 30, 2013 and 2012 were approximately $2.8 million and $2.6 million, respectively. As of September 30, 2013, the gross unrecognized tax benefit was approximately $24.5 million.
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 to six 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, 2013.
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, 2013 and 2012 (in thousands, except per share amounts):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
10,404

 
$
15,501

 
$
46,477

 
$
62,116

Weighted-average shares of common stock used to compute basic net income per share (excluding unvested restricted stock)
108,305

 
108,091

 
108,039

 
107,957

Effect of dilutive common stock equivalents:
 
 
 
 
 
 
 
Dilutive effect of unvested restricted stock units
312

 
273

 
305

 
384

Dilutive effect of employee stock options
2,884

 
3,412

 
3,028

 
4,177

Shares used in computing diluted net income per common share
111,501

 
111,776

 
111,372

 
112,518

Basic net income per common share
$
0.10

 
$
0.14

 
$
0.43

 
$
0.58

Diluted net income per common share
$
0.09

 
$
0.14

 
$
0.42

 
$
0.55

Weighted average stock options and restricted stock units excluded from calculation due to anti-dilutive effect
5,976

 
4,790

 
5,932

 
3,412



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


Note 12.  Commitments and Contingencies
Lease Obligations
In February 2000, the Company entered into lease agreements for two office buildings located at 2000 and 2100 Seaport Boulevard in Redwood City, California, which the Company occupied from August 2001 through December 2004 as its former corporate headquarters. These lease agreements expired in July 2013. As a result of the 2004 Restructuring Plan, the Company relocated the corporate headquarters and subsequently entered into a series of sublease agreements with tenants to occupy a majority of the vacated space. The majority of the subleases expired in June and July 2013. In February 2012, the Company purchased these two buildings for approximately $148.6 million in cash, which reflects a purchase price of $153.2 million less a rent credit of $4.6 million.
In December 2004, the Company relocated its corporate headquarters within Redwood City, California and entered into a new lease agreement for two buildings at 100 and 200 Cardinal Way. The lease term, including executed renewal terms, started in December 2004 and expires in December 2013. In the third quarter of 2013, the Company relocated its corporate headquarters to 2000 and 2100 Seaport Boulevard. As a result of the relocation, the Company recognized the anticipated rental expense for the remainder of the lease term of 100 and 200 Cardinal Way.
The Company leases certain office facilities under various non-cancelable operating leases, which expire at various dates through 2021 and require the Company to pay operating costs, including property taxes, insurance, and maintenance.
Future minimum lease payments as of September 30, 2013 under non-cancelable operating leases with original terms in excess of one year are summarized as follows (in thousands):
 
 
Operating
Leases
Remaining 2013
$
2,255

2014
8,600

2015
8,441

2016
5,921

2017
4,225

Thereafter
7,186

Total future minimum operating lease payments
$
36,628

Warranties
The Company generally provides a warranty for its software products and services to its customers for a period of three to six months. 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, 2013 and December 31, 2012 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

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


Company has not had to reimburse any of its customers for any losses related to these indemnification provisions, and no material claims against the Company are outstanding as of September 30, 2013. 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. Accumulated Other Comprehensive Income (Loss), and Note 6. Derivative Financial Instruments of Notes to Condensed Consolidated Financial Statements for a further discussion.
Litigation
The Company is 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, 2013 and 2012. At September 30, 2013 and December 31, 2012, 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 30% and 29% of total revenues in the third quarter of 2013 and 2012, respectively, and 32% of total revenues for both of the nine-month periods ended September 30, 2013 and 2012.

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


Total revenue by geographic region is summarized as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
North America
$
164,930

 
$
134,613

 
$
453,866

 
$
389,587

Europe, the Middle East, and Africa
50,435

 
37,705

 
150,577

 
125,456

Other
20,029

 
18,000

 
67,690

 
61,787

Total revenues
$
235,394

 
$
190,318

 
$
672,133

 
$
576,830

Property and equipment, net by geographic region are summarized as follows (in thousands):
 
September 30,
2013
 
December 31,
2012
Property and equipment, net:
 
 
 
North America
$
142,782

 
$
135,388

Europe, the Middle East, and Africa
3,202

 
3,395

Other
4,788

 
6,691

Total property and equipment, net
$
150,772

 
$
145,474


Note 14.  Acquisitions
Acquisition during the nine months ended September 30, 2013:
In February 2013, the Company acquired Active Endpoints, Inc. (“Active Endpoints”), a privately-held company, for approximately $10.0 million in cash. Active Endpoints designs, markets, and supports on-premise and cloud based process automation software solutions. Total assets acquired and liabilities assumed was approximately $10.0 million of which approximately $7.1 million was allocated to goodwill, $3.8 million was allocated to identifiable intangible assets, and $0.9 million to net liabilities assumed. The goodwill is not deductible for tax purposes.
Approximately $1.5 million of the consideration otherwise payable to former Active Endpoints stockholders was placed into an escrow and held as partial security for certain indemnification obligations. The escrow fund will remain in place until May 2014.
Acquisitions in 2012:
Heiler Software AG
In November 2012, the Company acquired a majority interest in the shares of Heiler Software AG ("Heiler"), a publicly-traded German company, at the end of the initial acceptance period of the takeover offer. The Company purchased the majority interest at a price of 7.04 Euro per share in cash, or approximately $101.9 million. Heiler provides enterprise product information management, master data management and procurement solutions that enable retailers, distributors and manufacturers to manage product information across channels and data sources. As of December 31, 2012, the Company held approximately 97.7% of the outstanding shares of Heiler. During December 2012 and the first half of 2013, the Company acquired other shareholders' interest in Heiler for approximately $6.8 million, for total cash consideration of approximately $108.7 million. The squeeze-out of the remaining shareholders was effective in the second quarter of 2013, increasing the Company's ownership in Heiler to 100 percent.
The fair value of the noncontrolling interest in Heiler at the acquisition date was $2.9 million. The valuation techniques and significant inputs used to measure the fair value of the noncontrolling interest included quoted market prices.

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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 at the acquisition date (in thousands):
Net tangible assets
$
16,400

Identifiable intangible assets:
 
Developed and core technology
16,586

Customer relationships
5,339

Contract backlog
648

Trade names
298

In-process research and development
3,784

Noncontrolling interest
(2,861
)
Total identifiable net assets
40,194

Goodwill
61,660

Total cash consideration
$
101,854

During the first quarter of 2013, the Company recorded $2.8 million of additional accrued liabilities. The allocation of the purchase price consideration was based upon a preliminary valuation and the Company's estimates and assumptions are subject to change as the Company obtains additional information for estimates within the measurement period (up to one year from the acquisition date). The primary areas of the preliminary purchase price allocation that are not yet finalized are amounts for income tax assets and liabilities. The goodwill is not deductible for tax purposes.
Other Acquisitions in 2012
In addition, during 2012 the Company acquired Data Scout Solutions Group Limited and TierData, Inc., both of which were privately-held companies, for an aggregate consideration of approximately $12.0 million in cash. Total assets acquired and liabilities assumed was approximately $15.0 million of which approximately $3.9 million was allocated to identifiable intangible assets, $3.9 million to net liabilities assumed, and $15.0 million was allocated to goodwill, which is partially deductible for tax purposes. Total acquiree transaction related costs and other liabilities was approximately $1.9 million, and include legal, accounting, and consulting fees as of the date of the acquisitions.
Approximately $2.4 million of the consideration otherwise payable to former shareholders was held as partial security for certain indemnification obligations, and will be held back for payment until March 2014.
At the time of these two acquisitions, the Company was obligated to pay up to an additional $6.0 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. The fair market value and gross amount of these earn-out payments were $4.9 million and $6.0 million, respectively. The fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement, which reflects the Company's own assumptions in measuring fair value. The Company paid $0.2 million in earn-out payments during the year ended December 31, 2012, and $0.5 million and $1.3 million for the three and nine months ended September 30, 2013, respectively. The fair value of the contingent consideration liability associated with these earn-outs was $3.6 million as of September 30, 2013.
The Company's business combinations completed during the nine months ended September 30, 2013 and 2012 did not have a material impact on the Company's condensed consolidated financial statements, and therefore pro forma disclosures have not been presented.


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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 the productivity of our sales force, license revenues, service revenues, international revenues, deferred revenues, cost of license revenues, cost of service revenues, operating expenses, amortization of acquired technology, share-based compensation, and provision for income taxes; the growth of our customer base and customer demand for our products and services; 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, subscription services, and from sales of services, which consist of maintenance, consulting, and education services.
We receive software revenues from licensing our products under perpetual licenses directly to end users and indirectly through resellers, distributors, and OEMs in the United States and internationally. We also receive an increasing amount of software revenues from our customers and partners under subscription-based licenses for a variety of cloud and address validation offerings. We receive service revenues from maintenance contracts, consulting services, and education services that we perform for customers that license our products either directly or indirectly. Most of our international sales have been in Europe, the Middle East, and Africa ("EMEA"). Revenues outside of EMEA and North America comprised approximately 10% of total consolidated revenues during the first nine months of 2013, 10% during 2012, and less than 10% during 2011.
During the first quarter of 2013, we performed a review of the presentation of certain of our revenue categories and adopted a revised presentation, which we believe more accurately reflects our evolving product and service offerings. A change was made to rename other revenues to subscription revenues and present subscription revenues and license revenues as software revenues. Other revenues were previously presented in services revenues. A corresponding change was made to present cost of license revenues and cost of other revenues as cost of software revenues. This change in presentation will not affect our total revenues, total cost of revenues or total gross margin. Conforming changes have been made for all prior periods presented. Subscription revenues of $8.0 million and $20.4 million for the three and nine months ended September 30, 2012, respectively were reclassified from service revenues to software revenues. Cost of subscription revenues of $0.6 million and $2.6 million for the three and nine months ended September 30, 2012, respectively were reclassified from cost of service revenues to cost of software revenues.
We license our software and provide services to many industry sectors, including, but not limited to, automotive, energy and utilities, entertainment/media, financial services, healthcare, high technology, insurance, manufacturing, public sector, retail, services, telecommunications, and travel/transportation. Financial services remains our largest vertical industry sector.
Total revenues in the third quarter of 2013 increased by 24% to $235.4 million compared to $190.3 million for the same period in 2012. Software revenues increased by 35% in the third quarter of 2013 from the same period in 2012 due to a 34% increase in license revenues and a 48% increase in subscription revenues. The increase in license revenues reflected increases in the average transaction size of license orders and number of transactions in the quarter ended September 30, 2013, compared to the same period in 2012. The increase in subscription revenues was due to growth in the installed customer base and higher customer demand of subscription offerings. Services revenues increased by 16% in the third quarter of 2013 from the same period in 2012 due to a 14% growth in maintenance revenues and a 26% increase in consulting and education services. The maintenance revenues growth was attributable to the increased size of our installed customer base, and the increase in consulting and education services revenues was primarily due to an increase in consulting revenues due to higher customer demand.

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In the first nine months of 2013, total revenues increased by 17% to $672.1 million from $576.8 million in the comparable period a year ago. Software revenues increased by 18% in the first nine months of 2013 from the same period in 2012 due to an increase of 14% in license revenues and a 61% increase in subscription revenues. The increase in license revenues reflected an increase in the number of transactions and the average transaction size of license orders in the first nine months of 2013, compared to the same period in 2012. The increase in subscription revenues was due to growth in the installed customer base and higher customer demand of subscription offerings. Services revenues increased by 16% in the first nine months of 2013 from the same period in 2012 due to a 13% growth in maintenance revenues and a 27% increase in consulting and education services. The maintenance revenues growth was attributable to the increased size of our installed customer base, and the increase in consulting and education services revenues was primarily due to an increase in consulting revenues due to higher customer demand.
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, particularly in Europe, continue to experience uncertainty driven by varying macroeconomic conditions. Although some of these economies have shown signs of improvement, including in the United States, the macroeconomic environment remains uncertain and uneven. Uncertainty in the macroeconomic environment and associated global economic conditions have resulted in extreme volatility in credit, equity, and foreign currency markets. In particular, economic concerns continue with respect to the European sovereign debt markets and potential ramifications of any U.S. debt, income tax and budget issues, including future delays in approving the U.S. budget or reductions in government spending. Such uncertainty and associated conditions have also resulted in volatility in several of our vertical markets, particularly the financial services and public sectors. These conditions have also adversely affected the buying patterns of customers and our overall pipeline conversion rate, as well as our revenue growth expectations. Furthermore, we have made incremental investments in Asia-Pacific and Latin America, and have continued investing in 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 poses challenges as competitors market a broader suite of software products or solutions and bundled pricing arrangements to our existing or prospective customers. Moreover, because of current macroeconomic uncertainty, there is increased competition for the allocation of customers' IT budget dollars.
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. 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 license orders, and we generally have weaker demand for our software products and services in the first and third quarters of the year. The first quarter of 2013, and the first and fourth quarters of 2012 followed these seasonal trends. However, license revenues in the third quarter of 2013 were higher as compared to the first and second quarters of 2013, and license revenues in the second and third quarters of 2012 were lower as compared to the first quarter of 2012. The uncertain macroeconomic conditions and recent changes in our sales organization, particularly the recent transition in our EMEA sales leadership, make our future results more difficult to predict based on historical seasonal trends.
We focus on a number of key initiatives to address these factors and other opportunities and challenges. These key initiatives include the strengthening of our partnerships, the broadening of our distribution capability worldwide, the enablement of our sales force and distribution channel to sell both our existing products and technologies as well as new products and technologies, the alignment of our worldwide sales and field operations with company-wide initiatives and the implementation of a more rigorous sales process, 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 continue to grow our business at our historic growth rates.

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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, MicroStrategy, 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 traditional data warehousing products and more strategic data integration solutions beyond data warehousing, including enterprise data integration, data quality, master data management, B2B data exchange, application information lifecycle management, complex event processing, ultra messaging, and cloud data integration. We also operate the Informatica Marketplace, which allows buyers and sellers to share and leverage data integration solutions. To address the risks of introducing new products or enhancements to our existing 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 differentiators, 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” and other informational seminars and materials for our direct sales force and indirect distribution channel, in-person technical seminars for our pre-sales consultants, the building of product demonstrations, and creation and distribution of targeted marketing collateral.
We continue to implement changes in our worldwide sales, marketing and field operations to address recent sales execution challenges and improve performance, particularly with respect to our pipeline generation and management capabilities, the reliability of our pipeline estimates and our pipeline conversion rates. In addition to the leadership transitions in our international sales organizations and continued investment in our sales specialists and domain experts, we have also implemented pipeline generation and management initiatives and more rigorous sales planning and processes. Additionally, we have expanded our international sales presence in recent years by opening new offices, increasing headcount, and through acquisitions. As a result of these changes and our international expansion, as well as the increase in our direct sales headcount in the United States, our sales and marketing expenses have increased. As our products become more complex and we target new customers for our software and services, we expect to broaden our go-to-market initiatives and, as a result, our expenses may increase. In the long term, we expect these investments to result in increased revenues and productivity and ultimately higher profitability. As we continue to implement further changes, we may experience increased sales force turnover and additional disruption to our ongoing operations. These changes may also take longer to implement than expected, which may adversely affect our sales force productivity. 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.
For further discussion regarding these and related risks, see Risk Factors in Part II, Item 1A of this Report.
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, income taxes, impairment of goodwill and intangible assets, business combinations, share-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 year ended December 31, 2012.
There have been no changes in our critical accounting policies since the end of 2012.

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Recent Accounting Pronouncements
For recent accounting pronouncements, see Note 1. Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Report.
Results of Operations
The following table presents certain financial data for the three and nine months ended September 30, 2013 and 2012 as a percentage of total revenues:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Software
42
 %
 
39
 %
 
42
 %
 
41
 %
Service
58

 
61

 
58

 
59

Total revenues
100

 
100

 
100

 
100

Cost of revenues:


 


 
 
 
 
Software
1

 
1

 
1

 
1

Service
16

 
15

 
16

 
16

Amortization of acquired technology
2

 
3

 
3

 
2

Total cost of revenues
19

 
19

 
20

 
19

Gross profit
81

 
81

 
80

 
81

Operating expenses:


 


 
 
 
 
Research and development
18

 
19

 
18

 
18

Sales and marketing
40

 
39

 
40

 
37

General and administrative
10

 
8

 
9

 
8

Amortization of intangible assets
1

 
1

 
1

 
1

Facilities restructuring and facility lease termination costs

 

 

 

Acquisitions and other charges
1

 
1

 

 
1

Total operating expenses
70

 
68

 
68

 
65

Income from operations
11

 
13

 
12

 
16

Interest income

 

 

 

Interest expense

 

 

 

Other expense, net

 

 

 

Income before income taxes
11

 
13

 
12

 
16

Income tax provision
7

 
5

 
5

 
5

Net income
4
 %
 
8
 %
 
7
 %
 
11
 %


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Revenues
Total revenues in the third quarter of 2013 increased by 24% to $235.4 million compared to $190.3 million for the same period in 2012. Software revenues increased by 35% in the third quarter of 2013 from the same period in 2012 due to a 34% increase in license revenues and a 48% increase in subscription revenues. The increase in license revenues reflected increases in the average transaction size of license orders and number of transactions in the quarter ended September 30, 2013, compared to the same period in 2012. The increase in subscription revenues was due to growth in the installed customer base and higher customer demand of subscription offerings. Services revenues increased by 16% in the third quarter of 2013 from the same period in 2012 due to a 14% growth in maintenance revenues and a 26% increase in consulting and education services. The maintenance revenues growth was attributable to the increased size of our installed customer base, and the increase in consulting and education services revenues was primarily due to an increase in consulting revenues due to higher customer demand.
  
In the first nine months of 2013, total revenues increased by 17% to $672.1 million from $576.8 million in the comparable period a year ago. Software revenues increased by 18% in the first nine months of 2013 from the same period in 2012 due to an increase of 14% in license revenues and a 61% increase in subscription revenues. The increase in license revenues reflected an increase in the number of transactions and the average transaction size of license orders in the first nine months of 2013, compared to the same period in 2012. The increase in subscription revenues was due to growth in the installed customer base and higher customer demand of subscription offerings. Services revenues increased by 16% in the first nine months of 2013 from the same period in 2012 due to a 13% growth in maintenance revenues and a 27% increase in consulting and education services. The maintenance revenues growth was attributable to the increased size of our installed customer base, and the increase in consulting and education services revenues was primarily due to an increase in consulting revenues due to higher customer demand.
The following table and discussion compare our revenues by type for the three and nine months ended September 30, 2013 and 2012 (in thousands, except percentages):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
Percentage
Change
 
2013
 
2012
 
Percentage
Change
Software revenues:
 
 
 
 
 
 
 
 
 
 
 
License
$
88,012

 
$
65,891

 
34
%
 
$
246,239

 
$
216,935

 
14
%
Subscription
11,814

 
7,959

 
48
%
 
32,921

 
20,412

 
61
%
Total software revenues
99,826

 
73,850

 
35
%
 
279,160

 
237,347

 
18
%
Service revenues: