News Column

CA, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.

May 19, 2014

Introduction

This "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A) is intended to provide an understanding of our financial condition, changes in financial condition, cash flow, liquidity and results of operations. This MD&A should be read in conjunction with our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K and the Risk Factors included in Part I, Item 1A of this Form 10-K, as well as other cautionary statements and risks described elsewhere in this Form 10-K. Business Overview We are one of the world's leading providers of information technology (IT) management software and solutions. Our solutions help organizations of all sizes develop, manage, and secure complex IT environments that increase productivity and enhance the competitiveness in their businesses. We do this across a wide range of environments such as mainframe, distributed, cloud, and mobile. The majority of the Global Fortune 500 relies on us to help manage their IT environments. 21



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Our objective is to be the world's leading independent software provider for IT management and security solutions to help organizations and enterprises develop, manage, and secure modern IT architectures, across mainframe, distributed, mobile and cloud environments. To accomplish this, key elements of our strategy include: Innovating in key product areas to extend our market leadership and differentiation. Our product development strategy is built around three key growth areas, where we are focused on innovating and delivering differentiated products and solutions: application development and IT operations (DevOps), Management Cloud, and Security across multiple platforms.



Addressing shifts in market dynamics and technology. We will innovate to

deliver new differentiated solutions that enable our customers to manage

the challenges and capture the opportunities of disruptive technologies

such as the ability to harvest big data, the shift to software-defined IT,

the proliferation of mobile technologies, social access (or social

credentials) authentication, and the always on, ubiquitously connected

"Internet of Things." Accelerating growth in our global customer base. We are focused on



maintaining strong relationships with our core, large enterprise customer

base, and will proactively target growth with these customers as well as

new large enterprises we do not currently serve. In parallel, we are

broadening our customer base to new buyer segments beyond the customer's

Chief Information Officer and IT department and increasingly to geographic

regions we have underserved. Pursuing new business models and expanded routes to market. While our



traditional on-premise software delivery remains core to our enterprise

customers, we see SaaS and managed services as increasingly attractive for

our customers. This simplifies their decision-making and accelerates the value they can derive from new solution investments. We have a broad and deep portfolio of software solutions with which to execute our business strategy. We organize our offerings in Mainframe Solutions, Enterprise Solutions and Services segments. Mainframe Solutions products are designed mainly for the IBM System z



mainframe platform, which runs many of our largest customers'

mission-critical applications. We help customers seamlessly manage their

mainframe as part of their evolving data center through flexible

management approaches, cross-platform visibility and workload portability.

Enterprise Solutions products operate on non-mainframe platforms and

include our DevOps, Management Cloud, and Security product groups. DevOps

includes application delivery, application performance management and

infrastructure management. Management Cloud helps customers optimize their

investments, projects, resources and processes. Security delivers

identity-centric security solutions to meet the needs of today's mobile,

cloud-connected, open enterprise.

Services helps customers reach their IT and business goals by enabling the

rapid implementation and adoption of our mainframe solutions and

enterprise solutions.

Our traditional core customers generally consist of large enterprises that have computing environments from multiple vendors and are highly complex. We currently serve customers across most major industries worldwide, including banks, insurance companies, other financial services providers, government agencies, global service providers, telecommunication providers, manufacturers, technology companies, retailers, educational organizations and health care institutions. We offer our solutions through our direct sales force and indirectly through our partners. We remain focused on strengthening relationships with our core customers--which we refer to as our "Platinum" customers, consisting of our top 500 accounts-- through product leadership, account management and a differentiated customer experience. We believe enhanced relationships in our traditional customer base of large enterprises with multi-year enterprise license agreements will drive renewals and provide opportunities to increase account penetration that will help to drive revenue growth. At the same time, we continue to dedicate sales resources and deploy additional solutions to address opportunities to sell to new enterprises and to expand our relationship with existing non-core customers--which we refer to as our "Named" customers. In addition to this dedication of additional sales resources, we service some of these customers through partners. We believe we can grow our business and increase market share by delivering differentiated technology and collaborating with partners to leverage their relationships, market reach and implementation capacity. We are deploying new routes to market, and simplifying the buying and deployment process for our customers. This customer focus allows us to better align marketing and sales resources with how customers want to buy. We have also implemented broad-based business initiatives to drive accountability for sales execution. Work is underway to deploy an updated global branding and marketing program for CA Technologies to significantly enhance our connection with new and existing customers, introduce the market to new areas of our capability and contribute directly to business growth and new customer acquisitions. Marketing efforts are key to our ability to expand our customer base, reach new segments and grow in key global markets. 22



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CA Technologies Business Model We generate revenue from the following sources: license fees - licensing our products on a right-to-use basis; maintenance fees - providing customer technical support and product enhancements; service fees - providing professional services such as product implementation, consulting, customer training and customer education; and SaaS offerings - typically licensed using a subscription fee. The timing and amount of fees recognized as revenue during a reporting period are determined in accordance with generally accepted accounting principles in the United States of America (GAAP). Revenue is reported net of applicable sales taxes. Under our business model, we offer customers a wide range of licensing options. For traditional, on-premise licensing, we typically license to customers either perpetually or on a subscription basis for a specified term. Our customers also purchase maintenance and support services that provide technical support and any general product enhancements released during the maintenance period. Under a perpetual license, the customer has the right to use the licensed program for an indefinite period of time upon payment of a one-time license fee. If the customer wants to receive maintenance, the customer is required to pay an additional annual maintenance fee. Under a subscription license, the customer has the right to usage and maintenance of the licensed products during the term of the agreement. Under our flexible licensing terms, customers can license our software products under multi-year licenses, with most customers choosing terms of one-to-five years, although longer terms may sometimes be negotiated by customers in order to obtain greater cost certainty. Thereafter, the license generally renews for a similar period of time on similar terms and conditions, but subject to the customer's payment of our then prevailing subscription license fee. For our mainframe solutions, the majority of our licenses provide customers with the right to use one or more of our products up to a specific license capacity, generally measured in millions of instructions per second (MIPS). For these products, customers may acquire additional capacity during the term of a license by paying us an additional license fee. For our enterprise solutions, our licenses may provide customers with the right to use one or more of our products limited to a number of servers, users or copies, among other things. Customers may license these products for additional servers, users or copies, etc., during the term of a license by paying us an additional license fee. Our services are typically delivered on a time-and-materials basis, but alternative pay arrangements, such as fixed fee or staff augmentations, can also be arranged. SaaS is another delivery model we offer to our customers who prefer to utilize our technology off-premise with little to no infrastructure required. Our SaaS offerings are typically licensed using a subscription fee, most commonly on a monthly or annual basis. Executive Summary We concluded a year of significant transformation and strategic progress, which included the execution of our Fiscal 2014 Rebalancing Plan (Fiscal 2014 Plan), while shifting investment to new growth markets. During fiscal 2014, we continued to focus on financial and operational performance. Our Mainframe Solutions segment results for fiscal 2014 performed in line with our expectations, while our Enterprise Solutions segment performance remained inconsistent across most geographies and product lines. A summary of key results for fiscal 2014 compared with fiscal 2013 is as follows: Revenue: Total revenue decreased $95 million, or 2%, as a result of a decline in subscription and maintenance revenue and a decline in software fees and other revenue. The decrease in subscription and maintenance revenue for fiscal 2014 compared with fiscal 2013 was primarily attributable to a



decrease in fiscal 2014 and prior period enterprise solutions new product

sales. In addition, there was an unfavorable foreign exchange effect of $37 million compared with fiscal 2013.



Due to sales under-performance in fiscal 2014, we expect a year-over-year

percentage decline in total revenue for fiscal 2015 compared with fiscal

2014 similar to or slightly below the year-over-year percentage decline in

total revenue for fiscal 2014 compared with fiscal 2013. We expect

year-over-year revenue growth to decline by a low-single-digit percentage

in the first half of fiscal 2015 and to improve through the second half of

fiscal 2015.



Bookings:

Total bookings increased 11% primarily as a result of a year-over-year

increase in renewals within subscription and maintenance bookings, partially offset by a decrease in total new product and mainframe solutions capacity sales.



Mainframe solutions renewals, and to a lesser extent, enterprise solutions

renewals, increased year-over-year primarily as a result of the timing of our renewal portfolio. 23



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Within total bookings, total new product and mainframe solutions capacity

sales decreased by approximately 10% for fiscal 2014 compared with fiscal

2013 primarily due to a decrease in mainframe solutions capacity sales in

the fourth quarter of fiscal 2014. Mainframe solutions new product sales

decreased by a percentage in the low teens and capacity sales decreased in

a mid-30% range. Enterprise solutions new product sales decreased by a mid-single-digit percentage. We expect our fiscal 2015 renewal portfolio to decline by a high-single-digit percentage compared with fiscal 2014. Excluding the impact from a contract renewal with a large system integrator which occurred during fiscal 2014, we expect the value of our fiscal 2015 renewal portfolio to be consistent with the value of our fiscal 2014 renewal portfolio.



Expenses:

Total expenses before interest and income taxes increased 5% compared with

the year-ago period, primarily due to expenses associated with the Fiscal

2014 Plan recognized within "Other (gains) expenses, net", increases in product development and enhancements expenses and costs of licensing and maintenance. These increases were partially offset by a decrease in selling and marketing expenses, driven mostly by the lower number of



employees involved in selling and marketing activities, and a decrease in

amortization of capitalized software costs.

Product development and enhancements expenses increased as the amount

capitalized for internally developed software costs decreased.

Income taxes: Income tax expense for fiscal 2014 and fiscal 2013 was $140 million and

$354 million, respectively. This decrease was primarily due to the favorable resolutions of uncertain tax positions relating to U.S. and non-U.S. jurisdictions. Our fiscal 2014 and 2013 effective tax rate was 13.5% and 27.4%, respectively. We expect a full-year effective tax rate of about 30% for fiscal 2015.



Diluted income per common share: Diluted income per common share from continuing operations decreased to

$1.99 from $2.03, primarily due to the decrease in revenue, partially

offset by a decrease in income tax expense.

Segment results: Mainframe Solutions revenue decreased compared with the year-ago period

primarily due to an unfavorable foreign exchange effect. Excluding the effect of foreign exchange, Mainframe Solutions revenue would have increased slightly primarily as a result of improved renewal yields. Mainframe Solutions operating margin increased primarily as a result of a decrease in selling and marketing expenses.



Enterprise Solutions revenue decreased compared with the year-ago period

primarily due to a decrease in new product sales in both the current and

prior fiscal year. This decline in revenue was primarily from a decrease

in sales of certain mature product lines, partially offset by an increase

in sales of recently acquired products. Enterprise Solutions operating

margin increased as a result of the decrease in selling and marketing

expenses and product development and enhancement expenses during fiscal

2014.

Services revenue decreased slightly compared with fiscal 2013 primarily

due to a decrease in engagements relating to customer education and

government agencies. Operating margin for Services remained consistent for

fiscal 2014 compared with fiscal 2013.

Cash flow from continuing operations: Net cash provided by operating activities - continuing operations



decreased 28% compared with the year-ago period primarily due to higher

income tax payments of $176 million, payments associated with the Fiscal

2014 Plan of $108 million and an increase in internally developed software

costs recognized as expense of approximately $125 million.

We expect cash flow from operations to increase by a percentage between

the mid-single digits and the low teens for fiscal 2015 compared with

fiscal 2014, primarily as a result of expected lower cash payments

relating to income taxes and lower payments associated with the Fiscal

2014 Plan. Discontinued Operations: In the fourth quarter of fiscal 2014, the Company entered into a



definitive agreement to divest its CA ERwin Data Modeling solution assets

(ERwin). The Company expects to close the sale of ERwin during fiscal

2015. The results of these business operations are presented in income

from discontinued operations for all periods. The divestiture is part of our continued effort to rationalize our portfolio and further sharpen our focus on core capabilities, such as Management Cloud, application development and IT operations (DevOps) and



Security across mainframe, distributed, cloud and mobile environments.

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Performance Indicators Management uses several quantitative and qualitative performance indicators to assess our financial results and condition. Each provides a measurement of the performance of our business and how well we are executing our plan. Our predominantly subscription-based business model is less common among our competitors in the software industry and it may be difficult to compare the results for many of our performance indicators with those of our competitors. The following is a summary of the performance indicators that management uses to review performance: Year Ended March 31, 2014 (1) 2013 (1) Change Percent Change (dollars in millions) Total revenue $ 4,515$ 4,610$ (95 ) (2 )% Income from continuing operations $ 899$ 939$ (40 ) (4 )% Cash provided by operating activities - continuing operations $ 997$ 1,390$ (393 ) (28 )% Total bookings $ 4,521$ 4,082$ 439 11 %



Subscription and maintenance bookings $ 3,718$ 3,214$ 504

16 % Weighted average subscription and maintenance license agreement duration in years 3.35 3.27 0.08 2 % At March 31, 2014 2013 Change Percent Change (dollars in millions) Cash, cash equivalents and short-term investments (2) $ 3,252$ 2,776$ 476 17 % Total debt $ 1,766$ 1,290$ 476 37 % Total expected future cash collections from committed contracts (1) (3) $ 5,155$ 5,169$ (14 ) - % Total revenue backlog (1) (3) $ 7,704$ 7,747$ (43 ) (1 )% Total current revenue backlog (1) (3) $ 3,542$ 3,545 $



(3 ) - %

(1) Information presented excludes the results of our discontinued operations.

(2) At March 31, 2014, short-term investments were less than $1 million. At

March 31, 2013, short-term investments were $183 million.

(3) Refer to the discussion in the "Liquidity and Capital Resources" section of

this MD&A for additional information about expected future cash collections

from committed contracts, billing backlog and revenue backlog.

Analyses of our performance indicators shown above and our segment performance can be found in the "Results of Operations" and "Liquidity and Capital Resources" sections of this MD&A. Total Revenue - Total revenue is the amount of revenue recognized during the reporting period from the sale of license, maintenance and professional services agreements. Amounts recognized as subscription and maintenance revenue are recognized ratably over the term of the agreement. Professional services revenue is generally recognized as the services are performed or recognized on a ratable basis over the term of the related software license. Software fees and other revenue generally represents license fee revenue recognized at the inception of a license agreement (up-front basis) and also includes our SaaS revenue, which is recognized as services are provided. Total Bookings - Total bookings, or sales, includes the incremental value of all subscription, maintenance and professional services contracts and software fees and other contracts entered into during the reporting period and is generally reflective of the amount of products and services during the period that our customers have agreed to purchase from us. Revenue for bookings attributed to sales of software products for which license fee revenue is recognized on an up-front basis is reflected in "Software fees and other" in our Consolidated Statements of Operations. As our business strategy has evolved, our management looks within total bookings at renewal bookings, which we define as bookings attributable to the renewable value of a prior contract, (i.e., the maintenance value and, in the case of non-perpetual licenses, the license value), and at total new product and mainframe solutions capacity sales, which we define as sales of products or mainframe solutions capacity that are new or in addition to products or mainframe solutions capacity previously contracted for by a customer. Mainframe solutions capacity and new product sales growth can be inconsistent on both a quarterly and annual basis. We believe the period-over-period change in mainframe solutions new sales and capacity combined is a more appropriate measure of performance. Starting in the first quarter of fiscal 2015, we will only provide total mainframe solutions new sales. 25



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The amount of new product and capacity sales for a period, as currently tracked by us, requires estimation by management and has not been historically reported. Within a given period, the amount of new product and capacity sales may not be material to the change in our total bookings or revenue compared with prior periods. New product and capacity sales can be reflected as subscription and maintenance bookings in the period (for which revenue would be recognized ratably over the term of the contract) or in software fees and other bookings (which are recognized as software fees and other revenue in the current period). Subscription and Maintenance Bookings - Subscription and maintenance bookings is the aggregate incremental amount we expect to collect from our customers over the terms of the underlying subscription and maintenance agreements entered into during a reporting period. These amounts include the sale of products directly by us and may include additional products, services or other fees for which we have not established vendor specific objective evidence (VSOE). Subscription and maintenance bookings also includes indirect sales by distributors and volume partners, value-added resellers and exclusive representatives to end-users, where the contracts incorporate the right for end-users to receive unspecified future software products, and other contracts without these rights entered into in close proximity or contemplation of such agreements. These amounts are expected to be recognized ratably as subscription and maintenance revenue over the applicable term of the agreements. Subscription and maintenance bookings excludes the value associated with perpetual licenses for which revenue is recognized on an up-front basis, SaaS offerings and professional services arrangements. The license and maintenance agreements that contribute to subscription and maintenance bookings represent binding payment commitments by customers over periods that range generally from three to five years, although in certain cases customer commitments can be for longer or shorter periods. These current period bookings are often renewals of prior contracts that also had various durations, usually from three to five years. The amount of new subscription and maintenance bookings recorded in a period is affected by the volume, duration and value of contracts renewed during that period. Subscription and maintenance bookings typically increases in each consecutive quarter during a fiscal year, with the first quarter having the least bookings and the fourth quarter having the most bookings. However, subscription and maintenance bookings may not always follow the pattern of increasing in consecutive quarters during a fiscal year, and the quarter-to-quarter differences in subscription and maintenance bookings may vary. Given the varying durations of the contracts being renewed, year-over-year comparisons of bookings are not always indicative of the overall bookings trend. Within bookings, we also consider the yield on our renewals. We define "renewal yield" as the percentage of the renewable value of a prior contract (i.e., the maintenance value and, in the case of non-perpetual licenses, the license value) realized in current period bookings. The renewable value of a prior contract is an estimate affected by various factors including contractual renewal terms, price increases and other conditions. Beginning with the first quarter of fiscal 2014, we no longer consider price increases after December 31, 2012 as part of the renewable value of the prior period contract. Previously, the renewable portion of a contract would have to be renewed at the previous amount plus the amount of any price increases to be deemed to be renewed at 100%. Management made this change because it believes it provides a truer measure of our ability to renew the value of a prior contract. We estimate the aggregate renewal yield for a quarter based on a review of material transactions representing a substantial majority of the dollar value of renewals during the current period. There may be no correlation between year-over-year changes in bookings and year-over-year changes in renewal yield, since renewal yield is based on the renewable value of contracts of various durations, most of which are longer than one year. Additionally, period-to-period changes in subscription and maintenance bookings do not necessarily correlate to changes in cash receipts. The contribution to current period revenue from subscription and maintenance bookings from any single license or maintenance agreement is relatively small, since revenue is recognized ratably over the applicable term for these agreements. Weighted Average Subscription and Maintenance License Agreement Duration in Years - The weighted average subscription and maintenance license agreement duration in years reflects the duration of all subscription and maintenance agreements executed during a period, weighted by the total contract value of each individual agreement. Weighted average subscription and maintenance license agreement duration in years can fluctuate from period to period depending on the mix of license agreements entered into during a period. Weighted average duration information is disclosed in order to provide additional understanding of the volume of our bookings. 26



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Total Revenue Backlog - Total revenue backlog represents the aggregate amount we expect to recognize as revenue in the future as either subscription and maintenance revenue, professional services revenue or software fees and other revenue associated with contractually committed amounts billed or to be billed as of the balance sheet date. Total revenue backlog is composed of amounts recognized as liabilities in our Consolidated Balance Sheets as deferred revenue (billed or collected) as well as unearned amounts yet to be billed under subscription and maintenance and software fees and other agreements. Classification of amounts as current and noncurrent depends on when such amounts are expected to be earned and therefore recognized as revenue. Amounts that are expected to be earned and therefore recognized as revenue in 12 months or less are classified as current, while amounts expected to be earned in greater than 12 months are classified as noncurrent. The portion of the total revenue backlog that relates to subscription and maintenance agreements is recognized as revenue evenly on a monthly basis over the duration of the underlying agreements and is reported as subscription and maintenance revenue in our Consolidated Statements of Operations. Generally, we believe that an increase or decrease in the current portion of revenue backlog on a year-over-year basis is a favorable or unfavorable indicator of future subscription and maintenance revenue performance, respectively, due to the high percentage of our revenue that is recognized from license agreements that are already committed and being recognized ratably. "Deferred revenue (billed or collected)" is composed of: (i) amounts received from customers in advance of revenue recognition and (ii) amounts billed but not collected for which revenue has not yet been earned. Results of Operations The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for fiscal 2014, 2013 and 2012 and the period-over-period dollar and percentage changes for those line items. These comparisons of past results are not necessarily indicative of future results. Year Ended March 31, Dollar Change Percent Change Dollar Change Percent Change 2014 (1) 2013 (1) 2012 (1) 2014/2013 2014/2013 2013/2012 2013/2012 (dollars in millions) Revenue: Subscription and maintenance $ 3,747$ 3,833$ 3,994 $ (86 ) (2 )% $ (161 ) (4 )% Professional services 379 382 382 (3 ) (1 )% - - % Software fees and other 389 395 403 (6 ) (2 )% (8 ) (2 )% Total revenue $ 4,515$ 4,610$ 4,779 $ (95 ) (2 )% $ (169 ) (4 )% Expenses: Costs of licensing and maintenance $ 303$ 282$ 284 $ 21 7 % $ (2 ) (1 )% Cost of professional services 353 354 357 (1 ) - % (3 ) (1 )% Amortization of capitalized software costs 282 317 223 (35 ) (11 )% 94 42 % Selling and marketing 1,150 1,273 1,388 (123 ) (10 )% (115 ) (8 )% General and administrative 395 405 462 (10 ) (2 )% (57 ) (12 )% Product development and enhancements 587 489 509 98 20 % (20 ) (4 )% Depreciation and amortization of other intangible assets 144 158 176 (14 ) (9 )% (18 ) (10 )% Other (gains) expenses, net 208 (5 ) 15 213 NM (20 ) (133 )% Total expense before interest and income taxes $ 3,422$ 3,273$ 3,414 $ 149 5 % $ (141 ) (4 )% Income before interest and income taxes $ 1,093$ 1,337$ 1,365$ (244 ) (18 )% $ (28 ) (2 )% Interest expense, net 54 44 35 10 23 % 9 26 % Income before income taxes $ 1,039$ 1,293$ 1,330$ (254 ) (20 )% $ (37 ) (3 )% Income tax expense 140 354 407 (214 ) (60 )% (53 ) (13 )% Income from continuing operations $ 899$ 939$ 923 $ (40 ) (4 )% $ 16 2 %



(1) Information presented excludes the results of our discontinued operations.

