News Column

INFORMATICA CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 7, 2014

This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of the federal securities laws, particularly statements referencing our expectations relating to the productivity of our sales force, software revenues, service revenues, international revenues, potential future revenues, cost of software revenues, cost of service revenues, operating expenses, amortization of acquired technology, stock-based compensation, and provision for income taxes; the growth of our customer base and customer demand for our products and services; our credit agreement; the sufficiency of our cash balances and cash flows for the next 12 months; our stock repurchase programs; investment and potential investments of cash or stock to acquire or invest in complementary businesses, products, or technologies; the impact of recent changes in accounting standards; market risk sensitive instruments, contractual obligations; and assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as "may," "will," "expects," "intends," "plans," "anticipates," "estimates," "potential," or "continue," or the negative thereof, or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to risks and uncertainties, including but not limited to the factors set forth in this Report under Part II, Item 1A. Risk Factors. All forward-looking statements and reasons why results may differ included in this Report are made as of the date of the filing of this Report, and we assume no obligation to update any such forward-looking statements or reasons why actual results may differ. The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing in Part I, Item 1 of this Report. Overview We are the leading independent provider of enterprise data integration software and services. We generate revenues from sales of software licenses, subscription-based licenses, maintenance and support services, and professional services, consisting of consulting and education services. We receive software revenues from licensing our products under perpetual licenses directly to end users and indirectly through resellers, distributors, and OEMs in the United States and internationally. We also receive an increasing amount of software revenues from our customers and partners under subscription-based licenses for a variety of cloud and address validation offerings. We receive service revenues from maintenance contracts, consulting services, and education services that we perform for customers that license our products either directly or indirectly. Most of our international sales have been in Europe, the Middle East, and Africa ("EMEA"). Revenues outside of EMEA and North America comprised approximately 12% of total consolidated revenues during the first half of 2014 and 10% of total consolidated revenues during 2013 and 2012. We license our software and provide services to many industry sectors, including, but not limited to, automotive, energy and utilities, entertainment/media, financial services, healthcare, high technology, insurance, manufacturing, public sector, retail, services, telecommunications, and travel/transportation. Financial services remains our largest vertical industry sector. Total revenues in the second quarter of 2014 increased by 13% to $250.7 million compared to $222.4 million for the same period in 2013. Our software revenues increased by 13% in the second quarter of 2014 from the same period in 2013 due to a 9% increase in license revenues and a 43% increase in subscription revenues. The increase in license revenues reflected increases in the average transaction size of license orders and number of transactions in the quarter ended June 30, 2014, compared to the same period in 2013. The increase in subscription revenues was due to growth in the installed customer base and higher customer demand for our subscription offerings. Service revenues increased by 12% in the second quarter of 2014 from the same period in 2013 due to a 13% growth in maintenance revenues and an 11% increase in consulting and education services. The maintenance revenues growth was attributable to the increased size of our installed customer base, and the increase in consulting and education services revenues was primarily due to higher customer demand for consulting services, partially offset by a decrease in education classes offered. In the first half of 2014, total revenues increased by 13% to $493.8 million from $436.7 million in the comparable period a year ago. Software revenues increased by 15% in the first half of 2014 from the same period in 2013 due to an increase of 11% in license revenues and a 45% increase in subscription revenues. The increase in license revenues reflected increases in the average transaction size of license orders and number of transactions in the first half of 2014, compared to the same period in 2013. The increase in subscription revenues was due to growth in the installed customer base and higher customer demand of subscription offerings. Service revenues increased by 12% in the first half of 2014 from the same period in 2013 due to a 13% growth in maintenance revenues and a 6% increase in consulting and education services. The maintenance revenues growth was attributable 29



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to the increased size of our installed customer base, and the increase in consulting and education services revenues was primarily due to an increase in consulting revenues due to higher customer demand, partially offset by a decrease in education classes offered. Due to our dynamic market, we face both significant opportunities and challenges, and as such, we focus on the following key factors: Competition: The market for our products is highly competitive, quickly



evolving and subject to rapidly changing technology, which may expand the

alternatives available to our customers for their data integration requirements. Our competitors may be able to respond more quickly to new or emerging technologies, technological trends, changes in customer requirements and industry consolidation. Moreover, competition from new and emerging technologies and changes in technological trends,



particularly the shift to cloud-based solutions, has increased market

confusion about the benefits of our products compared to other solutions.

We must compete effectively, particularly on the basis of functionality

and price, against a variety of different vendors offering existing data

integration software products, vendors of new and emerging technologies,

and hand-coded, custom-built data integration solutions. Product Introductions and Enhancements: To address the expanding data integration needs of our customers and prospective customers and to



respond to rapid technological changes and customer concerns, we introduce

new products and technology enhancements on a regular basis, including

products we acquire. The introduction of new products, integration of acquired products and enhancement of existing products, is a complex process involving inherent risks, and to which we devote significant



resources. We cannot predict the impact of new or enhanced products on our

overall sales and we may not generate sufficient revenues to justify their

costs.

Quarterly and Seasonal Fluctuations: Historically, purchasing patterns in

the software industry have followed quarterly and seasonal trends that are

likely to continue in the future. Specifically, it is normal for us to recognize a substantial portion of our new license orders in the last month of each quarter and sometimes in the last few weeks or days of each



quarter, though such fluctuations are mitigated somewhat by recognition of

backlog orders. In recent years, the fourth quarter has had the highest

level of license revenues and license orders, and we generally had weaker

demand for our software products and services in the first and third

quarters of the year. The first, second and fourth quarters of 2013

followed these seasonal trends. However, license revenues in the second

quarter of 2014 were lower as compared to the first quarter of 2014, and

license revenues in the third quarter of 2013 were higher as compared to

the first and second quarters of 2013. The uncertain macroeconomic

conditions and recent changes in our worldwide sales organization make our

future results more difficult to predict based on historical seasonal

trends. Macroeconomic and Geopolitical Conditions: The United States and many foreign economies, particularly in Europe, continue to experience



uncertainty driven by varying macroeconomic and geopolitical conditions.

Although some of these economies have shown signs of improvement,

including in the United States, the macroeconomic environment remains

uncertain and uneven. Uncertainty in the macroeconomic environment and

associated global economic conditions as well as geopolitical conditions

have resulted in extreme volatility in credit, equity, and foreign

currency markets. In particular, economic concerns continue with respect

to the European sovereign debt markets and potential ramifications of any

U.S. debt, income tax and budget issues, including future delays in

approving the U.S. budget or reductions in government spending. Such

uncertainty and associated conditions have also resulted in volatility in

several of our vertical markets, particularly the financial services and

public sectors. These conditions have also adversely affected the buying

patterns of customers and our overall pipeline conversion rate, as well as

our revenue growth expectations. Furthermore, we continue to invest in our

international operations. There are significant risks with overseas

investments, and our growth prospects in these regions are uncertain.

Increased volatility, further declines in credit, equity and foreign currency markets, and geopolitical conditions could cause delays or cancellations in international orders. We focus on a number of key initiatives to address these factors and other opportunities and challenges. These key initiatives include the broadening of our distribution capability worldwide, the enablement of our sales force and distribution channel to sell both our existing products and technologies as well as new products and technologies, the alignment of our worldwide sales and field operations with company-wide initiatives and the implementation of a more rigorous sales process, the strengthening of our partnerships, and strategic acquisitions of complementary businesses, products, and technologies. If we are unable to execute these key initiatives successfully, we may not be able to continue to grow our business at our historic growth rates. We concentrate on maintaining and strengthening our relationships with our existing strategic partners and building relationships with additional strategic partners. These partners include systems integrators, resellers and distributors, and strategic technology partners, including enterprise application providers, database vendors, and enterprise information integration vendors, in the United States and internationally. See "Risk Factors - We rely on our relationships with our strategic partners. If we do not establish, maintain and strengthen these relationships, our ability to generate revenue and control expenses could be adversely affected, which could cause a decline in the price of our common stock" in Part II, Item 1A of this Report. 30



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We have broadened our distribution efforts, and we have continued to expand our sales both in terms of traditional data warehousing products and more strategic data integration solutions beyond data warehousing, including cloud data integration, data quality, information lifecycle management, data exchange, and master data management, among others. We also operate the Informatica Marketplace, which allows buyers and sellers to share and leverage data integration solutions. To address the risks of introducing new products or enhancements to our existing products, we have continued to invest in programs to help train our internal sales force and our external distribution channel on new product functionalities, key differentiators, and key business values. These programs include user conferences for customers and partners, our annual sales kickoff conference for all sales and key marketing personnel, "webinars" and other informational seminars and materials for our direct sales force and indirect distribution channel, in-person technical seminars for our pre-sales consultants, the building of product demonstrations, and creation and distribution of targeted marketing collateral. We continue to implement changes in our worldwide sales, marketing and field operations to address recent sales execution challenges and improve performance, particularly with respect to our pipeline generation and management capabilities, the reliability of our pipeline estimates and our pipeline conversion rates. In addition to the various leadership transitions in our worldwide sales organization and continued investment in our sales specialists and domain experts, we have also implemented pipeline generation and management initiatives and more rigorous sales planning and processes. Additionally, we have expanded our international sales presence in recent years by opening new offices, increasing headcount, and through acquisitions. As a result of these changes and our international expansion, as well as the increase in our direct sales headcount in the United States, our sales and marketing expenses have increased. As our products become more complex and we target new customers for our software and services, we expect to broaden our go-to-market initiatives and, as a result, our expenses may increase. In the long term, we expect these investments to result in increased revenues and productivity and ultimately higher profitability. As we continue to implement further changes, we may experience increased sales force turnover and additional disruption to our ongoing operations. These changes may also take longer to implement than expected, which may adversely affect our sales force productivity, profitability and revenues. If we experience an increase in sales personnel turnover, do not achieve expected increases in our sales pipeline, experience a decline in our sales pipeline conversion ratio, or do not achieve increases in sales productivity and efficiencies from our new sales personnel as they gain more experience, then it is unlikely that we will achieve our expected increases in revenue, sales productivity, or profitability. For further discussion regarding these and related risks, see Risk Factors in Part II, Item 1A of this Report. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") in the United States, which require us to make estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these assumptions, judgments, and estimates are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Any material differences between these estimates and actual results will impact our consolidated financial statements. On a regular basis, we evaluate our estimates, judgments, and assumptions and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of the Board of Directors. We believe that the estimates, judgments, and assumptions involved in the accounting for revenue recognition, income taxes, business combinations, impairment of goodwill and intangible assets, stock-based compensation, and allowance for doubtful accounts have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. The critical accounting estimates associated with these policies are discussed in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no changes to our critical accounting policies since the end of 2013. Recent Accounting Pronouncements For recent accounting pronouncements, see Note 1. Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Report. 31



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Results of Operations The following table presents certain financial data for the three and six months ended June 30, 2014 and 2013 as a percentage of total revenues: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Revenues: Software 41 % 41 % 42 % 41 % Service 59 59 58 59 Total revenues 100 100 100 100 Cost of revenues: Software 1 1 1 1 Service 18 16 17 16 Amortization of acquired technology 1 3 2 3 Total cost of revenues 20 20 20 20 Gross profit 80 80 80 80 Operating expenses: Research and development 19 19 19 19 Sales and marketing 38 40 37 39 General and administrative 8 8 8 9 Amortization of intangible assets 1 1 1



1

Acquisitions and other charges (benefit) - - - - Total operating expenses 66 68 65 68 Income from operations 14 12 15 12 Interest income - - - - Interest expense - - - - Other expense, net - - - - Income before income taxes 14 12 15 12 Income tax provision 5 4 5 4 Net income 9 % 8 % 10 % 8 % Revenues Total revenues in the second quarter of 2014 increased by 13% to $250.7 million compared to $222.4 million for the same period in 2013. Our software revenues increased by 13% in the second quarter of 2014 from the same period in 2013 due to a 9% increase in license revenues and a 43% increase in subscription revenues. The increase in license revenues reflected increases in the average transaction size of license orders and number of transactions in the quarter ended June 30, 2014, compared to the same period in 2013. The increase in subscription revenues was due to growth in the installed customer base and higher customer demand for our subscription offerings. Service revenues increased by 12% in the second quarter of 2014 from the same period in 2013 due to a 13% growth in maintenance revenues and an 11% increase in consulting and education services. The maintenance revenues growth was attributable to the increased size of our installed customer base, and the increase in consulting and education services revenues was primarily due to higher customer demand for consulting services, partially offset by a decrease in education classes offered. In the first half of 2014, total revenues increased by 13% to $493.8 million from $436.7 million in the comparable period a year ago. Software revenues increased by 15% in the first half of 2014 from the same period in 2013 due to an increase of 11% in license revenues and a 45% increase in subscription revenues. The increase in license revenues reflected increases in the average transaction size of license orders and number of transactions in the first half of 2014, compared to the same period in 2013. The increase in subscription revenues was due to growth in the installed customer base and higher customer demand of subscription offerings. Service revenues increased by 12% in the first half of 2014 from the same period in 2013 due to a 13% growth in 32



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maintenance revenues and a 6% increase in consulting and education services. The maintenance revenues growth was attributable to the increased size of our installed customer base, and the increase in consulting and education services revenues was primarily due to an increase in consulting revenues due to higher customer demand, partially offset by a decrease in education classes offered.



The following table and discussion compare our revenues for the three and six months ended June 30, 2014 and 2013 (in thousands, except percentages):

Three Months Ended June 30, Six Months Ended June 30, Percentage Percentage 2014 2013 Change 2014 2013 Change Software revenues: License $ 87,293$ 80,095 9 % $ 175,804$ 158,227 11 % Subscription 16,162 11,333 43 % 30,694 21,107 45 % Total software revenues 103,455 91,428 13 % 206,498 179,334 15 % Service revenues: Maintenance 112,494 99,701 13 % 221,765 195,604 13 % Consulting and education 34,764 31,310 11 % 65,547 61,801 6 % Total service revenues 147,258 131,011 12 % 287,312 257,405 12 % Total revenues $ 250,713$ 222,439 13 % $ 493,810$ 436,739 13 % Software Revenues Our software revenues were $103.5 million (or 41% of total revenues) for the three months ended June 30, 2014 compared to $91.4 million (or 41% of total revenues) for the three months ended June 30, 2013, representing an increase of $12.0 million (or 13%). Our software revenues were $206.5 million (or 42% of total revenues) for the six months ended June 30, 2014 compared to $179.3 million (or 41% of total revenues) for the six months ended June 30, 2013, representing an increase of $27.2 million (or 15%). License Revenues Our license revenues increased to $87.3 million (or 35% of total revenues) for the three months ended June 30, 2014 from $80.1 million (or 36% of total revenues) for the three months ended June 30, 2013. Our license revenues increased to $175.8 million (or 36% of total revenues) for the six months ended June 30, 2014 from $158.2 million (or 36% of total revenues) for the six months ended June 30, 2013. The increases in license revenues of $7.2 million (or 9%) and $17.6 million (or 11%) for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013 were primarily due to increases in the average transaction size of license orders and the number of transactions. The average transaction amount for orders greater than $100,000 in the second quarter of 2014, including upgrades for which we charge customers an additional fee, increased to $465,000 from $441,000 in the second quarter of 2013. The average transaction amount for orders greater than $100,000 for the six months ended June 30, 2014, including upgrades for which we charge our customers an additional fee, increased to $439,000 from $426,000 in the same period of 2013. The number of transactions greater than $1.0 million increased to 23 in the second quarter of 2014 from 15 in the same period of 2013. The number of transactions greater than $1.0 million increased to 36 for the six months ended June 30, 2014 from 34 in the same period of 2013. We offer two types of upgrades: (1) upgrades that are not part of the post-contract services for which we charge customers an additional fee, and (2) upgrades that are part of the post-contract services that we provide to our customers at no additional charge, when and if available. Subscription Revenues Subscription revenues, which primarily represent revenues from customers and partners under subscription-based licenses for a variety of cloud and address validation offerings, increased to $16.2 million (or 6% of total revenues) for the three months ended June 30, 2014 compared to $11.3 million (or 5% of total revenues) for the three months ended June 30, 2013. Subscription revenues increased to $30.7 million (or 6% of total revenues) for the six months ended June 30, 2014 from $21.1 million (or 5% of total revenues) for the six months ended June 30, 2013. The increases of $4.8 million (or 43%) and $9.6 million (or 45%) in subscription revenues for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013 were primarily due to an increase in the installed base of subscription customers and higher customer demand. 33



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For the remainder of 2014, we expect our revenues from subscriptions to increase from the comparable 2013 levels primarily due to our growing installed customer base and an anticipated increase in demand for subscription offerings. Service Revenues Maintenance Revenues Maintenance revenues increased to $112.5 million (or 45% of total revenues) for the three months ended June 30, 2014 compared to $99.7 million (or 45% of total revenues) for the three months ended June 30, 2013. Maintenance revenues increased to $221.8 million (or 45% of total revenues) for the six months ended June 30, 2014 compared to $195.6 million (or 45% of total revenues) for the six months ended June 30, 2013. The increase of $12.8 million (or 13%) and $26.2 million (or 13%) in maintenance revenues for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013 were primarily due to the increasing size of our installed customer base, including those customers acquired through our acquisitions. See Note 13. Acquisitions of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Report. For the remainder of 2014, we expect maintenance revenues to increase from the comparable 2013 levels due to our growing installed customer base. Consulting and Education Revenues Consulting and education revenues slightly increased to $34.8 million (or 14% of total revenues) for the three months ended June 30, 2014 compared to $31.3 million (or 14% of total revenues) for the three months ended June 30, 2013. Consulting and education revenues increased to $65.5 million (or 13% of total revenues) for the six months ended June 30, 2014 compared to $61.8 million (or 14% of total revenues) for the six months ended June 30, 2013. The increase of $3.5 million (or 11%) and $3.7 million (or 6%) in consulting and education revenues for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013 were primarily due to higher customer demand for consulting services, partially offset by a decrease in education classes offered. For the remainder of 2014, we expect our revenues from consulting and education revenues to increase from the comparable 2013 levels primarily due to an anticipated increase in demand for consulting services. International Revenues Our international revenues were $90.7 million (or 36% of total revenues) and $77.0 million (or 35% of total revenues) for the three months ended June 30, 2014 and 2013, respectively. Our international revenues were $180.0 million (or 36% of total revenues) and $147.8 million (or 34% of total revenues) for the six months ended June 30, 2014 and 2013, respectively. The increase of $13.7 million (or 18%) in international revenues for the three months ended June 30, 2014 compared to the same period in 2013 was due to increases in software revenues and service revenues in EMEA, Asia-Pacific, and Latin America. The increase of $32.2 million (or 22%) in international revenues for the six months ended June 30, 2014 compared to the same period in 2013 was due to increases in software revenues and service revenues in EMEA, Asia-Pacific and Latin America. For the remainder of 2014, we expect our international revenues as a percentage of total revenues to be relatively consistent with, or increase from, the comparable 2013 levels. Potential Future Revenues (New Orders, Backlog, and Deferred Revenues) Our potential future revenues include backlog consisting primarily of (1) product orders (both on a perpetual and subscription basis) that have not shipped as of the end of a given quarter, (2) product orders received from certain distributors, resellers, OEMs, and end users not included in deferred revenues, where revenue is recognized after cash receipt (collectively (1) and (2) above are referred as "aggregate backlog"), and (3) deferred revenues. Our deferred revenues consist primarily of the following: (1) maintenance revenues that we recognize over the term of the contract, typically one year, (2) subscription offerings that are recognized over the period of performance as services are provided, (3) license product orders that have shipped but where the terms of the license agreement contain acceptance language or other terms that require that the license revenues be deferred until all revenue recognition criteria are met or recognized ratably over an extended period, and (4) consulting and education services revenues that have been prepaid but for which services have not yet been performed. We typically ship products shortly after the receipt of an order, which is common in the software industry, and historically our backlog of license orders awaiting shipment at the end of any given quarter has varied. However, our backlog historically decreases from the prior quarter at the end of the first and third quarters and increases at the end of the fourth quarter. Aggregate backlog and deferred revenues at June 30, 2014 were approximately $336.2 million compared to $298.2 million at June 30, 2013 and $343.2 million at December 31, 2013. The change in the second quarter of 2014 from the comparable period of 2013 was 34



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primarily due to increases in deferred service and software revenues. The international portion of aggregate backlog and deferred revenues may fluctuate with changes in foreign currency exchange rates. Aggregate backlog and deferred revenues as of any particular date are not necessarily indicative of future results. Cost of Revenues The following table sets forth, for the periods indicated, our cost of revenues (in thousands, except percentages): Three Months Ended June 30, Six Months Ended June 30, Percentage Percentage 2014 2013 Change 2014 2013 Change Cost of software revenues $ 2,450$ 2,501 (2 )% $ 5,569$ 4,643 20 % Cost of service revenues 43,343 36,463 19 % 83,572 72,493 15 % Amortization of acquired technology 3,286 5,621 (42 )% 7,271 11,345 (36 )% Total cost of revenues $ 49,079$ 44,585 10 % $ 96,412$ 88,481 9 % Cost of software revenues, as a percentage of software revenues 2 % 3 % (1 )% 3 % 3 % - % Cost of service revenues, as a percentage of service revenues 29 % 28 % 1 % 29 % 28 % 1 % Cost of Software Revenues Our cost of software revenues is a combination of costs of license and subscription revenues. Cost of license revenues consists primarily of software royalties, product packaging, documentation, and production costs. Cost of subscription revenues consists primarily of fees paid to third party vendors for hosting services related to our subscription services and royalties paid to postal authorities. Cost of software revenues was flat at $2.5 million (or 2% of software revenues) for the three months ended June 30, 2014 compared to $2.5 million (or 3% of software revenues) in the same period of 2013. Cost of software revenues increased to $5.6 million (or 3% of software revenues) for the six months ended June 30, 2014 compared to $4.6 million (or 3% of software revenues) in the same period of 2013. The increase of $0.9 million (or 20%) in cost of software revenues for the six months ended June 30, 2014 compared to the same period in 2013, was primarily due to a $0.7 million increase in software royalties and a $0.2 million increase in fees paid to third party vendors for hosting services. For the remainder of 2014, we expect that our cost of software revenues as a percentage of software revenues to be relatively consistent with the first half of 2014. Cost of Service Revenues Our cost of service revenues is a combination of costs of maintenance, consulting and education services revenues. Our cost of maintenance revenues consists primarily of costs associated with customer service personnel expenses and royalty fees for maintenance related to third-party software providers. Cost of consulting revenues consists primarily of personnel costs and expenses incurred in providing consulting services at customers' facilities. Cost of education services revenues consists primarily of the costs of providing education classes and materials at our headquarters, sales and training offices, and customer locations. Cost of service revenues increased to $43.3 million (or 29% of service revenues) in the second quarter of 2014 compared to $36.5 million (or 28% of service revenues) in the same period of 2013. Cost of service revenues increased to $83.6 million (or 29% of service revenues) for the six months ended June 30, 2014 compared to $72.5 million (or 28% of service revenues) in the same period of 2013. The $6.9 million (or 19%) increase in the second quarter of 2014 compared to the same period of 2013 was primarily due to a $3.3 million increase in personnel related costs (including stock-based compensation), a $2.5 million increase in subcontractor fees, and a $1.1 million increase in general overhead costs. The $11.1 million (or 15%) increase for the six months ended June 30, 2014 compared to the same period of 2013 was primarily due to a $5.1 million increase in personnel related costs (including stock-based compensation), a $4.5 million increase in subcontractor fees, and a $1.5 million increase in general overhead costs. For the remainder of 2014, we expect that our cost of service revenues, in absolute dollars, to increase from the 2013 levels, mainly due to headcount increases to support and deliver increased service revenues. We expect; however, the cost of service revenues as a percentage of service revenues for the remainder of 2014 to remain relatively consistent with the first half of 2014. 35



