form10q_033110.htm
 




UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
 
FORM 10-Q
________________
 
 
R
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 
For the quarterly period ended March 31, 2010

OR

 
£
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-25871

INFORMATICA CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
77-0333710
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

100 Cardinal Way
Redwood City, California 94063
(Address of principal executive offices, including zip code)

(650) 385-5000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:  Yes R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes £ No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
    Large accelerated filer R       Accelerated filer £       Non-accelerated filer £        Smaller reporting company £


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). £ Yes R No

As of April 30, 2010, there were approximately 91,834,000 shares of the registrant’s common stock outstanding.

 


 
 
 

 


INFORMATICA CORPORATION
 
Table of Contents

 
Page No.
 
   
3
 
3
 
4
 
5
 
6
 
28
 
45
 
47
 
48
 
48
 
48
 
62
 
63
 
64
 
65
 

 
2


PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INFORMATICA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
 
March 31,
2010
   
December 31,
2009
 
   
(Unaudited)
       
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 152,024     $ 159,197  
Short-term investments
    202,438       305,283  
Accounts receivable, net of allowances of $4,236 and $3,454, respectively
    77,757       110,653  
Deferred tax assets
    26,478       23,673  
Prepaid expenses and other current assets
    20,447       15,251  
Total current assets
    479,144       614,057  
                 
Property and equipment, net
    7,967       7,928  
Goodwill
    399,895       287,068  
Other intangible assets, net
    93,121       63,586  
Long-term deferred tax assets
    25,301       8,259  
Other assets
    7,392       8,724  
Total assets
  $ 1,012,820     $ 989,622  
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable
  $ 8,150     $ 4,274  
Accrued liabilities
    39,731       37,367  
Accrued compensation and related expenses
    30,523       41,523  
Deferred tax liabilities
    424        
Income taxes payable
    9,273       12,949  
Accrued facilities restructuring charges
    19,904       19,880  
Deferred revenues
    145,235       139,629  
Convertible senior notes
    201,000        
Total current liabilities
    454,240       255,622  
                 
Convertible senior notes
          201,000  
Accrued facilities restructuring charges, less current portion
    29,833       32,845  
Long-term deferred revenues
    4,044       4,531  
Long-term deferred tax liabilities
          516  
Long-term income taxes payable
    11,695       11,995  
Total liabilities
    499,812       506,509  
                 
Commitments and contingencies (Note 12)
               
                 
Stockholders’ equity:
               
Common stock
    91       90  
Additional paid-in capital
    456,608       434,262  
Accumulated other comprehensive loss
    (5,214 )     (968 )
Retained earnings
    61,523       49,729  
Total stockholders’ equity
    513,008       483,113  
Total liabilities and stockholders’ equity
  $ 1,012,820     $ 989,622  

See accompanying notes to condensed consolidated financial statements.

 
3


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

 
 
 
Three Months Ended
March 31,
 
 
 
2010
   
2009
 
Revenues:
           
License
  $ 55,047     $ 44,059  
Service
    80,083       64,999  
Total revenues
    135,130       109,058  
                 
Cost of revenues:
               
License
    965       748  
Service
    23,057       18,472  
Amortization of acquired technology
    2,772       1,557  
Total cost of revenues
    26,794       20,777  
                 
Gross profit
    108,336       88,281  
                 
Operating expenses:
               
Research and development
    23,578       18,183  
Sales and marketing
    51,419       41,438  
General and administrative
    11,408       10,806  
Amortization of intangible assets
    2,710       2,051  
Facilities restructuring charges
    656       809  
Acquisitions and other
    3,649        
Total operating expenses
    93,420       73,287  
                 
Income from operations
    14,916       14,994  
Interest income
    951       1,790  
Interest expense
    (1,580 )     (1,671 )
Other income, net
    1,980       767  
Income before provision for income taxes
    16,267       15,880  
Provision for income taxes
    4,473       4,821  
Net income
  $ 11,794     $ 11,059  
                 
Basic net income per common share
  $ 0.13     $ 0.13  
Diluted net income per common share
  $ 0.12     $ 0.12  
                 
Shares used in computing basic net income per common share
    90,748       86,862  
Shares used in computing diluted net income per common share
    107,374       100,430  
 



See accompanying notes to condensed consolidated financial statements.

 
4


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

 
 
 
Three Months Ended
March 31,
 
 
 
2010
   
2009
 
Operating activities:
           
Net income
  $ 11,794     $ 11,059  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    1,829       1,353  
Gain on sale of investment in equity interests
    (1,824 )      
Gain on early extinguishment of debt
          (337 )
Stock compensation
    5,482       4,199  
Deferred income taxes
    (632 )     (1,469 )
Tax benefits from stock compensation
    4,189       672  
Excess tax benefits from stock compensation
    (3,325 )     (397 )
Amortization of intangible assets and acquired technology
    5,482       3,608  
Non-cash facilities restructuring charges
    656       809  
Other non-cash items
    (6 )     610  
Changes in operating assets and liabilities:
               
Accounts receivable
    42,162       23,730  
Prepaid expenses and other assets
    2,403       (3,612 )
Accounts payable and other current liabilities
    (18,924 )     (20,499 )
Income taxes payable
    (5,276 )     665  
Accrued facilities restructuring charges
    (3,604 )     (3,219 )
Deferred revenues
    2,776       (4,291 )
Net cash provided by operating activities
    43,182       12,881  
Investing activities:
               
Purchases of property and equipment
    (1,300 )     (577 )
Purchases of investments
    (42,569 )     (146,227 )
Purchase of investment in equity interest
    (1,500 )      
Sale of investment in equity interest
    4,824        
Maturities of investments
    64,318       115,848  
Sales of investments
    81,047       14,097  
Business acquisitions, net of cash acquired
    (168,777 )     (32,976 )
Net cash used in investing activities
    (63,957 )     (49,835 )
Financing activities:
               
Net proceeds from issuance of common stock
    13,785       6,967  
Repurchases and retirement of common stock
          (5,910 )
Withholding taxes related to restricted stock units net share settlement
    (1,108 )      
Repurchases of convertible senior notes
          (19,200 )
Excess tax benefits from stock compensation
    3,325       397  
Net cash provided by (used in) financing activities
    16,002       (17,746 )
Effect of foreign exchange rate changes on cash and cash equivalents
    (2,400 )     (1,825 )
Net decrease in cash and cash equivalents
    (7,173 )     (56,525 )
Cash and cash equivalents at beginning of period
    159,197       179,874  
Cash and cash equivalents at end of period
  $ 152,024     $ 123,349  


See accompanying notes to condensed consolidated financial statements.


 
5

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements of Informatica Corporation (“Informatica,” or the “Company”) have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States of America. However, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the financial statements include all adjustments necessary, which are of a normal and recurring nature for the fair presentation of the results of the interim periods presented. All of the amounts included in this Report related to the condensed consolidated financial statements and notes thereto as of and for the three months ended March 31, 2010 and 2009 are unaudited. The interim results presented are not necessarily indicative of results for any subsequent interim period, the year ending December 31, 2010, or any future period.

The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments, and assumptions. The Company believes that the estimates, judgments, and assumptions upon which it relies are reasonable based on information available at the time that these estimates, judgments, and assumptions were made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates and actual results, Informatica’s financial statements would be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also instances that management’s judgment in selecting an available alternative would not produce a materially different result.

These unaudited, condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2009 included in the Company’s Annual Report on Form 10-K filed with the SEC. The condensed consolidated balance sheet as of December 31, 2009 has been derived from the audited consolidated financial statements of the Company.

Revenue Recognition

The Company derives its revenues from software license fees, maintenance fees, and professional services, which consist of consulting and education services. The Company recognizes revenue in accordance with Software Revenue Recognition (ASC 985-605-25), and the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 (“SAB No. 104”), Revenue Recognition, and other authoritative accounting literature.

Under ASC 985-605-25, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable.

Persuasive evidence of an arrangement exists.  The Company determines that persuasive evidence of an arrangement exists when it has a written contract, signed by both the customer and the Company, and written purchase authorization.

Delivery has occurred.  Software is considered delivered when title to the physical software media passes to the customer or, in the case of electronic delivery, when the customer has been provided with the access codes to download and operate the software.

Fee is fixed or determinable.  The Company considers arrangements with extended payment terms not to be fixed or determinable. If the license fee in an arrangement is not fixed or determinable, revenue is recognized as payments become due. Revenue arrangements with resellers and distributors require evidence of sell-through, that is, persuasive evidence that the products have been sold to an identified end user. The Company’s standard agreements do not contain product return rights.

Collection is probable.  The Company assesses first the credit-worthiness and collectability at a country level based on the country’s overall economic climate and general business risk. Then, for the customers in the countries that are deemed credit-worthy, it assesses credit and collectability based on their payment history and credit profile. When a customer is not deemed credit-worthy, revenue is recognized at the time that payment is received.

 
6

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The Company also enters into Original Equipment Manufacturer (“OEM”) arrangements that provide for license fees based on inclusion of technology and/or products in the OEM’s products. These arrangements provide for fixed and irrevocable royalty payments. The Company recognizes royalty payments as revenues based on the royalty report that it receives from the OEMs. In the case of OEMs with fixed royalty payments, revenue is recognized upon execution of the agreement, delivery of the software, and when all other criteria for revenue recognition have been met.

Multiple contracts with a single counterparty executed within close proximity of each other are evaluated to determine if the contracts should be combined and accounted for as a single arrangement. The Company recognizes revenues net of applicable sales taxes, financing charges absorbed by Informatica, and amounts retained by our resellers and distributors, if any.

The Company’s software license arrangements include the following multiple elements: license fees from our core software products and/or product upgrades that are not part of post-contract services, maintenance fees, consulting, and/or education services. The Company uses the residual method to recognize license revenue when the license arrangement includes elements to be delivered at a future date and vendor-specific objective evidence (“VSOE”) of fair value exists to allocate the fee to the undelivered elements of the arrangement. VSOE is based on the price charged when an element is sold separately. If VSOE does not exist for any undelivered software product element of the arrangement, all revenue is deferred until all elements have been delivered, or VSOE is established. If VSOE does not exist for any undelivered services elements of the arrangement, all revenue is recognized ratably over the period that the services are expected to be performed. If the software arrangement includes significant modification or customization of the software, software license revenue is recognized as the consulting services revenue is recognized.

The Company recognizes maintenance revenues, which consist of fees for ongoing support and product updates, ratably over the term of the contract, typically one year.

Consulting revenues are primarily related to implementation services and product configurations performed on a time-and-materials basis and, occasionally, on a fixed fee basis. Education services revenues are generated from classes offered at both Company and customer locations. Revenues from consulting and education services are recognized as the services are performed.
 
Other revenues, consisting of software subscription and cloud services revenues (which are not material at this time but growing), are generally recognized as the services are performed. Cloud services is a model of software deployment whereby a vendor licenses an application to customers for use as a service on demand.
  
Deferred revenues include deferred license, maintenance, consulting, education, and other services revenues. For customers not deemed credit-worthy, the Company’s practice is to net unpaid deferred revenue for that customer against the related receivable balance.

Fair Value Measurement of Financial Assets and Liabilities

 
Fair Value Measurements and Disclosures (ASC 820-10-35) establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
 
 
 
Level 1. Observable inputs such as quoted prices in active markets;
 
 
 
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
 
 
 
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Further, ASC 820-10-35 allows the Company to measure the fair value of its financial assets and liabilities based on one or more of the three following valuation techniques:
 
 
Market approach. Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities;
 
 
 
Cost approach. Amount that would be required to replace the service capacity of an asset (replacement cost); and

 
Income approach. Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing, and excess earnings models).



 
7

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 
The following table summarizes the fair value measurement classification of Informatica as of March 31, 2010 (in thousands):

 
 
 
 
 
 
 
 
 
 
Total
   
Quoted
Prices in
Active
Markets for
Identical
Assets
 (Level 1)
   
 
Significant
Other
Observable
Inputs
(Level 2)
   
 
 
 
 Significant
Unobservable
Inputs
(Level 3)
 
Assets:
                       
Money market funds (1)
  $ 3,089     $ 3,089     $     $  
Marketable securities (2)
    209,437             209,437        
Total money market funds and marketable securities
    212,526       3,089       209,437        
Investment in equity interest (3)
    1,500                   1,500  
Foreign currency derivatives (4)
    277             277        
Total
  $ 214,303     $ 3,089     $ 209,714     $ 1,500  
Liabilities:
                               
Convertible senior notes
  $ 279,567     $ 279,567     $     $  
Total
  $ 279,567     $ 279,567     $     $  

 
The following table summarizes the fair value measurement classification of Informatica as of December 31, 2009 (in thousands):

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
   
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
   
 
 
Significant
Other
Observable
Inputs
(Level 2)
   
 
 
 
Significant
Unobservable
Inputs
(Level 3)
 
Assets:
                       
Money market funds (1)
  $ 10,895     $ 10,895     $     $  
Marketable securities (2)
    306,283             306,283        
Total money market funds and marketable securities
    317,178       10,895       306,283        
Investment in equity interest (3)
    3,000                   3,000  
Foreign currency derivatives (4)
    1             1        
Total
  $ 320,179     $ 10,895     $ 306,284     $ 3,000  
Liabilities:
                               
Foreign currency derivatives (5)
  $ 206     $     $ 206     $  
Convertible senior notes
    257,055       257,055              
Total
  $ 257,261     $ 257,055     $ 206     $  

____________

 
 
(1)
Included in cash and cash equivalents on the condensed consolidated balance sheets.
     
 
(2)
Included in either cash and cash equivalents or short-term investments on the condensed consolidated balance sheets.
     
 
(3)
Included in other non-current assets on the condensed consolidated balance sheets.
     
 
(4)
Included in prepaid expenses and other current assets on the condensed consolidated balance sheets.
     
 
(5)
Included in accrued liabilities on the condensed consolidated balance sheets.

The Company has classified its convertible debt as Level I, according to ASC 820-10-35 since it has quote prices available in active markets for identical assets. The estimated fair value of the Company’s Convertible Senior Notes as of March 31, 2010, based

 
8

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



on the closing price as of March 31, 2010 (the last trading day of the respective period) at the Over-the-Counter market, was $279.6 million.

Informatica uses a market approach for determining the fair value of all its Level 1 and Level 2 marketable securities financial assets and Convertible Senior Notes liabilities.

The Company for the valuation of its money market funds uses valuations based on quoted prices in active markets for identical assets that the Company has the ability to access.

Informatica uses the following methodology to determine the fair value of its treasury bills, corporate bonds, and agency and government bonds aggregating $193 million and $280 million at March 31, 2010 and December 31, 2009, respectively. These securities generally have market prices from multiple sources; therefore, the Company uses a “consensus price” or a weighted average price for each security. Informatica receives market prices for these securities from a variety of industry standard data providers (e.g., Bloomberg), security master files from large financial institutions, and other third-party sources. Then, the Company uses these multiple prices as inputs into a distribution-curve-based algorithm to determine the daily market value.

Informatica uses the following methodology to determine the fair value of its commercial paper and certificates of deposit aggregating $10 million and $26 million at March 31, 2010 and December 31, 2009, respectively. 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 market place, the price on that subsequent transaction clearly reflects the market price on that day and Informatica will adjust the price in the system to the observed transaction price and follow a revised accretion schedule to determine the daily price.

Foreign Currency Derivatives and Hedging Instruments

Informatica uses the income approach to value the derivatives, using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present value amount, assuming that participants are motivated but not compelled to transact. Level 2 inputs are limited to quoted prices that are observable for the asset and liabilities, which include interest rates and credit risk. The Company has used mid-market pricing as a practical expedient for fair value measurements. Key inputs for currency derivatives are the spot rates, forward rates, interest rates, and credit derivative markets. The spot rate for each currency is the same spot rate used for all balance sheet translations at the measurement date and is sourced from the Federal Reserve Bulletin. The following values are interpolated from commonly quoted intervals available from Bloomberg: forward points and the London Interbank Offered Rate (LIBOR) used to discount and determine the fair value of assets and liabilities. One-year credit default swap spreads identified per counterparty at month end in Bloomberg are used to discount derivative assets for counterparty non-performance risk, all of which have terms of 13 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 Informatica’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 material risks at this time. Both the Company and the counterparties are expected to perform under the contractual terms of the instruments. See Note 5. Other Comprehensive Income, Note 6. Derivative Financial Instruments, and Note 12. Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements for a further discussion.

Informatica made a $1.5 million investment in the preferred stock of a privately held company in February 2010, which was classified as Level 3 for value measurement purposes. In determining the fair value of this investment, the Company uses the cash flow of the entity against its own cash flow assumptions at the time that investment was made.

During the first quarter of 2010, Informatica received $4.8 million for its $3.0 million investment in another privately held company due to the acquisition of such company. As a result of this transaction, the Company recorded a gain of $1.8 million in other income for the three months ended March 31, 2010.


 
9

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Fair Value of Financial Instruments, Concentrations of Credit Risk, and Credit Evaluations

The fair value of the Company’s cash, cash equivalents, short-term investments, accounts receivable, and accounts payable approximates their respective carrying amounts due to their short-term maturity.

Financial instruments, which subject the Company to concentrations of credit risk, consist primarily of cash equivalents, investments in marketable securities, and trade accounts receivable. The Company maintains its cash and cash equivalents and investments with high-quality financial institutions.

The Company performs ongoing credit evaluations of its customers, which are primarily located in the United States, Canada, and Europe, and generally does not require collateral. The Company makes judgments as to its ability to collect outstanding receivables and provide allowances for the portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided at differing rates, based upon the age of the receivable. In determining these percentages, the Company analyzes its historical collection experience and current economic trends. If the historical data it uses to calculate the allowance for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected. The Company evaluates its counterparties associated with the Company’s forward foreign exchange contracts at least quarterly as part of its cash flow hedge program. Since all these counterparties are large credit worthy commercial banking institutions, the Company does not consider counterparty non-performance a material risk.

Note 2.  Cash, Cash Equivalents, and Short-Term Investments

The Company’s marketable securities are classified as available-for-sale as of the balance sheet date and are reported at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income in stockholders’ equity, net of tax. Realized gains and losses and permanent declines in value, if any, on available-for-sale securities are reported in other income or expense as incurred.

Realized gains recognized for the three months ended March 31, 2010 and 2009 were $71,000 and $3,000, respectively. The realized gains are included in other income of the condensed consolidated statements of income for the respective periods. The cost of securities sold was determined based on the specific identification method. The Company sold approximately $35 million of its investment in marketable securities in December 2009 in anticipation of its cash requirement for the acquisition of Siperian.

The following is a summary of the Company’s investments as of March 31, 2010 and December 31, 2009 (in thousands):

   
March 31, 2010
 
 
 
 
 
 
 
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
 
Estimated
Fair Value
 
Cash
  $ 141,936     $     $     $ 141,936  
Cash equivalents:
                               
Money market funds
    3,089                   3,089  
Certificates of deposit
    6,999                   6,999  
Total cash equivalents
    10,088                   10,088  
Total cash and cash equivalents
    152,024                   152,024  
Short-term investments:
                               
Certificates of deposit
    4,560                   4,560  
Commercial paper
    4,985                   4,985  
Corporate notes and bonds
    61,428       288       (57 )     61,659  
Federal agency notes and bonds
    92,831       89       (64 )     92,856  
U.S. government notes and bonds
    14,423       37             14,460  
Municipal notes and bonds
    23,880       39       (1 )     23,918  
Total short-term investments
    202,107       453       (122 )     202,438  
Total cash, cash equivalents, and short-term investments *
  $ 354,131     $ 453     $ (122 )   $ 354,462  
___________

*
Total estimated fair value above included $212,526 comprised of cash equivalents and short-term investments at March 31, 2010.

 
10

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)





   
December 31, 2009
 
 
 
 
 
 
 
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
 
Estimated
Fair Value
 
Cash
  $ 147,302     $     $     $ 147,302  
Cash equivalents:
                               
Money market funds
    10,895                   10,895  
Municipal notes and bonds
    1,000                   1,000  
Total cash equivalents
    11,895                   11,895  
Total cash and cash equivalents
    159,197                   159,197  
Short-term investments:
                               
Certificates of deposit
    5,040                   5,040  
Commercial paper
    20,953                   20,953  
Corporate notes and bonds
    63,168       364       (42 )     63,490  
Federal agency notes and bonds
    143,840       200       (252 )     143,788  
U.S. government notes and bonds
    24,515       44       (10 )     24,549  
Municipal notes and bonds
    47,387       88       (12 )     47,463  
Total short-term investments
    304,903       696       (316 )     305,283  
Total cash, cash equivalents, and short-term investments *
  $ 464,100     $ 696     $ (316 )   $ 464,480  
___________

*
Total estimated fair value above included $317,178 comprised of cash equivalents and short-term investments at December 31, 2009.

In accordance with ASC 320, Investments – Debt and Equity Securities, Informatica considers the investment category and the length of time that an individual security has been in continuous unrealized loss position to make a decision that the investment is other-than-temporary impaired.

The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2010 (in thousands):

   
Less Than 12 Months
 
 
 
 
 
 
Fair Value
   
Gross
Unrealized
Losses
 
Corporate notes and bonds
  $ 17,871     $ (57 )
Federal agency notes and bonds
    38,437       (64 )
Municipal notes and bonds
    3,606       (1 )
    $ 59,914     $ (122 )

Informatica uses a market approach for determining the fair value of all its marketable securities and money market funds, which it has classified as Level 2 and Level 1, respectively. The declines in value of these investments are primarily related to changes in interest rates and are considered to be temporary in nature.

The following table summarizes the cost and estimated fair value of the Company’s cash equivalents and short-term investments by contractual maturity at March 31, 2010 (in thousands):

   
Cost
   
Fair Value
 
Due within one year
  $ 155,186     $ 155,543  
Due one year to two years
    51,635       51,640  
Due after two years
    5,374       5,343  
Total
  $ 212,195     $ 212,526  


 
11

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)




Note 3. Goodwill and Intangible Assets

The carrying amounts of intangible assets other than goodwill as of March 31, 2010 and December 31, 2009 are as follows (in thousands):

   
March 31, 2010
   
December 31, 2009
 
 
 
 
 
Gross
Carrying
Amount
   
 
Accumulated
Amortization
   
Net
Amount
   
Gross
Carrying
Amount
   
 
Accumulated
Amortization
   
Net
Amount
 
Developed and core technology
  $ 86,339     $ (24,786 )   $ 61,553     $ 55,350     $ (22,048 )   $ 33,302  
Customer relationships
    33,534       (16,023 )     17,511       31,426       (14,029 )     17,397  
Vendor relationships
    7,908       (1,408 )     6,500       7,908       (992 )     6,916  
Other:
                                               
Trade names
    2,494       (975 )     1,519       2,494       (835 )     1,659  
Covenants not to compete
    2,000       (1,317 )     683       2,000       (1,217 )     783  
Patents
    3,720       (285 )     3,435       3,720       (191 )     3,529  
In-process research and development
    1,920             1,920                    
    $ 137,915     $ (44,794 )   $ 93,121     $ 102,898     $ (39,312 )   $ 63,586  

Amortization expense of intangible assets was $5.5 million and $3.6 million for the three months ended March 31, 2010 and 2009, respectively. The Company’s weighted-average amortization period is six years for developed and core technology, is five years for customer relationships, vendor relationships, trade names, and covenants not to compete, and is ten years for patents. The amortization expense related to identifiable intangible assets as of March 31, 2010 is expected to be $17.3 million for the remainder of 2010, $21.2 million, $18.3 million, $15.7 million, and $8.4 million for the years ending December 31, 2011, 2012, 2013, and 2014, respectively, and $10.3 million for the years thereafter.

The increase of $31.0 million in the gross carrying amount of developed and core technology was primarily due to the intangibles of $21.3 million and $9.8 million acquired from Siperian and 29West, respectively. The increase of $2.1 million in the gross carrying amount of customer relationships was primarily due to the intangibles of $1.6 million and $0.6 million acquired from Siperian and 29West, respectively. See Note 15. Acquisitions, of Notes to Condensed Consolidated Financial Statements for a further discussion. In addition, $2.3 million of developed and core technology, and $3.7 million of customer relationships at March 31, 2010, related to the Identity Systems and PowerData acquisitions, were recorded in European local currencies; therefore, the gross carrying amount and accumulated amortization are subject to periodic translation adjustments.

Subsequent to adoption of SFAS No. 141(R) on January 1, 2009, Business Combinations (ASC 805), the Company has acquired certain customer relationships for approximately $13.3 million from Applimation, AddressDoctor, Agent Logic, Siperian, and 29West acquisitions, which consist of software maintenance agreements. These renewable agreements are usually for a duration of one year and renewable afterward. The costs of renewal of these contracts are reflected in the cost of service revenues.

In the first quarter of 2010, in conjunction with our acquisition of Siperian, we recorded in-process research and development (IPR&D) of $1.9 million. The IPR&D capitalized costs were associated with software development efforts in process at the time of the business combination that had not yet achieved technological feasibility and no future alternative uses had been identified.

The change in the carrying amount of goodwill for the three months ended March 31, 2010 is as follows (in thousands):

 
 
 
March 31,
2010
 
Beginning balance as of December 31, 2009
  $ 287,068  
Goodwill recorded in acquiring Siperian
    78,360  
Goodwill recorded in acquiring 29West
    36,397  
Local currency translation and other adjustments
    (1,930 )
Ending balance as of March 31, 2010
  $ 399,895  

The goodwill acquired through the Siperian and 29West acquisitions is nondeductible for tax purposes.


 
12

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 4. Convertible Senior Notes

On March 8, 2006, the Company issued and sold Convertible Senior Notes (“Notes”) with an aggregate principal amount of $230 million due 2026. The Company pays interest at 3.0% per annum to holders of the Notes, payable semi-annually on March 15 and September 15 of each year, commencing September 15, 2006. Each $1,000 principal amount of Notes is initially convertible, at the option of the holders, into 50 shares of our common stock prior to the earlier of the maturity date (March 15, 2026) or the redemption or repurchase of the Notes. The initial conversion price represented a premium of 29.28% relative to the last reported sale price of common stock of the Company on the NASDAQ Stock Market (Global Select) of $15.47 on March 7, 2006. The conversion rate is subject to certain adjustments. The conversion rate initially represents a conversion price of $20.00 per share. After March 15, 2011, the Company may from time to time redeem the Notes, in whole or in part, for cash, at a redemption price equal to the full principal amount of the Notes, plus any accrued and unpaid interest. Holders of the Notes may require the Company to repurchase all or a portion of their Notes at a purchase price in cash equal to the full outstanding principal amount of the Notes plus any accrued and unpaid interest on March 15, 2011, March 15, 2016, and March 15, 2021, or upon the occurrence of certain events including a change in control.

Pursuant to a Purchase Agreement (the “Purchase Agreement”), the Notes were sold for cash consideration in a private placement to an initial purchaser, UBS Securities LLC, an “accredited investor,” within the meaning of Rule 501 under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the private placement exemption afforded by Section 4(2) of the Securities Act. The initial purchaser reoffered and resold the Notes to “qualified institutional buyers” under Rule 144A of the Securities Act without being registered under the Securities Act, in reliance on applicable exemptions from the registration requirements of the Securities Act. In connection with the issuance of the Notes, the Company filed a shelf registration statement with the SEC for the resale of the Notes and the common stock issuable upon conversion of the Notes. The Company also agreed to periodically update the shelf registration and to keep it effective until the earlier of the date the Notes or the common stock issuable upon conversion of the Notes is eligible to be sold to the public pursuant to Rule 144(k) of the Securities Act or the date on which there are no outstanding registrable securities. The Company has evaluated the terms of the call feature, redemption feature, and the conversion feature under applicable accounting literature, including Derivatives and Hedging  (ASC 815) and Debt With Conversion and Other Options (ASC 470-20) and concluded that none of these features should be separately accounted for as derivatives.

In connection with the issuance of the Notes, the Company incurred $6.2 million of issuance costs, which primarily consisted of investment banker fees and legal and other professional fees. These costs are classified within Other Assets and are being amortized as a component of interest expense using the effective interest method over the life of the Notes from issuance through March 15, 2026. If the holders require repurchase of some or all of the Notes on the first repurchase date, which is March 15, 2011, the Company would accelerate amortization of the pro rata share of the unamortized balance of the issuance costs on such date. Also, if the Company repurchases some of the outstanding balance of the Notes, it would accelerate amortization of the pro rata share of the unamortized balance of the issuance costs at the time of such repurchases. If the holders require conversion of some or all of the Notes when the conversion requirements are met, the Company would accelerate amortization of the pro rata share of the unamortized balance of the issuance cost to additional paid-in capital on such date. Amortization expenses related to the issuance costs were $68,000 and $535,000 for the three-month periods ended March 31, 2010 and 2009, respectively. Interest expenses on the Notes were $1.5 million and $1.6 million for the three-month periods ended March 31, 2010 and 2009, respectively. Interest payments of $3.0 million and $3.3 million were made in the three-month periods ended March 31, 2010 and 2009, respectively.

In October 2008, Informatica’s Board of Directors authorized the repurchase of a portion of its outstanding Notes due in 2026 in privately negotiated transactions with the holders of the Notes. In the fourth quarter of 2008, Informatica repurchased $9.0 million of its outstanding Convertible Senior Notes at a cost of $7.8 million at a discount. As a result, $1.0 million, net of prorated deferred expenses written off for $0.2 million, is reflected in other income for the three months ended December 31, 2008. During the three-month period ended March 31, 2009, Informatica repurchased an additional $20.0 million of its outstanding Notes, net of $0.3 million gain due to early retirement of the Notes and $0.5 million due to recapture of prorated deferred expenses, at a discounted cost of $19.2 million.


 
13

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The following table sets forth the ending balance of the Convertible Senior Notes as of March 31, 2010 and December 31, 2009 resulting from the repurchase activities in the respective periods (in thousands):

Balance at January 1, 2008
  $ 230,000  
Face amount of Notes repurchased during the fourth quarter of 2008
    (9,000 )
Balance at December 31, 2008
    221,000  
Face amount of Notes repurchased during the first quarter of 2009
    (20,000 )
Balance at December 31, 2009
  $ 201,000  
Face amount of Notes repurchased during the first quarter of 2010
     
Balance at March 31, 2010
  $ 201,000  


Note 5. Other Comprehensive Income

Accumulated other comprehensive income refers to gains and losses that, under GAAP, are recorded as an element of stockholders’ equity and are excluded from net income, net of tax. Other comprehensive income activity consisted of the following items (in thousands):
 
 
 
 
 
Three Months Ended
March 31,
 
 
 
2010
   
2009
 
Net income, as reported
  $ 11,794     $ 11,059  
Other comprehensive income:
               
Unrealized loss on investments (1)
    (30 )     (496 )
Cumulative translation adjustments (2)
    (4,480 )     (2,831 )
Derivatives gain (loss) (3)
    264       (350 )
Other comprehensive income
  $ 7,548     $ 7,382  
_________

(1)
The tax effects on unrealized loss on investments were $19,000 and $317,000 for the three months ended March 31, 2010 and 2009, respectively.
(2)
The tax effects on cumulative translation adjustments were $144,000 and $73,000 for the three months ended March 31, 2010 and 2009, respectively.
(3)
The tax effects on cash flow hedging gain (loss) were $169,000 and ($223,000) for the three months ended March 31, 2010 and 2009, respectively.

Ending balance of accumulated other comprehensive loss as of March 31, 2010 and December 31, 2009 consisted of the following (in thousands):
 
 
 
 
March 31,
2010
   
December 31,
2009
 
Net unrealized gain on available-for-sale investments
  $ 202     $ 232  
Cumulative translation adjustments
    (5,589 )     (1,109 )
Derivatives gain (loss)
    173       (91 )
Accumulated other comprehensive loss
  $ (5,214 )   $ (968 )

Informatica did not have any other-than-temporary gain or loss reflected in accumulated other comprehensive loss as of March 31, 2010 and December 31, 2009.

Informatica determines the basis of the cost of a security sold and the amount reclassified out of other comprehensive income into statement of income based on specific identification.

 
14

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)




The following table reflects the change in accumulated investment unrealized gain (loss) included in other comprehensive income for the three months ended March 31, 2010 and 2009 (in thousands):

   
Three Months Ended March  31,
 
 
 
2010
   
2009
 
Net unrealized investment gain balance, net of tax effects at beginning of the year
  $ 232     $ 879  
Investment unrealized loss, net of tax effects
    (30 )     (496 )
Net unrealized investment gain balance, net of tax effects at end of the period
  $ 202     $ 383  

The following table reflects the change in accumulated derivatives gain (loss) included in other comprehensive income for the three months ended March 31, 2010 and 2009 (in thousands):

   
Three Months Ended March 31,
 
 
 
2010
   
2009
 
Net unrealized derivatives gain (loss) balance, net of tax effects at beginning of the year
  $ (91 )   $ 51  
Reclassified to the statement of income, net of tax effects
    10       39  
Derivatives gain (loss) for hedging transactions, net of tax effects
    254       (389 )
Net unrealized derivatives gain (loss) balance, net of tax effects at end of the period
  $ 173     $ (299 )

See Note 1. Summary of Significant Accounting Policies, Note 6. Derivative Financial Instruments, and Note 12. Commitments and Contingencies of Notes to Condensed Consolidated Financial Statements for a further discussion.


Note 6. Derivative Financial Instruments

The functional currency of Informatica’s foreign subsidiaries is their local currencies, except for Informatica Cayman Ltd., which is in euros. The Company translates all assets and liabilities of its foreign subsidiaries into U.S. dollars at current exchange rates as of the applicable balance sheet date. Revenues and expenses are translated at the average exchange rate prevailing during the period, and the gains and losses resulting from the translation of the foreign subsidiaries’ financial statements are reported in accumulated other comprehensive income (loss), as a separate component of stockholders’ equity. Net gains and losses resulting from foreign exchange transactions are included in other income or expense, net in the condensed consolidated statements of income.

Informatica’s results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Indian rupee, Israeli shekel, euro, British pound sterling, Canadian dollar, Japanese yen, Brazilian real, and Australian dollar. The Company initiated certain cash flow hedge programs in an attempt to reduce the impact of certain foreign currency fluctuations starting in the fourth quarter of 2008. The purpose of these programs is to reduce the volatility of identified cash flows and expenses caused by movement in certain foreign currency exchange rates, in particular, the Indian rupee and Israeli shekel.Informatica is currently using foreign exchange forward contracts to hedge certain non-functional currency anticipated expenses reflected in the intercompany accounts between Informatica U.S. and its two subsidiaries in India and Israel. Exposures resulting from fluctuations in the foreign currency exchange rates applicable to these foreign denominated expenses are covered through the Company’s cash flow hedge programs initiated since the fourth quarter of 2008. The foreign exchange contracts initiated in 2008 expired in November 2009. In December 2009, the Company entered into some additional forward contracts with monthly expiration dates through January 18, 2011 for Indian rupees and Israeli shekels. 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.

Informatica has forecasted the amount of its anticipated foreign currency expenses based on its historical performance and its 2009 and 2010 financial plans. As of March 31, 2010, these foreign exchange contracts, carried at fair value, have a maturity of ten months or less. During the first quarter of 2010, the Company did not enter into any new forward exchange contracts, and the Company closed out approximately two foreign exchange contracts per month when the foreign currency denominated expenses are paid and any gain or loss is offset against income.
 
Informatica and its subsidiaries do not enter into derivative contracts for speculative purposes.

 
15

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



As of March 31, 2010, a derivative gain of $173,000 was included in accumulated other comprehensive income, net of applicable taxes. The Company expects to reclassify this amount to its condensed consolidated statements of income during the remaining duration of its foreign exchange forward contracts that expire on January 18, 2011.
 
Informatica evaluates the effectiveness of its hedge programs using statistical analysis at the inception of the hedge prospectively as well as retrospectively. Informatica uses the spot price method and excludes the time value of derivative instruments for determination of hedge effectiveness.  

The effect of derivative instruments designated as cash flow hedges on the accumulated other comprehensive income and condensed consolidated statements of income for the three months ended March 31, 2010 and 2009 is as follows (in thousands):

   
Three Months Ended March 31, 2010
   
Three Months Ended March 31, 2009
 
 
 
Gain
Recognized (1)
   
Gain (Loss)
Reclassified (2)
   
Gain (Loss)
Recognized (3)
   
Loss
Recognized (1)
   
Loss
Reclassified (2)
   
Gain
Recognized (3)
 
Indian rupee
  $ 374     $ (19 )   $ 14     $ (365 )   $ (20 )   $ 104  
Israeli shekel
    44       3       (4 )     (272 )     (45 )     14  
Total
  $ 418     $ (16 )   $ 10     $ (637 )   $ (65 )   $ 118  

 

 
(1)
Amount of gain and loss recognized in accumulated other comprehensive income (effective portion).
     
 
(2)
Amount of gain and loss reclassified from accumulated other comprehensive income into the operating expenses of condensed consolidated statements of income (effective portion).

 
(3)
Amount of gain and loss recognized in income on derivatives for the amount excluded from effectiveness testing located in operating expenses of condensed consolidated statements of income. The Company did not have any ineffective portion of derivatives recorded in the condensed consolidated statements of income.

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

The following tables reflect the fair value amounts for derivatives designated and not designated as hedging instruments at March 31, 2010 and December 31, 2009 and the gain (loss) recognized in other income, net for non-designated foreign currency forward contracts for the three months ended March 31, 2010 and 2009 (in thousands):

 
 
 
Derivatives Designated as Hedging Instruments under ASC 815:
 
Derivative
Assets at
March 31,
2010 (1)
   
Derivative
Liabilities at
March 31,
 2010 (2)
 
Indian rupee
  $ 204     $  
Israeli shekel
    39        
Total
  $ 243     $  

 
 
 
Derivatives Designated as Hedging Instruments under ASC 815:
 
Derivative
Assets at
December 31,
2009 (1)
   
Derivative
Liabilities at
December 31,
2009 (2)
 
Indian rupee
  $     $ 206  
Israeli shekel
    1        
Total
  $ 1     $ 206  
                 





 
16

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)




 
 
 
Derivatives Not Designated as Hedging Instruments under ASC 815:
 
Derivative
Assets at
March 31,
2010 (1)
   
Derivative
Liabilities at
March 31,
2010 (2)
 
Indian rupee
  $ 28     $  
Israeli shekel
    6        
Total
  $ 34     $  

There were no derivative assets or liabilities not designated as hedging instruments at December 31, 2009.

 
(1)
Included in prepaid expenses and other current assets on the condensed consolidated balance sheets.
     
 
(2)
Included in accrued liabilities on the condensed consolidated balance sheets.

 
 
Gain (Loss) Recognized in Other Income, Net for Derivatives Not Designated as Hedging Instruments under ASC 815:
 
Three Months
 Ended
March 31,
2010
   
Three Months
Ended
March 31,
2009
 
Indian rupee
  $ 29     $ (21 )
Israeli shekel
    (4 )     (2 )
Total
  $ 25     $ (23 )


Note 7. Stock Repurchases and Retirement of Convertible Senior Notes

The purpose of Informatica’s stock repurchase program is, among other things, to help offset the dilution caused by the issuance of stock under our employee stock option and employee stock purchase plans. The number of shares acquired and the timing of the repurchases are based on several factors, including general market conditions and the trading price of the Company’s common stock. These purchases can be made from time to time in the open market and are funded from the Company’s available working capital.

In April 2006, our Board of Directors authorized a stock repurchase program of up to $30 million of our common stock until April 2007. In April 2007, Informatica’s Board of Directors authorized a stock repurchase program for up to an additional $50 million of its common stock. In April 2008, Informatica’s Board of Directors authorized repurchase of an additional $75 million of its common stock under the stock repurchase program. In October 2008, Informatica’s Board of Directors approved expanding the repurchase program to include the repurchase of a portion of its outstanding Convertible Senior Notes (“Notes”) due in 2026 in privately negotiated transactions with holders of the Notes.

From April 2007 to December 31, 2009, the Company repurchased 6,498,121 shares of its common stock at a cost of $97 million and $29 million of its outstanding Notes at a cost of $27 million. The Company has approximately $0.3 million available to repurchase additional shares of its common stock or redeem the remaining of its Notes under this program as of December 31, 2009. In January 2010, the Board of Directors authorized repurchase of an additional $50 million of its common stock and outstanding Notes under the stock repurchase program. This repurchase program does not have an expiration date.

The repurchased shares are retired and reclassified as authorized and unissued shares of common stock. The Company may continue to repurchase its common stock and outstanding Notes from time to time, as determined by management under programs approved by the Board of Directors.

The Company did not have any repurchases pursuant to the stock repurchase program during the three months ended March 31, 2010.

Note 8. Stock Compensation

Informatica grants restricted stock units (“RSUs”) and stock options under its 2009 Employee Stock Incentive Plan. Informatica uses the Black-Scholes-Merton option pricing model to determine the fair value of option awards granted. The Company is using a blend of average historical and market-based implied volatilities for calculating the expected volatilities for employee stock options

 
17

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



and market-based implied volatilities for its Employee Stock Purchase Plan (“ESPP”). The expected term of employee stock options granted is derived from historical exercise patterns of the options while the expected term of ESPP is based on the contractual terms. The risk-free interest rate for the expected term of the option and ESPP is based on the U.S. Treasury yield curve in effect at the time of grant.

Stock Compensation (ASC 718) 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 Company increased its forfeiture rate for stock options from 8% in 2009 to 10% in 2010, which did not materially impact its stock compensation. The forfeiture rate for RSUs remained at 10% for both 2009 and 2010.

The Company amortizes its stock compensation using a straight-line method over the vesting term of the awards.

The Company estimated the fair value of its stock compensation awards related to stock options granted using the following assumptions:

 
 
 
Three Months Ended
March 31,
 
 
 
2010
   
2009
 
Option Grants:
           
Expected volatility
    36 %     46-48 %
Weighted-average volatility
    36 %     46 %
Expected dividends
           
Expected term of options (in years)
    3.7       3.6  
Risk-free interest rate
    1.9 %     1.6 %
ESPP: *
               
Expected volatility
    33 %     51 %
Weighted-average volatility
    33 %     51 %
Expected dividends
           
Expected term of ESPP (in years)
    0.5       0.5  
Risk-free interest rate — ESPP
    1.7 %     0.4 %
____________

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

The allocations of stock compensation for the three months ended March 31, 2010 and 2009 are as follows (in thousands):
 
 
 
 
Three Months Ended
March 31,
 
 
 
2010
   
2009
 
Cost of service revenues
  $ 662     $ 531  
Research and development
    1,609       1,118  
Sales and marketing
    1,773       1,367  
General and administrative
    1,438       1,183  
Total stock compensation
    5,482       4,199  
Tax benefit of stock compensation
    (1,140 )     (889 )
Total stock compensation, net of tax benefit
  $ 4,342     $ 3,310  


Note 9. Facilities Restructuring Charges

2004 Restructuring Plan

In October 2004, the Company announced a restructuring plan (“2004 Restructuring Plan”) related to the December 2004 relocation of the Company’s corporate headquarters within Redwood City, California. In 2005, the Company subleased the available space at the Pacific Shores Center under the 2004 Restructuring Plan. The Company recorded restructuring charges of approximately $103.6 million, consisting of $21.6 million in leasehold improvement and asset write-offs and $82.0 million related to estimated

 
18

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



facility lease losses, which consist of the present value of lease payment obligations for the remaining three-year lease term (as of March 31, 2010) of the previous corporate headquarters, net of actual and estimated sublease income. The Company has actual and estimated sublease income, including the reimbursement of certain property costs such as common area maintenance, insurance, and property tax, net of estimated broker commissions of $3.9 million for the remainder of 2010, $5.4 million in 2011, $5.5 million in 2012, and $1.7 million in 2013.

Subsequent to 2004, the Company continued to record accretion on the cash obligations related to the 2004 Restructuring Plan. Accretion represents imputed interest and is the difference between the non-discounted future cash obligations and the discounted present value of these cash obligations. At March 31, 2010, the Company will recognize approximately $4.5 million of accretion as a restructuring charge over the remaining four years term of the lease as follows: $1.6 million for the remainder of 2010, $1.6 million in 2011, $1.0 million in 2012, and $0.3 million in 2013.

2001 Restructuring Plan

During 2001, the Company announced a restructuring plan (“2001 Restructuring Plan”) and recorded restructuring charges of approximately $12.1 million, consisting of $1.5 million in leasehold improvement and asset write-offs and $10.6 million related to the consolidation of excess leased facilities in the San Francisco Bay Area and Texas.

During 2002, the Company recorded additional restructuring charges of approximately $17.0 million, consisting of $15.1 million related to estimated facility lease losses and $1.9 million in leasehold improvement and asset write-offs. The Company calculated the estimated costs for the additional restructuring charges based on current market information and trend analysis of the real estate market in the respective area.

In December 2004, the Company recorded additional restructuring charges of $9.0 million related to estimated facility lease losses. The restructuring accrual adjustments recorded in the third and fourth quarters of 2004 were the result of the relocation of its corporate headquarters within Redwood City, California in December 2004, an executed sublease for the Company’s excess facilities in Palo Alto, California during the third quarter of 2004, and an adjustment to management’s estimate of occupancy of available vacant facilities. In 2005, the Company subleased the available space at the Pacific Shores Center under the 2001 Restructuring Plan through May 2013, which was subsequently subleased until July 2013 under a December 2007 sublease agreement.

A summary of the activity of the accrued restructuring charges for the three months ended March 31, 2010 is as follows (in thousands):

 
 
 
 
 
Accrued
Restructuring
Charges at
December 31,
   
 
 
Restructuring
   
 
 
 
Net Cash
   
 
 
 
Non-Cash
   
Accrued
Restructuring
Charges at
March 31,
 
 
 
2009
   
Charges
   
Adjustments
   
Payment
   
Reclass
   
2010
 
2004 Restructuring Plan
                                   
Excess lease facilities
  $ 47,496     $ 616     $ 40     $ (3,224 )   $ (40 )   $ 44,888  
2001 Restructuring Plan
                                               
Excess lease facilities
    5,229                   (380 )           4,849  
    $ 52,725     $ 616     $ 40     $ (3,604 )   $ (40 )   $ 49,737  

For the three months ended March 31, 2010, the Company recorded $616,000 of restructuring charges from accretion charges related to the 2004 Restructuring Plan. Actual future cash requirements may differ from the restructuring liability balances as of March 31, 2010 if the Company is unable to sublease the excess leased facilities after the expiration of the subleases, there are changes to the time period that facilities are vacant, or the actual sublease income is different from current estimates. If the subtenants do not extend their subleases and the Company is unable to sublease any of the related Pacific Shores facilities during the remaining lease terms through 2013, restructuring charges could increase by approximately $3.9 million.

Inherent in the estimation of the costs related to the restructuring efforts are assessments related to the most likely expected outcome of the significant actions to accomplish the restructuring. The estimates of sublease income may vary significantly depending, in part, on factors that may be beyond the Company’s control, such as the time periods required to locate and contract with suitable sublessees when the Company’s existing sublessees vacate as well as the market rates at the time of entering into new sublease agreements.

 
19

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)




Note 10. Income Taxes

The Company’s effective tax rates were 27% and 30% for the three-month periods ended March 31, 2010 and 2009, respectively. The effective tax rates differed from the federal statutory rate of 35% primarily due to benefits of certain earnings from operations in lower-tax jurisdictions throughout the world, offset by compensation expense related to non-deductible stock compensation, nondeductible transaction costs, and the accrual of reserves related to uncertain tax positions. The Company has not provided for residual U.S. taxes in any of these lower-tax jurisdictions since it intends to indefinitely reinvest these earnings offshore.

In assessing the need for any additional valuation allowance in the quarter ended March 31, 2010, 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, consistent with prior quarters it was considered more likely than not that the Company’s deferred tax assets that are not stock compensation related would be realizable. As a result, the remaining valuation allowance is primarily related to deferred tax assets that were created through the benefit from stock option deductions on a “with” and “without” basis and recorded on the balance sheet with a corresponding valuation allowance prior to the Company’s adoption of Stock Compensation (ASC 718).  Pursuant to Stock Compensation (ASC 718-740-25-10), the benefit of these deferred tax assets will be recorded in the stockholders’ equity when they are utilized on an income tax return to reduce the Company’s taxes payable, and as such, they will not impact the Company’s effective tax rate.

The unrecognized tax benefits related to Income Taxes (ASC 740), if recognized, would impact the income tax provision by $15.4 million and $13.2 million as of March 31, 2010 and 2009, respectively. The Company has elected to include interest and penalties as a component of tax expense. Accrued interest and penalties as of March 31, 2010 and 2009 were approximately $2.4 million and $2.0 million, respectively.

The Company files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. Informatica is under examination by the Internal Revenue Service for fiscal years 2005 and 2006. Due to net operating loss carry-forwards, substantially all of our tax years remained open for tax examination. In 2009, the Company reached an agreement with the Internal Revenue Service to settle certain matters, including cost sharing and buy-in amounts for tax years ended December 31, 2001 through 2006. The tax provision impact as a result of the settlement was $7.0 million of which $6.1 million was accrued for previously.

The Company has been informed by certain state and foreign taxing authorities that it was selected for examination. Most state and foreign jurisdictions have three or four open tax years at any point in time. The field work for certain state audits has commenced and is at various stages of completion as of March 31, 2010.

Although the outcome of any tax audit is uncertain, the Company believes that it has adequately provided in its financial statements for any additional taxes that it may be required to pay as a result of such examinations. The Company regularly assesses the likelihood of outcomes resulting from these examinations to determine the adequacy of its provision for income taxes, and believes its current reserve to be reasonable. If tax payments ultimately prove to be unnecessary, the reversal of these tax liabilities would result in tax benefits in the period that the Company determined such liabilities were no longer necessary. However, if an ultimate tax assessment exceeds its estimate of tax liabilities, an additional tax provision might be required.


Note 11. Net Income per Common Share

Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share reflects the potential dilution of securities by adding other common stock equivalents, primarily stock options and common shares potentially issuable under the terms of the Convertible Senior Notes, to the weighted-average number of common shares outstanding during the period, if dilutive. Potentially dilutive securities have been excluded from the computation of diluted net income per share if their inclusion is anti-dilutive.


 
20

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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


 
 
 
Three Months Ended
March 31,
 
 
 
2010
   
2009
 
Net income
  $ 11,794     $ 11,059  
Effect of convertible senior notes, net of related tax effects
    961       1,138  
Net income adjusted
  $ 12,755     $ 12,197  
                 
Weighted-average shares of common stock used to compute basic net income per share (excluding unvested restricted stock)
    90,748       86,862  
Effect of dilutive common stock equivalents:
               
Dilutive effect of unvested restricted stock units
    384        
Dilutive effect of employee stock options
    6,192       2,951  
Dilutive effect of convertible senior notes
    10,050       10,617  
Shares used in computing diluted net income per common share
    107,374       100,430  
Basic net income per common share
  $ 0.13     $ 0.13  
Diluted net income per common share
  $ 0.12     $ 0.12  

The diluted net income per common share calculation requires the dilutive effect of convertible securities to be reflected in the diluted net income per share by application of the “if-converted” method. This method assumes an add-back of interest and amortization of issuance cost, net of income taxes, to net income if the securities are converted. The Company determined that for the three months ended March 31, 2010 and 2009, the Convertible Senior Notes had a dilutive effect on diluted net income per share, and as such, it had an add-back of $1.0 million and $1.1 million for the three months ended March 31, 2010 and 2009, respectively, in interest and issuance cost amortization, net of income taxes, to net income for the diluted net income per share calculation.

In calculating its diluted net income per common share, Informatica excluded 18,000 and 3,124,000 of its options for the three months ended March 31, 2010 and 2009, respectively, since the inclusion of these options would have been anti-dilutive.


Note 12. Commitments and Contingencies

Lease Obligations

In December 2004, the Company relocated its corporate headquarters within Redwood City, California and entered into a new lease agreement. The initial lease term was from December 15, 2004 to December 31, 2007 with a three-year option to renew to December 31, 2010 at fair market value. In May 2007, the Company exercised its renewal option to extend the office lease term to December 31, 2010. In May 2009, the Company executed the lease amendment to further extend the lease term for another 3 years to December 31, 2013. The future minimum contractual lease payments are $2.5 million for the remainder of 2010, $3.4 million, $3.5 million, and $3.6 million for the years ending December 31, 2011, 2012, and 2013, respectively.

The Company entered into two lease agreements in February 2000 for two office buildings at the Pacific Shores Center in Redwood City, California, which was used as its former corporate headquarters from August 2001 through December 2004. The leases expire in July 2013. In 2001, a financial institution issued a $12.0 million letter of credit, which required the Company to maintain certificates of deposits as collateral until the leases expire in 2013. As of June 2008, however, the Company was no longer required to maintain certificates of deposits for this letter of credit related to its former corporate headquarters leases at the Pacific Shores Center in Redwood City, California.

The Company leases certain office facilities under various non-cancelable operating leases, including those described above, which expire at various dates through 2013 and require the Company to pay operating costs, including property taxes, insurance, and maintenance. Operating lease payments in the table below include approximately $57.0 million for operating lease commitments for facilities that are included in restructuring charges. See Note 9. Facilities Restructuring Charges, above, for a further discussion.

 
21

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Future minimum lease payments as of March 31, 2010 under non-cancelable operating leases with original terms in excess of one year are summarized as follows (in thousands):

   
Operating
Leases
   
Sublease
Income
   
 
Net
 
Remaining 2010
  $ 20,742     $ 1,848     $ 18,894  
2011
    26,316       2,503       23,813  
2012
    25,849       2,550       23,299  
2013
    17,182       1,313       15,869  
2014
    1,858             1,858  
Thereafter
    1,967             1,967  
    $ 93,914     $ 8,214     $ 85,700  

Of these future minimum lease payments, the Company has accrued $49.7 million in the facilities restructuring accrual at March 31, 2010. This accrual includes the minimum lease payments of $57.0 million and an estimate for operating expenses of $17.4 million and sublease commencement costs associated with excess facilities and is net of estimated sublease income of $20.2 million and a present value discount of $4.5 million recorded in accordance with Statement of Financial Accounting Standards No. 146 (As Amended), Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”).

Warranties

The Company generally provides a warranty for its software products and services to its customers for a period of three to six months and accounts for its warranties. The Company’s software products’ media are generally warranted to be free from defects in materials and workmanship under normal use, and the products are also generally warranted to substantially perform as described in certain Company documentation and the product specifications. The Company’s services are generally warranted to be performed in a professional manner and to materially conform to the specifications set forth in a customer’s signed contract. In the event there is a failure of such warranties, the Company generally will correct or provide a reasonable work-around or replacement product. The Company has provided a warranty accrual of $0.2 million as of March 31, 2010 and December 31, 2009. To date, the Company’s product warranty expense has not been significant.

Indemnification

The Company sells software licenses and services to its customers under contracts, which the Company refers to as the License to Use Informatica Software (“License Agreement”). Each License Agreement contains the relevant terms of the contractual arrangement with the customer and generally includes certain provisions for indemnifying the customer against losses, expenses, liabilities, and damages that may be awarded against the customer in the event the Company’s software is found to infringe upon a patent, copyright, trademark, or other proprietary right of a third party. The License Agreement generally limits the scope of and remedies for such indemnification obligations in a variety of industry-standard respects, including but not limited to certain time and scope limitations and a right to replace an infringing product with a non-infringing product.

The Company believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of the License Agreement. In addition, the Company requires its employees to sign a proprietary information and inventions agreement, which assigns the rights to its employees’ development work to the Company. To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions, and no material claims against the Company are outstanding as of March 31, 2010. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the License Agreement, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

In addition, the Company indemnifies its officers and directors under the terms of indemnity agreements entered into with them, as well as pursuant to our certificate of incorporation, bylaws, and applicable Delaware law. To date, the Company has not incurred any costs related to these indemnifications.

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 Contingencies (ASC 450).

 
22

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Derivative Financial Instruments

Informatica uses foreign exchange forward contracts to hedge certain operational (“cash flow”) exposures resulting from changes in foreign currency exchange rates. Such cash flow exposures result from portions of its forecasted expenditures denominated in currencies other than the U.S. dollar, primarily the Indian rupee and Israeli shekel. As of March 31, 2010, these foreign exchange contracts, carried at fair value, have a maturity of ten months or less. Informatica enters into these foreign exchange contracts to hedge forecasted operating expenditures in the normal course of business, and accordingly, they are not speculative in nature.

As of March 31, 2010, the notional amounts of the outstanding foreign exchange forward contracts that the Company committed to purchase in the fourth quarter of 2009 for the Indian rupees and Israeli shekels were $9.8 million and $2.9 million, respectively.
 
See Note 1. Summary of Significant Accounting Policies, Note 5. Other Comprehensive Income, and Note 6. Derivative Financial Instruments, of Notes to Condensed Consolidated Financial Statements for a further discussion.
 

 
Litigation

On November 8, 2001, a purported securities class action complaint was filed in the U.S. District Court for the Southern District of New York. The case is entitled In re Informatica Corporation Initial Public Offering Securities Litigation, Civ. No. 01-9922 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) (S.D.N.Y.). Plaintiffs’ amended complaint was brought purportedly on behalf of all persons who purchased our common stock from April 29, 1999 through December 6, 2000. It names as defendants Informatica Corporation, two of our former officers (the “Informatica defendants”), and several investment banking firms that served as underwriters of our April 29, 1999 initial public offering (IPO) and September 28, 2000 follow-on public offering. The complaint alleges liability as to all defendants under Sections 11 and/or 15 of the Securities Act of 1933 and Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934, on the grounds that the registration statements for the offerings did not disclose that: (1) the underwriters had agreed to allow certain customers to purchase shares in the offerings in exchange for excess commissions paid to the underwriters; and (2) the underwriters had arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The complaint also alleges that false analyst reports were issued. No specific damages are claimed.

Similar allegations were made in other lawsuits challenging more than 300 other initial public offerings and follow-on offerings conducted in 1999 and 2000. The cases were consolidated for pretrial purposes. On February 19, 2003, the Court ruled on all defendants’ motions to dismiss. The Court denied the motions to dismiss the claims under the Securities Act of 1933. The Court denied the motion to dismiss the Section 10(b) claim against Informatica and 184 other issuer defendants. The Court denied the motion to dismiss the Section 10(b) and 20(a) claims against the Informatica defendants and 62 other individual defendants.

The Company accepted a settlement proposal presented to all issuer defendants. In this settlement, plaintiffs will dismiss and release all claims against the Informatica defendants, in exchange for a contingent payment by the insurance companies collectively responsible for insuring the issuers in all of the IPO cases, and for the assignment or surrender of control of certain claims we may have against the underwriters. The Informatica defendants will not be required to make any cash payments in the settlement, unless the pro rata amount paid by the insurers in the settlement exceeds the amount of the insurance coverage, a circumstance that we do not believe will occur. Any final settlement will require approval of the Court after class members are given the opportunity to object to the settlement or opt out of the settlement.

All parties in all lawsuits have reached a settlement which will not require the Company to contribute cash.  The Court gave preliminary approval to the settlement on June 10, 2009 and gave final approval on October 6, 2009. Several objectors have filed notices of appeals of the final judgment dismissing the cases upon the settlement.

On July 15, 2002, the Company filed a patent infringement lawsuit against Acta Technology, Inc., now known as Business Objects Data Integration, Inc. (“BODI”) and the final judgment in the Company’s favor included a permanent injunction preventing BODI from shipping the infringing technology which remains in effect until the patent expires in 2019.

On August 21, 2007, JuxtaComm Technologies (“JuxtaComm”) filed a complaint in the Eastern District of Texas against the Company and 20 other defendants, including Microsoft, IBM and Business Objects, for infringement of JuxtaComm’s U.S. patent 6,195,662 (“System for Transforming and Exchanging Data Between Distributed Heterogeneous Computer Systems”).  In its

 
23

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



complaint, JuxtaComm sought unspecified monetary damages and permanent injunctive relief. This matter was settled in August 2009. The Company received a release and settlement of any past damages related to potential infringement of the subject patent and a non-exclusive, non-transferable, fully paid license for the subject patent.

On November 24, 2008, Data Retrieval Technologies LLC (“Data Retrieval”) filed a complaint in the Western District of Washington against the Company and Sybase, Inc., alleging patent infringement of U.S. Patent Nos. 6,026,392 (the “ ‛392 patent”) and 6,631,382 (the “ ‛382 patent”).  On December 5, 2008, the Company and Sybase filed an action in the Northern District of California against Data Retrieval, Timeline, Inc. (“Timeline”) and TMLN Royalty, LLC (“TMLN Royalty”), asserting declaratory relief claims for non-infringement and invalidity of the ‛392 and  ‛382 patents.  On January 15, 2009, we filed an answer to the complaint in the Western District of Washington and asserted declaratory relief counterclaims for non-infringement and invalidity of the ‛392 and ‛382 patents.  In addition, on January 15, 2009, Informatica and Sybase filed a voluntary dismissal without prejudice of Timeline and TMLN Royalty in the Northern District of California action.  On April 1, 2009, in the Northern District of California action, Data Retrieval filed an answer and asserted counterclaims for patent infringement of the ‛382 and ‛392 patents.  On April 8, 2009, the Court in the Western District of Washington transferred that action to the Northern District of California.  On April 21, 2009, the Company filed its reply to Data Retrieval’s counterclaims in the Northern District of California. Following Data Retrieval’s service of its Disclosure of Asserted Claims and Preliminary Infringement Contentions on June 8, 2009, on June 18, 2009, the Company filed a motion for partial summary judgment of the following claims and issues: (1) non-infringement of the ‛382 patent; (2) non-infringement of the unasserted claims (claims 2-25) of the ‛392 patent; and (3) no infringement of either patent-in-suit by the Informatica PowerCenter product. On September 11, 2009, the U.S. District Court granted the Company’s motion for partial summary judgment on all of the claims and issues requested by the Company.  The case is currently in the discovery phase and no trial date has been set.  The Company intends to vigorously defend itself.

On January 12, 2010, Data Retrieval initiated another action for patent infringement against the Company in the United States District Court for the Northern District of California, Case No. C 09-05360-VRW, asserting two patents, U.S. Patent Nos. 5,802,511 (the “ ‛511 patent”) and 6,625,617 B2 (the “ ‛617 patent”) (collectively, the “Data Retrieval II patents-in-suit”) (the “Data Retrieval II Action”). Sybase, Inc. is also named as a defendant in the Data Retrieval II Action. The Data Retrieval II Action was related to the Data Retrieval I Actions and assigned to the same Judge. In the Data Retrieval II Action, Data Retrieval alleges that a “suite of data warehousing systems and/or material components thereof,” including PowerCenter, Data Explorer and PowerExchange, infringe the Data Retrieval II patents-in-suit. Data Retrieval accuses the Company of infringing at least claims 1, 2 and 14 of the ‛511 patent and at least claims 25 and 26 of the ‛617 patent. The Company has not yet responded to Data Retrieval’s Complaint in the Data Retrieval II Action. No discovery has commenced and no trial date been set.

The Company is also a party to various legal proceedings and claims arising from the normal course of business activities.

Based on current available information, Informatica does not expect that the ultimate outcome of these unresolved matters, individually or in the aggregate, will have a material adverse effect on its results of operations, cash flows, or financial position. However, litigation is subject to inherent uncertainties and the Company’s view of these matters may change in the future. In addition, given such uncertainties, the Company has from time to time discussed settlement in the context of litigation and has accrued, based on Contingencies (ASC 450), for estimates of settlement. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the Company’s financial position and results of operation for the period in which the unfavorable outcome occurred, and potentially in future periods.


Note 13. Significant Customer Information and Segment Reporting

  Segment Reporting (ASC 280) establishes standards for the manner in which public companies report information about operating segments in their annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The method for determining the information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance.

 
24

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)




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 following table presents geographic information (in thousands):

 
 
 
Three Months Ended
March 31,
 
 
 
2010
   
2009
 
Revenues:
           
North America
  $ 87,690     $ 71,783  
Europe
    33,370       24,728  
Other
    14,070       12,547  
    $ 135,130     $ 109,058  

 
 
 
March 31,
2010
   
December 31,
2009
 
Long-lived assets (excluding assets not allocated):
           
North America
  $ 95,782     $ 65,384  
Europe
    3,869       4,610  
Other
    1,437       1,520  
    $ 101,088     $ 71,514  

No customer accounted for more than 10% of the Company’s total revenues in the three months ended March 31, 2010 and 2009. At March 31, 2010 and 2009, no single customer accounted for more than 10% of the accounts receivable balance.


Note 14. Recent Accounting Pronouncements

In October 2009, the FASB issued an Accounting Standard Update (“ASU No. 2009-13”) or (“EITF No. 08-01”) which requires a vendor to allocate revenue to each unit of accounting in many arrangements involving multiple deliverables based on the relative selling price of each deliverable. It also changes the level of evidence of standalone selling price required to separate deliverables by allowing a vendor to make its best estimate of the standalone selling price of deliverables when more objective evidence of selling price is not available. The best estimate of selling price can be used when VSOE or third-party evidence (“TPE”) of fair value are not available. Cloud services is a model of software deployment whereby a vendor licenses an application to customers for use as a service on demand and is within the scope of this ASU. Informatica is currently using these revenue models on a limited basis and the amount of revenue generated from these models is not material at this time but is growing. This ASU is effective for the arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Informatica will adopt this ASU as of January 1, 2011 and the Company expects that its adoption will not materially impact the consolidated financial statements.

In January 2010, the FASB issued an Accounting Standard Update (“ASU No. 2010-02”) which provides for decreases in ownership of a subsidiary – a scope clarification. The objective of this update is to address implementation issues related to the changes in ownership provisions in the Consolidation – Overall Subtopic (Subtopic 810-10) of the FASB Accounting Standards Codification, originally issued as FASB Statement No. 160 Noncontrolling Interests in Consolidated Financial Statements. This update is effective beginning in the first interim period or annual reporting period ending on or after December 15, 2009. The Company has adopted this ASU in the first quarter of 2010 and its adoption did not have an impact on the consolidated financial statements.

In January 2010, the FASB issued an Accounting Standard Update (“ASU No. 2010-06”) which provides amendments to Subtopic 820-1 that requires new disclosures regarding transfers in and out of Level 1 and 2 and activities in Level 3 for fair value measurements. This ASU also provides clarification to existing disclosures regarding fair value measurement disclosures for each class of assets and liabilities and valuation techniques. This ASU and guidance for new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures related to activities in Level 3. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company has adopted this ASU in its entirety as required in the first quarter of 2010.

 
25

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)




In February 2010, the FASB issued an Accounting Standard Update (“ASU No. 2010-09”) which provides amendments to remove the requirement for an SEC filer to disclose a date in both issued and revised financial statements. The Company has adopted this ASU as required in the first quarter of 2010.


Note 15. Acquisitions

Siperian, Inc.

On January 28, 2010, the Company acquired Siperian, Inc., (“Siperian”) a privately held company incorporated in Delaware. Siperian provides an integrated model-driven master data management (MDM) platform that adapts to most business requirements. The acquisition extends the Company’s data integration software to include Siperian’s technology. The Company acquired Siperian in a cash merger transaction valued at approximately $130 million. As a result of this acquisition, the Company also assumed certain facility leases and certain liabilities and commitments. Approximately $18.3 million of the consideration otherwise payable to former Siperian stockholders, vested option holders and participants in Siperian’s Management Acquisition Bonus Plan was placed into an escrow fund and held as partial security for the indemnification obligations of the former Siperian stockholders, vested option holders, and participants in Siperian’s Management Acquisition Bonus Plan set forth in the merger agreement and for purposes of the working capital adjustment stated in the contract. The escrow fund will remain in place until July 28, 2011, although 50% of the escrow funds will be distributed to former Siperian stockholders, vested option holders, and participants in Siperian’s Management Acquisition Bonus Plan on January 28, 2011.


The following table presents the purchase price allocation of $102.9 million and the acquiree’s transaction related costs and debt settlement of $27.1 million which was paid by the Company on January 28, 2010 or shortly thereafter. This amount consists of investment banker, legal and accounting fees, certain employee related compensation, and debt settlement as of the date of this acquisition (in thousands):

 
Goodwill
  $ 78,360  
Developed and core technology
    21,340  
Customer relationships
    1,630  
In-process research & development
    1,920  
Assumed liabilities, net of assets
    (333 )
Total purchase price allocation
    102,917  
Acquiree’s transaction related costs and debt settlement
    27,083  
Total
  $ 130,000  

Informatica has finalized plans to terminate certain employees and vacate certain facilities of Siperian. The cost associated with such exit activities, which are reflected in the Acquisition related expenses in the Statement of Income is as follows (in thousands):

 
Termination of certain employees
  $ 326  
Vacating certain facilities of Siperian
    1,121  
Total
  $ 1,447  

Informatica does not expect to incur any additional expenses related to these exit activities in the future.

Informatica estimated $6.6 million for sales and use tax liabilities, foreign income tax liabilities, and costs for certain product warranty issues. Further, Informatica has made some additional estimates regarding recoverability of accounts receivable and miscellaneous accruals.


 
26

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The following table presents the unaudited pro forma results of Informatica (including Siperian) for the three-month periods ended March 31, 2010 and 2009 (in thousands, except per share amounts). The unaudited pro forma financial information combines the results of operations of Informatica and Siperian as though the companies had been combined as of the beginning of each of the fiscal periods presented. The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2009. The unaudited pro forma results presented include amortization charges for acquired intangible assets, eliminations of intercompany transactions, adjustments to interest expense and interest income, adjustment of deferred revenues to its estimated fair values, and tax adjustments and tax benefits related to the acquisition.

   
Three Months Ended
March 31,
 
 
 
2010
   
2009
 
Pro forma adjusted total revenues
  $ 136,049     $ 113,862  
Pro forma adjusted net income
  $ 5,568     $ 6,910  
Pro forma adjusted net income per share—basic
  $ 0.06     $ 0.08  
Pro forma adjusted net income per share—diluted
  $ 0.06     $ 0.08  
Pro forma weighted-average basic shares
    90,748       86,862  
Pro forma weighted-average diluted shares
    97,324       89,813  

The Convertible Senior Notes are anti-dilutive for the above periods presented.

29West Inc.

On March 22, 2010, the Company acquired 29West Inc., (“29West”) a privately held company incorporated in Illinois. 29West develops high-speed messaging software, known as Ultra Messaging. This software is used for distribution of data, streaming market data and proprietary trading and market making, and is sold to banks, hedge funds, exchanges and software application vendors worldwide. The Company acquired 29West in a cash merger transaction valued at approximately $50 million. As a result of this acquisition, the Company also assumed certain facility leases and certain liabilities and commitments. Approximately $7 million of the consideration otherwise payable to former 29West stockholders and vested option holders was placed into an escrow fund and held as partial security for the indemnification obligations of the former 29West stockholders and vested option holders. The escrow fund will remain in place until September 22, 2011.

The following table presents the purchase price allocation of $47.0 million and the acquiree’s transaction related costs of $3.0 million which was paid on March 22, 2010 or shortly thereafter. This amount consists of investment banker, legal and accounting fees, and certain employee related compensation as of the date of this acquisition (in thousands):

 
Goodwill
  $ 36,397  
Developed and core technology
    9,750  
Customer relationships
    590  
Assumed assets, net of liabilities
    262  
Total purchase price allocation
    46,999  
Acquiree’s transaction related costs and debt settlement
    3,001  
Total
  $ 50,000  

Informatica estimated $1.4 million for the sales and use tax liability and has made additional estimates regarding recoverability of accounts receivable and miscellaneous accruals.



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of the federal securities laws, particularly statements referencing our expectations relating to license revenues, service revenues, international revenues, deferred revenues, cost of license revenues, cost of service revenues, operating expenses, amortization of acquired technology, stock compensation, interest income or expense, and provision for income taxes; deferred taxes; international expansion; the ability of our products to meet customer demand; continuing impacts from our 2004 and 2001 Restructuring Plans; the sufficiency of our cash balances and cash flows for the next 12 months; our stock repurchase programs; investment and potential investments of cash or stock to acquire or invest in complementary businesses, products, or technologies; the impact of recent changes in accounting standards; the acquisitions of Agent Logic, AddressDoctor, Applimation, Siperian, and 29West; and assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “intends,” “plans,” “anticipates,” “estimates,” “potential,” or “continue,” or the negative thereof, or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to risks and uncertainties, including but not limited to the factors set forth under Part II, Item 1A Risk Factors. All forward-looking statements and reasons why results may differ included in this Report are made as of the date hereof, and we assume no obligation to update any such forward-looking statements or reasons why actual results may differ.

The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this Report.


Overview

We are the leading independent provider of enterprise data integration software. We generate revenues from sales of software licenses for our enterprise data integration software products, including product upgrades that are not part of post-contract services, and from sales of services, which consist of maintenance, consulting, education, and other services.

We receive revenues from licensing our products under perpetual licenses directly to end users and indirectly through resellers, distributors, and OEMs in the United States and internationally. We also receive a small amount of revenues under subscription-based licenses for cloud offerings from our customers and partners. We receive service revenues from maintenance contracts, consulting services, and education services that we perform for customers that license our products either directly or indirectly. Most of our international sales have been in Europe, and revenues outside of Europe and North America have comprised 10% or less of total consolidated revenues during the past three years.

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

Despite the uncertainty in the macroeconomic environment in the United States and many foreign economies, we were able to grow our total revenues in the first quarter of 2010 by 24% to $135.1 million compared to $109.1 million from the same period in 2009. License revenues increased by 25% to $55.0 million in the first quarter of 2010 compared to $44.1 million for the same period in 2009 with revenue growth in all geographical regions. Our growth in license revenues reflects the continued market acceptance of our products for broader data integration projects. Services revenues increased by 23% due to 18% growth in maintenance revenues which is attributable to the increased size of our installed customer base, and a 41% increase in consulting, education, and other services revenues.

On January 28, 2010, we acquired Siperian, a privately held company incorporated in Delaware. Siperian provides an integrated model-driven master data management (MDM) platform that adapts to many business requirements. The acquisition extends our data integration software to include Siperian’s technology. We acquired Siperian in a cash merger transaction valued at approximately $130 million. As a result of this acquisition, we also assumed certain facility leases and certain liabilities and commitments. Approximately $18.3 million of the consideration otherwise payable to former Siperian stockholders, vested option holders and participants in Siperian’s Management Acquisition Bonus Plan was placed into an escrow fund and held as partial security for the indemnification obligations of the former Siperian stockholders, vested option holders, and participants in Siperian’s Management

 
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Acquisition Bonus Plan as set forth in the merger agreement and for purposes of the working capital adjustment set forth therein. The escrow fund will remain in place until July 28, 2011, although 50% of the escrow funds will be distributed to former Siperian stockholders, vested option holders, and participants in Siperian’s Management Acquisition Bonus Plan on January 28, 2011.

On March 22, 2010, we acquired 29West, a privately held company incorporated in Illinois. 29West develops high speed messaging software, known as Ultra Messaging. This software is used for distribution of data, streaming market data and proprietary trading and market making, and is sold to banks, hedge funds, exchanges and software application vendors worldwide. We acquired 29West in a cash merger transaction valued at approximately $50 million. As a result of this acquisition, we also assumed certain facility leases and certain liabilities and commitments. Approximately $7 million of the consideration otherwise payable to former 29West stockholders and vested option holders was placed into an escrow fund and held as partial security for the indemnification obligations of the former 29West stockholders and vested option holders. The escrow fund will remain in place until September 22, 2011.

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

 
Macroeconomic Conditions:  The United States and many foreign economies continue to experience uncertainty driven by varying macroeconomic conditions but have shown some signs of improvement. As we have seen improvement in the economy in the United States and parts of Europe, we have increased our hiring and recently completed two acquisitions with the expectation of continued progress toward macroeconomic recovery.

 
Competition:  Inherent in our industry are risks arising from competition with existing software solutions, including solutions from IBM, Oracle, and SAP, technological advances from other vendors, and the perception of cost savings by solving data integration challenges through customer hand-coding development resources. Our prospective customers may view these alternative solutions as more attractive than our offerings. Additionally, the consolidation activity in our industry (including Oracle’s acquisition of BEA Systems, GoldenGate, Hyperion Solutions, Siebel, SilverCreek, and Sunopsis; IBM’s acquisition of Cognos, DataMirror, Initiate Systems, and SPSS; SAP’s acquisition of Business Objects, which had previously acquired FirstLogic; and Tibco Software’s acquisition of Netrics) could pose challenges as competitors market a broader suite of software products or solutions to our prospective customers.

 
New Product Introductions:  To address the expanding data integration and data integrity needs of our customers and prospective customers, we continue to introduce new products and technology enhancements on a regular basis. In August 2009, we delivered the PowerCenter Cloud Edition to enable our customers to procure PowerCenter functionality from Amazon Web Services by the hour. In November, 2009, we released Informatica Cloud 9. In December 2009, we delivered a version upgrade to our entire data integration platform by delivering the generally available version of Informatica 9. In February 2010, we launched Informatica Data Cloud Store, the industry’s first Infrastructure-as-a-Service offering to archive database and enterprise application data to the cloud in a cost-effective and secure manner. New product introductions and/or enhancements have inherent risks including, but not limited to, product availability, product quality and interoperability, and customer adoption or the delay in customer purchases. Given these risks and the recent introduction of these products, we cannot predict their impact on our overall sales and revenues.

 
Quarterly and Seasonal Fluctuations:  Historically, purchasing patterns in the software industry have followed quarterly and seasonal trends and are likely to do so in the future. Specifically, it is normal for us to recognize a substantial portion of our new license orders in the last month of each quarter and sometimes in the last few weeks or days of each quarter, though such fluctuations are mitigated somewhat by recognition of backlog orders. In recent years, the fourth quarter has had the highest level of license revenues and order backlog, and we generally have weaker demand for our software products and services in the first and third quarters of the year. The first quarter of 2010 followed this seasonal trend. The current macroeconomic conditions make our historical seasonal trends more difficult to predict.

To address these potential risks, we have focused on a number of key initiatives, including certain cost containment measures, the strengthening of our partnerships, the broadening of our distribution capability worldwide, and the targeting of our sales force and distribution channel on new products, and strategic acquisitions of complementary businesses, products, and technologies.

We are concentrating on maintaining and strengthening our relationships with our existing strategic partners and building relationships with additional strategic partners. These partners include systems integrators, resellers and distributors, and strategic technology partners, including enterprise application providers, database vendors, and enterprise information integration vendors, in

 
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the United States and internationally. In September 2009, we announced an expanded partnership with Hewlett-Packard. In September 2009, we also announced that Intel will embed Informatica B2B Data Transformation in its Intel SOA Expressway offering. We are partners with FAST (acquired by Microsoft), SAP, Oracle, Hyperion Solutions (acquired by Oracle), and salesforce.com. See “Risk Factors — We rely on our relationships with our strategic partners. If we do not maintain and strengthen these relationships, our ability to generate revenue and control expenses could be adversely affected, which could cause a decline in the price of our common stock” in Part II, Item 1A.

We have broadened our distribution efforts, and we have continued to expand our sales both in terms of selling data warehouse products to the enterprise level and of selling more strategic data integration solutions beyond data warehousing, including enterprise data integration, data quality, master data management, B2B data exchange, application information lifecycle management, complex event processing, ultra messaging, and cloud data integration to our customers’ enterprise architects and chief information officers. We also launched the first comprehensive Data Integration Marketplace that allows buyers and sellers to share and leverage data integration solutions. We have expanded our international sales presence in recent years by opening new offices, increasing headcount, and through acquisitions. As a result of this international expansion, as well as the increase in our direct sales headcount in the United States, our sales and marketing expenses have increased. In the long term, we expect these investments to result in increased revenues and productivity and ultimately higher profitability, although we experienced a tougher than expected selling environment in certain regions in 2009. If we experience an increase in sales personnel turnover, do not achieve expected increases in our sales pipeline, experience a decline in our sales pipeline conversion ratio, or do not achieve increases in sales productivity and efficiencies from our new sales personnel as they gain more experience, then it is unlikely that we will achieve our expected increases in revenue, sales productivity, or profitability from our international operations. We have experienced some increases in revenues and sales productivity in the United States in the past few years. In the second half of 2009, we experienced increases in revenues internationally, but we have not yet achieved the same level of sales productivity internationally as domestically.


Critical Accounting Policies and Estimates

In preparing our condensed consolidated financial statements, we make assumptions, judgments, and estimates that can have a significant impact on amounts reported in our condensed consolidated financial statements. We base our assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis we evaluate our assumptions, judgments, and estimates and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of the Board of Directors. We believe that the assumptions, judgments, and estimates involved in the accounting for revenue recognition, facilities restructuring charges, income taxes, impairment of goodwill, acquisitions, stock compensation, and allowance for doubtful accounts have the greatest potential impact on our condensed consolidated financial statements, so we consider these to be our critical accounting policies. We discuss below the critical accounting estimates associated with these policies. Historically, our assumptions, judgments, and estimates relative to our critical accounting policies have not differed materially from actual results. For further information on our significant accounting policies, see the discussion in Note 1. Summary of Significant Accounting Policies, and Note 14. Recent Accounting Pronouncements of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Report.

     Revenue Recognition

We recognize revenue in accordance with generally accepted accounting principles (“GAAP”) in the United States that have been prescribed for the software industry. The accounting rules related to revenue recognition are complex and are affected by interpretations of such rules. These rules and their interpretations are often subject to change. Consequently, the revenue recognition process requires management to make significant judgments – for example, to determine if collectability is probable.

We derive revenues from software license fees, maintenance fees (which entitle the customer to receive product support and unspecified software updates), professional services, consisting of consulting and education services, and other revenues, consisting of software subscription and cloud services revenues. We follow the appropriate revenue recognition rules for each type of revenues. The basis for recognizing software license revenue is determined by Software Revenue Recognition (ASC 985-605-25),  and the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 104, Revenue Recognition, which is discussed in the subsection Revenue Recognition in Note 1. Summary of Significant Accounting Policies, of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Report. Substantially all of our software licenses are perpetual licenses under which the customer acquires the perpetual right to use the software as provided and subject to the conditions of the license agreement. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is

 
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probable. In applying these criteria to revenue transactions, we must exercise judgment and use estimates to determine the amount of software, maintenance, and professional services revenue to be recognized at each period.

We assess whether fees are fixed or determinable prior to recognizing revenue. We must make interpretations of our customer contracts and exercise judgments in determining if the fees associated with a license arrangement are fixed or determinable. We consider factors including extended payment terms, financing arrangements, the category of customer (end-user customer or reseller), rights of return or refund, and our history of enforcing the terms and conditions of customer contracts. If the fee due from a customer is not fixed or determinable due to extended payment terms, revenue is recognized when payment becomes due or upon cash receipt, whichever is earlier. We require evidence of sell-through from resellers and distributors for order acceptance. We then recognize revenue from resellers and distributors upon shipment if all other revenue recognition criteria are met, which in substantially all cases is upon collection. Further, we make judgments in determining the collectability of the amounts due from our customers that could possibly impact the timing of revenue recognition. We assess credit worthiness and collectability, and when a customer is not deemed credit worthy, revenue is recognized when payment is received.

Our software license arrangements include the following multiple elements: license fees from our core software products and/or product upgrades that are not part of post-contract services, maintenance fees, consulting, and/or education services. We use the residual method to recognize license revenue upon delivery when the arrangement includes elements to be delivered at a future date and vendor-specific objective evidence (“VSOE”) of fair value exists to allocate the fee to the undelivered elements of the arrangement. VSOE is based on the price charged when an element is sold separately. If VSOE does not exist for any undelivered software product element of the arrangement, all revenue is deferred until all elements have been delivered, or VSOE is established. If VSOE does not exist for any undelivered services elements of the arrangement, all revenue is recognized ratably over the period that the services are expected to be performed. We are required to exercise judgment in determining if VSOE exists for each undelivered element.

Consulting services, if included as part of the software arrangement, generally do not require significant modification or customization of the software. If, in our judgment, the software arrangement includes significant modification or customization of the software, then software license revenue is recognized as the consulting services revenue is recognized.

Consulting revenues are primarily related to implementation of services and product configurations. These services are performed on a time-and-materials basis and, occasionally, on a fixed-fee basis. Revenue is generally recognized as these services are performed. If uncertainty exists about our ability to complete the project, our ability to collect the amounts due, or in the case of fixed-fee consulting arrangements, our ability to estimate the remaining costs to be incurred to complete the project, revenue is deferred until the uncertainty is resolved.

Other revenues, consisting of software subscription and cloud services revenues (which are not material at this time but growing), are generally recognized as the services are performed.

Multiple contracts with a single counterparty executed within close proximity of each other are evaluated to determine if the contracts should be combined and accounted for as a single arrangement.

We recognize revenues net of applicable sales taxes, financing charges that we have absorbed, and amounts retained by our resellers and distributors, if any. Our agreements do not permit returns, and historically we have not had any significant returns or refunds; therefore, we have not established a sales return reserve at this time.

     Facilities Restructuring Charges

During the fourth quarter of 2004, we recorded significant charges (2004 Restructuring Plan) related to the relocation of our corporate headquarters, to take advantage of more favorable lease terms and reduce our operating expenses. The accrued restructuring charges represent net present value of lease obligations and estimated commissions and other costs (principally leasehold improvements and asset write-offs), offset by actual and estimated gross sublease income, which is net of estimated broker commissions and tenant improvement allowances, expected to be received over the remaining lease terms. In addition, we significantly increased the 2001 restructuring charges (2001 Restructuring Plan) in the third and fourth quarters of 2004 due to changes in our assumptions used to calculate the original charges as a result of our decision to relocate our corporate headquarters.

These liabilities include management’s estimates pertaining to sublease activities. Inherent in the assessment of the costs related to our restructuring efforts are estimates related to the probability weighted outcomes of the significant actions to accomplish the

 
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restructuring. We will continue to evaluate the commercial real estate market conditions periodically to determine if our estimates of the amount and timing of future sublease income are reasonable based on current and expected commercial real estate market conditions. Our estimates of sublease income may vary significantly depending, in part, on factors that may be beyond our control, such as the global economic downturn, time periods required to locate and contract suitable subleases, and market rates at the time of subleases. Currently, we have subleased our excess facilities in connection with our 2004 and 2001 facilities restructuring but for durations that are generally less than the remaining lease terms.

If we determine that there is a change in the estimated sublease rates or in the expected time it will take us to sublease our vacant space, we may incur additional restructuring charges in the future and our cash position could be adversely affected. See Note 9. Facilities Restructuring Charges of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Report. Future adjustments to the charges could result from a change in the time period that the buildings will be vacant, expected sublease rates, expected sublease terms, and the expected time it will take to sublease.

     Accounting for Income Taxes

We use the asset and liability method of accounting for income taxes in accordance with Income Taxes (ASC 740). Under this method, income tax expenses or benefits are recognized for the amount of taxes payable or refundable for the current year and for deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. We account for any income tax contingencies in accordance with ASC 740. The measurement of current and deferred tax assets and liabilities is based on provisions of currently enacted tax laws. The effects of any future changes in tax laws or rates have not been taken into account with the exception of revaluing deferred taxes for California relating to 2011 and thereafter.

As part of the process of preparing consolidated financial statements, we estimate our income taxes and tax contingencies in each of the tax jurisdictions in which we operate prior to the completion and filing of tax returns for such periods. This process involves estimating actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in net deferred tax assets and liabilities. We must then assess the likelihood that the deferred tax assets will be realizable, and to the extent we believe that realizability is not likely, we must establish a valuation allowance.

In assessing the need for any additional valuation allowance, we considered all the evidence available to us, both positive and negative, including historical levels of income, legislative developments, expectations and risks associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies.

Accounting for Impairment of Goodwill

We assess goodwill for impairment in accordance with Intangibles – Goodwill and Other (ASC 350), which requires that goodwill be tested for impairment at the “reporting unit level” (“Reporting Unit”) at least annually and more frequently upon the occurrence of certain events, as defined by ASC 350. We have determined that we have one reporting segment and also one Reporting Unit within that segment. We test goodwill for impairment in our annual impairment test on October 31 of each year, using the two-step process required by ASC 350. First, we review the carrying amount of the Reporting Unit compared to the “fair value” of the Reporting Unit based on quoted market prices of our common stock. Second, if such comparison reflects potential impairment, we would then perform the discounted cash flow analyses. These analyses are based on cash flow assumptions that are consistent with the plans and estimates that we use to manage our business. An excess of the carrying value to fair value might indicate a potential goodwill impairment. Finally, if we determine that goodwill might have been impaired, then we would compare the “implied fair value” of the goodwill, as defined by ASC 350, to its carrying amount to determine the amount of impairment loss, if any.

We determined in our annual impairment tests on October 31, 2009, 2008, and 2007 that the fair value of our Reporting Unit exceeded the carrying amount and, accordingly, determined that goodwill had not been impaired and is not at risk of failing. We have made assumptions and estimates about future values and remaining useful lives which are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends as well as internal factors such as changes in our business strategy and our internal forecasts. Although we believe that the assumptions and estimates that we have made are sound and reasonable, but nevertheless the result of our financial operations would have been materially different if we hade made different assumptions and estimates.


 
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Acquisitions

In accordance with Business Combinations (ASC 805), we are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired, liabilities assumed, as well as to in-process research and development (IPR&D) based on their estimated fair values at the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets, support obligations assumed, estimated restructuring liabilities, and pre-acquisition contingencies.

A number of events could potentially affect the accuracy of our assumptions and estimates. Although we believe the assumptions and estimates that we have made are reasonable and appropriate, nevertheless a level of uncertainty is inherent in all such decisions. The following are some of the examples of critical accounting estimates that we have applied in our acquisitions:
 
     
 
future expected cash flows from software license sales, support agreements, consulting contracts, other customer contracts, and acquired developed technologies and patents;
     
 
expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed;
     
 
the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio; and
     
 
discount rates.
 
In connection with the purchase price allocations for our acquisitions, we estimate the fair value of the support obligations assumed. The estimated fair value of the support obligations is determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs related to fulfilling the obligations plus a normal profit margin. The estimated costs to fulfill the support obligations are based on the historical direct costs related to providing the support services and to correct any errors in the software products acquired. The sum of these costs and operating profit approximates, in theory, the amount that we would be required to pay a third party to assume the support obligation. We do not include any costs associated with selling efforts or research and development or the related fulfillment margins on these costs. Profit associated with any selling efforts is excluded because the acquired entities would have concluded those selling efforts on the support contracts prior to the acquisition date. We also do not include the estimated research and development costs to provide product upgrades on a “when and if available” basis in our fair value determinations, as these costs are not deemed to represent a legal obligation at the time of acquisition.

Accounting for business combinations has been impacted by ASC 805. Under the new accounting pronouncement, we expense transaction costs and restructuring expenses related to the acquisition as incurred. In contrast, we treated transaction costs and restructuring expenses as part of the cost of the acquired business previously, thus effectively capitalizing those amounts within the basis of the acquired assets. Further, pursuant to ASC 805, we identify pre-acquisition contingencies and determine their respective fair values as of the end of the purchase price allocation period. We will adjust the amounts recorded as pre-acquisition contingencies in our operating results in the period in which the adjustment is determined. Furthermore, any adjustment applicable to acquisition related tax contingencies estimates will be reflected in our operating results in the period in which the adjustment is determined. Moreover, we identify the in-process research and development costs and determine their respective fair values and reflect them as part of the purchase price allocation. In-process research and development costs, under the new guidance, meet the definition of asset, and we classify them as an indefinite lived intangible asset until the asset is put to use or deemed to be impaired.

Stock Compensation

We account for stock compensation related to share-based transactions in accordance with the provisions of Stock Compensation (ASC 718). Accordingly, stock compensation is estimated at the grant date based on the fair value of the awards and is recognized as an expense ratably on a straight line basis over its requisite service period. It requires a certain amount of judgment to select the appropriate fair value model and calculate the fair value of share-based awards, including estimating stock price volatility and expected life. Further, estimates of forfeiture rates could shift the stock compensation from one period to the next.

We have estimated the expected volatility as an input into the Black-Scholes-Merton valuation formula when assessing the fair value of options granted. Our current estimate of volatility was based upon a blend of average historical and market-based implied

 
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volatilities of our stock price that we have used consistently since the adoption of SFAS No. 123(R) Share-Based Payments (ASC 718) in 2006. Our volatility rates were 36% and 46% for the first quarter of 2010 and 2009, respectively. The decrease in the first quarter of 2010 compared to the first quarter of 2009 was due to a decline in the implied volatility component of our volatility rates. To the extent that the volatility rate in our stock price decreases in the future, our estimates of the fair value of options granted will decrease accordingly. For example, a 10% lower volatility rate for the options granted in the first quarter of 2010 would have decreased the fair value of the options granted by approximately $1.7 million.

We derived our expected life of the options that we granted in 2009 from the historical option exercises, post-vesting cancellations, and estimates concerning future exercises and cancellations for vested and unvested options that remain outstanding. We slightly increased our expected life estimate from 3.6 years in 2009 to 3.7 years in 2010.

In addition, we apply an expected forfeiture rate in determining the amount of stock compensation. We estimate our forfeiture rate for stock options based on actual historical forfeited options. We increased our forfeiture rate, for the quarter ended March 31, 2010, to 10% from 8% in the same period of 2009. The impact on our stock compensation in the first quarter of 2010 due to the change in our forfeiture rate was negligible.

We have granted Restricted Stock Units (“RSUs”) to our executive officers, certain employees, and directors in 2009 and 2010. We have recorded the stock compensation for RSUs net of the 10% forfeiture estimate. We estimate our forfeiture rate for RSUs based on actual historical forfeited grants. We believe that the estimates that we have used for the calculation of the variables to arrive at stock compensation are accurate. We will, however, continue to monitor the historical performance of these variables and will modify our methodology and assumptions in the future as needed.

Allowances for Doubtful Accounts

We establish allowances for doubtful accounts based on our review of credit profiles of our customers, contractual terms and conditions, current economic trends and historical payment, and return and discount experiences. We reassess the allowances for doubtful accounts each quarter. However, unexpected events or significant future changes in trends could result in a material impact to our future statements of income and of cash flows. Our allowance for doubtful accounts at March 31, 2010 and December 31, 2009 was $4.2 million and $3.5 million, respectively. The increase in the bad debt allowance for our accounts receivable is mainly due to additional bad debt allowance for the accounts receivable from our recent acquisitions.


Recent Accounting Pronouncements

For recent accounting pronouncements see Note 14. Recent Accounting Pronouncements, of Notes to Condensed Consolidated Financial Statements under Part I, Item 1 of this Report.

 
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Results of Operations

The following table presents certain financial data for the three months ended March 31, 2010 and 2009 as a percentage of total revenues:

 
 
 
Three Months Ended
March 31,
 
 
 
2010
   
2009
 
Revenues:
           
License
    41 %     40 %
Service
    59       60  
Total revenues
    100       100  
Cost of revenues:
               
License
    1       1  
Service
    17       17  
Amortization of acquired technology
    2       1  
Total cost of revenues
    20       19  
Gross profit
    80       81  
Operating expenses: