INFA-2014.03.31-10Q
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 March 31, 2014
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 April 30, 2014, there were approximately 109,792,000 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)
 
March 31,
2014
 
December 31,
2013
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
308,448

 
$
297,818

Short-term investments
421,666

 
379,616

Accounts receivable, net of allowances of $4,372 and $4,135, respectively
161,014

 
204,374

Deferred tax assets
46,021

 
32,898

Prepaid expenses and other current assets
38,640

 
34,541

Total current assets
975,789

 
949,247

Property and equipment, net
159,587

 
157,308

Goodwill
523,114

 
523,142

Other intangible assets, net
36,103

 
41,625

Long-term deferred tax assets
31,882

 
44,865

Other assets
6,831

 
6,834

Total assets
$
1,733,306

 
$
1,723,021

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 

 
 

Accounts payable
$
8,995

 
$
10,124

Accrued liabilities
50,311

 
63,055

Accrued compensation and related expenses
50,566

 
71,314

Income taxes payable
4,003

 
14,184

Deferred revenues
299,564

 
285,184

Total current liabilities
413,439

 
443,861

Long-term deferred revenues
12,533

 
12,938

Long-term deferred tax liabilities
45

 
44

Long-term income taxes payable
29,972

 
29,878

Other liabilities
3,400

 
550

Total liabilities
459,389

 
487,271

Commitments and contingencies (Note 11)


 


Stockholders' equity:
 

 
 

Common stock, $0.001 par value; 200,000 shares authorized; 109,550 shares and
 
 
 
108,643 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively
110

 
109

Additional paid-in capital
817,182

 
805,728

Accumulated other comprehensive loss
(1,353
)
 
(3,212
)
Retained earnings
457,978

 
433,125

Total stockholders’ equity
1,273,917

 
1,235,750

Total liabilities and stockholders' equity
$
1,733,306

 
$
1,723,021

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

INFORMATICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended
March 31,
 
2014
 
2013
Revenues:
 
 
 
Software
$
103,043

 
$
87,906

Service
140,054

 
126,394

Total revenues
243,097

 
214,300

Cost of revenues:
 

 
 

Software
3,119

 
2,142

Service
40,229

 
36,030

Amortization of acquired technology
3,985

 
5,724

Total cost of revenues
47,333

 
43,896

Gross profit
195,764

 
170,404

Operating expenses:
 

 
 

Research and development
45,685

 
39,523

Sales and marketing
91,584

 
84,057

General and administrative
20,053

 
18,487

Amortization of intangible assets
1,536

 
1,988

Acquisitions and other charges
89

 
1,650

Total operating expenses
158,947

 
145,705

Income from operations
36,817

 
24,699

Interest income
1,153

 
890

Interest expense
(127
)
 
(120
)
Other expense, net
(84
)
 
(68
)
Income before income taxes
37,759

 
25,401

Income tax provision
12,906

 
7,494

Net income
$
24,853

 
$
17,907

Basic net income per common share
$
0.23

 
$
0.17

Diluted net income per common share
$
0.22

 
$
0.16

Shares used in computing basic net income per common share
109,164

 
107,669

Shares used in computing diluted net income per common share
111,935

 
111,263

See accompanying notes to condensed consolidated financial statements.


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Table of Contents

INFORMATICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
Three Months Ended
March 31,
 
2014
 
2013
Net income
$
24,853

 
$
17,907

Other comprehensive income:
 
 
 
Change in foreign currency translation adjustment, net of tax benefit (expense) of $(161) and $303
569

 
(6,968
)
Available-for-sale investments:
 
 
 
Change in net unrealized gain (loss), net of tax benefit (expense) of $(57) and $44
93

 
(71
)
Less: reclassification adjustment for net (gain) loss included in net income, net of tax benefit (expense) of $(1) and $3
(2
)
 
4

Net change, net of tax benefit (expense) of $(56) and $41
91

 
(67
)
Cash flow hedges:
 
 
 
Change in unrealized gain, net of tax expense of $(550) and $(103)
898

 
169

Less: reclassification adjustment for net (gain) loss included in net income, net of tax benefit (expense) of $185 and $(2)
301

 
(3
)
Net change, net of tax expense of $(735) and $(101)
1,199

 
166

Total other comprehensive income (loss), net of tax effect
1,859

 
(6,869
)
Total comprehensive income, net of tax effect
$
26,712

 
$
11,038

See accompanying notes to condensed consolidated financial statements.




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Table of Contents

INFORMATICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended
March 31,
 
2014
 
2013
Operating activities:
 
 
 
Net income
$
24,853

 
$
17,907

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

Depreciation and amortization
4,300

 
3,687

Stock-based compensation
14,246

 
13,530

Deferred income taxes
(2,063
)
 
(2,318
)
Tax benefits from stock-based compensation
284

 
2,692

Excess tax benefits from stock-based compensation
(1,660
)
 
(2,845
)
Amortization of intangible assets and acquired technology
5,521

 
7,712

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
43,360

 
45,584

Prepaid expenses and other assets
(3,127
)
 
362

Accounts payable and accrued liabilities
(27,845
)
 
(26,231
)
Income taxes payable
(9,101
)
 
338

Deferred revenues
13,975

 
15,162

Net cash provided by operating activities
62,743

 
75,580

Investing activities:
 

 
 

Purchases of property and equipment
(6,200
)
 
(3,236
)
Purchases of investments
(104,490
)
 
(110,663
)
Maturities of investments
46,180

 
58,119

Sales of investments
16,752

 
23,273

Business acquisitions, net of cash acquired

 
(7,464
)
Net cash used in investing activities
(47,758
)
 
(39,971
)
Financing activities:
 

 
 

Net proceeds from issuance of common stock
23,303

 
22,011

Repurchases and retirement of common stock
(23,323
)
 
(21,994
)
Withholding taxes related to restricted stock units net share settlement
(3,056
)
 
(2,849
)
Payment of contingent consideration
(3,061
)
 
(520
)
Excess tax benefits from stock-based compensation
1,660

 
2,845

Purchase of acquiree stock

 
(2,667
)
Net cash used in financing activities
(4,477
)
 
(3,174
)
Effect of foreign exchange rate changes on cash and cash equivalents
122

 
(3,939
)
Net increase in cash and cash equivalents
10,630

 
28,496

Cash and cash equivalents at beginning of period
297,818

 
190,127

Cash and cash equivalents at end of period
$
308,448

 
$
218,623

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 months ended March 31, 2014 and 2013 are unaudited. The interim results presented are not necessarily indicative of results for any subsequent interim period, the year ending December 31, 2014, 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. Any material differences between these estimates and actual results will impact the Company's condensed consolidated financial statements. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result.
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 November 2012, the Company acquired a majority interest in the shares of Heiler Software AG ("Heiler Software") 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 Software to 100 percent. The Company consolidated the financial results of Heiler Software with its financial results beginning in November 2012. The noncontrolling interest in the Company's net income was not significant to consolidated results for the first quarter of 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, 2013 included in the Company's Annual Report on Form 10-K filed with the SEC. The consolidated balance sheet as of December 31, 2013 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, 2013.
Recent Accounting Pronouncements
In March 2013, the Financial Accounting Standards Board ("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. The Company adopted ASU 2013-05 prospectively as required on January 1, 2014. Adoption of ASU 2013-05 did not impact the Company's condensed consolidated financial statements and disclosures.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which clarifies that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available or the tax law of the jurisdiction does not require, and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred

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


tax assets. The Company adopted ASU 2013-11 prospectively as required on January 1, 2014. Adoption of ASU 2013-11 did not impact the Company's condensed consolidated financial statements and disclosures.
There have been no other changes to the Company's significant accounting policies since the end of 2013.
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 March 31, 2014 (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)
$
13,825

 
$
13,825

 
$

 
$

Time deposits (ii)
23,306

 
23,306

 

 

Marketable debt securities (ii)
402,360

 

 
402,360

 

Total money market funds, time deposits, and marketable debt securities
439,491

 
37,131

 
402,360

 

Foreign currency derivatives (iii)
1,456

 

 
1,456

 

Total assets
$
440,947

 
$
37,131

 
$
403,816

 
$

Liabilities:
 

 
 

 
 

 
 

Foreign currency derivatives (iv)
$
218

 
$

 
$
218

 
$

Total liabilities
$
218

 
$

 
$
218

 
$

The following table summarizes financial assets and financial liabilities that the Company measures at fair value on a recurring basis as of December 31, 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)
$
21,893

 
$
21,893

 
$

 
$

Time deposits (ii)
21,585

 
21,585

 

 

Marketable debt securities (ii)
370,384

 

 
370,384

 

Total money market funds, time deposits, and marketable debt securities
413,862

 
43,478

 
370,384

 

Foreign currency derivatives (iii)
284

 

 
284

 

Total assets
$
414,146

 
$
43,478

 
$
370,668

 
$

Liabilities:
 

 
 

 
 

 
 

Foreign currency derivatives (iv)
$
1,024

 
$

 
$
1,024

 
$

Acquisition-related contingent consideration (iv)
3,071

 

 

 
3,071

Total liabilities
$
4,095

 
$

 
$
1,024

 
$
3,071

____________________
(i)
Included in cash and cash equivalents on the condensed consolidated balance sheets.
(ii)
Included in either cash and cash equivalents or short-term investments on the condensed consolidated balance sheets.
(iii)
Included in prepaid expenses and other current assets on the condensed consolidated balance sheets.
(iv)
Included in accrued liabilities on the condensed consolidated balance sheets.

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


Money Market Funds, Time Deposits, and Marketable Debt 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 foreign currency derivatives are the spot rates, forward rates, interest rates, and credit derivative market rates. The spot rate for each foreign 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 months ended March 31, 2014 and 2013.
See Note 5. Accumulated Other Comprehensive Income (Loss), Note 6. Derivative Financial Instruments, and Note 11. 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 months ended March 31, 2014 and 2013. 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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Table of Contents
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The changes in the acquisition-related contingent consideration liability for the three months ended March 31, 2014 consisted of the following (in thousands):
 
March 31,
2014
Beginning balance as of December 31, 2013
$
3,071

Change in fair value of contingent consideration
(10
)
Payment of contingent consideration
(3,061
)
Ending balance as of March 31, 2014
$


See Note 13. Acquisitions of Notes to Condensed Consolidated Financial Statements for a further discussion.

Note 2.  Cash, Cash Equivalents, and Short-Term Investments
The Company's short-term investments are classified as available-for-sale as of the balance sheet date and are reported at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income in stockholders' equity, net of tax. Realized gains or losses and other-than-temporary impairments, if any, on available-for-sale securities are reported in other income or expense as incurred. Realized gains recognized for the three months ended March 31, 2014 and 2013 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 March 31, 2014 (in thousands):
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Cash
$
290,623

 
$

 
$

 
$
290,623

Cash equivalents:
 

 
 

 
 

 
 

Money market funds
13,825

 

 

 
13,825

Federal agency notes and bonds
4,000

 

 

 
4,000

Total cash equivalents
17,825

 

 

 
17,825

Total cash and cash equivalents
308,448

 

 

 
308,448

Short-term investments:
 

 
 

 
 

 
 

Certificates of deposit
1,200

 

 

 
1,200

Commercial paper
6,995

 

 

 
6,995

Corporate notes and bonds
207,969

 
293

 
(201
)
 
208,061

Federal agency notes and bonds
69,945

 
19

 
(72
)
 
69,892

Time deposits
23,306

 

 

 
23,306

Municipal notes and bonds
112,003

 
222

 
(13
)
 
112,212

Total short-term investments
421,418

 
534

 
(286
)
 
421,666

Total cash, cash equivalents, and short-term investments
$
729,866

 
$
534

 
$
(286
)
 
$
730,114




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


The following table summarizes the Company’s cash, cash equivalents, and short-term investments as of December 31, 2013 (in thousands):
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Cash
$
263,572

 
$

 
$

 
$
263,572

Cash equivalents:
 

 
 

 
 

 
 

Money market funds
21,893

 

 

 
21,893

U.S. government notes and bonds
12,353

 

 

 
12,353

Total cash equivalents
34,246

 

 

 
34,246

Total cash and cash equivalents
297,818

 

 

 
297,818

Short-term investments:
 

 
 

 
 

 
 

Certificates of deposit
960

 

 

 
960

Commercial paper
12,738

 

 

 
12,738

Corporate notes and bonds
175,446

 
220

 
(220
)
 
175,446

Federal agency notes and bonds
64,863

 
31

 
(69
)
 
64,825

Time deposits
21,585

 

 

 
21,585

Municipal notes and bonds
103,923

 
153

 
(14
)
 
104,062

Total short-term investments
379,515

 
404

 
(303
)
 
379,616

Total cash, cash equivalents, and short-term investments
$
677,333

 
$
404

 
$
(303
)
 
$
677,434

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 March 31, 2014 (in thousands):
 
Less Than 12 months
 
 
 
 
Fair
Value
 
Gross
Unrealized
Losses
Corporate notes and bonds
$
75,288

 
$
(197
)
Federal agency notes and bonds
48,955

 
(72
)
Municipal notes and bonds
15,011

 
(13
)
Total
$
139,254

 
$
(282
)
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 March 31, 2014 (in thousands):
 
Greater Than 12 months
 
 
 
 
Fair
Value
 
Gross
Unrealized
Losses
Corporate notes and bonds
$
1,250

 
$
(4
)
Total
$
1,250

 
$
(4
)
The changes in value of these investments are primarily related to changes in interest rates and are considered to be temporary in nature.

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


The following table summarizes the cost and estimated fair value of the Company’s short-term investments by contractual maturity at March 31, 2014 (in thousands):
 
Cost
 
Fair
Value
Due within one year
$
162,397

 
$
162,514

Due in one year to two years
171,728

 
171,977

Due after two years
87,293

 
87,175

Total
$
421,418

 
$
421,666


Note 3.  Intangible Assets and Goodwill
The carrying amounts of the intangible assets other than goodwill as of March 31, 2014 and December 31, 2013 are as follows (in thousands, except years):
 
March 31, 2014
 
December 31, 2013
 
Weighted
Average
Useful Life
(Years)
 
Cost
 
Accumulated
Amortization
 
Net
 
Cost
 
Accumulated
Amortization
 
Net
 
Developed and core technology
$
130,743

 
$
(103,011
)
 
$
27,732

 
$
130,744

 
$
(99,026
)
 
$
31,718

 
6
Other Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
41,683

 
(36,149
)
 
5,534

 
41,683

 
(35,216
)
 
6,467

 
6
All other (i)
17,205

 
(14,368
)
 
2,837

 
17,205

 
(13,765
)
 
3,440

 
4-11
Total other intangible assets
58,888

 
(50,517
)
 
8,371

 
58,888

 
(48,981
)
 
9,907

 
 
Total intangible assets, net
$
189,631

 
$
(153,528
)
 
$
36,103

 
$
189,632

 
$
(148,007
)
 
$
41,625

 
 
____________________
(i)
All other includes vendor relationships, trade names, covenants not to compete, and patents.
Total amortization expense related to intangible assets was $5.5 million and $7.7 million for the three months ended March 31, 2014 and 2013, 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.

12

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


As of March 31, 2014, 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 2014
$
9,033

 
$
3,194

 
$
12,227

2015
8,610

 
2,097

 
10,707

2016
5,082

 
1,299

 
6,381

2017
3,163

 
863

 
4,026

2018
1,394

 
439

 
1,833

Thereafter
450

 
479

 
929

Total expected amortization expense
$
27,732

 
$
8,371

 
$
36,103

The changes in the carrying amount of goodwill for the three months ended March 31, 2014 are as follows (in thousands):
 
March 31,
2014
Beginning balance as of December 31, 2013
$
523,142

Subsequent goodwill adjustments
(28
)
Ending balance as of March 31, 2014
$
523,114

The goodwill is partially deductible for tax purposes. See Note 13. 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 March 31, 2014, and a total of $220.0 million remained available for borrowing.
Revolving loans accrue interest at a per annum rate based on either, at our election, (i) the base rate plus a margin ranging from 1.00% to 1.75% depending on the Company's consolidated leverage ratio, or (ii) LIBOR (based on 1-, 2-, 3-, or 6-month interest periods) plus a margin ranging from 2.00% to 2.75% depending on the Company's consolidated leverage ratio. The base rate is equal to the highest of (i) JPMorgan Chase Bank, N.A.'s prime rate, (ii) the federal funds rate plus a margin equal to 0.50%, and (iii) LIBOR for a 1-month interest period plus a margin equal to 1.00%. Revolving loans may be borrowed, repaid and reborrowed until September 29, 2014, at which time all amounts borrowed must be repaid. Accrued interest on the revolving loans is payable quarterly in arrears with respect to base rate loans and at the end of each interest rate period (or at each 3- month interval in the case of loans with interest periods greater than 3 months) with respect to LIBOR loans. The Company is also obligated to pay other customary closing fees, arrangement fees, administrative fees, commitment fees, and letter of credit fees. A quarterly commitment fee is applied to the average daily unborrowed amount under the credit facility at a per annum rate ranging from 0.35% to 0.50% depending on the Company's consolidated leverage ratio. The Company may prepay the loans or terminate or reduce the commitments in whole or in part at any time, without premium or penalty, subject to certain conditions including minimum amounts in the case of commitment reductions and reimbursement of certain costs in the case of prepayments of LIBOR loans.
The Credit Agreement contains customary representations and warranties, covenants, and events of default, including the requirement to maintain a maximum consolidated leverage ratio of 2.75 to 1.00 and a minimum consolidated interest coverage ratio of 3.50 to 1.00. The occurrence of an event of default could result in the acceleration of the obligations under the Credit Agreement. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Credit Agreement at a per annum rate equal to 2.00% above the applicable interest rate for any overdue principal and 2.00% above the rate applicable for base rate loans for any other overdue amounts. The Company was in compliance with all covenants under the Credit Agreement as of March 31, 2014.

13

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



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 March 31, 2014, net of taxes (in thousands):
 
 
Cumulative
Translation
Adjustments
 
Net Unrealized
Gain (Loss) on
Available-for-Sale
Investments
 
Net Unrealized
Gain (Loss) on
Cash Flow Hedges
 
Total
Accumulated other comprehensive income (loss) as of December 31, 2013
 
$
(2,879
)
 
$
63

 
$
(396
)
 
$
(3,212
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Other comprehensive income before reclassifications, net of tax expense of $(161), $(57) and $(550)
 
569

 
93

 
898

 
1,560

Net (gain) loss reclassified from accumulated other comprehensive income (loss), net of tax benefit (expense) of $ —, $(1) and $185
 

 
(2
)
(i) 
301

(ii) 
299

Total other comprehensive income (loss), net of tax effect (iii)
 
569

 
91

 
1,199

 
1,859

Accumulated other comprehensive income (loss) as of March 31, 2014
 
$
(2,310
)
 
$
154

 
$
803

 
$
(1,353
)
____________________
(i)
The before-tax gain of $3 was included in other expense, net on the condensed consolidated statements of income.
(ii)
The before-tax losses of $120 and $366 were included in cost of service revenues and operating expenses, primarily research and development expense, respectively on the condensed consolidated statements of income.
(iii)
The tax benefit (expense) was included in income tax provision on the condensed consolidated statements of income.


14

Table of Contents
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 three months ended March 31, 2013, net of taxes (in thousands):
 
 
Cumulative
Translation
Adjustments
 
Net Unrealized
Gain (Loss) on
Available-for-Sale
Investments
 
Net Unrealized
Gain (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 $303, $44 and $(103)
 
(6,968
)
 
(71
)
 
169

 
(6,870
)
Net (gain) loss reclassified from accumulated other comprehensive income (loss), net of tax benefit (expense) of $ —, $3 and $(2)
 

 
4

(i) 
(3
)
(ii) 
1

Total other comprehensive income (loss), net of tax effect (iii)
 
(6,968
)
 
(67
)
 
166

 
(6,869
)
Accumulated other comprehensive loss as of March 31, 2013
 
$
(14,980
)
 
$
175

 
$
(94
)
 
$
(14,899
)
____________________
(i)
The before-tax loss of $7 was included in other expense, net on the condensed consolidated statements of income.
(ii)
The before-tax gain of $5 was included in research and development expense on the condensed consolidated statements of income.
(iii)
The tax benefit (expense) was included in income tax provision on the condensed consolidated statements of income.
The Company did not have any other-than-temporary impairment recognized in accumulated other comprehensive income (loss) as of March 31, 2014 and December 31, 2013.
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 11. 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 the foreign currency anticipated expenses of 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.

15

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


The Company has forecasted the amount of its anticipated foreign currency expenses based on its historical performance and its projected financial plan. As of March 31, 2014, the remaining open foreign exchange contracts, carried at fair value, are 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 expense, net, 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 $26.1 million and $30.1 million to buy as of March 31, 2014 and December 31, 2013, 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 net monetary assets or liabilities. The notional amounts of foreign currency contracts open at period end in US dollar equivalents were $2.8 million and $2.6 million to buy at March 31, 2014 and December 31, 2013, respectively.
The following table reflects the fair value amounts for the foreign exchange contracts designated and not designated as hedging instruments at March 31, 2014 and December 31, 2013 (in thousands):
 
March 31, 2014
 
December 31, 2013
 
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
$
1,410

 
$
137

 
$
284

 
$
830

Derivatives not designated as hedging instruments
46

 
81

 

 
194

Total fair value of derivative instruments
$
1,456

 
$
218

 
$
284

 
$
1,024

____________________
(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. The derivatives held by the Company are not subject to any credit contingent features negotiated with its counterparties. The Company is not required to pledge nor is entitled to receive cash collateral related to the above contracts.

16

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


The following table sets forth the offsetting of derivative assets as of March 31, 2014 and December 31, 2013 (in thousands):
 
 
 
 
 
 
 
Gross Amounts Not Offset
in the Condensed Consolidated
Balance Sheets
 
 
 
Gross
Amounts of
Recognized
Assets
 
Gross
Amounts Offset
in the Condensed
Consolidated
Balance Sheets
 
Net Amounts
of Assets
Presented
in the Condensed
Consolidated
Balance Sheets
 
 
Financial
Instruments(i)
 

Cash
Collateral
Pledged
 
Net
Amount
As of March 31,
 
 
 
 
 
 
 
 
 
 
 
2014:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
1,456

 
$

 
$
1,456

 
$
(142
)
 
$

 
$
1,314

As of December 31,
 
 
 
 
 
 
 
 
 
 
 
2013:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
284

 
$

 
$
284

 
$
(268
)
 
$

 
$
16

____________________
(i)
The balances at March 31, 2014 and December 31, 2013 were related to derivative liabilities which are allowed to be net settled against derivative assets in accordance with the master netting agreements.
The following table sets forth the offsetting of derivative liabilities as of March 31, 2014 and December 31, 2013 (in thousands):
 
 
 
 
 
 
 
Gross Amounts Not Offset
in the Condensed Consolidated
Balance Sheets
 
 
 
Gross
Amounts of
Recognized
Liabilities
 
Gross
Amounts Offset
in the Condensed
Consolidated
Balance Sheets
 
Net Amounts
of Liabilities
Presented
in the Condensed
Consolidated
Balance Sheets
 

Financial
Instruments(ii)
 

Cash
Collateral
Pledged
 
Net
Amount
As of March 31,
 
 
 
 
 
 
 
 
 
 
 
2014:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
218

 
$

 
$
218

 
$
(142
)
 
$

 
$
76

As of December 31,
 
 
 
 
 
 
 
 
 
 
 
2013:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
1,024

 
$

 
$
1,024

 
$
(268
)
 
$

 
$
756

____________________
(ii)
The balances at March 31, 2014 and December 31, 2013 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with the master netting agreements.
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. In October 2013, the Company changed its effectiveness assessment method from the spot to

17

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


spot price method to include time value in the assessment. Prospectively, the Company includes all changes in value that are effective including changes in time value to accumulated other comprehensive income. The Company no longer records amounts as an excluded component of the hedge relationship.  
The before-tax effects of derivative instruments designated as cash flow hedges on the accumulated other comprehensive loss and condensed consolidated statements of income for the three months ended March 31, 2014 and 2013 are as follows (in thousands):
 
Three Months Ended
March 31,
 
2014
 
2013
Amount of gain recognized in other comprehensive income (effective portion)
$
1,448

 
$
272

Amount of gain (loss) reclassified from accumulated other comprehensive income to cost of service revenues and operating expenses (effective portion)
$
(486
)
 
$
5

Amount of gain recognized in income on derivatives for the amount excluded from effectiveness testing located in operating expenses
$

 
$
70

The Company did not have any ineffective portion of the derivative recorded in the condensed consolidated statements of income.
The before-tax gain (loss) recognized in other expense, net for non-designated foreign currency forward contracts for the three months ended March 31, 2014 and 2013 are as follows (in thousands):
 
Three Months Ended
March 31,
2014
 
2013
Gain recognized in other expense, net
$
75

 
$
21

See Note 1. Summary of Significant Accounting Policies, Note 5. Accumulated Other Comprehensive Income (Loss), and Note 11. 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 January 2014, 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 months ended March 31, 2014 and 2013, the Company repurchased approximately 582,000 shares of its common stock at a cost of $23.3 million and approximately 610,000 shares of its common stock at a cost of $22.0 million, respectively.
As of March 31, 2014, $80.7 million remained available for share repurchases under this program.

18

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


Note 8.  Stock-Based Compensation
The Company grants stock options, restricted stock units (“RSUs”) and performance-based restricted stock units (“PRSUs”) under its 2009 Equity Incentive Plan. Eligible employees may elect to purchase shares of common stock through the Employee Stock Purchase Plan ("ESPP"). The fair value of each option award and ESPP share is estimated on the date of grant using the Black-Scholes-Merton option pricing model that uses the assumptions in the following table. The Company has consistently used a blend of average historical and market-based implied volatilities for calculating the expected volatilities for employee stock options, and uses market-based implied volatilities for its 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 expected term of options granted to employees is derived from the historical option exercises, post-vesting cancellations, and estimates concerning future exercises and cancellations for vested and unvested options that remain outstanding. The risk-free interest rate for the expected term of the option and ESPP is based on the U.S. Treasury yield curve in effect at the time of grant. The Company recognizes its stock-based compensation related to options using a straight-line method over the vesting term of the awards. The Company recognizes its stock-based compensation related to ESPP using a straight-line method over the offering period, which is six months.
The fair value of RSUs and PRSUs is the grant date closing price of our common stock. The Company recognizes expense related to RSUs using a straight-line method over the vesting term of the awards. The Company recognizes expense for PRSUs based on the probability of achieving certain performance criteria, as defined in the PRSU agreements, and uses the graded vesting attribution method over the requisite service period.

The Company records stock-based compensation for options, RSUs and PRSUs granted net of estimated forfeiture rates. ASC 718, Stock Compensation, requires the Company to estimate forfeiture rates at the time of grant and revise 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
March 31,
 
2014
 
2013
Option grants:
 
 
 
Expected volatility
37 - 40%

 
41 - 43%

Expected dividends

 

Expected term of options (in years)
3.5

 
3.3

Risk-free interest rate
1.0
%
 
0.6
%
ESPP: (i)
 
 
 
Expected volatility
36
%
 
42
%
Expected dividends

 

Expected term of ESPP (in years)
0.5

 
0.5

Risk-free interest rate
0.1
%
 
0.1
%
____________________
(i)
ESPP purchases are made on the last day of January and July of each year.

19

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


The allocations of the stock-based compensation, net of estimated income tax benefit, for the three months ended March 31, 2014 and 2013 are as follows (in thousands):
 
Three Months Ended
March 31,
 
2014
 
2013
Cost of service revenues
$
1,464

 
$
1,330

Research and development
4,662

 
4,440

Sales and marketing
4,706

 
4,689

General and administrative
3,414

 
3,071

Total stock-based compensation
14,246

 
13,530

Estimated tax benefit of stock-based compensation
(3,862
)
 
(3,640
)
Total stock-based compensation, net of estimated tax benefit
$
10,384

 
$
9,890

Stock Option Activity
A summary of stock option activity through March 31, 2014 is presented below (in thousands, except per share amounts):
 
 
 
 
 
 
 
Number of
Shares
 
Weighted-
Average
Exercise Price
Per Share
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
Outstanding at December 31, 2013
9,424

 
$
29.05

 
3.48
 
$
127,697

Granted
1,226

 
$
38.29

 
 
 
 
Exercised
(1,014
)
 
$
11.95

 
 
 
 
Forfeited or expired
(453
)
 
$
43.20

 
 
 
 
Outstanding at March 31, 2014
9,183

 
$
31.48

 
4.09
 
$
75,508

Exercisable at March 31, 2014
5,174

 
$
26.54

 
2.67
 
$
69,452

Restricted Stock Unit Activity
A summary of RSU activity, excluding PRSUs, through March 31, 2014 is presented below (in thousands, except per share amounts):
 
 
 
Number of
Shares
 
Weighted-
Average
Grant Date
Fair Value
Outstanding at December 31, 2013
1,793

 

Awarded
498

 
$
38.28

Released
(95
)
 
$
39.31

Forfeited
(85
)
 
$
40.19

Outstanding at March 31, 2014
2,111

 

Performance-Based Restricted Stock Unit Activity
During the first quarter of 2014, the Company granted approximately 224,000 target PRSUs. The performance period for the PRSUs granted in 2014 is the 2014 fiscal year. If certain performance goals are met, PRSUs would become eligible to vest, and vest ratably over two or four years on the annual anniversary dates of the grant, contingent upon the recipient’s continued service to the company. Certain participants have the ability to receive up to 125% to 150% of the target number of shares originally granted. The Compensation Committee of the Board of Directors will certify actual performance achievement for these PRSUs in the first quarter of 2015. The weighted-average grant date fair value of 2014 PRSUs was $38.25 per share.

20

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


The performance period for the 649,900 target number of PRSUs granted in 2013 was the 2013 fiscal year. In the first quarter of 2014, the Compensation Committee of the Board of Directors certified actual performance achievement for PRSUs granted in 2013, and as a result, 507,000 shares became eligible to vest. The achieved PRSUs vest ratably over four years on the annual anniversary dates of the grant, contingent upon the recipient's continued service to the Company. The weighted-average grant date fair value of 2013 PRSUs was $37.42 per share.
A summary of PRSU activity based upon PRSUs granted in 2013, certified and actually achieved through March 31, 2014 is presented below (in thousands):
 
 Number of
Shares
Outstanding at December 31, 2013

Achieved
507

Released
(122
)
Forfeited
(39
)
Outstanding at March 31, 2014
346


Note 9.  Income Taxes
The Company's effective tax rates were 34% and 30% for the three months ended March 31, 2014 and 2013, respectively. Both rates were lower than the federal statutory rate of 35% primarily due to the benefits of foreign earnings in lower-tax jurisdictions and the domestic manufacturing deduction, partially offset by nondeductible stock-based compensation, state income taxes, and the accrual of reserves related to uncertain tax positions. The higher tax rate for the three months ended March 31, 2014 as compared to the same period in 2013 was primarily due to the fact that the Company recognized the entire 2012 research and development credit in the first quarter of 2013 and this credit expired on December 31, 2013.
The Company is a U.S.-based multinational corporation subject to tax in various U.S. and foreign tax jurisdictions. This fact causes the Company's effective tax rate to be sensitive to its geographic mix of earnings. The geographic mix of earnings is impacted by the fluctuation in currency exchange rates between the U.S. dollar and the functional currencies of the Company's foreign subsidiaries. The Company's results of operations will continue to be adversely affected to the extent that its geographic mix of earnings becomes more weighted toward jurisdictions with higher tax rates, and will be favorably affected to the extent the relative geographic mix shifts to lower tax jurisdictions. As of March 31, 2014, 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 March 31, 2014, 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 March 31, 2014, consistent with prior periods, it was considered more likely than not that the Company's non-stock-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 certain operating losses incurred outside of the United States in the current year.
The unrecognized tax benefits related to ASC 740, if recognized, would impact the income tax provision by $27.1 million and $19.8 million as of March 31, 2014 and 2013, respectively. The Company has elected to include interest and penalties as a component of income tax expenses. Accrued interest and penalties as of March 31, 2014 and 2013 were approximately $2.3 million and $2.5 million, respectively. As of March 31, 2014, the gross unrecognized tax benefit was approximately $29.3 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 have commenced and are at various stages of completion as of March 31, 2014.

21

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


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 these 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 10.  Net Income per Common Share
The following table sets forth the calculation of basic and diluted net income per share for the three months ended March 31, 2014 and 2013 (in thousands, except per share amounts):
 
Three Months Ended
March 31,
 
2014
 
2013
Net income
$
24,853

 
$
17,907

Weighted-average shares of common stock used to compute basic net income per share (excluding unvested restricted stock)
109,164

 
107,669

Effect of dilutive common stock equivalents:
 
 
 
Dilutive effect of unvested restricted stock units
654

 
322

Dilutive effect of employee stock options
2,117

 
3,272

Shares used in computing diluted net income per common share
111,935

 
111,263

Basic net income per common share
$
0.23

 
$
0.17

Diluted net income per common share
$
0.22

 
$
0.16

Weighted average stock options and restricted stock units excluded from calculation due to anti-dilutive effect
4,653

 
5,554


Note 11.  Commitments and Contingencies
Lease Obligations
The Company leases certain office facilities under various non-cancelable operating leases, which expire at various dates through 2024 and require the Company to pay operating costs, including property taxes, insurance, and maintenance.
Future minimum lease payments as of March 31, 2014 under non-cancelable operating leases with original terms in excess of one year are summarized as follows (in thousands):
 
 
Operating
Leases
Remaining 2014
$
7,929

2015
11,093

2016
8,005

2017
5,837

2018
4,679

Thereafter
9,334

Total future minimum operating lease payments
$
46,877

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

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


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 March 31, 2014 and December 31, 2013 was not material.
Indemnification
The Company's software license agreements generally include 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 agreements generally limit 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 these indemnification provisions. In addition, the Company requires its employees to sign a proprietary information and inventions agreement, which assigns the rights to its employees’ development work to the Company. To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions, and no material claims against the Company are outstanding as of March 31, 2014. The Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions due to the limited and infrequent history of prior indemnification claims.
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.


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


Note 12.  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 months ended March 31, 2014 and 2013. At March 31, 2014 and December 31, 2013, 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 37% and 33% of total revenues in the first quarter of 2014 and 2013, respectively.
Total revenue by geographic region is summarized as follows (in thousands):
 
Three Months Ended
March 31,
 
2014
 
2013
Revenues:
 
 
 
North America
$
153,844

 
$
143,480

Europe, the Middle East, and Africa
60,202

 
46,426

Other
29,051

 
24,394

Total revenues
$
243,097

 
$
214,300

Property and equipment, net by geographic region are summarized as follows (in thousands):
 
March 31,
2014
 
December 31,
2013
Property and equipment, net:
 
 
 
North America
$
147,906

 
$
147,460

Europe, the Middle East, and Africa
5,648

 
4,907

Other
6,033

 
4,941

Total property and equipment, net
$
159,587

 
$
157,308


Note 13.  Acquisitions
Acquisitions in Fiscal Year 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.
Heiler Software AG
In November 2012, the Company acquired a majority interest in the shares of Heiler Software, 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 Software 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 Software. During December 2012 and the first half of 2013, the Company acquired other shareholders'

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


interest in Heiler Software 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 Software 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.
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 during the measurement period. The goodwill is not deductible for tax purposes.
The Company's business combinations completed in 2013 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, software revenues, service revenues, international revenues, deferred revenues, cost of software revenues, cost of service revenues, operating expenses, amortization of acquired technology, stock-based compensation, and provision for income taxes; the growth of our customer base and customer demand for our products and services; 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 software and services. We generate revenues from sales of software licenses, subscription-based licenses, maintenance and support services, and professional services, consisting of consulting and education services.
We receive license 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 12% of total consolidated revenues during the first quarter of 2014 and 10% of total consolidated revenues during 2013 and 2012.
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 first quarter of 2014 increased by 13% to $243.1 million compared to $214.3 million for the same period in 2013. Our software revenues increased by 17% in the first quarter of 2014 from the same period in 2013 due to a 13% increase in license revenues and a 49% 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 March 31, 2014, compared to the same period in 2013. The increase in subscription revenues was due to growth in the installed customer base and higher customer demand for our subscription offerings. Services revenues increased by 11% in the first quarter of 2014 from the same period in 2013 due to a 14% growth in maintenance revenues and a 1% 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 higher customer demand for consulting services, partially offset by a decrease in education classes offered.
Due to our dynamic market, we face both significant opportunities and challenges, and as such, we focus on the following key factors:
Competition:  The market for our products is highly competitive, quickly evolving and subject to rapidly changing technology, which may expand the alternatives available to our customers for their data integration requirements. Our competitors may be able to respond more quickly to new or emerging technologies, technological trends, changes in customer requirements and industry consolidation. Moreover, competition from new and emerging technologies and changes in technological trends, particularly the shift to cloud-based solutions, has increased market confusion about the benefits of our products compared to other solutions. We must compete effectively, particularly on the basis of functionality

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and price, against a variety of different vendors offering existing data integration software products, vendors of new and emerging technologies, and hand-coded, custom-built data integration solutions.
Product Introductions and Enhancements:  To address the expanding data integration needs of our customers and prospective customers and to respond to rapid technological changes and customer concerns, 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 that are likely to continue 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 had weaker demand for our software products and services in the first and third quarters of the year. The first quarter of 2014, and the first, second and fourth quarters of 2013 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. 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.
Macroeconomic and Geopolitical Conditions:  The United States and many foreign economies, particularly in Europe, continue to experience uncertainty driven by varying macroeconomic and geopolitical 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 continue to invest in our international operations. There are significant risks with overseas investments, and our growth prospects in these regions are uncertain. Increased volatility, further declines in credit, equity and foreign currency markets, and geopolitical conditions could cause delays or cancellations in international orders.
We focus on a number of key initiatives to address these factors and other opportunities and challenges. These key initiatives include 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, the strengthening of our partnerships, 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.
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. 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 cloud data integration, data quality, information lifecycle management, data exchange, and master data management, among others. 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.

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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, profitability and revenues. 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, business combinations, impairment of goodwill and intangible assets, stock-based compensation, and allowance for doubtful accounts have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. The critical accounting estimates associated with these policies are discussed in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2013.
There have been no changes to our critical accounting policies since the end of 2013.
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.

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Results of Operations
The following table presents certain financial data for the three months ended March 31, 2014 and 2013 as a percentage of total revenues:
 
Three Months Ended
March 31,
 
2014
 
2013
Revenues:
 
 
 
Software
42
 %
 
41
 %
Service
58

 
59

Total revenues
100

 
100

Cost of revenues:


 


Software
1

 
1

Service
16

 
16

Amortization of acquired technology
2

 
3

Total cost of revenues
19

 
20

Gross profit
81

 
80

Operating expenses:


 


Research and development
19

 
18

Sales and marketing
38

 
39

General and administrative
8

 
9

Amortization of intangible assets
1

 
1

Acquisitions and other charges

 
1

Total operating expenses
66

 
68

Income from operations
15

 
12

Interest income

 

Interest expense

 

Other expense, net

 

Income before income taxes
15

 
12

Income tax provision
5

 
4

Net income
10
 %
 
8
 %

Revenues
Our total revenues increased to $243.1 million for the three months ended March 31, 2014 compared to $214.3 million for the three months ended March 31, 2013, representing an increase of $28.8 million (or 13%). The increase in the first quarter of 2014 from the same period in 2013 was primarily due to an increase in license revenues resulting from increases in average transaction size and the number of transactions in 2014 as compared to 2013, as well as the increases in maintenance and consulting service revenues as a result of growth in our customer installed base and higher customer demand, partially offset by a decrease in education services revenues.
  

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The following table and discussion compare our revenues for the three months ended March 31, 2014 and 2013 (in thousands, except percentages):
 
Three Months Ended March 31,
 
2014
 
2013
 
Percentage
Change
Software revenues:
 
 
 
 
 
License
$
88,511

 
$
78,133

 
13
%
Subscription
14,532

 
9,773

 
49
%
Total software revenues
103,043

 
87,906

 
17
%
Service revenues:
 
 
 
 
 
Maintenance
109,271

 
95,903

 
14
%
Consulting and education
30,783

 
30,491

 
1
%
Total service revenues
140,054

 
126,394

 
11
%
Total revenues
$
243,097

 
$
214,300

 
13
%
Software Revenues
Our software revenues were $103.0 million (or 42% of total revenues) for the three months ended March 31, 2014 compared to $87.9 million (or 41% of total revenues) for the three months ended March 31, 2013, representing an increase of $15.1 million(or 17%).
License Revenues
Our license revenues increased to $88.5 million (or 36% of total revenues) for the three months ended March 31, 2014 from $78.1 million (or 36% of total revenues) for the three months ended March 31, 2013. The increase in license revenues of $10.4 million (or 13%) for the three months ended March 31, 2014 compared to the same period in 2013 was primarily due to increases in the average transaction size of license orders and the number of transactions in the quarter ended March 31, 2014, compared to the same period in 2013.
The average transaction amount for orders greater than $100,000 in the first quarter of 2014, including upgrades for which we charge customers an additional fee, increased to $411,000 from $409,000 in the first quarter of 2013. The number of transactions greater than $1.0 million decreased to 13 in the first quarter of 2014 from 19 in the same period of 2013. We offer two types of upgrades: (1) upgrades that are not part of the post-contract services for which we charge customers an additional fee, and (2) upgrades that are part of the post-contract services that we provide to our customers at no additional charge, when and if available.

Subscription Revenues
Subscription revenues, which primarily represent revenues from customers and partners under subscription-based licenses for a variety of cloud and address validation offerings, increased to $14.5 million (or 6% of total revenues) for the three months ended March 31, 2014 compared to $9.8 million (or 5% of total revenues) for the three months ended March 31, 2013. The increase of $4.8 million (or 49%) in subscription revenues for the three months ended March 31, 2014, compared to the same period in 2013 was primarily due to an increase in the installed base of subscription customers and higher customer demand.
For the remainder of 2014, we expect our revenues from subscriptions to increase from the comparable 2013 levels primarily due to our growing installed customer base and an anticipated increase in demand for subscription offerings.
Service Revenues
Maintenance Revenues
Maintenance revenues increased to $109.3 million (or 45% of total revenues) for the three months ended March 31, 2014 compared to $95.9 million (or 45% of total revenues) for the three months ended March 31, 2013. The increase of $13.4 million (or 14%) in maintenance revenues for the three months ended March 31, 2014, compared to the same period in 2013 was primarily due to the increasing size of our installed customer base, including those customers acquired through our acquisitions.

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For the remainder of 2014, we expect maintenance revenues to increase from the comparable 2013 levels due to our growing installed customer base.
Consulting and Education Revenues
Consulting and education revenues slightly increased to $30.8 million (or 13% of total revenues) for the three months ended March 31, 2014 compared to $30.5 million (or 14% of total revenues) for the three months ended March 31, 2013. The increase of $0.3 million (or 1%) in consulting and education revenues for the three months ended March 31, 2014, compared to the same period in 2013 was primarily due to higher customer demand for consulting services, partially offset by a decrease in education classes offered.
For the remainder of 2014, we expect our revenues from consulting and education revenues to increase from the comparable 2013 levels primarily due to an anticipated increase in demand for consulting services.
International Revenues
Our international revenues were $89.3 million (or 37% of total revenues) and $70.8 million (or 33% of total revenues) for the three months ended March 31, 2014 and 2013, respectively. The increase of $18.4 million (or 26%) in international revenues for the three months ended March 31, 2014 compared to the same period in 2013 was primarily due to an increase in software revenues in EMEA and Latin America, and an increase in service revenues in EMEA, Latin America and Asia-Pacific.
For the remainder of 2014, we expect our international revenues as a percentage of total revenues to be relatively consistent with, or increase from, the comparable 2013 levels.
Potential Future Revenues (New Orders, Backlog, and Deferred Revenues)
Our potential future revenues include backlog consisting primarily of (1) product orders (both on a perpetual and subscription basis) that have not shipped as of the end of a given quarter, (2) product orders received from certain distributors, resellers, OEMs, and end users not included in deferred revenues, where revenue is recognized after cash receipt (collectively (1) and (2) above are referred as “aggregate backlog”), and (3) deferred revenues. Our deferred revenues consist primarily of the following: (1) maintenance revenues that we recognize over the term of the contract, typically one year, (2) subscription offerings that are recognized over the period of performance as services are provided, (3) license product orders that have shipped but where the terms of the license agreement contain acceptance language or other terms that require that the license revenues be deferred until all revenue recognition criteria are met or recognized ratably over an extended period, and (4) consulting and education services revenues that have been prepaid but for which services have not yet been performed.
We typically ship products shortly after the receipt of an order, which is common in the software industry, and historically our backlog of license orders awaiting shipment at the end of any given quarter has varied. However, our backlog historically decreases from the prior quarter at the end of the first and third quarters and increases at the end of the fourth quarter. Aggregate backlog and deferred revenues at March 31, 2014 were approximately $339.3 million compared to $297.1 million at March 31, 2013 and $343.2 million at December 31, 2013. The change in the first quarter of 2014 from the comparable period of 2013 was primarily due to increases in deferred software and service revenues, partially offset by a decrease in aggregate backlog. The international portion of aggregate backlog and deferred revenues may fluctuate with changes in foreign currency exchange rates. Aggregate backlog and deferred revenues as of any particular date are not necessarily indicative of future results.

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Cost of Revenues
The following table sets forth, for the periods indicated, our cost of revenues (in thousands, except percentages):
 
Three Months Ended March 31,
 
2014
 
2013
 
Percentage
Change
Cost of software revenues
$
3,119

 
$
2,142

 
46
 %
Cost of service revenues
40,229

 
36,030

 
12
 %
Amortization of acquired technology
3,985

 
5,724

 
(30
)%
Total cost of revenues
$
47,333

 
$
43,896

 
8
 %
Cost of software revenues, as a percentage of software revenues
3
%
 
2
%
 
1
 %
Cost of service revenues, as a percentage of service revenues
29
%
 
29
%
 
 %
Cost of Software Revenues
Our cost of software revenues is a combination of costs of license and subscription revenues. Cost of license revenues consists primarily of software royalties, product packaging, documentation, and production costs. Cost of subscription revenues consists primarily of fees paid to third party vendors for hosting services related to our subscription services and royalties paid to postal authorities. Cost of software revenues increased to $3.1 million (or 3% of software revenues) for the three months ended March 31, 2014 compared to $2.1 million (or 2% of software revenues) in the same period of 2013. The increase of $1.0 million (or 46%) in cost of software revenues for the three months ended March 31, 2014 compared to the same period in 2013, was primarily due to a $0.8 million increase in software royalties and a $0.2 million increase in fees paid to third party vendors for hosting services.
For the remainder of 2014, we expect that our cost of software revenues as a percentage of software revenues to be relatively consistent with the first quarter of 2014.
Cost of Service Revenues
Our cost of service revenues is a combination of costs of maintenance, consulting and education services revenues. Our cost of maintenance revenues consists primarily of costs associated with customer service personnel expenses and royalty fees for maintenance related to third-party software providers. Cost of consulting revenues consists primarily of personnel costs and expenses incurred in providing consulting services at customers’ facilities. Cost of education services revenues consists primarily of the costs of providing education classes and materials at our headquarters, sales and training offices, and customer locations.
Cost of service revenues increased to $40.2 million (or 29% of service revenues) in the first quarter of 2014 compared to $36.0 million (or 29% of service revenues) in the same period of 2013. The $4.2 million (or 12%) increase in the first quarter of 2014 compared to the same period of 2013 was primarily due to a $1.8 million increase in personnel related costs (including stock-based compensation), a $2.0 million increase in subcontractor fees, and a $0.4 million increase in general overhead costs.
For the remainder of 2014, we expect that our cost of service revenues, in absolute dollars, to increase from the 2013 levels, mainly due to headcount increases to support and deliver increased service revenues. We expect; however, the cost of service revenues as a percentage of service revenues for the remainder of 2014 to remain relatively consistent with the first quarter of 2014.
Amortization of Acquired Technology
The following table sets forth, for the periods indicated, our amortization of acquired technology (in thousands, except percentages):
 
Three Months Ended March 31,
 
2014
 
2013
 
Percentage
Change
Amortization of acquired technology
$
3,985

 
$
5,724

 
(30
)%

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Amortization of acquired technology is the amortization of technologies acquired through business acquisitions and technology licenses. Amortization of acquired technology decreased to $4.0 million for the three months ended March 31, 2014 from $5.7 million in the same period of 2013. The decrease of $1.7 million (or 30%) for the three months ended March 31, 2014, compared to the same period of 2013 was primarily due to a $1.1 million decrease in amortization of certain technologies that were fully amortized after March 31, 2013, and a $0.6 million decrease in amortization of certain acquired technologies which are amortized using a method based on expected cash flows.
For the remainder of 2014, we expect the amortization of acquired technology to be approximately $9.0 million before the effect of any potential future acquisitions subsequent to March 31, 2014.
Operating Expenses
Research and Development
The following table sets forth, for the periods indicated, our research and development expenses (in thousands, except percentages):
 
Three Months Ended March 31,
 
2014
 
2013
 
Percentage
Change
Research and development
$
45,685

 
$
39,523

 
16
%
Our research and development expenses consist primarily of salaries and other personnel-related expenses, consulting services, facilities, and related overhead costs associated with the development of new products, enhancement and localization of existing products, quality assurance, and development of documentation for our products. Research and development expenses increased to $45.7 million (or 19% of total revenues) for the three months ended March 31, 2014 from $39.5 million (or 18% of total revenues) for the three months ended March 31, 2013. All software development costs for software intended to be marketed to customers have been expensed in the period incurred since the costs incurred subsequent to the establishment of technological feasibility have not been significant.
The $6.2 million (or 16%) increase in the first quarter of 2014 compared to the same period of 2013 was primarily due to a $4.9 million increase in personnel-related costs (including stock-based compensation) as a result of increased headcount and a $1.3 million increase in general overhead costs.
For the remainder of 2014, we expect research and development expenses as a percentage of total revenues to be relatively consistent with the first quarter of 2014.
Sales and Marketing
The following table sets forth, for the periods indicated, our sales and marketing expenses (in thousands, except percentages):
 
Three Months Ended March 31,
 
2014
 
2013
 
Percentage
Change
Sales and marketing
$
91,584

 
$
84,057

 
9
%
Our sales and marketing expenses consist primarily of personnel costs, including commissions and bonuses, as well as costs of public relations, seminars, marketing programs, lead generation, travel, and trade shows. Sales and marketing expenses increased to $91.6 million (or 38% of total revenues) for the three months ended March 31, 2014 from $84.1 million (or 39% of total revenues) for the three months ended March 31, 2013.
The $7.5 million (or 9%) increase for the three months ended March 31, 2014 compared to the same period in 2013 was primarily due to a $5.6 million increase in personnel-related costs, a $1.1 million increase in third-party services, a $0.4 million increase in marketing programs, and a $0.4 million increase in general overhead costs. Personnel-related costs include salaries, employee benefits, sales commissions, and stock-based compensation. Sales and marketing headcount increased from 996 in March 2013 to 1,119 in March 2014. The sales and marketing expenses as a percentage of total revenues decreased by one percentage point in the first quarter of 2014 compared to the same period in 2013.
For the remainder of 2014, we expect sales and marketing expenses as a percentage of total revenues to be relatively consistent with the first quarter of 2014. The sales and marketing expenses as a percentage of total revenues may fluctuate from one period

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to the next due to the timing of hiring new sales and marketing personnel, our spending on marketing programs, and the level of the commission expenditures, in each period.
General and Administrative
The following table sets forth, for the periods indicated, our general and administrative expenses (in thousands, except percentages):
 
Three Months Ended March 31,
 
2014
 
2013
 
Percentage
Change
General and administrative
$
20,053

 
$
18,487

 
8
%
Our general and administrative expenses consist primarily of personnel costs for finance, human resources, legal, and general management, as well as professional service expenses associated with recruiting, legal, tax and accounting services. General and administrative expenses increased to $20.1 million (or 8% of total revenues) for the three months ended March 31, 2014 from $18.5 million (or 9% of total revenues) for the three months ended March 31, 2013.
The $1.6 million (or 8%) increase for the three months ended March 31, 2014 compared to the same period in 2013 was primarily due to a $1.3 million increase in personnel-related costs (including stock-based compensation) as a result of increased headcount, and a $0.3 million increase in general overhead costs.
For the remainder of 2014, we expect general and administrative expenses as a percentage of total revenues to be relatively consistent with or decrease slightly from the first quarter of 2014.
Amortization of Intangible Assets
The following table sets forth, for the periods indicated, our amortization of intangible assets (in thousands, except percentages):
 
Three Months Ended March 31,
 
2014
 
2013
 
Percentage
Change
Amortization of intangible assets
$
1,536

 
$
1,988

 
(23
)%
Amortization of intangible assets is the amortization of customer relationships, vendor relationships, trade names, and covenants not to compete acquired through prior business acquisitions, and patents acquired. Amortization of intangible assets decreased to $1.5 million (or 1% of total revenues) for the three months ended March 31, 2014 from $2.0 million (or 1% of total revenues) for the three months ended March 31, 2013.
For the remainder of 2014, we expect amortization of the remaining intangible assets to be approximately $3.2 million, before the impact of any amortization for any possible intangible assets acquired as part of any potential future acquisitions subsequent to March 31, 2014.
Acquisitions and Other Charges
The following table sets forth, for the periods indicated, our acquisitions and other charges (in thousands, except percentages):
 
Three Months Ended March 31,
 
2014
 
2013
 
Percentage
Change
Acquisitions and other charges
$
89

 
$
1,650

 
(95
)%
For the three months ended March 31, 2013, acquisition and other charges of $1.7 million primarily consisted of $1.4 million legal, accounting, tax, bankers' and other professional service fees, $0.1 million severance payments to former employees of an acquiree, and $0.2 million accretion related charges for earn-outs and holdbacks associated with prior acquisitions.

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Interest and Other Income, Net
The following table sets forth, for the periods indicated, our interest and other income, net (in thousands, except percentages):
 
Three Months Ended March 31,
 
2014
 
2013
 
Percentage
Change
Interest income 
$
1,153

 
$
890

 
30
 %
Interest expense 
(127
)
 
(120
)
 
6
 %
Other expense, net
(84
)
 
(68
)
 
(24
)%
Interest and other income, net
$
942

 
$
702

 
34
 %