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The following table sets forth, for the fiscal years indicated, the percentage of total revenue presented by the items in the accompanying Consolidated Statements of Operations.

Percentage of Total Revenue for the Year Ended March 31, 2014 2013 2012 Revenue: Subscription and maintenance 83 % 83 % 84 % Professional services 8 8 8 Software fees and other 9 9 8 Total revenue 100 % 100 % 100 % Expenses: Costs of licensing and maintenance 7 % 6 % 6 % Cost of professional services 8 8 7 Amortization of capitalized software costs 6 7 5 Selling and marketing 25 28 29 General and administrative 9 9 10 Product development and enhancements 13 11 11 Depreciation and amortization of other intangible assets 3 3 4 Other (gains) expenses, net 5 - - Total expenses before interest and income taxes 76 % 71 % 71 % Income before interest and income taxes 24 % 29 % 29 % Interest expense, net 1 1 1 Income before income taxes 23 % 28 % 28 % Income tax expense 3 8 9 Income from continuing operations 20 % 20 % 19 %



Note: Amounts may not add to their respective totals due to rounding.

Revenue

Total Revenue As more fully described below, total revenue decreased in fiscal 2014 compared with fiscal 2013 and decreased in fiscal 2013 compared with fiscal 2012. During fiscal 2014, total revenue decreased primarily due to a decrease in subscription and maintenance revenue. In addition, during fiscal 2014, there was an unfavorable foreign exchange effect of $37 million compared with fiscal 2013. During fiscal 2013, total revenue reflected an unfavorable foreign exchange effect of $95 million compared with fiscal 2012 and a decrease in subscription and maintenance revenue. Due to sales under-performance in fiscal 2014, we expect a year-over-year percentage decline in total revenue for fiscal 2015 compared with fiscal 2014 similar to or slightly below the year-over-year percentage decline in total revenue for fiscal 2014 compared with fiscal 2013. We expect year-over-year revenue growth to decline by a low-single-digit percentage in the first half of fiscal 2015 and improve through the second half of fiscal 2015. Subscription and Maintenance Subscription and maintenance revenue is the amount of revenue recognized ratably during the reporting period from: (i) subscription license agreements that were in effect during the period, generally including maintenance that is bundled with and not separately identifiable from software usage fees or product sales, (ii) maintenance agreements associated with providing customer technical support and access to software fixes and upgrades that are separately identifiable from software usage fees or product sales, and (iii) license agreements bundled with additional products, maintenance or professional services for which VSOE has not been established. These amounts include the sale of products directly by us, as well as by distributors and volume partners, value-added resellers and exclusive representatives to end-users, where the contracts incorporate the right for end-users to receive unspecified future software products, and other contracts entered into in close proximity or contemplation of such agreements. 28



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The decrease in subscription and maintenance revenue for fiscal 2014 compared with fiscal 2013 was primarily attributable to a decrease in fiscal 2014 and prior period enterprise solutions new product sales. For fiscal 2014, this unfavorable effect of fiscal 2014 and prior period sales was partially offset by a higher renewal yield. In addition, the increased percentage of bookings recognized as software fees and other revenue during fiscal 2013 had an unfavorable effect on subscription and maintenance revenue. This is a result of the product software fees and other bookings being recognized as revenue on an up-front basis in the period in which they are recorded and not recognized ratably over the life of the contract. If the percentage of these bookings increases in the future, this will continue to have an unfavorable effect on subscription and maintenance revenue. There was also an unfavorable foreign exchange effect of $29 million for fiscal 2014. The decrease in subscription and maintenance revenue for fiscal 2013 compared with fiscal 2012 was primarily attributable to an unfavorable foreign exchange effect of $82 million. The decrease in subscription and maintenance revenue was also attributable to a decrease in both current and prior period new product and mainframe solutions capacity sales. In addition, the increased percentage of bookings recognized as software fees and other revenue during fiscal 2013 had an unfavorable effect on subscription and maintenance revenue. Professional Services Professional services revenue primarily includes product implementation, consulting, customer education and customer training. Professional services revenue for fiscal 2014 decreased slightly compared with fiscal 2013 primarily due to a decrease in engagements relating to customer education and government agencies. Partially offsetting this decrease was an increase in engagements associated with large renewals that occurred earlier in fiscal 2014 and in the fourth quarter of fiscal 2013. Professional services revenue for fiscal 2013 was consistent with fiscal 2012. Software Fees and Other Software fees and other revenue consists primarily of revenue that is recognized on an up-front basis. This includes revenue associated with enterprise solutions products sold on an up-front basis directly by our sales force or through transactions with distributors and volume partners, value-added resellers and exclusive representatives (sometimes referred to as our "indirect" or "channel" revenue). It also includes our SaaS revenue, which is recognized as the services are provided, generally ratably over the term of the SaaS arrangement, rather than up-front. Software fees and other revenue decreased for fiscal 2014 compared with fiscal 2013 primarily as a result of a decrease of $13 million in sales of enterprise solutions products recognized on an up-front basis. This decrease was partially offset by an increase in revenue from our SaaS offerings. Software fees and other revenue decreased for fiscal 2013 compared with fiscal 2012 primarily due to $39 million in revenue we recognized under a license agreement in connection with a litigation settlement with Rocket Software, Inc. (Rocket) which occurred in the third quarter of fiscal 2012. Rocket did not admit any wrongdoing in connection with this settlement. As part of this settlement, Rocket agreed to license technology from us, including source code authored several years ago and related trade secrets that were the subject of the litigation. This decrease was partially offset by an increase of $24 million in revenue from our SaaS offerings and an increase of $6 million in revenue from our perpetual enterprise solutions products. Total Revenue by Geography The following table presents the amount of revenue earned from sales to unaffiliated customers in the United States and international regions and corresponding percentage changes for fiscal 2014, 2013 and 2012. Fiscal 2014 Fiscal 2013 Compared With Compared With Fiscal 2013 Fiscal 2012 (dollars in millions) % % 2014 (1) % Of Total 2013 (1) % Of Total Change 2013 (1) % Of Total 2012 (1) % Of Total Change United States $ 2,677 59 % $ 2,716 59 % (1 )% $ 2,716 59 % $ 2,779 58 % (2 )% International 1,838 41 % 1,894 41 % (3 )% 1,894 41 % 2,000 42 % (5 )% Total $ 4,515 100 % $ 4,610 100 % (2 )% $ 4,610 100 % $ 4,779 100 % (4 )%



(1) Information presented excludes the results of our discontinued operations.

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Revenue in the United States decreased by $39 million, or 1%, for fiscal 2014 compared with fiscal 2013 primarily due to a decrease in subscription and maintenance revenue, as described above. International revenue decreased by $56 million, or 3%, for fiscal 2014 compared with fiscal 2013, primarily due to an unfavorable foreign exchange effect of $37 million. Excluding the unfavorable foreign exchange effect, revenue declined in all regions except the Latin America region. Revenue in the United States decreased by $63 million, or 2%, for fiscal 2013 compared with fiscal 2012 primarily due to a decrease in subscription and maintenance revenue, as described above. International revenue decreased by $106 million, or 5%, for fiscal 2013 compared with fiscal 2012, primarily due to an unfavorable foreign exchange effect of $95 million. Excluding the unfavorable foreign exchange effect, revenue declined in all regions except the Latin America region. Price changes do not have a material effect on revenue in a given period as a result of our ratable subscription model.



Expenses

Operating expenses for fiscal 2014 increased compared with fiscal 2013 primarily as a result of our Fiscal 2014 Plan. The Fiscal 2014 Plan comprises the termination of more than 1,800 employees and global facilities consolidations. We intend to fill a majority of the positions involved in the Fiscal 2014 Plan with new employees that have skills to enable us to better focus our resources on priority products and market segments. The Fiscal 2014 Plan includes streamlining our sales structure to eliminate redundancies while maintaining our focus on customers. In addition, we have consolidated our development sites into development hubs to promote collaboration and agile development. Severance and facility consolidation actions under the Fiscal 2014 Plan were substantially completed by the end of fiscal 2014. Costs associated with the Fiscal 2014 Plan are included in the "Other (gains) expenses, net" line of our Consolidated Statements of Operations. Operating expenses for fiscal 2014 were also unfavorably affected by an increase in product development and enhancements expenses and costs of licensing and maintenance. Partially offsetting these increases in operating expenses was a decrease in selling and marketing expenses, primarily driven by the lower number of employees involved in selling and marketing activities and amortization of capitalized software costs. In the first quarter of fiscal 2013, there was $35 million of income from an intellectual property transaction recognized in "Other (gains) expenses, net," in addition to an impairment recorded in the fourth quarter of fiscal 2013 of $55 million relating to purchased software. Operating expenses for fiscal 2013 decreased compared with fiscal 2012 due to a decrease in selling and marketing expenses, a decrease in general and administrative expenses, a favorable effect of foreign exchange on operating expenses, a decrease in severance costs and a decrease of $20 million due to a change in our employee vacation benefits. As noted above, there was $35 million of income from an intellectual property transaction recognized in "Other (gains) expenses, net" in the first quarter of fiscal 2013. Partially offsetting these decreases was an increase in amortization of capitalized software costs. Costs of Licensing and Maintenance Costs of licensing and maintenance include technical support, royalties, and other manufacturing and distribution costs. The increase in costs of licensing and maintenance for fiscal 2014 compared with fiscal 2013 was primarily attributable to the addition of technical support personnel in connection with the Fiscal 2014 Plan. Costs of licensing and maintenance for fiscal 2013 were consistent with fiscal 2012. Cost of Professional Services Cost of professional services consists primarily of our personnel-related costs associated with providing professional services and training to customers. Cost of professional services for fiscal 2014 was consistent with fiscal 2013 and operating margin for professional services was 7% for each of fiscal 2014 and fiscal 2013. Cost of professional services for fiscal 2013 was consistent with fiscal 2012 and operating margin for professional services was 7% for each of fiscal 2013 and fiscal 2012. Operating margin for professional services does not include certain additional direct costs that are included within the Services segment (see "Performance of Segments" below). Expenses for the Services segment consist of cost of professional services and other direct costs included within selling and marketing and general and administrative expenses. Amortization of Capitalized Software Costs Amortization of capitalized software costs consists of the amortization of both purchased software and internally generated capitalized software development costs. Internally generated capitalized software development costs relate to new products and significant enhancements to existing software products that have reached the technological feasibility stage. We evaluate the useful lives and recoverability of capitalized software and other intangible assets when events or changes in circumstances indicate that an impairment may exist. These evaluations require complex assumptions about key factors such as future customer demand, technology trends and the impact of those factors on the technology we acquire and develop for our products. Impairments or revisions to useful lives could result from the use of alternative assumptions that reflect reasonably possible outcomes related to future customer demand or technology trends for assets within the Enterprise Solutions segment. 30



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The decrease in amortization of capitalized software costs for fiscal 2014 compared with fiscal 2013 was primarily due to an impairment recorded in the fourth quarter of fiscal 2013 of $55 million relating to purchased software (see Note 6, "Long Lived Assets," in the Notes to the Consolidated Financial Statements for additional information), partially offset by an increase in software development projects that have reached general availability in recent periods and amortization from assets acquired from recent acquisitions. Our product offerings and go-to-market strategy continue to evolve to include solutions and product suites that may be delivered either on-premise or via SaaS or cloud platforms. We expect our product offerings to continue to become available to customers at more frequent intervals than our historical release cycles. We have adopted the Agile development methodologies, which are characterized by a more dynamic development process with more frequent revisions to a product release's features and functions as the software is being developed. These factors resulted in our commencing capitalization much later in the development life cycle. As a result, product development and enhancements expenses have increased in fiscal 2014 as the amount capitalized for internally developed software costs decreased. In the future, the amount to be capitalized for internally developed software costs is not expected to be significant. As a result, future amortization of capitalized software costs is expected to decrease. The increase in amortization of capitalized software costs for fiscal 2013 compared with fiscal 2012 was due to the afore-mentioned impairment recorded in the fourth quarter of fiscal 2013 of $55 million relating to purchased software, as well as an increase in software development projects that have reached general availability in recent periods and amortization from assets acquired from our fiscal 2012 acquisitions. Selling and Marketing Selling and marketing expenses include the costs relating to our sales force, channel partners, corporate and business marketing and customer training programs. For fiscal 2014, the decrease in selling and marketing expenses compared with fiscal 2013 was primarily attributable to a decrease in personnel-related costs of $150 million due to a reduced headcount as a result of the Fiscal 2014 Plan and prior year workforce reduction actions, as well as a decrease in commission expense due to lower new sales during fiscal 2014. These decreases were partially offset by a $46 million increase in our marketing initiatives for fiscal 2014 compared with fiscal 2013. For fiscal 2013, the decrease in selling and marketing expenses compared with fiscal 2012 was attributable to a decrease in personnel-related costs of $42 million, a favorable foreign exchange effect of $24 million, a decrease in commission expense of $22 million, a decrease in severance costs of $17 million, and a decrease in promotion expense of $17 million. The decrease in the personnel-related and promotion expenses was primarily attributable to our cost containment efforts. General and Administrative General and administrative expenses include the costs of corporate and support functions, including our executive leadership and administration groups, finance, legal, human resources, corporate communications and other costs such as provisions for doubtful accounts. For fiscal 2014, general and administrative expenses decreased compared with fiscal 2013, primarily due to a favorable foreign exchange effect of $7 million. For fiscal 2013, general and administrative expenses decreased compared with fiscal 2012, primarily due to a decrease in costs associated with external consultants of $24 million, a favorable foreign exchange effect of $10 million and a decrease in severance costs of $8 million. The decrease in external consultants expenses was primarily attributable to our cost containment efforts. Product Development and Enhancements For fiscal 2014 and fiscal 2013, product development and enhancements expenses represented 13% and 11% of total revenue, respectively. The increase in product development and enhancements expenses was attributable to the decrease in capitalized software development costs of approximately $128 million (see "Amortization of Capitalized Software Costs" above), partially offset by a decrease in personnel-related costs from a reduced headcount as a result of the Fiscal 2014 Plan and prior year workforce reduction actions. For fiscal 2013 and fiscal 2012, product development and enhancements expenses represented 11% of total revenue. The slight decrease in product development and enhancements expenses for fiscal 2013 compared with fiscal 2012 was primarily attributable to a decrease in personnel-related costs. These decreases were partially offset by a decrease in the proportion of expenditures that were capitalized during fiscal 2013 compared with fiscal 2012. Product development and enhancements expenses are expected to increase in future periods as the amount of capitalized software development costs decreases (see "Amortization of Capitalized Software Costs" above). 31



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Depreciation and Amortization of Other Intangible Assets The decrease in depreciation and amortization of other intangible assets for fiscal 2014 compared with fiscal 2013 was primarily due to a decrease in depreciation expense, which was primarily as a result of property and equipment that became fully depreciated in the first quarter of fiscal 2014. This decrease was partially offset by an increase in amortization of other intangible assets acquired from recent acquisitions. The decrease in depreciation and amortization of other intangible assets for fiscal 2013 compared with fiscal 2012 was primarily due to acquired intangible assets that became fully amortized. Other (Gains) Expenses, Net The summary of other (gains) expenses, net was as follows: Year Ended March 31, (in millions) 2014 2013 2012 Fiscal 2014 Plan $ 171 $ - $ - Legal settlements 29 18 9 (Gains) losses from foreign exchange derivative contracts (20 ) 11 (3 ) Losses from foreign exchange rate fluctuations 38 1 7 Assignment of rights to intellectual property - (35 ) - Other miscellaneous items (10 ) - 2 Total $ 208$ (5 )$ 15 For fiscal 2014, other (gains) expenses, net includes a foreign currency loss of $6 million relating to the remeasurement of monetary assets and liabilities of our Venezuelan subsidiary. This loss arose from our use of exchange rates from the Venezuelan government's most recent auction-based exchange rate program, the Complementary System for Foreign Currency Administration rate. As of March 31, 2014, our net monetary assets in Venezuela are less than $10 million and could be subject to further foreign currency losses. However, while the amounts and timing of these potential losses are unknown, they are not expected to materially affect our financial position or operating results. For fiscal 2013, other (gains) expenses, net included a transaction in the first quarter of fiscal 2013 to assign the rights of certain of our intellectual property assets to a large technology company for $35 million as part of an effort to more fully utilize our intellectual property assets. We will continue to have the ability to use these intellectual property assets in current and future product offerings. Interest Expense, Net Interest expense, net for fiscal 2014 increased compared with fiscal 2013 primarily as a result of additional interest expense relating to our debt offering that occurred during the second quarter of fiscal 2014. The increase in interest expense, net for fiscal 2013 compared with fiscal 2012 was primarily attributable to a decrease in interest income due to lower interest rates and lower cash balances in the current period. Refer to the "Liquidity and Capital Resources" section of this MD&A and Note 8, "Debt," in the Notes to the Consolidated Financial Statements for additional information. Income Taxes Income tax expense for fiscal 2014, 2013 and 2012 was $140 million, $354 million and $407 million, respectively. Our effective tax rate was 13.5%, 27.4% and 30.6%, for fiscal 2014, 2013 and 2012, respectively. We expect a full-year effective tax rate of about 30% for fiscal 2015. The reduction in the effective tax rate for fiscal 2014, compared with fiscal 2013, resulted primarily from favorable resolutions of uncertain tax positions relating to U.S. and non-U.S. jurisdictions (including the completion of the examination of our U.S. federal income tax returns for the tax years ended March 31, 2005, 2006 and 2007). These items taken together resulted in a net benefit of $168 million for fiscal 2014. The reduction in the effective tax rate for fiscal 2013, compared with fiscal 2012, resulted primarily from resolutions of uncertain tax positions relating to U.S. and non-U.S. jurisdictions (including the completion of the examination of our U.S. federal income tax returns for the tax years ended March 31, 2008, 2009 and 2010) and the retroactive reinstatement of the U.S. Research and Development Tax Credit in January 2013, partially offset by refinements of tax positions taken for prior periods. These items taken together resulted in a net benefit of $63 million for fiscal 2013. The reduction in the effective tax rate for fiscal 2012, compared with fiscal 2011, resulted primarily from the recognition of tax benefits related to an investment in a foreign subsidiary and a decrease in the valuation allowance for state net operating loss carryforwards due to a change in forecasted state taxable income. These items taken together resulted in a net benefit of $36 million for fiscal 2012. 32



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No provision has been made for U.S. federal income taxes on $2,349 million and $2,220 million at March 31, 2014 and 2013, respectively, of unremitted earnings of our foreign subsidiaries since we plan to permanently reinvest all such earnings outside the United States. It is not practicable to determine the amount of tax associated with such unremitted earnings. In November 2013, we received a tax assessment of Brazilian reais 211 million (which translated to $93 million at March 31, 2014), including interest and penalties, from the Brazilian tax authority relating to fiscal 2008-2013. The assessment included a report of findings in connection with the examination. We disagree with the proposed adjustments in the assessment and intend to vigorously dispute these matters through applicable administrative and judicial procedures, as appropriate. While we believe that we will ultimately prevail, if the assessment is not resolved in our favor, it would have an impact on our consolidated financial position, cash flows or results of operations. We do not believe it is reasonably possible that the amount of unrecognized tax benefits for this matter will significantly increase or decrease within the next 12 months. Refer to Note 15, "Income Taxes," in the Notes to the Consolidated Financial Statements for additional information. Discontinued Operations In the fourth quarter of fiscal 2014, the Company entered into a definitive agreement to divest its CA ERwin Data Modeling solution assets (ERwin). The Company expects to close the sale of ERwin during fiscal 2015. The results of discontinued operations for fiscal 2014, 2013 and 2012 included revenue of $32 million, $33 million and $35 million, respectively, and income from operations, net of taxes, of $15 million, $16 million and $15 million, respectively. In the first quarter of fiscal 2012, we sold our Internet Security business for $14 million. The results of discontinued operations for fiscal 2012 included revenue of $15 million and income from operations, net of taxes, of $13 million. Refer to Note 3, "Divestitures," in the Notes to the Consolidated Financial Statements for additional information. Performance of Segments Our Mainframe Solutions and Enterprise Solutions segments comprise our software business organized by the nature of our software offerings and the platform on which the products operate. The Mainframe Solutions segment products help customers and partners transform mainframe management, gain more value from existing technology and extend mainframe capabilities. Our Enterprise Solutions segment consists of various product offerings, including: DevOps, which helps customers unite application development and IT operations; Management Cloud, where we help customers optimize investments, projects, resources and processes; and Security, which includes identity and access management. The Services segment comprises product implementation, consulting, customer education and customer training. These services include those directly related to our mainframe solutions and enterprise solutions. We regularly enter into a single arrangement with a customer that includes mainframe solutions, enterprise solutions and services. The amount of contract revenue assigned to segments is generally based on the manner in which the proposal is made to the customer. The software product revenue is assigned to the Mainframe Solutions and Enterprise Solutions segments based on either: (1) a list price allocation method (which allocates a discount in the total contract price to the individual products in proportion to the list price of the product); (2) allocations included within internal contract approval documents; or (3) the value for individual software products as stated in the customer contract. The price for the implementation, consulting, education and training services is separately stated in the contract and these amounts of contract revenue are assigned to the Services segment. The contract value assigned to each operating segment is then recognized in a manner consistent with the revenue recognition policies we apply to the customer contract for purposes of preparing our Consolidated Financial Statements. Segment expenses include costs that are controllable by segment managers (i.e., direct costs) and, in the case of the Mainframe Solutions and Enterprise Solutions segments, an allocation of shared and indirect costs (i.e., allocated costs). Segment-specific direct costs include a portion of selling and marketing costs, licensing and maintenance costs, product development costs, general and administrative costs and amortization of the cost of internally developed software. Allocated segment costs primarily include indirect and non-segment-specific direct selling and marketing costs and general and administrative costs that are not directly attributable to a specific segment. The basis for allocating shared and indirect costs between the Mainframe Solutions and Enterprise Solutions segments is dependent on the nature of the cost being allocated and is either in proportion to segment revenues or in proportion to the related direct cost category. Expenses for the Services segment consist of cost of professional services and other direct costs included within selling and marketing and general and administrative expenses. There are no allocated or indirect costs for the Services segment. Segment expenses do not include share-based compensation expense; amortization of purchased software; amortization of other intangible assets; costs associated with our Fiscal 2014 Plan; and other miscellaneous costs. Additionally, starting in the first quarter of fiscal 2014, the measure of segment expenses and segment profit was revised by the Chief Operating Decision Maker, who is our Chief Executive Officer, to treat all costs of internal software development as segment expense in the period the costs are incurred and as a result, we will add back capitalized internal software costs and exclude amortization of internally developed software costs previously capitalized from segment expenses. Prior period segment expense and profit information has been revised to present segment profit and expense on a consistent basis. A measure of segment assets is not currently provided to our Chief Executive Officer and has therefore not been disclosed. 33



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Segment financial information for fiscal 2014, 2013 and 2012 is as follows: Mainframe Solutions Fiscal 2014 (1) Fiscal 2013 (1) Fiscal 2012 (1) Revenue $ 2,478 $ 2,489 $ 2,612 Expenses 987 1,028 1,157 Segment profit $ 1,491 $ 1,461 $ 1,455 Segment operating margin 60 % 59 % 56 %



(1) Information presented excludes the results of our discontinued operations.

For fiscal 2014, Mainframe Solutions revenue decreased compared with the year-ago period primarily due to an unfavorable foreign exchange effect of $18 million. Excluding the effect of foreign exchange, Mainframe Solutions revenue would have increased slightly primarily as a result of improved renewal yields. The increase in Mainframe Solutions operating margin for fiscal 2014 compared with fiscal 2013 was primarily a result of a decrease in selling and marketing expense as result of lower personnel expenses. The decrease in Mainframe Solutions revenue for fiscal 2013 compared with fiscal 2012 was driven primarily by an unfavorable foreign exchange effect of $56 million, the aforementioned $39 million in revenue recognized in connection with the Rocket settlement and lower mainframe solutions new product and capacity sales in prior periods. The increase in Mainframe Solutions operating margin for fiscal 2013 compared with fiscal 2012 was primarily a result of the decrease in selling and marketing expenses, a favorable effect of foreign exchange on operating expenses, a decrease in general and administrative expenses and a decrease in severance costs. Enterprise Solutions Fiscal 2014 (1) Fiscal 2013 (1) Fiscal 2012 (1) Revenue $ 1,658 $ 1,739 $ 1,785 Expenses 1,514 1,599 1,691 Segment profit $ 144 $ 140 $ 94 Segment operating margin 9 % 8 % 5 %



(1) Information presented excludes the results of our discontinued operations.

Enterprise Solutions revenue for fiscal 2014 decreased compared with fiscal 2013 primarily due to a decrease in new product sales in both the current and prior fiscal year. This decline in revenue was primarily due to a decrease in sales of certain mature product lines, partially offset by an increase in sales of recently acquired products. There was also an unfavorable foreign exchange effect of $17 million compared with the year-ago period. Enterprise Solutions operating margin for fiscal 2014 increased as a result of the decrease in selling and marketing expenses and product development and enhancement expenses during fiscal 2014. Fiscal 2013 included income from the aforementioned $35 million intellectual property transaction. Enterprise Solutions revenue for fiscal 2013 decreased compared with fiscal 2012 primarily due to an unfavorable foreign exchange effect of $32 million and lower new product sales from prior periods. Within Enterprise Solutions revenue, there was a decrease in revenue from our service assurance, automation and data management products, partially offset by an increase in revenue attributable to our ITKO and Nimsoft products. Enterprise Solutions operating margin for fiscal 2013 compared with fiscal 2012 increased as a result of the income from the aforementioned $35 million intellectual property transaction in the first quarter of fiscal 2013, which contributed two percentage points to operating margin in fiscal 2013, as well as a decrease in severance costs compared with fiscal 2012. These favorable items were offset by our additional investments in ITKO and Nimsoft products. Services Fiscal 2014 Fiscal 2013 Fiscal 2012 Revenue $ 379$ 382$ 382 Expenses 357 358 359 Segment profit $ 22$ 24$ 23 Segment operating margin 6 % 6 % 6 % Services segment expenses include cost of professional services and assigned general and administrative expenses that are not included in the cost of professional services expense lines of the Consolidated Statement of Operations. Services revenue for fiscal 2014 decreased compared with fiscal 2013 primarily due to a decrease in engagements relating to customer education and government agencies. Operating margin for Services remained consistent for fiscal 2014 compared with fiscal 2013. For fiscal 2013, Services revenue, expenses and operating margin remained consistent compared with fiscal 2012. 34



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Refer to Note 17, "Segment and Geographic Information," in the Notes to the Consolidated Financial Statements for additional information.

Bookings

For fiscal 2014 and fiscal 2013, total bookings were $4,521 million and $4,082 million, respectively. The increase in bookings was primarily due to a year-over-year increase in renewals within subscription and maintenance bookings, partially offset by a decrease in total new product and mainframe solutions capacity sales. Mainframe solutions renewals, and to a lesser extent, enterprise solutions renewals, increased year-over-year primarily as a result of the timing of our renewal portfolio. Within total bookings, total new product and mainframe solutions capacity sales decreased by approximately 10% for fiscal 2014 compared with fiscal 2013 primarily due to a decrease in mainframe solutions capacity sales in the fourth quarter of fiscal 2014. Excluding the unfavorable effect of foreign exchange, total new product and mainframe solutions capacity sales decreased by a high-single-digit percentage. Mainframe solutions new product sales decreased by a percentage in the low teens and capacity sales decreased by a mid-30% range. Mainframe solutions capacity and new product sales growth can be inconsistent on both a quarterly and annual basis. We believe the period-over-period change in mainframe solutions new sales and capacity combined is a more appropriate measure of performance. Starting in the first quarter of fiscal 2015, we will only provide total mainframe solutions new sales. For fiscal 2014, mainframe solutions new sales including capacity were down in the mid 20% range. The decrease in mainframe solutions new product sales was due to several factors, including: the composition of the renewal portfolio as compared with the prior year, which included a more than $200 million contract with a U.S. government agency in the fourth quarter of fiscal 2013 having a large amount of mainframe capacity; and improved price performance realized by customers on capacity. Overall, we expect the percentage growth of our mainframe solutions revenue to perform in line with the mainframe industry. Enterprise solutions new product sales decreased by a mid-single-digit percentage primarily due to a decline in sales from certain mature product lines, partially offset by an increase in sales of recently acquired products. Total new product and mainframe solutions capacity sales decreased in all regions. Total bookings in fiscal 2014 compared with the year-ago period increased in all regions, except in the Asia Pacific Japan region. In fiscal 2014 compared with the year-ago period, total bookings increased in the Europe, Middle East and Africa region primarily as a result of several large contract renewals. For fiscal 2013 and fiscal 2012, total bookings were $4,082 million and $4,632 million, respectively. The decrease in total bookings was primarily a result of a year-over-year decline in mainframe solutions renewals, enterprise and mainframe solutions new product sales and mainframe solutions capacity sales reflected in subscription and maintenance bookings and to a lesser extent a decrease in professional services bookings. This decrease was slightly offset by an increase in software fees and other bookings that are or will be recognized as software fees and other revenue and were primarily driven by growth in our SaaS offerings. For fiscal 2012, software fees and other bookings included the aforementioned $39 million recognized in connection with the Rocket settlement. Mainframe solutions new product and capacity sales were down in fiscal 2013 compared with fiscal 2012 primarily due to lower renewals. Enterprise solutions new product sales declined primarily due to our lower-than expected sales of new products outside of our renewal process. Bookings performance was also negatively affected by a difficult macroeconomic environment. During the first quarter of fiscal 2013, bookings performance was unexpectedly disrupted by our efforts to align our sales force to execute our customer segmented go-to-market initiative. In fiscal 2013, total bookings decreased compared with fiscal 2012 in the United States and Europe, Middle East and Africa regions and increased in the Asia Pacific Japan and Latin America regions. Total new product and mainframe solutions capacity sales in fiscal 2013 declined by approximately 20% compared with fiscal 2012. Within these bookings, new product and capacity sales decreased in all regions except in the Asia Pacific Japan region. Subscription and Maintenance Bookings For fiscal 2014 and fiscal 2013, subscription and maintenance bookings were $3,718 million and $3,214 million, respectively. The increase in subscription and maintenance bookings was primarily attributable to an increase in our renewals. During fiscal 2014, we executed a total of 54 license agreements with incremental contract values in excess of $10 million each, for an aggregate contract value of $1,973 million. During fiscal 2013, we executed a total of 52 license agreements with incremental contract values in excess of $10 million each, for an aggregate contract value of $1,514 million. For fiscal 2013 and fiscal 2012, subscription and maintenance bookings were $3,214 million and $3,753 million, respectively. The decrease in subscription and maintenance bookings was primarily attributable to lower mainframe solutions renewals, and lower enterprise and mainframe solutions new product sales and mainframe solutions capacity sales reflected in subscription and maintenance bookings. Within renewals, the decrease in mainframe solutions renewals was primarily attributable to the composition of the renewal portfolio. This decrease was partially offset by an increase in enterprise solutions renewals. 35



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Mainframe solutions renewals, and to a lesser extent, enterprise solutions renewals, increased year-over-year. The value of our fiscal 2014 renewals increased in the mid-20% range compared with fiscal 2013. Excluding the aforementioned contract renewal with a large system integrator, the value of our fiscal 2014 renewals would have increased by a percentage in the low teens. This increase was primarily due to a higher dollar value of contract renewals in fiscal 2014 compared with fiscal 2013 and also was a result of certain renewals closing prior to their scheduled expiration dates. A renewal can close before its scheduled renewal date for a number of reasons, including customer preference, customer needs for additional products or capacity, or our preference. The level of contracts closed prior to scheduled expiration dates and the reasons for such closings can vary from quarter to quarter. For the fourth quarter of fiscal 2014, our percentage renewal yield was in the mid-90 percent range. Our percentage renewal yield was above 90 percent for each quarter of fiscal 2014. There was not a material difference between this renewal yield percentage and the renewal yield percentage as it would have been calculated under our previous methodology. We expect our fiscal 2015 renewal portfolio to decline by a high-single-digit percentage compared with fiscal 2014. Excluding the impact from a contract renewal with a large system integrator which occurred during fiscal 2014, we expect the value of our fiscal 2015 renewal portfolio to be consistent with the value of our fiscal 2014 renewal portfolio. Annualized subscription and maintenance bookings is an indicator that normalizes the bookings recorded in the current period to account for contract length. It is calculated by dividing the total value of all new subscription and maintenance license agreements entered into during a period by the weighted average subscription and license agreement duration in years for all such subscription and maintenance license agreements recorded during the same period. Annualized subscription and maintenance bookings increased from $983 million in fiscal 2013 to $1,110 million in fiscal 2014 due to the increase in subscription and maintenance bookings from fiscal 2013 to fiscal 2014. The weighted average subscription and maintenance license agreement duration in years increased from 3.27 in fiscal 2013 to 3.35 in fiscal 2014. Although each contract is subject to terms negotiated by the respective parties, we do not expect the weighted average subscription and maintenance agreement duration in years to change materially from historical levels for end-user contracts. 36



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Selected Quarterly Information

Fiscal 2014 Quarter Ended June 30 (1) September 30 (1) December 31 (1) March 31 (1) Total (1) (dollars in millions, except per share amounts) Revenue $ 1,120 $ 1,132 $ 1,155 $ 1,108$ 4,515 Percentage of annual revenue 25 % 25 % 25 % 25 % 100 % Costs of licensing and maintenance $ 70 $ 73 $ 78 $ 82 $ 303 Cost of professional services $ 88 $ 88 $ 88 $ 89 $ 353 Amortization of capitalized software costs $ 69 $ 72 $ 72 $ 69 $ 282 Income from continuing operations $ 331 $ 236 $ 228 $ 104$ 899 Basic income per common share from continuing operations $ 0.73 $ 0.52 $ 0.51 $ 0.23$ 2.00 Diluted income per common share from continuing operations $ 0.73 $ 0.52 $ 0.50 $ 0.23$ 1.99 Fiscal 2013 Quarter Ended June 30 (1) September 30 (1) December 31 (1) March 31 (1) Total (1) (dollars in millions, except per share amounts) Revenue $ 1,137 $ 1,144 $ 1,186 $ 1,143$ 4,610 Percentage of annual revenue 24 % 25 % 26 % 25 % 100 % Costs of licensing and maintenance $ 68 $ 69 $ 71 $ 74 $ 282 Cost of professional services $ 86 $ 88 $ 92 $ 88 $ 354 Amortization of capitalized software costs (2) $ 64 $ 67 $ 65 $ 121$ 317 Income from continuing operations $ 236 $ 218 $ 247 $ 238$ 939 Basic income per common share from continuing operations $ 0.50 $ 0.47 $ 0.54 $ 0.52$ 2.03 Diluted income per common share from continuing operations $ 0.50 $ 0.47 $ 0.54 $ 0.52$ 2.03



(1) Information presented excludes the results of our discontinued operations.

(2) Includes impairment of $55 million in the fourth quarter of fiscal 2013

relating to purchased software (see Note 6, "Long Lived Assets," in the Notes

to the Consolidated Financial Statements for additional information).

Liquidity and Capital Resources Our cash and cash equivalent balances are held in numerous locations throughout the world, with 61% held in our subsidiaries outside the United States at March 31, 2014. Cash and cash equivalents totaled $3,252 million at March 31, 2014, representing an increase of $659 million from the March 31, 2013 balance of $2,593 million. The increase in cash was primarily a result of cash received from our August 2013 debt offering and maturities of short-term investments. During fiscal 2014, there was a $62 million favorable translation effect from foreign currency exchange rates on cash held outside the United States in currencies other than the U.S. dollar. Although 61% of our cash and cash equivalents is held by foreign subsidiaries, we currently neither intend nor expect a need to repatriate these funds to the United States in the foreseeable future. We expect existing domestic cash, cash equivalents and cash flows from operations to be sufficient to fund our domestic operating activities and our investing and financing activities, including, among other things, the payment of regular quarterly dividends, compliance with our debt repayment schedules, repurchases of our common stock and the funding of capital expenditures, for at least the next 12 months and for the foreseeable future thereafter. In addition, we expect existing foreign cash, cash equivalents and cash flows from foreign operations to be sufficient to fund our foreign operating activities and investing activities, including, among other things, the funding of capital expenditures, acquisitions and research and development, for at least the next 12 months and for the foreseeable future thereafter. 37



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Sources and Uses of Cash Under our subscription and maintenance agreements, customers generally make installment payments over the term of the agreement, often with at least one payment due at contract execution, for the right to use our software products and receive product support, software fixes and new products when available. The timing and actual amounts of cash received from committed customer installment payments under any specific agreement can be affected by several factors, including the time value of money and the customer's credit rating. Often, the amount received is the result of direct negotiations with the customer when establishing pricing and payment terms. In certain instances, the customer negotiates a price for a single up-front installment payment and seeks its own internal or external financing sources. In other instances, we may assist the customer by arranging financing on the customer's behalf through a third-party financial institution. Alternatively, we may decide to transfer our rights to the future committed installment payments due under the license agreement to a third-party financial institution in exchange for a cash payment. Once transferred, the future committed installments are payable by the customer to the third-party financial institution. Whether the future committed installments have been financed directly by the customer with our assistance or by the transfer of our rights to future committed installments to a third party, these financing agreements may contain limited recourse provisions with respect to our continued performance under the license agreements. Based on our historical experience, we believe that any liability that we may incur as a result of these limited recourse provisions will be immaterial. Amounts billed or collected as a result of a single installment for the entire contract value, or a substantial portion of the contract value, rather than being invoiced and collected over the life of the license agreement, are reflected in the liability section of our Consolidated Balance Sheets as "Deferred revenue (billed or collected)." Amounts received from either a customer or a third-party financial institution that are attributable to later years of a license agreement have a positive impact on billings and cash provided by operating activities in the current period. Accordingly, to the extent these collections are attributable to the later years of a license agreement, billings and cash provided by operating activities during the license's later years will be lower than if the payments were received over the license term. We are unable to predict with certainty the amount of cash to be collected from single installments for the entire contract value, or a substantial portion of the contract value, under new or renewed license agreements to be executed in future periods. For fiscal 2014, gross receipts related to single installments for the entire contract value, or a substantial portion of the contract value, were $502 million compared with $672 million in fiscal 2013. In any quarter, we may receive payments in advance of the contractually committed date on which the payments were otherwise due. In limited circumstances, we may offer discounts to customers to ensure payment in the current period of invoices that have been billed, but might not otherwise be paid until a subsequent period because of payment terms. Historically, any such discounts have not been material. Amounts due from customers from our subscription licenses are offset by deferred revenue related to these license agreements, leaving no or minimal net carrying value on our Consolidated Balance Sheets for those amounts. The fair value of these amounts may exceed or be less than this carrying value but cannot be practically assessed since there is no existing market for a pool of customer receivables with contractual commitments similar to those owned by us. The actual fair value may not be known until these amounts are sold, securitized or collected. Although these customer license agreements commit the customer to payment under a fixed schedule, to the extent amounts are not yet due and payable by the customer, the agreements are considered executory in nature due to our ongoing commitment to provide maintenance and unspecified future software products as part of the agreement terms. We can estimate the total amounts to be billed from committed contracts, referred to as our "billings backlog," and the total amount to be recognized as revenue from committed contracts, referred to as our "revenue backlog." The aggregate amounts of our billings backlog and trade receivables already reflected in our Consolidated Balance Sheets represent the amounts we expect to collect in the future from committed contracts. 38



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Table of Contents March 31, 2014 (1) March 31, 2013 (1) (in millions) Billings backlog: Amounts to be billed - current $ 1,986 $ 2,140 Amounts to be billed - noncurrent 2,369 2,173 Total billings backlog $ 4,355 $ 4,313



Revenue backlog: Revenue to be recognized within the next 12 months - current

$ 3,542 $ 3,545



Revenue to be recognized beyond the next 12 months - noncurrent

4,162 4,202 Total revenue backlog $ 7,704 $ 7,747 Deferred revenue (billed or collected) $ 3,349 $ 3,434 Total billings backlog 4,355 4,313 Total revenue backlog $ 7,704 $ 7,747



(1) Information presented excludes the results of our discontinued operations.

Note: Revenue backlog includes deferred subscription and maintenance, professional services and software fees and other revenue. We can also estimate the total cash to be collected in the future from committed contracts, referred to as our "Expected future cash collections," by adding the total billings backlog to the trade accounts receivable, which represent amounts already billed but not collected, from our Consolidated Balance Sheets. March 31, 2014 (1) March 31,



2013 (1)

(in millions) Expected future cash collections: Total billings backlog $ 4,355 $



4,313

Trade accounts receivable, net 800



856

Total expected future cash collections $ 5,155 $



5,169

(1) Information presented excludes the results of our discontinued operations.

Total billings backlog in fiscal 2014 compared with fiscal 2013 increased slightly as a result of a favorable effect of foreign exchange. Total current billings backlog in fiscal 2014 compared with fiscal 2013 decreased primarily due to the timing of billings from committed contracts. Total expected future cash collections in fiscal 2014 was consistent compared with fiscal 2013. Total revenue backlog in fiscal 2014 decreased slightly compared with fiscal 2013. Revenue to be recognized in the next 12 months at March 31, 2014 was consistent compared with March 31, 2013. This reflects our unfavorable year-to-date sales performance for fiscal 2014 offset by the favorable year-over-year effect from a large system integrator renewal for more than $300 million that was executed in the third quarter of fiscal 2014, which was expected to expire within the fourth quarter of fiscal 2014. Generally, we believe that a change in the current portion of revenue backlog on a year-over-year basis is an indicator of future subscription and maintenance revenue performance due to the high percentage of our revenue that is recognized from license agreements that are already committed and being recognized ratably. Unbilled amounts relating to subscription licenses are mostly collectible over a period of one-to-five years and at March 31, 2014, on a cumulative basis, 46%, 77%, 90%, 98% and 99% come due within fiscal 2015 through 2019, respectively. 39



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Cash Provided by Operating Activities

Year Ended March 31,



$ Change

2014 (1) 2013 (1) 2012 (1) 2014 / 2013 2013 / 2012 (in millions) Cash collections from billings (2) $ 4,756$ 4,824$ 5,107$ (68 )$ (283 ) Vendor disbursements and payroll (2) (3,093 ) (3,110 ) (3,226 ) 17 116 Income tax payments, net (500 ) (324 ) (411 ) (176 ) 87 Other disbursements, net (3) (166 ) - 18 (166 ) (18 ) Net cash provided by continuing operating activities $ 997$ 1,390$ 1,488$ (393 )$ (98 )



(1) Information presented excludes the results of our discontinued operations.

(2) Amounts include value added taxes and sales taxes.

(3) For fiscal 2014, amount includes $108 million of payments associated with the

Fiscal 2014 Plan, interest, prior period restructuring plans and

miscellaneous receipts and disbursements. For fiscal 2013, amount includes

interest, restructuring payments and $35 million in cash proceeds received

from the aforementioned intellectual property transaction in the first

quarter of fiscal 2013 and miscellaneous receipts and disbursements. For

fiscal 2012, amount includes interest, restructuring payments and miscellaneous receipts and disbursements. Fiscal 2014 versus Fiscal 2013 Operating Activities: Net cash provided by continuing operating activities for fiscal 2014 was $997 million, representing a decrease of $393 million compared with fiscal 2013. Net cash provided by continuing operating activities was unfavorably affected by an increase in income tax payments of $176 million, which includes an income tax refund received in the second quarter of fiscal 2014 of $70 million. In addition, there was an unfavorable effect from the payments associated with the Fiscal 2014 Plan of $108 million and an increase in internally developed software costs recognized as expense of approximately $125 million. For fiscal 2013, other disbursements, net included the $35 million in cash proceeds received as other income from the aforementioned intellectual property transaction in first quarter of fiscal 2013. We expect cash flow from operations to increase by a percentage between the mid-single digits and the low teens for fiscal 2015 compared with fiscal 2014, primarily as a result of expected lower cash payments relating to income taxes and lower payments associated with the Fiscal 2014 Plan. Investing Activities: Net cash provided by investing activities from continuing operations for fiscal 2014 was $5 million compared with net cash used in investing activities from continuing operations of $473 million for fiscal 2013. The change in net investing activities was primarily due to a decrease in the amount capitalized for internally developed software costs of $125 million, a decrease in restricted cash of $50 million and a decrease in net investments made during fiscal 2014 compared with fiscal 2013. During fiscal 2014, we had maturities of short-term investments of $191 million and purchases of short-term investments of $9 million, compared with purchases of short-term investments of $346 million and maturities of short-term investments of $163 million during fiscal 2013. The year-over-year change in our investment amounts is a result of a change in the allocation of our investment portfolio, which reduced our investments in instruments with maturities greater than 90 days. These decreases were partially offset by an increase in cash paid for acquisitions of $57 million. Financing Activities: Net cash used in continuing financing activities from continuing operations for fiscal 2014 was $421 million compared with $938 million in fiscal 2013. The decrease was primarily due to the receipt of proceeds of $498 million from our August 2013 debt offering and an increase in the exercise of common stock options of $66 million during fiscal 2014, partially offset by an increase in net repayments from our notional pooling arrangement of $36 million and an increase in common shares repurchased of $14 million. Refer to the "Debt Arrangements" table below for additional information about our debt balances at March 31, 2014. 40



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Fiscal 2013 versus Fiscal 2012 Operating Activities: Net cash provided by continuing operating activities for fiscal 2013 was $1,390 million, representing a decrease of $98 million compared with fiscal 2012. The decrease was primarily due to a decrease in cash collections of $283 million from lower billings, partially offset by a decrease in vendor disbursements, payroll and other disbursements, net of $98 million and a decrease in income tax payments of $87 million. For fiscal 2013, there was an increase in cash collections from single installment payments of $193 million. For fiscal 2013, other disbursements, net includes $35 million in cash proceeds received as other income from the aforementioned intellectual property transaction that occurred in the first quarter of fiscal 2013. Investing Activities: Net cash used in continuing investing activities for fiscal 2013 was $473 million compared with $455 million for fiscal 2012. The increase in net cash used in continuing investing activities was primarily due to an increase in cash paid for investments of $238 million and a decrease in cash received from investment sales and maturities of $124 million, partially offset by a decrease in cash paid for acquisitions of $311 million, a decrease in purchases of property and equipment of $22 million and a decrease in capitalized software development costs of $15 million. Financing Activities: Net cash used in continuing financing activities for fiscal 2013 was $938 million compared with $1,330 million in fiscal 2012. The decrease in net cash used in continuing financing activities was primarily due to a decrease in common shares repurchased of $560 million and a decrease in net debt repayments, including our notional pooling arrangement, of $114 million, partially offset by an increase in cash dividends paid of $271 million. Refer to the "Debt Arrangements" table below for additional information about our debt balances at March 31, 2013. Debt Arrangements Our debt arrangements consisted of the following: At March 31, 2014 2013 (in millions) Revolving credit facility due June 2018 -



-

5.375% Senior Notes due December 2019 750



750

6.125% Senior Notes due December 2014, net of unamortized premium from fair value hedge of $8 and $19

508



519

2.875% Senior Notes due August 2018 250



-

4.500% Senior Notes due August 2023 250



-

Other indebtedness, primarily capital leases 13



26

Unamortized discount for Notes (5 ) (5 ) Total debt outstanding $ 1,766$ 1,290 Less the current portion (514 ) (16 ) Total long-term debt portion $ 1,252$ 1,274 In August 2013, we issued $250 million of 2.875% Senior Notes due August 2018 (2.875% Notes) and $250 million of 4.500% Senior Notes due August 2023 (4.500% Notes). The 2.875% Notes and 4.500% Notes are senior unsecured obligations that rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations and are redeemable by us at any time, subject to a "make-whole" premium of 25 basis points and 30 basis points for the 2.875% Notes and 4.500% Notes, respectively. Interest on the 2.875% Notes and 4.500% Notes is payable semiannually in August and February. The 2.875% Notes and 4.500% Notes contain customary covenants and events of default. The maturity of the 2.875% Notes and the 4.500% Notes may be accelerated by holders upon certain events of default, including failure to make payments when due and failure to comply with covenants. We have entered into interest rate swaps to convert $500 million of our 6.125% Senior Notes into floating interest rate payments through December 1, 2014. Under the terms of the swaps, we will pay quarterly interest at an average rate of 2.88% plus the three-month LIBOR rate, and will receive payment at 5.625%. The LIBOR-based rate is set quarterly three months prior to the date of the interest payment. At March 31, 2014, the fair value of these derivatives was an asset of $8 million, which is included in "Other current assets" in the Consolidated Balance Sheet. The carrying value of the 6.125% Notes was adjusted by an amount that is equal and offsetting to the fair value of the swaps. 41



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In April 2011, we repaid the $250 million outstanding balance of our revolving credit facility that was due August 2012. In August 2011, we replaced the revolving credit facility due August 2012 with a new revolving credit facility due August 2016. In June 2013, we amended our revolving credit facility to extend the termination date from August 2016 to June 2018. The maximum committed amount available under the revolving credit facility due June 2018 is $1 billion. The facility also provides us with an option to increase the available credit by an amount up to $500 million. This option is subject to certain conditions and the agreement of the facility lenders. At March 31, 2014 and 2013, there were no outstanding borrowings under the revolving credit facility. At March 31, 2014, our senior unsecured notes were rated Baa2 (stable) by Moody's Investor Services, BBB+ (stable) by Standard and Poor's, and BBB+ (stable) by Fitch Ratings. From time to time, we examine our debt balances in light of market conditions and other factors and thus, the levels of our debt balances may change. For further information on our debt balances, refer to Note 8, "Debt," in the Notes to the Consolidated Financial Statements. Stock Repurchases Under the $2.5 billion capital allocation program approved by our Board of Directors on January 23, 2012, we were authorized to acquire up to $1.5 billion of our common stock. As part of the capital allocation program, we entered into an accelerated share repurchase agreement with a bank in the fourth quarter of fiscal 2012 to purchase $500 million of our common stock. Under the agreement, we paid $500 million to the bank for an initial delivery of 15 million shares. The accelerated share repurchase transaction was completed in the first quarter of fiscal 2013 and we received 3.7 million additional shares. The final number of shares delivered upon settlement of the agreement was determined based on the average price of our common stock over the term of the accelerated share repurchase agreement. During fiscal 2013, excluding the accelerated share repurchase transaction, we repurchased 20 million shares of our common stock for $495 million. During fiscal 2014, we repurchased 16 million shares of our common stock for $505 million. At March 31, 2014, we completed the purchases of our common stock under the abovementioned stock repurchase program. On May 14, 2014, our Board of Directors approved a stock repurchase program that authorized us to acquire up to $1 billion of our common stock. We expect to complete the program in approximately three years. We expect to fund the program with available cash on hand and repurchase shares on the open market, through solicited or unsolicited privately negotiated transactions or otherwise from time to time based on market conditions and other factors. Dividends We have paid cash dividends each year since July 1990. For fiscal 2014, 2013 and 2012, we paid annual cash dividends of $1.00, $1.00 and $0.40 per share, respectively. On January 23, 2012, our Board of Directors approved a capital allocation program that targeted the return of up to $2.5 billion to shareholders through fiscal 2014. This included an increase in the annual dividend from $0.20 to $1.00 per share on our common stock as and when declared by the Board of Directors. For each of fiscal 2014 and 2013, we paid quarterly cash dividends of $0.25 per share. We paid a cash dividend of $0.25 per share in the fourth quarter of fiscal 2012 and $0.05 per share in each of the first three quarters of fiscal 2012. Effect of Foreign Currency Exchange Rate Changes There was a $62 million favorable impact to our cash balances in fiscal 2014 predominantly due to the weakening of the U.S. dollar against the euro (7%), the British pound sterling (10%) and the Israeli shekel (5%), partially offset by the strengthening of the U.S. dollar against the Brazilian real (11%), the Australian dollar (11%) and the Japanese yen (9%). There was an $83 million unfavorable impact to our cash balances in fiscal 2013 predominantly due to the strengthening of the U.S. dollar against the euro (4%), the Brazilian real (10%) and the Japanese yen (12%). Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements with unconsolidated entities or related parties and, accordingly, off-balance sheet risks to our liquidity and capital resources from unconsolidated entities are limited. Contractual Obligations and Commitments We have commitments under certain contractual arrangements to make future payments for goods and services. These contractual arrangements secure the rights to various assets and services to be used in the future in the normal course of business. For example, we are contractually committed to make certain minimum lease payments for the use of property under operating lease agreements. In accordance with current accounting rules, the future rights and related obligations pertaining to such contractual arrangements are not reported as assets or liabilities on our Consolidated Balance Sheets. We expect to fund these contractual arrangements with cash generated from operations in the normal course of business. 42



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The following table summarizes our contractual arrangements at March 31, 2014 and the timing and effect that those commitments are expected to have on our liquidity and cash flow in future periods. In addition, the table summarizes the timing of payments on our debt obligations as reported on our Consolidated Balance Sheet at March 31, 2014. Payments Due By Period Less Than 1-3 3-5 More Than Contractual Obligations Total 1 Year Years Years 5 Years (in millions) Long-term debt obligations (inclusive of interest) $ 2,156$ 579$ 120$ 366$ 1,091 Operating lease obligations (1) 447 95 146 101 105 Purchase obligations 113 85 25 3 - Other obligations (2) 56 18 17 9 12 Total $ 2,772$ 777$ 308$ 479$ 1,208



(1) The contractual obligations for noncurrent operating leases exclude sublease

income totaling $23 million expected to be received in the following periods:

$5 million (less than 1 year); $7 million (1-3 years); $5 million (3-5

years); and $6 million (more than 5 years).

(2) $202 million of estimated liabilities related to unrecognized tax benefits

are excluded from the contractual obligations table because we could not make

a reasonable estimate of when those amounts will become payable.

Critical Accounting Policies and Estimates We review our financial reporting and disclosure practices and accounting policies quarterly to help ensure that they provide accurate and transparent information relative to the current economic and business environment. Note 1, "Significant Accounting Policies" in the Notes to the Consolidated Financial Statements contains a summary of the significant accounting policies that we use. Many of these accounting policies involve complex situations and require a high degree of judgment, either in the application and interpretation of existing accounting literature or in the development of estimates that affect our financial statements. On an ongoing basis, we evaluate our estimates and judgments based on historical experience as well as other factors that we believe to be reasonable under the circumstances. These estimates may change in the future if underlying assumptions or factors change. We consider the following significant accounting policies to be critical because of their complexity and the high degree of judgment involved in implementing them. Revenue Recognition We generate revenue from the following primary sources: (1) licensing software products, including SaaS license agreements; (2) providing customer technical support (referred to as maintenance); and (3) providing professional services, such as product implementation, consulting and education. Software license agreements under our subscription model include the right to receive and use unspecified future software products for no additional fee during the term of the agreement. We are required under generally accepted accounting principles (GAAP) to recognize revenue from these subscription licenses ratably over the term of the agreement. These amounts are recorded as subscription and maintenance revenue. We also license our software products without the right to unspecified future software products. Revenue from these arrangements is either recognized at the inception of the license agreement (up-front basis) or ratably over the term of any maintenance agreement that is bundled with the license. Revenue is recognized up-front only when we have established VSOE for all of the undelivered elements of the agreement. We use the residual method to determine the amount of license revenue to be recognized up-front. The residual method allocates arrangement consideration to the undelivered elements based upon VSOE of the fair value of those elements, with the residual of the arrangement consideration allocated to the license. The portion allocated to the license is recognized "up-front" once all four of the revenue recognition criteria are met as described below. We establish VSOE of the fair value of maintenance from either contractually stated renewal rates or using the bell-shaped curve method. VSOE of the fair value of professional services is established based on hourly rates when sold on a stand-alone basis. Up-front revenue is recorded as Software Fees and Other. Revenue recognized on an up-front model will result in higher total revenue in a reporting period than if that revenue was recognized ratably. If VSOE does not exist for all undelivered elements of an arrangement, we recognize total revenue from the arrangement ratably over the term of the maintenance agreement. Revenue recognized ratably is recorded as "Subscription and maintenance revenue." 43



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Revenue recognition does not commence until (1) we have evidence of an arrangement with a customer; (2) we deliver the specified products; (3) license agreement terms are fixed or determinable and free of contingencies or uncertainties that may alter the agreement such that it may not be complete and final; and (4) collection is probable. Revenue from sales to distributors and volume partners, value-added resellers and exclusive representatives commences, either on an up-front basis or ratably as described above, when these entities sell the software product to their customers. This is commonly referred to as the sell-through method. Revenue from professional service arrangements is generally recognized as the services are performed. Revenue and costs from committed professional services that are sold as part of a software license agreement are deferred and recognized on a ratable basis over the life of the related software transaction. In the event that agreements with our customers are executed in close proximity of other license agreements with the same customer, we evaluate whether the separate arrangements are linked, and, if so, they are considered a single multi-element arrangement for which revenue is recognized ratably as "Subscription and maintenance revenue" in the Consolidated Statements of Operations. In the case of a professional services arrangement that is linked to a subscription-based software license arrangement, revenue is recognized as "Professional services" for its respective portion, in the Consolidated Statements of Operations. We have an established business practice of offering installment payment options to customers and a history of successfully collecting substantially all amounts due under those agreements. We assess collectability based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If, in our judgment, collection of a fee is not probable, we will not recognize revenue until the uncertainty is removed through the receipt of cash payment. We do not typically offer installment payments for perpetual license agreements that are recognized up-front, within "Software fees and other." See Note 1, "Significant Accounting Policies" for additional information on our revenue recognition policy. Accounts Receivable The allowance for doubtful accounts is a reserve for the impairment of accounts receivable on the Consolidated Balance Sheets. In developing the estimate for the allowance for doubtful accounts, we rely on several factors, including: Historical information, such as general collection history of multi-year



software agreements;

Current customer information and events, such as extended delinquency,

requests for restructuring and filings for bankruptcy;

Results of analyzing historical and current data; and

The overall macroeconomic environment.

The allowance includes two components: (1) specifically identified receivables that are reviewed for impairment when, based on current information, we do not expect to collect the full amount due from the customer; and (2) an allowance for losses inherent in the remaining receivable portfolio based on historical activity. Income Taxes We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, along with net operating losses and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect on deferred tax assets and liabilities of a change in tax rates on income in the period that includes the enactment date. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. We reflect changes in recognition or measurement in a period in which the change in judgment occurs. We record interest and penalties related to uncertain tax positions in income tax expense. Goodwill, Capitalized Software Products, and Other Intangible Assets Goodwill is tested for impairment at least annually in the fourth quarter of our fiscal year. We may first perform a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying amount, and, if so, we then apply the two-step impairment test. The two-step impairment test first compares the fair value of our reporting units, which are the same as our operating segments, to their carrying amount (i.e., book value). If the fair value of the reporting unit exceeds its carrying amount, goodwill is not impaired and we are not required to perform further testing. If the carrying amount of the reporting unit exceeds its fair value, we determine the implied fair value of the reporting unit's goodwill and if the carrying amount of the reporting unit's goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference. Based on our impairment analysis in the fourth quarter of fiscal 2014, we determined that the fair value of each of our reporting units exceeded the carrying amount of the unit by more than 10% of the carrying amount. 44



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We determine the fair value of our reporting units based on use of income and market approaches. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions include the revenue growth rates and operating profit margins that are used to project future cash flows, discount rates, future economic and market conditions and determination of appropriate market comparables. We make certain judgments and assumptions in allocating shared costs among reporting units. We base our fair value estimates on assumptions that are consistent with information used by the business for planning purposes and that we believe to be reasonable; however, actual future results may differ from those estimates. Changes in judgments on any of these factors could materially affect the value of the reporting unit. The carrying values of capitalized software products, purchased software, internally developed software and other intangible assets are reviewed for recoverability on a quarterly basis. The facts and circumstances considered include an assessment of the net realizable value for capitalized software products and the recoverability of the cost of other intangible assets from future cash flows to be derived from the use of the asset. It is not possible for us to predict the likelihood of any possible future impairments or, if such an impairment were to occur, the magnitude of any impairment. Intangible assets with finite useful lives are subject to amortization over the expected period of economic benefit to us. We evaluate whether events or circumstances have occurred that warrant a revision to the remaining useful lives of intangible assets. In cases where a revision is deemed appropriate, the remaining carrying amounts of the intangible assets are amortized over the revised remaining useful life. Accounting for Business Combinations The allocation of the purchase price for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired, including in-process research and development, and liabilities assumed based on their respective fair values. Product Development and Enhancements GAAP specifies that costs incurred internally in researching and developing a computer software product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established and assumptions are used that reflect our best estimates and is influenced by our product release strategies and software development methodologies. Annual amortization of capitalized software costs is the greater of the amount computed using the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or the straight-line method over the remaining estimated economic life of the software product, generally estimated to be five years from the date the product became available for general release to customers. We amortize capitalized software costs using the straight-line method. We expect that our product offerings and go-to-market strategy will continue to evolve in future periods to include solutions and product suites that may be delivered either on-premise or via SaaS or cloud platforms. We expect these product offerings will continue to become available to customers at more frequent intervals than our historical release cycles. We also expect a more extensive adoption of Agile development methodologies which are characterized by a more dynamic development process with more frequent revisions to a product release's features and functions as the software is being developed. These factors will result in our commencing capitalization much later in the development life cycle. As a result, product and development expenses are expected to increase in future periods as the amount of software development costs capitalized decreases. Accounting for Share-Based Compensation We currently maintain several stock-based compensation plans. We use the Black-Scholes option-pricing model to compute the estimated fair value of certain share-based awards. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected lives, and risk-free interest rates. These assumptions reflect our best estimates, but these items involve uncertainties based on market and other conditions outside of our control. As a result, if other assumptions had been used, stock-based compensation expense could have been materially affected. Furthermore, if different assumptions are used in future periods, stock-based compensation expense could be materially affected in future years. As described in Note 14, "Stock Plans," in the Notes to the Consolidated Financial Statements, performance share units (PSUs) are awards under the long-term incentive programs for senior executives where the number of shares or restricted shares, as applicable, ultimately received by the senior executives depends on our performance measured against specified targets and will be determined at the conclusion of the three-year or one-year period, as applicable. The fair value of each award is estimated on the date that the performance targets are established based on the fair value of our stock and our estimate of the level of achievement of our performance targets. We are required to recalculate the fair value of issued PSUs each reporting period until the underlying shares are granted. The adjustment is based on the quoted market price of our stock on the reporting period date. Each quarter, we compare the actual performance we expect to achieve with the performance targets. 45



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Fair Value of Financial Instruments The measurement of fair value for our financial instruments is based on the authoritative guidance which establishes a fair value hierarchy that is based on three levels of inputs and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. See Note 10, "Fair Value Measurements," for additional information. We are exposed to financial market risks arising from changes in interest rates and foreign exchange rates. Changes in interest rates could affect our monetary assets and liabilities, and foreign exchange rate changes could affect our foreign currency denominated monetary assets and liabilities and forecasted transactions. We enter into derivative contracts with the intent of mitigating a portion of these risks. See Note 9, "Derivatives," for additional information. Legal Contingencies We are currently involved in various legal proceedings and claims. Periodically, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any legal proceeding or claim is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of the probability of a loss and the determination as to whether the amount of loss is reasonably estimable. Due to the uncertainties related to these matters, the decision to record an accrual and the amount of accruals recorded are based only on the information available at the time. As additional information becomes available, we reassess the potential liability related to our pending litigation and claims, and may revise our estimates. Any revisions could have a material effect on our results of operations. Refer to Note 11, "Commitments and Contingencies," in the Notes to the Consolidated Financial Statements for a description of our material legal proceedings. New Accounting Pronouncements Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08), which changes the criteria for reporting discontinued operations and enhances disclosures on discontinued operations. ASU 2014-08 requires that an entity report as a discontinued operation only a disposal that represents a strategic shift in operations that has a major effect on its operations and financial results. Examples cited in the guidance include a disposal of a major geographical area, a major line of business, a major equity method investment or other major part of an entity. The new guidance also requires expanded disclosures about the assets, liabilities, income and expenses of discontinued operations. ASU 2014-08 is to be applied prospectively and is effective for interim periods with fiscal years beginning on or after December 15, 2014. Early adoption of ASU 2014-08 is permitted, but only for disposals or assets held for sale that have not been reported in previously issued (or available to be issued) financial statements. We have not early adopted the provisions of ASU 2014-08.


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