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Amortization of Acquired Technology The following table sets forth, for the periods indicated, our amortization of acquired technology (in thousands, except percentages): Three Months Ended June 30, Six Months Ended June 30, Percentage Percentage 2014 2013 Change 2014 2013 Change Amortization of acquired technology $ 3,286$ 5,621 (42 )% $ 7,271$ 11,345 (36 )% Amortization of acquired technology is the amortization of technologies acquired through business acquisitions and technology licenses. Amortization of acquired technology decreased to $3.3 million for the three months ended June 30, 2014 from $5.6 million in the same period of 2013. Amortization of acquired technology decreased to $7.3 million for the six months ended June 30, 2014 from $11.3 million in the same period of 2013. The decrease of $2.3 million (or 42%) for the three months ended June 30, 2014, compared to the same period of 2013 was primarily due to a $1.5 million decrease in amortization of certain technologies that were fully amortized after June 30, 2013, and a $0.8 million decrease in amortization of certain acquired technologies which are amortized using a method based on expected cash flows. The decrease of $4.1 million (or 36%) for the six months ended June 30, 2014, compared to the same period of 2013 was primarily due to a $1.9 million decrease in amortization of certain technologies that were fully amortized after June 30, 2013, and a $2.2 million decrease in amortization of certain acquired technologies which are amortized using a method based on expected cash flows. For the remainder of 2014, we expect the amortization of acquired technology to be approximately $5.9 million before the effect of any potential future acquisitions subsequent to June 30, 2014. Operating Expenses Research and Development The following table sets forth, for the periods indicated, our research and development expenses (in thousands, except percentages): Three Months Ended June 30, Six Months Ended June 30, Percentage Percentage 2014 2013 Change 2014 2013 Change Research and development $ 48,850$ 41,668 17 % $ 94,535$ 81,191 16 % Our research and development expenses consist primarily of salaries and other personnel-related expenses, consulting services, facilities, and related overhead costs associated with the development of new products, enhancement and localization of existing products, quality assurance, and development of documentation for our products. Research and development expenses increased to $48.9 million (or 19% of total revenues) and $94.5 million (or 19% of total revenues) for the three and six months ended June 30, 2014, respectively, compared to $41.7 million (or 19% of total revenues) and $81.2 million (or 19% of total revenues) for the three and six months ended June 30, 2013, respectively. All software development costs for software intended to be marketed to customers have been expensed in the period incurred since the costs incurred subsequent to the establishment of technological feasibility have not been significant. The $7.2 million (or 17%) increase in the second quarter of 2014 compared to the same period of 2013 was primarily due to a $5.3 million increase in personnel-related costs (including stock-based compensation) as a result of increased headcount and a $1.9 million increase in general overhead costs. The $13.3 million (or 16%) increase for the six months ended June 30, 2014 compared to the same period of 2013 was primarily due to a $10.2 million increase in personnel-related costs (including stock-based compensation) as a result of increased headcount and a $3.1 million increase in general overhead costs. For the remainder of 2014, we expect research and development expenses as a percentage of total revenues to be relatively consistent with the first half of 2014. 36



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Sales and Marketing The following table sets forth, for the periods indicated, our sales and marketing expenses (in thousands, except percentages):

Three Months Ended June 30, Six Months Ended June 30, Percentage Percentage 2014 2013 Change 2014 2013 Change Sales and marketing $ 96,784$ 89,510 8 % $ 188,368$ 173,567 9 % Our sales and marketing expenses consist primarily of personnel costs, including commissions and bonuses, as well as costs of public relations, seminars, marketing programs, lead generation, travel, and trade shows. Sales and marketing expenses increased to $96.8 million (or 38% of total revenues) and $188.4 million (or 37% of total revenues) for the three and six months ended June 30, 2014, respectively, compared to $89.5 million (or 40% of total revenues) and $173.6 million (or 39% of total revenues) for the three and six months ended June 30, 2013, respectively. The $7.3 million (or 8%) increase for the three months ended June 30, 2014 compared to the same period in 2013 was primarily due to a $5.6 million increase in personnel-related costs, a $0.9 million increase in third-party services, and a $0.8 million increase in general overhead costs. The $14.8 million (or 9%) increase for the six months ended June 30, 2014 compared to the same period in 2013 was primarily due to $11.2 million increase in personnel-related costs, a $2.4 million increase in third-party services, and a $1.2 million increase in general overhead costs. Sales and marketing headcount increased from 1,035 in June 2013 to 1,174 in June 2014. For the remainder of 2014, we expect sales and marketing expenses as a percentage of total revenues to be relatively consistent with the first half of 2014. The sales and marketing expenses as a percentage of total revenues may fluctuate from one period to the next due to the timing of hiring new sales and marketing personnel, our spending on marketing programs, and the level of the commission expenditures, in each period. General and Administrative The following table sets forth, for the periods indicated, our general and administrative expenses (in thousands, except percentages): Three Months Ended June 30, Six Months Ended June 30, Percentage Percentage 2014 2013 Change 2014 2013 Change General and administrative $ 20,019$ 19,181 4 % $ 40,072$ 37,668 6 % Our general and administrative expenses consist primarily of personnel costs for finance, human resources, legal, and general management, as well as professional service expenses associated with recruiting, legal, tax and accounting services. General and administrative expenses increased to $20.0 million (or 8% of total revenues) and $40.1 million (or 8% of total revenues) for the three and six months ended June 30, 2014, respectively, compared to $19.2 million (or 8% of total revenues) and $37.7 million (or 9% of total revenues) for the three and six months ended June 30, 2013, respectively. The $0.8 million (or 4%) increase for the three months ended June 30, 2014 compared to the same period in 2013 was primarily due to a $1.6 million increase in personnel-related costs (including stock-based compensation) as a result of increased headcount, partially offset by a $0.6 million decrease in third-party services, and a $0.2 million decrease in general overhead costs. The $2.4 million (or 6%) increase for the six months ended June 30, 2014 compared to the same period in 2013 was primarily due to a $2.9 million increase in personnel-related costs (including stock-based compensation) as a result of increased headcount, partially offset by a $0.5 million decrease in general overhead costs. For the remainder of 2014, we expect general and administrative expenses as a percentage of total revenues to be relatively consistent with or decrease slightly from the first half of 2014. 37



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Amortization of Intangible Assets The following table sets forth, for the periods indicated, our amortization of intangible assets (in thousands, except percentages): Three Months Ended June 30, Six Months Ended June 30, Percentage Percentage 2014 2013 Change

2014 2013 Change Amortization of $ 1,384$ 2,000 (31 )% $ 2,920$ 3,988 (27 )% intangible assets Amortization of intangible assets is the amortization of customer relationships, vendor relationships, trade names, and covenants not to compete acquired through prior business acquisitions, and patents acquired. Amortization of intangible assets decreased to $1.4 million (or 1% of total revenues) for the three months ended June 30, 2014 from $2.0 million (or 1% of total revenues) for the three months ended June 30, 2013. Amortization of intangible assets decreased to $2.9 million (or 1% of total revenues) for the six months ended June 30, 2014 from $4.0 million (or 1% of total revenues) for the six months ended June 30, 2013. The decrease of $1.1 million (or 27%) in amortization of intangible assets for the six months ended June 30, 2014 compared to the same period in 2013 was primarily due to a $0.8 million decrease in amortization of certain intangibles which are amortized using a method based on expected cash flows and a $0.3 million of decrease in amortization of certain intangibles that were fully amortized after June 30, 2013. For the remainder of 2014, we expect amortization of the remaining intangible assets to be approximately $3.0 million, before the impact of any amortization for any possible intangible assets acquired as part of any potential future acquisitions subsequent to June 30, 2014. Acquisitions and Other Charges (Benefit) The following table sets forth, for the periods indicated, our acquisitions and other charges (in thousands, except percentages): Three Months Ended June 30,



Six Months Ended June 30,

Percentage Percentage 2014 2013 Change 2014 2013 Change Acquisitions and other charges (benefit) $ 771$ (436 ) (277 )% $ 860$ 1,214 (29 )% For the three and six months ended June 30, 2014, acquisition and other charges of $0.8 million and $0.9 million, respectively, primarily consisted of legal, accounting, tax, bankers' and other professional service fees. For the three months ended June 30, 2013, acquisition and other benefit of $0.4 million primarily consisted of $2.5 million of earn-out related adjustments associated with prior acquisitions. This was partially offset by $0.9 million in charges for legal, accounting, tax, bankers' and other professional services fees, and $0.9 million of severance liabilities to former employees of an acquiree. For the six months ended June 30, 2013, acquisition and other charges of $1.2 million primarily consisted of $2.3 million in charges for legal, accounting, tax, bankers' and other professional services fees, and $1.0 million of severance liabilities to former employees of acquirees. This was partially offset by $2.1 million of earn-out related adjustments and accretion charges associated with prior acquisitions. 38



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Interest and Other Income, Net The following table sets forth, for the periods indicated, our interest and other income, net (in thousands, except percentages):

Three Months Ended June 30, Six Months Ended June 30, Percentage Percentage 2014 2013 Change 2014 2013 Change Interest income $ 1,179$ 893 32 % $ 2,332$ 1,783 31 % Interest expense (166 ) (128 ) 30 % (293 ) (248 ) 18 % Other expense, net (198 ) (391 ) 49 % (282 ) (459 ) 39 % Interest and other income, net $ 815$ 374 118 % $ 1,757$ 1,076 63 % Interest and other income, net consists primarily of interest income earned on our cash, cash equivalents, and short-term investments, as well as foreign exchange transaction gains and losses, and interest expense. The increase in income of $0.4 million (or 118%) for the three months ended June 30, 2014 compared to the same period in 2013, was primarily due to a $0.3 million increase in interest income due to higher yields and higher cash balances, and a $0.1 million increase in foreign exchange gains. The increase in income of $0.7 million (or 63%) for the six months ended June 30, 2014 compared to the same period in 2013, was primarily due to a $0.5 million increase in interest income due to higher yields and higher cash balances, and a $0.2 million increase in foreign exchange gains. Income Tax Provision The following table sets forth, for the periods indicated, our provision for income taxes (in thousands, except percentages): Three Months Ended June 30, Six Months Ended June 30, Percentage Percentage 2014 2013 Change 2014 2013 Change Income tax provision $ 11,812$ 8,139 45 % $ 24,718$ 15,633 58 % Effective tax rate 34 % 31 % 3 % 34 % 30 % 4 % Our effective tax rates were 34% and 31% for the three months ended June 30, 2014 and 2013, respectively, and 34% and 30% for the six months ended June 30, 2014 and 2013, respectively. The rates were lower than the federal statutory rate of 35% primarily due to the benefits of foreign earnings in lower-tax jurisdictions and the domestic manufacturing deduction, partially offset by nondeductible stock-based compensation, state income taxes, and the accrual of reserves related to uncertain tax positions. The higher tax rate for the three months ended June 30, 2014 as compared to the same period in 2013 was primarily due to the fact that we did not recognize any benefit from the federal research and development credit in 2014 and we recognized tax benefits from adjustments to tax reserves in the second quarter of 2013. In addition, the higher tax rate for the six months ended June 30, 2014 as compared to the same period in 2013 was primarily due to the facts that we recognized the entire 2012 research and development credit in the first quarter of 2013 and this credit expired on December 31, 2013. As of June 30, 2014, we have not provided for residual U.S. taxes in any of these lower-tax jurisdictions since we intend to indefinitely reinvest the net undistributed earnings of our foreign subsidiaries offshore. We are a U.S.-based multinational corporation subject to tax in various U.S. and foreign tax jurisdictions. This fact causes our effective tax rate to be sensitive to our geographic mix of earnings. Our results of operations will continue to be adversely affected to the extent that our geographic mix of earnings becomes more weighted toward jurisdictions with higher tax rates, and will be favorably affected to the extent the relative geographic mix shifts to lower tax jurisdictions. Our effective tax rate in 2014 continues to be highly dependent on the result of our global operations, the execution of business combinations, the outcome of various tax audits and any changes in applicable tax laws. For example, our effective tax rate has historically benefited from the federal research and development tax credit. This credit is currently expired for 2014 and has not yet been reinstated. Further, the geographic mix of earnings is impacted by the fluctuation in currency exchange rates between the U.S. dollar and the functional currencies of our foreign subsidiaries. 39



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Liquidity and Capital Resources We have funded our operations primarily through cash flows from operations and equity and debt offerings in the past. As of June 30, 2014, we had $686.2 million in available cash and cash equivalents and short-term investments. Our primary sources of cash are the collection of accounts receivable from our customers and proceeds from the exercise of stock options and stock purchased under our employee stock purchase plan. In addition, as of June 30, 2014, we had $220.0 million available for borrowing under the credit agreement discussed below. Our uses of cash include payroll and payroll-related expenses and operating expenses such as marketing programs, travel, professional services, and facilities and related costs. We have also used cash to purchase property and equipment, repurchase common stock from the open market to reduce the dilutive impact of stock option issuances, and acquire businesses and technologies to expand our product offerings. Approximately 35% of our cash, cash equivalents, and short-term investments are held by our foreign subsidiaries. Our intent is to permanently reinvest our earnings from foreign operations and current plans do not anticipate that we will need funds generated from foreign operations to fund our domestic operations. In the event funds from foreign operations are needed to fund operations in the United States and if U.S. tax has not already been previously accrued, we would be required to accrue and pay additional U.S. taxes in order to repatriate these funds. The following table summarizes our cash flows for the six months ended June 30, 2014 and 2013 (in thousands): Six Months Ended June 30, 2014 2013



Cash provided by operating activities $ 102,081$ 108,927 Cash used in investing activities $ (111,596 )$ (80,165 ) Cash used in financing activities $ (30,535 )$ (22,497 )

Operating Activities: Cash provided by operating activities for the six months ended June 30, 2014 was $102.1 million, representing a decrease of $6.8 million from the six months ended June 30, 2013. This decrease resulted primarily from a $10.3 million decrease in income taxes payable, a $9.9 million decrease in deferred revenues, a $1.5 million net decrease in adjustments for non-cash expenses, a $1.0 million increase in prepaid expenses and other assets. These were partially offset by an $11.6 million increase in net income, a $2.2 million decrease in accounts receivable, and a $2.1 million increase in accounts payable and accrued liabilities. We recognized excess tax benefits from stock-based compensation of $2.6 million during the six months ended June 30, 2014. This amount is recorded as a use of cash from operating activities and an offsetting amount is recorded as a source of cash provided by financing activities. We made net cash payments for taxes in different jurisdictions of $42.8 million during the six months ended June 30, 2014. Our "days sales outstanding" in accounts receivable increased from 62 days at June 30, 2013 to 66 days at June 30, 2014 due to a higher amount of billings which occurred toward the end of the second quarter of 2014 compared to end of the second quarter of 2013, and a higher mix of international transactions, which tend to have slightly longer collection cycles. Investing Activities: Net cash used in investing activities for the six months ended June 30, 2014 was $111.6 million due to $165.9 million in purchases of investments, $54.6 million used to acquire StrikeIron, net of cash acquired, $8.7 million in purchases of property and equipment, and $0.3 million in purchase of an investment in equity interests. These cash outflows were partially offset by cash provided by the maturities of investments of $86.9 million and sales of investments of $31.0 million. We have identified our investment portfolio as "available-for-sale," and our investment objectives are to preserve principal and provide liquidity while maximizing yields without significantly increasing risk. We may sell an investment at any time if the credit rating of the investment declines, the yield on the investment is no longer attractive, or we need additional cash. We invest only in money market funds, time deposits, and marketable debt securities. We believe that the purchase, maturity, or sale of our investments has no material impact on our overall liquidity. We acquire property and equipment in our normal course of business. The amount and timing of these purchases and the related cash outflows in future periods depend on a number of factors, including the hiring of employees, the rate of upgrade of computer hardware and software used in our business, as well as our business outlook. We have used cash to acquire businesses and technologies that enhance and expand our product offerings, and we anticipate that we will continue to do so in the future. Due to the nature of these transactions, it is difficult to predict the amount and timing of such cash requirements to complete such transactions. We may be required to raise additional funds to complete future acquisitions. In addition, we may be obligated to pay certain variable and deferred earn-out payments based upon achievement of certain performance targets. 40



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Financing Activities: Net cash used in financing activities for the six months ended June 30, 2014 was $30.5 million due to repurchases and retirement of our common stock of $55.9 million, withholding taxes for restricted stock units net share settlement of $6.0 million, and payment of contingent consideration of $3.1 million. These amounts were partially offset by proceeds received from the issuance of common stock to option holders and participants of our ESPP program of $31.7 million and excess tax benefits from stock-based compensation of $2.6 million. We receive cash from the exercise of common stock options and the sale of common stock under our ESPP. Although we expect to continue to receive some proceeds from the issuance of common stock to option holders and participants of ESPP in future periods, the timing and amount of such proceeds are difficult to predict and are contingent on a number of factors, including the price of our common stock, the number of employees participating in our stock option plans and our employee stock purchase plan, and overall market conditions. Our Board of Directors has approved a stock repurchase program for the repurchase of our common stock. Purchases can be made from time to time in the open market and will be funded from our available cash. The primary purpose of this program is to enhance shareholder value, including partially offsetting the dilutive impact of stock based incentive plans. The number of shares to be purchased and the timing of purchases are based on several factors, including the price of our common stock, our liquidity and working capital needs, general business and market conditions, and other investment opportunities. The repurchased shares are retired and reclassified as authorized and unissued shares of common stock. We may continue to repurchase shares from time to time, as determined by management as authorized by the Board of Directors. In January 2014, we announced that our Board authorized an additional $100 million increase to the program. We had $48.1 million available to repurchase additional shares of our common stock under this program as of June 30, 2014. In July 2014, we announced that our Board authorized an additional $100 million increase to the program. See Part II, Item 2 of this Report for information regarding the number of shares purchased under the stock repurchase program. In connection with our acquisitions, we are obligated to pay up to an additional $1.2 million for certain variable and deferred earn-out payments based upon the achievement of certain performance targets. We believe that our cash balances and the cash flows generated by operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, we may be required to raise or desire additional funds for selective purposes, such as acquisitions or other investments in complementary businesses, products, or technologies, and may raise such additional funds through public or private equity or debt financing or from other sources. Credit Agreement In September 2010, we entered into a Credit Agreement (the "Credit Agreement") that matures in September 2014. The Credit Agreement provides for an unsecured revolving credit facility in an amount of up to $220.0 million, with an option for us to request to increase the revolving loan commitments by an aggregate amount of up to $30.0 million with new or additional commitments, for a total credit facility of up to $250.0 million. No amounts were borrowed during the six months ended June 30, 2014. No amounts were outstanding under the Credit Agreement as of June 30, 2014, and a total of $220.0 million remained available for borrowing. The Credit Agreement contains customary representations and warranties, covenants and events of default, including the requirement to maintain a maximum consolidated leverage ratio of 2.75 to 1.00 and a minimum consolidated interest coverage ratio of 3.50 to 1.00. We were in compliance with all covenants under the Credit Agreement as of June 30, 2014. As of the date of this report, we intend to renew the Credit Agreement. For further information, see Note 4. Borrowings of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Report. Contractual Obligations and Operating Leases The following table summarizes our significant contractual obligations, including future minimum lease payments at June 30, 2014, under non-cancelable operating leases with original terms in excess of one year, and the effect of such obligations on our liquidity and cash flows in the future periods (in thousands): Payment Due by Period 2015 2017 2019 Remaining and and and Total 2014 2016 2018 Beyond



Operating lease payments $ 50,239$ 5,719$ 21,087$ 11,305$ 12,128

The above commitment table does not include approximately $30.6 million of long-term income tax liabilities recorded in accordance with ASC 740, Income Taxes. We are unable to make a reasonably reliable estimate of the timing of these potential future payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes. As a result, this 41



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amount is not included in the table above. For further information, see Note 9. Income Taxes of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Report. Contractual Obligations Purchase orders or contracts for the purchase of certain goods and services are not included in the preceding table. We cannot determine the aggregate amount of such purchase orders that represent contractual obligations because purchase orders may represent authorizations to purchase rather than binding agreements. For the purposes of this table, contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current needs and are fulfilled by our vendors within short time horizons. We also enter into contracts for outsourced services; however, the obligations under these contracts were not significant and the contracts generally contain clauses allowing for cancellation without significant penalty. Contractual obligations that are contingent upon the achievement of certain milestones are not included in the table above. We estimate the expected timing of payment of the obligations discussed above based on current information. Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations. Operating Leases We lease certain office facilities and equipment under non-cancelable operating leases, which expire at various dates through 2024. The expected timing of payment of the obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid may be different. Off-Balance Sheet Arrangements We do not have any off-balance sheet financing arrangements, transactions, or relationships with "special purpose entities."


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