form10q_033108.htm
 




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

 
For the quarterly period ended March 31, 2008

OR

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

Commission File Number: 0-25871

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

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

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

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

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

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

Large accelerated filer R       Accelerated filer £       Non-accelerated filer £        Smaller reporting company £


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

As of April 30, 2008, there were approximately 88,506,000 shares of the registrant’s common stock outstanding.
 





INFORMATICA CORPORATION

Table of Contents

   
Page No.
 
     
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    5  
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    36  
    37  
       
    38  
    39  
    51  
    52  
    53  
    54  
 EXHIBIT 31.1        
 EXHIBIT 31.2        
 EXHIBIT 32.1        


PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INFORMATICA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
   
March 31,
2008
   
December 31,
2007
 
   
(Unaudited)
       
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 304,701     $ 203,661  
Short-term investments
    218,070       281,197  
Accounts receivable, net of allowances of $1,346 and $1,299, respectively
    45,965       72,643  
Deferred tax assets
    18,482       18,294  
Prepaid expenses and other current assets
    18,630       14,693  
Total current assets
    605,848       590,488  
                 
Restricted cash
    12,126       12,122  
Property and equipment, net
    9,921       10,124  
Goodwill
    166,842       166,916  
Other intangible assets, net
    11,417       12,399  
Investment in equity interest
    3,000        
Long-term deferred tax assets
    462       462  
Other assets
    6,072       6,133  
Total assets
  $ 815,688     $ 798,644  
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable
  $ 4,715     $ 4,109  
Accrued liabilities
    19,375       25,381  
Accrued compensation and related expenses
    22,254       33,053  
Income taxes payable
          248  
Accrued facilities restructuring charges
    19,129       18,007  
Deferred revenues
    106,327       99,415  
Total current liabilities
    171,800       180,213  
                 
Convertible senior notes
    230,000       230,000  
Accrued facilities restructuring charges, less current portion
    53,672       56,235  
Long-term deferred revenues
    12,753       13,686  
Long-term income taxes payable
    6,577       5,968  
Total liabilities
    474,802       486,102  
                 
Commitments and contingencies (Note 10)
               
                 
Stockholders’ equity:
               
Common stock
    89       87  
Additional paid-in capital
    391,759       377,277  
Accumulated other comprehensive income
    8,276       5,640  
Accumulated deficit
    (59,238 )     (70,462 )
Total stockholders’ equity
    340,886       312,542  
Total liabilities and stockholders’ equity
  $ 815,688     $ 798,644  

See accompanying notes to condensed consolidated financial statements.


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

   
Three Months Ended
March 31,
 
   
2008
   
2007
 
Revenues:
           
License
  $ 44,209     $ 37,562  
Service
    59,501       49,552  
Total revenues
    103,710       87,114  
                 
Cost of revenues:
               
License
    693       805  
Service
    19,785       16,314  
Amortization of acquired technology
    620       722  
Total cost of revenues
    21,098       17,841  
                 
Gross profit
    82,612       69,273  
                 
Operating expenses:
               
Research and development
    17,724       18,024  
Sales and marketing
    42,787       35,111  
General and administrative
    8,369       7,725  
Amortization of intangible assets
    362       356  
Facilities restructuring charges
    947       1,049  
Total operating expenses
    70,189       62,265  
                 
Income from operations
    12,423       7,008  
Interest income
    4,857       5,049  
Interest expense
    (1,802 )     (1,804 )
Other income (expense), net
    503       (86 )
Income before provision for income taxes
    15,981       10,167  
Provision for income taxes
    4,757       1,073  
Net income
  $ 11,224     $ 9,094  
                 
Basic net income per common share
  $ 0.13     $ 0.11  
Diluted net income per common share
  $ 0.12     $ 0.10  
                 
Shares used in computing basic net income per common share
    88,128       86,448  
Shares used in computing diluted net income per common share
    103,727       102,638  
 



See accompanying notes to condensed consolidated financial statements.


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

   
Three Months Ended
March 31,
 
   
2008
   
2007
 
Operating activities:
           
Net income
  $ 11,224     $ 9,094  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    1,401       2,714  
Share-based payments
    4,114       4,041  
Deferred income taxes
    (188 )      
Tax benefits from stock option plans
    2,961        
Excess tax benefits from share-based payments
    (2,335 )      
Amortization of intangible assets and acquired technology
    982       1,078  
Non-cash facilities restructuring charges
    947       1,049  
Other non-cash items
    (652 )      
Changes in operating assets and liabilities:
               
Accounts receivable
    26,678       20,444  
Prepaid expenses and other assets
    (3,952 )     (2,419 )
Accounts payable and other current liabilities
    (16,201 )     (12,379 )
Income taxes payable
    435       3,789  
Accrued facilities restructuring charges
    (2,347 )     (3,547 )
Deferred revenues
    5,979       2,999  
Net cash provided by operating activities
    29,046       26,863  
Investing activities:
               
Purchases of property and equipment
    (1,071 )     (2,095 )
Purchases of investments
    (60,054 )     (123,473 )
Purchase of investment in equity interest
    (3,000 )      
Maturities of investments
    96,904       79,190  
Sales of investments
    27,216       13,450  
Net cash provided by (used in) investing  activities
    59,995       (32,928 )
Financing activities:
               
Net proceeds from issuance of common stock
    13,757       8,525  
Repurchases and retirement of common stock
    (6,349 )     (1,389 )
Excess tax benefits from share-based payments
    2,335        
Net cash provided by financing activities
    9,743       7,136  
Effect of foreign exchange rate changes on cash and cash equivalents
    2,256       156  
Net increase in cash and cash equivalents
    101,040       1,227  
Cash and cash equivalents at beginning of period
    203,661       120,491  
Cash and cash equivalents at end of period
  $ 304,701     $ 121,718  


See accompanying notes to condensed consolidated financial statements.


5

 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements of Informatica Corporation (“Informatica,” or the “Company”) have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States of America. However, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the financial statements include all adjustments necessary, which are of a normal and recurring nature for the fair presentation of the results of the interim periods presented. All of the amounts included in this report related to the condensed consolidated financial statements and notes thereto as of and for the three months ended March 31, 2008 and 2007 are unaudited. The interim results presented are not necessarily indicative of results for any subsequent interim period, the year ending December 31, 2008, or any future period.

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

These unaudited, condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2007 included in the Company’s Annual Report on Form 10-K filed with the SEC. The condensed consolidated balance sheet as of December 31, 2007 has been derived from the audited consolidated financial statements of the Company.

Revenue Recognition

The Company derives its revenues from software license fees, maintenance fees, and professional services, which consist of consulting and education services. The Company recognizes revenue in accordance with AICPA SOP 97-2, Software Revenue Recognition, as amended and modified by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, SOP 81-1, Accounting for Performance of Construction-type and Certain Production-type Contracts, the Securities and Exchange Commission’s Staff Accounting Bulletin SAB 104, Revenue Recognition, and other authoritative accounting literature.

Under SOP 97-2, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable.

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

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

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


6

 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Collection is probable. Credit worthiness and collectibility are first assessed at a country level based on the country’s overall economic climate and general business risk. For customers in the countries which are deemed credit-worthy, credit and collectibility are then assessed based on their payment history and credit profile. When a customer is not deemed credit worthy, revenue is recognized when payment is received.

The Company also enters into OEM arrangements that provide for license fees based on inclusion of our technology and/or products in the OEM’s products. These arrangements provide for fixed, irrevocable royalty payments. Royalty payments are recognized as revenues based on the activity in the royalty report that the Company receives from the OEM. In case of OEMs with fixed royalty payments, revenue is recognized upon execution of the agreement, delivery of the software, and when all other criteria for revenue recognition are met.

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

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

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

Consulting revenues are primarily related to implementation services and product configurations performed on a time-and-materials basis and, occasionally, on a fixed fee basis. Education services revenues are generated from classes offered at both Company and customer locations. Revenues from consulting and education services are recognized as the services are performed.

Deferred revenues include deferred license, maintenance, consulting, and education services revenue. For customers not deemed credit-worthy, the Company’s practice is to net unpaid deferred revenue for that customer against the related receivable balance.

Fair Value Measurement of Financial Assets and Liabilities

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), which defines fair value and establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), including an amendment of FASB Statement No. 115, which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities under an instrument-by-instrument election. At January 1, 2008, the Company adopted SFAS No. 157 and SFAS No. 159 which address aspects of the expanding application of fair value accounting. The company has elected not to use fair value for any of its investments held as of the beginning of the quarter ended March 31, 2008.
 
SFAS No. 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
 
 
 
Level 1. Observable inputs such as quoted prices in active markets;
 
 
 
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
 
 
 
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.


7

 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


    SFAS 157 allows the Company to measure the fair value of its financial assets and liabilities based on one or more of three following valuation techniques:
 
 
Market approach. Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities;
 
 
 
Cost approach. Amount that would be required to replace the service capacity of an asset (replacement cost); and

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

The following table summarizes the fair value measurement classification of Informatica as of March 31, 2008 (in thousands):

   
 
 
 
 
 
Total
   
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
   
 
Significant
Other
Observable
Inputs
(Level 2)
   
 
 
 Significant
Unobservable
Inputs
(Level 3)
 
Assets
                       
Money market funds
  $ 54,033     $ 54,033     $     $  
Marketable securities
    333,248             333,248        
Total money market funds and marketable securities
    387,281       54,033       333,248        
Investment in equity interest
    3,000                   3,000  
Total
  $ 390,281     $ 54,033     $ 333,248     $ 3,000  
Liabilities
                               
Convertible senior notes
  $ 257,430     $ 257,430     $     $  

Informatica uses a market approach for determining the fair value of all its Level 1 and Level 2 financial assets and liabilities. The Company also held a $3 million investment in the common stock of a privately held company at March 31, 2008, which was classified as Level 3 for value measurement purposes. In determining the fair value of this investment, the Company considered the pricing received by another third party for an investment in the same privately held company with similar terms and for the same amount and percentage of ownership interest.

Share-Based Payments

Summary of Assumptions

The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model that uses the assumptions noted in the following table. The Company is using a blend of average historical and market-based implied volatilities for calculating the expected volatilities for employee stock options and market-based implied volatilities for its Employee Stock Purchase Plan (ESPP). The expected term of employee stock options granted is derived from historical exercise patterns of the options while the expected term of ESPP is based on the contractual terms. The risk-free interest rate for the expected term of the option and ESPP is based on the U.S. Treasury yield curve in effect at the time of grant. SFAS No. 123(R) also requires the Company to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company is using an average of the past four quarters of actual forfeited options to determine its forfeiture rate.

8

 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company estimated the fair value of its share-based payment awards with no expected dividends using the following assumptions:
 
   
Three Months Ended
 
   
March 31,
 
   
2008
   
2007
 
Option grants:
           
Expected volatility
    39-41 %     41 %
Weighted-average volatility
    39 %     41 %
Expected dividends
           
Expected term of options (in years)
    3.3       3.3  
Risk-free interest rate
    2.5 %     4.7 %
ESPP: *
               
Expected volatility
    38 %     34 %
Weighted-average volatility
    38 %     34 %
Expected dividends
           
Expected term of ESPP (in years)
    0.5       0.5  
Risk-free interest rate — ESPP
    2.2 %     5.2 %
____________

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

The allocation of share-based payments for the three months ended March 31, 2008 is as follows (in thousands):
 
   
Three Months Ended
 
   
March 31,
 
   
2008
   
2007
 
Cost of service revenues
  $ 546     $ 469  
Research and development
    1,064       904  
Sales and marketing
    1,373       1,644  
General and administrative
    1,131       1,024  
Total share-based payments
    4,114       4,041  
Tax benefit of share-based payments
    (802 )     (867 )
Total share-based payments, net of tax benefit
  $ 3,312     $ 3,174  
 

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

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

Realized gains recognized for the three months ended March 31, 2008 were $55,000. There were no realized gains or losses recognized for the three months ended March 31, 2007. The realized gains are included in other income of the consolidated results of operations for the respective periods. The cost of securities sold was determined based on the specific identification method.

9

 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
The following is a summary of the Company’s investments as of March 31, 2008 and December 31, 2007 (in thousands):

   
March 31, 2008
 
   
 
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
 
Cash
  $ 135,490     $     $     $ 135,490  
Cash equivalents:
                               
Money market funds
    54,033                   54,033  
Commercial paper
    46,654       7             46,661  
Federal agency notes and bonds
    27,292       13             27,305  
U.S. government notes and bonds
    41,232             (20 )     41,212  
Total cash equivalents
    169,211       20       (20 )     169,211  
Total cash and cash equivalents
    304,701       20       (20 )     304,701  
Short-term investments:
                               
Commercial paper
    21,934       77             22,011  
Corporate notes and bonds
    44,500       286       (33 )     44,753  
Federal agency notes and bonds
    141,438       1,045             142,483  
U.S. government notes and bonds
    8,802       25       (4 )     8,823  
Total short-term investments
    216,674       1,433       (37 )     218,070  
Total cash, cash equivalents, and short-term investments *
  $ 521,375     $ 1,453     $ (57 )   $ 522,771  
___________
 
*
Total estimated fair value above included $387,281 comprised of cash equivalents and short-term investments at March 31, 2008.

   
December 31, 2007
 
   
 
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
 
Cash
  $ 102,939     $     $     $ 102,939  
Cash equivalents:
                               
Money market funds
    35,240                   35,240  
Commercial paper
    24,448       1             24,449  
Federal agency notes and bonds
    41,037             (4 )     41,033  
Total cash equivalents
    100,725       1       (4 )     100,722  
Total cash and cash equivalents
    203,664       1       (4 )     203,661  
Short-term investments:
                               
Commercial paper
    51,642       7       (4 )     51,645  
Corporate notes and bonds
    51,308       103       (25 )     51,386  
Federal agency notes and bonds
    150,049       371       (12 )     150,408  
U.S. government notes and bonds
    5,494       8       (1 )     5,501  
Municipal notes and bonds
    1,200       7             1,207  
Auction rate securities
    21,050                   21,050  
Total short-term investments
    280,743       496       (42 )     281,197  
Total cash, cash equivalents, and short-term investments
  $ 484,407     $ 497     $ (46 )   $ 484,858  

In accordance with FASB Staff Position No. FAS 115-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments, the following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2008  (in thousands):

   
Less Than 12 months
   
More Than 12 months
   
Total
 
   
 
Fair Value
   
Gross
Unrealized Losses
   
 
Fair Value
   
Gross
 Unrealized
Losses
   
 
Fair Value
   
Gross
 Unrealized
Losses
 
Corporate notes and bonds
  $ 8,995     $ (33 )   $     $     $ 8,995     $ (33 )
U.S. government notes and bonds
    43,472       (24 )                 43,472       (24 )
Total
  $ 52,467     $ (57 )   $     $     $ 52,467     $ (57 )
 
10

 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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

The following table summarizes the cost and estimated fair value of the Company’s cash equivalents and short-term investments by contractual maturity at March 31, 2008 (in thousands):

   
Cost
   
Fair Value
 
Due within one year
  $ 365,976     $ 367,079  
Due one year to two years
    19,909       20,202  
Due after two years
           
    $ 385,885     $ 387,281  

The company is maintaining certificate of deposits as collateral for the letters of credits which expire in 2013 in connection with certain lease agreements. These certificates of deposit for $12.1 million are classified as long-term restricted cash on the Company’s condensed consolidated balance sheets.


Note 3. Goodwill and Intangible Assets

The carrying amounts of intangible assets other than goodwill as of March 31, 2008 and December 31, 2007 are as follows (in thousands):

   
March 31, 2008
   
December 31, 2007
 
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Amount
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Amount
 
Developed and core technology
  $ 18,135     $ (10,711 )   $ 7,424     $ 18,135     $ (10,091 )   $ 8,044  
Customer relationships
    4,175       (2,107 )     2,068       4,175       (1,895 )     2,280  
Other:
                                               
Trade names
    700       (258 )     442       700       (208 )     492  
Covenant not to compete
    2,000       (517 )     1,483       2,000       (417 )     1,583  
    $ 25,010     $ (13,593 )   $ 11,417     $ 25,010     $ (12,611 )   $ 12,399  

Amortization expense of intangible assets was approximately $1.0 million and $1.1 million for the three months ended March 31, 2008 and 2007, respectively. The weighted-average amortization period of the Company’s developed and core technology, customer relationships, trade names, and covenants not to compete are 4 years, 5 years, 3.5 years, and 5 years, respectively. The amortization expense related to identifiable intangible assets as of March 31, 2008 is expected to be $2.9 million for the remainder of 2008, $3.7 million, $2.0 million, $1.8 million, $0.8 million and $0.2 million for the years ending December 31, 2009, 2010, 2011, 2012, and thereafter, respectively.

The change in the carrying amount of goodwill for the three months ended March 31, 2008 is as follows (in thousands):

   
March 31,
2008
 
Beginning balance as of December 31, 2007
  $ 166,916  
Subsequent goodwill adjustments
    (74 )
Ending balance as of March 31, 2008
  $ 166,842  

In the three-month period ended March 31, 2008, the Company recorded adjustments of $74,000 due to the tax benefits it received as a result of the exercise of non-qualified stock options granted as part of prior acquisitions.



11

 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 4. Convertible Senior Notes

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

Pursuant to a Purchase Agreement (the “Purchase Agreement”), the Notes were sold for cash consideration in a private placement to an initial purchaser, UBS Securities LLC, an “accredited investor,” within the meaning of Rule 501 under the Securities Act of 1933, as amended (“the Securities Act”), in reliance upon the private placement exemption afforded by Section 4(2) of the Securities Act. The initial purchaser reoffered and resold the Notes to “qualified institutional buyers” under Rule 144A of the Securities Act without being registered under the Securities Act, in reliance on applicable exemptions from the registration requirements of the Securities Act. In connection with the issuance of the Notes, the Company filed a shelf registration statement with the SEC for the resale of the Notes and the common stock issuable upon conversion of the Notes. The Company also agreed to periodically update the shelf registration and to keep it effective until the earlier of the date the Notes or the common stock issuable upon conversion of the Notes is eligible to be sold to the public pursuant to Rule 144(k) of the Securities Act or the date on which there are no outstanding registrable securities. The Company has evaluated the terms of the call feature, redemption feature, and the conversion feature under applicable accounting literature, including SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and Emerging Issues Task Force (“EITF”) No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, and concluded that none of these features should be separately accounted for as derivatives.

The Company used approximately $50 million of the net proceeds from the offering to fund the purchase of shares of its common stock concurrently with the offering of the Notes and intends to use the balance of the net proceeds for working capital and general corporate purposes, which may include the acquisition of businesses, products, product rights or technologies, strategic investments, or additional purchases of common stock.

In connection with the issuance of the Notes, the Company incurred $6.2 million of issuance costs, which primarily consisted of investment banker fees and legal and other professional fees. These costs are classified within Other Assets and are being amortized as a component of interest expense using the effective interest method over the life of the Notes from issuance through March 15, 2026. If the holders require repurchase of some or all of the Notes on the first repurchase date, which is March 15, 2011, the Company would accelerate amortization of the pro rata share of the unamortized balance of the issuance costs on such date. If the holders require conversion of some or all of the Notes when the conversion requirements are met, the Company would accelerate amortization of the pro rata share of the unamortized balance of the issuance cost to additional paid-in capital on such date. Amortization expense related to the issuance costs was $78,000, and interest expense on the Notes was $1.7 million for both of the three-month periods ended March 31, 2008 and 2007.

The current market value of the convertible senior notes as of March 31, 2008 is $257.4 million.



12

 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 5. Comprehensive Income

Other comprehensive income refers to gains and losses that, under GAAP, are recorded as an element of stockholders’ equity and are excluded from net income. Comprehensive income consisted of the following items (in thousands):

   
Three Months Ended
March 31,
 
   
2008
   
2007
 
Net income, as reported
  $ 11,224     $ 9,094  
Other comprehensive income:
               
Unrealized gain on investments *
    573       94  
Cumulative translation adjustment *
    2,063       222  
Comprehensive income
  $ 13,860     $ 9,410  
_________

*
The tax effects on unrealized gain on investments and cumulative translation adjustments were $448,000 for the three months ended March 31, 2008, and negligible for the three months ended March 31, 2007.

Accumulated other comprehensive income as of March 31, 2008 and December 31, 2007 consisted of the following (in thousands):

   
March 31,
2008
   
December 31, 2007
 
Unrealized gain on available-for-sale investments
  $ 794     $ 221  
Cumulative translation adjustment
    7,482       5,419  
    $ 8,276     $ 5,640  


Note 6. Stock Repurchases

The purpose of Informatica’s stock repurchase program is, among other things, to help offset the dilution caused by the issuance of stock under our employee stock option plans. The number of shares acquired and the timing of the repurchases are based on several factors, including general market conditions and the trading price of our common stock. These repurchased shares are retired and reclassified as authorized and unissued shares of common stock. These purchases can be made from time to time in the open market and are funded from available working capital. In April 2006, Informatica’s Board of Directors authorized a stock repurchase program for a one-year period for up to $30 million of our common stock. As of April 30, 2007, the Company repurchased 2,238,000 shares at a cost of $30 million, including 105,000 shares during the three months ended March 31, 2007.

In April 2007, Informatica’s Board of Directors authorized a stock repurchase program for up to an additional $50 million of our common stock. As of March 31, 2008, the Company repurchased 2,219,000 shares at cost of $33.9 million, including 350,000 shares during the three months ended March 31, 2008.

In April 2008, Informatica’s Board of Directors authorized a stock repurchase program for up to an additional $75 million of our common stock. Purchases can be made from time to time in the open market and will be funded from available working capital.


Note 7. Facilities Restructuring Charges

2004 Restructuring Plan

In October 2004, the Company announced a restructuring plan (“2004 Restructuring Plan”) related to the December 2004 relocation of the Company’s corporate headquarters within Redwood City, California. In 2005, the Company subleased the available space at the Pacific Shores Center under the 2004 Restructuring Plan with two subleases expiring in 2008 and 2009 with rights to extend for a period of one and four years, respectively. The Company recorded restructuring charges of approximately $103.6 million, consisting of $21.6 million in leasehold improvement and asset write-offs and $82.0 million related to estimated facility lease losses, which consist of the present value of lease payment obligations for the remaining

13

 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


five-year lease term of the previous corporate headquarters, net of actual and estimated sublease income. The Company has actual and estimated sublease income, including the reimbursement of certain property costs such as common area maintenance, insurance, and property tax, net of estimated broker commissions of $3.9 million for the remainder of 2008, $2.5 million in 2009, $1.4 million in 2010, $3.8 million in 2011, $4.4 million in 2012, and $2.4 million in 2013.

Subsequent to 2004, the Company continued to record accretion on the cash obligations related to the 2004 Restructuring Plan. Accretion represents imputed interest and is the difference between our non-discounted future cash obligations and the discounted present value of these cash obligations. As of March 31, 2008, the Company will recognize approximately $10.5 million of accretion as a restructuring charge over the remaining term of the lease, or approximately five years, as follows: $2.5 million for the remainder of 2008, $3.0 million in 2009, $2.3 million in 2010, $1.6 million in 2011, $0.9 million in 2012, and $0.2 million in 2013.

2001 Restructuring Plan

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

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

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

A summary of the activity of the accrued restructuring charges for the three months ended March 31, 2008 is as follows (in thousands):

   
Accrued
Restructuring
Charges at
December 31,
   
 
Restructuring
   
 
 
Net Cash
   
 
 
Non-cash
   
Accrued
Restructuring
Charges at
March 31,
 
   
2007
   
Charges
   
Adjustments
   
Payment
   
Reclass
   
2008
 
2004 Restructuring Plan
                                   
Excess lease facilities
  $ 64,446     $ 906     $ 41     $ (2,019 )   $ (41 )   $ 63,333  
2001 Restructuring Plan
                                               
Excess lease facilities
    9,796                   (328 )           9,468  
    $ 74,242     $ 906     $ 41     $ (2,347 )   $ (41 )   $ 72,801  

For the three months ended March 31, 2008, the Company recorded $0.9 million restructuring charges from accretion charges related to the 2004 Restructuring Plan. Actual future cash requirements may differ from the restructuring liability balances as of March 31, 2008 if the Company is unable to sublease the excess leased facilities after the expiration of the subleases, there are changes to the time period that facilities are vacant, or the actual sublease income is different from current estimates. If the subtenants do not extend their subleases and the Company is unable to sublease any of the related Pacific Shores facilities during the remaining lease terms through 2013, restructuring charges could increase by approximately $9.8 million.

Inherent in the estimation of the costs related to the restructuring efforts are assessments related to the most likely expected outcome of the significant actions to accomplish the restructuring. The estimates of sublease income may vary significantly depending, in part, on factors that may be beyond the Company’s control, such as the time periods required to locate and contract suitable subleases should the Company’s existing subleases elect to terminate their sublease agreements in 2008 and 2009 and the market rates at the time of entering into new sublease agreements.

14

 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 8. Income Taxes

The Company’s effective tax rate was 29.8% and 10.6% for the three months ended March 31, 2008 and 2007, respectively. The effective tax rate for the three months ended March 31, 2008 differed from the federal statutory rate of 35% primarily due to non-deductible amortization of deferred share-based payments, as well as the accrual of reserves pursuant to FIN 48, Accounting for Uncertainties in Income Taxes – an Interpretation of FASB Statement 109, offset by the tax rate benefits of certain earnings from Informatica's operations in lower-tax jurisdictions throughout the world for which the Company has not provided U.S. taxes because we intend to indefinitely reinvest such earnings outside the United States. The effective tax rate for the three months ended March 31, 2007 was 10.6% and primarily represented federal alternative minimum taxes, state minimum taxes, and income and withholding taxes attributable to foreign operations.

The Company released its valuation allowance for its non-stock option related deferred tax assets in the quarter ended September 30, 2007. The benefits related to Informatica’s stock option related deferred tax assets will be recorded in the stockholders’ equity as realized, and as such, these deferred tax assets will not provide a reduction in the Company’s effective tax rate. Informatica does not anticipate providing any valuation allowance for any of its deferred tax assets built in 2008.

The unrecognized tax benefits, if recognized, would impact the income tax provision by $7.6 million and $5.7 million as of March 31, 2008 and 2007, respectively. The Company has elected to include interest and penalties as a component of tax expense. Accrued interest and penalties at March 31, 2008 and 2007 were approximately $395,000 and $44,000, respectively. The Company does not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months.

The Company files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. We are currently under examination by the Internal Revenue Service for fiscal years 2005 and 2006. Due to net operating loss carry-forwards, substantially all of the Company’s tax years, from 1995 through 2006, remain open to tax examination. Recently the Company has also been informed by some state taxing authorities that we were selected for examination. Most state and foreign jurisdictions have three or four open tax years at any point in time. The field work for the state audits did not commence as of March 31, 2008. Although the outcome of any tax audit is uncertain, the Company believes that it has adequately provided in its financial statements for any additional taxes that it may be required to pay as a result of such examinations. If the payment ultimately proves to be unnecessary, the reversal of these tax liabilities would result in tax benefits in the period that the Company had determined such liabilities were no longer necessary. However, if an ultimate tax assessment exceeds our estimate of tax liabilities, additional tax provision might be required.


Note 9. Net Income per Common Share

Under the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 128, Earnings per Share, basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share reflects the potential dilution of securities by adding other common stock equivalents, primarily stock options and common shares potentially issuable under the terms of the convertible senior notes, to the weighted-average number of common shares outstanding during the period, if dilutive. Potentially dilutive securities have been excluded from the computation of diluted net income per share if their inclusion is antidilutive.

15

 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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


   
Three Months Ended
March 31,
 
   
2008
   
2007
 
Net income
  $ 11,224     $ 9,094  
Effect of convertible senior notes, net of related tax effects
    1,100       1,100  
Net income adjusted
  $ 12,324     $ 10,194  
                 
Weighted-average shares outstanding
    88,128       86,448  
Shares used in computing basic net income per common share
    88,128       86,448  
Dilutive effect of employee stock options, net of related tax benefits
    4,099       4,690  
Dilutive effect of convertible senior notes
    11,500       11,500  
Shares used in computing diluted net income per common share
    103,727       102,638  
Basic net income per common share
  $ 0.13     $ 0.11  
Diluted net income per common share
  $ 0.12     $ 0.10  

Diluted net income per common share is calculated according to SFAS No. 128, Earnings per Share, which requires the dilutive effect of convertible securities to be reflected in the diluted net income per share by application of the “if-converted” method. This method assumes an add-back of interest and amortization of issuance cost, net of income taxes, to net income if the securities are converted. The Company determined that for the three months ended March 31, 2008 and 2007, the convertible senior notes had a dilutive effect on diluted net income per share, and as such, it had an add-back of $1.1 million in interest and issuance cost amortization, net of income taxes, to net income for the diluted net income per share calculation for both periods.


Note 10. Commitments and Contingencies

Lease Obligations

In December 2004, the Company relocated its corporate headquarters within Redwood City, California and entered into a new lease agreement. The initial lease term was from December 15, 2004 to December 31, 2007 with a three-year option to renew to December 31, 2010 at fair market value. In May 2007, the Company exercised its renewal option to extend the office lease term to December 31, 2010. The future minimum contractual lease payments are $2.8 million for the remainder of 2008, and $4.0 million and $4.2 million for the years ending December 31, 2009 and 2010, respectively.

The Company entered into two lease agreements in February 2000 for two office buildings at the Pacific Shores Center in Redwood City, California, which was used as its former corporate headquarters from August 2001 through December 2004. The leases expire in July 2013. As part of these agreements, the Company purchased certificates of deposit totaling approximately $12 million as a security deposit for lease payments. These certificates of deposit are classified as long-term restricted cash on the Company’s condensed consolidated balance sheet.

The Company leases certain office facilities under various non-cancelable operating leases, including those described above, which expire at various dates through 2013 and require the Company to pay operating costs, including property taxes, insurance, and maintenance. Operating lease payments in the table below include approximately $88.1 million for operating lease commitments for facilities that are included in restructuring charges. See Note 7. Facilities Restructuring Charges, above, for a further discussion.


16

 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Future minimum lease payments as of March 31, 2008 under non-cancelable operating leases with original terms in excess of one year are summarized as follows (in thousands):

   
Operating
Leases
   
Sublease
Income
   
Net
 
Remaining 2008
  $ 18,205     $ 2,029     $ 16,176  
2009
    24,309       1,622       22,687  
2010
    23,730       407       23,323  
2011
    18,942       2,094       16,848  
2012
    19,357       2,628       16,729  
Thereafter
    12,211       1,345       10,866  
    $ 116,754     $ 10,125     $ 106,629  

Of these future minimum lease payments, the Company has accrued $72.8 million in the facilities restructuring accrual at March 31, 2008. This accrual includes the minimum lease payments of $88.1 million and an estimate for operating expenses of $17.1 million and sublease commencement costs associated with excess facilities and is net of estimated sublease income of $21.9 million and a present value discount of $10.5 million recorded in accordance with SFAS No. 146.

In December 2005, the Company subleased 35,000 square feet of office space at the Pacific Shores Center, its former corporate headquarters, in Redwood City, California through May 2013. In June 2005, the Company subleased 51,000 square feet of office space at the Pacific Shores Center, its previous corporate headquarters, in Redwood City, California through August 2008 with an option to renew through July 2013. In February 2005, the Company subleased 187,000 square feet of office space at the Pacific Shores Center for the remainder of the lease term through July 2013 with a right of termination by the subtenant that is exercisable in July 2009. In March 2004, the Company signed a sublease agreement for leased office space in Scotts Valley, California.

Warranties

The Company generally provides a warranty for its software products and services to its customers for a period of three to six months and accounts for its warranties under the SFAS No. 5, Accounting for Contingencies. The Company’s software products’ media are generally warranted to be free from defects in materials and workmanship under normal use, and the products are also generally warranted to substantially perform as described in certain Company documentation and the product specifications. The Company’s services are generally warranted to be performed in a professional manner and to materially conform to the specifications set forth in a customer’s signed contract. In the event there is a failure of such warranties, the Company generally will correct or provide a reasonable work-around or replacement product. The Company has provided a warranty accrual of $0.2 million as of March 31, 2008 and December 31, 2007. To date, the Company’s product warranty expense has not been significant.

Indemnification

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

The Company believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of the License Agreement. In addition, the Company requires its employees to sign a proprietary information and inventions agreement, which assigns the rights to its employees’ development work to the Company. To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions, and no material claims against the Company are outstanding as of March 31, 2008. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the License Agreement, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

17

 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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

The Company accrues for loss contingencies when available information indicates that it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated, in accordance with SFAS No. 5, Accounting for Contingencies.

Litigation

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

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

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

In September 2005, the Court granted preliminary approval of the settlement. The Court held a hearing to consider final approval of the settlement on April 24, 2006, and took the matter under submission. In the interim, the Second Circuit reversed the class certification of plaintiffs’ claims against the underwriters. Miles v. Merrill Lynch & Co. (In re Initial Public Offering Securities Litigation), 471 F.3d 24 (2d Cir. 2006). On April 6, 2007, the Second Circuit denied plaintiffs’ petition for rehearing, but clarified that the plaintiffs may seek to certify a more limited class in the district court. Accordingly, the parties withdrew the prior settlement, and plaintiffs filed amended complaints in focus or test cases in an attempt to comply with the Second Circuit’s ruling.

On July 15, 2002, we filed a patent infringement action in U.S. District Court in Northern California against Acta Technology, Inc. (“Acta”), now known as Business Objects Data Integration, Inc. (“BODI”), asserting that certain Acta products infringe on three of our patents: U.S. Patent No. 6,014,670, entitled “Apparatus and Method for Performing Data Transformations in Data Warehousing,” U.S. Patent No. 6,339,775, entitled “Apparatus and Method for Performing Data Transformations in Data Warehousing” (this patent is a continuation in part of and claims the benefit of U.S. Patent No. 6,014,670), and U.S. Patent No. 6,208,990, entitled “Method and Architecture for Automated Optimization of ETL Throughput in Data Warehousing Applications.” On July 17, 2002, we filed an amended complaint alleging that Acta products also infringe on one additional patent: U.S. Patent No. 6,044,374, entitled “Object References for Sharing Metadata in Data Marts.” In the suit, we are seeking an injunction against future sales of the infringing Acta/BODI products, as well as damages for past sales of the infringing products. On September 5, 2002, BODI answered the complaint and filed counterclaims against us seeking a declaration that each patent asserted is not infringed and is invalid and
 
18

 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
unenforceable. BODI has not made any claims for monetary relief against us and has not filed any counterclaims alleging that we have infringed any of BODI’s patents. On October 11, 2006, in response to the parties’ cross-motions for summary judgment, the Court ruled that U.S. Patent No. 6,044,374 was not infringed as a matter of law. However, the Court found that there remained triable issues of fact as to infringement and validity of the three remaining patents. On February 26, 2007, as stipulated by both parties, the Court dismissed the infringement claims on U.S. Patent No. 6,208,990 as well as BODI’s counterclaims on this patent. We have asserted that BODI’s infringement of the Informatica patents was willful and deliberate.

The trial began on March 12, 2007 on the two remaining patents (U.S. Patent No. 6,014,670 and U.S. Patent No. 6,339,775) originally asserted in 2002 and a verdict was reached on April 2, 2007. During the trial, the judge determined that, as a matter of law, BODI and its customers’ use of the Acta/BODI products infringe on our asserted patents. The jury unanimously determined that our patents are valid, that BODI’s infringement on our patents was done willfully and that a reasonable royalty for BODI’s infringement is $25.2 million. The jury’s determination that BODI’s infringement was willful permits the judge to increase the damages award by up to three times. On May 16, 2007, the judge issued a permanent injunction preventing BODI from shipping the infringing technology now and in the future.

As a result of post-trial motions, the judge has asked the parties to brief the issue of whether the damages award should be reduced in light of the United States Supreme Court’s April 30, 2007 AT&T Corp. v. Microsoft Corp. decision (which examines the territorial reach of U.S. patents). The post-trial motions filed focused on the amount of damages awarded and did not alter the jury’s determination of validity or willful infringement or the judge’s grant of the permanent injunction. The court issued and we accepted a damage award of $12.2 million in light of AT&T Corp. v. Microsoft Corp. On October 29, 2007, the court entered final judgment on the case for that amount and on December 18, 2007, the Court awarded us an additional amount of $1.7 million for prejudgment interest.  On November 28, 2007, BODI filed its Notice of Appeal and on December 12, 2007, we filed our Notice of Cross Appeal.  The parties have been in the process of filing appeal briefs, including responses and replies, which is expected to continue through July 2008.

On August 21, 2007, Juxtacomm Technologies (“Juxtacomm”) filed a complaint in the Eastern District of Texas against 21 defendants, including us, alleging patent infringement. We filed an answer to the complaint on October 10, 2007. It is our current assessment that our products do not infringe Juxtacomm’s patent and that potentially the patent itself is invalid due to significant prior art. We intend to vigorously defend ourselves.

We are also a party to various legal proceedings and claims arising from the normal course of business activities.


Note 11. Significant Customer Information and Segment Reporting

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The method for determining the information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance.

The Company is organized and operates in a single segment: the design, development, marketing, and sales of software solutions. The Company’s chief operating decision maker is its Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance.


19

 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The following table presents geographic information (in thousands):

   
Three Months Ended
March 31,
 
   
2008
   
2007
 
Revenues:
           
North America
  $ 69,359     $ 65,212  
Europe
    27,329       18,692  
Other
    7,022       3,210  
    $ 103,710     $ 87,114  

   
March 31,
2008
   
December 31, 2007
 
Long-lived assets (excluding assets not allocated):
           
North America
  $ 18,102     $ 19,247  
Europe
    1,625       1,769  
Other
    1,611       1,507  
    $ 21,338     $ 22,523  

No customer accounted for more than 10% of the Company’s total revenues in the three months ended March 31, 2008 and 2007. At March 31, 2008 and 2007, no single customer accounted for more than 10% of the accounts receivable balance.


Note 12. Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the Board decided to issue final Staff Position (“FSP FAS 157-2”) that will (1) partially deferred the effective date of SFAS No. 157, for one year for certain nonfinancial assets and nonfinancial liabilities, and (2) removed certain leasing transactions from the scope of FAS 157. This FSP effectively delays the implementation of this pronouncement for certain nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company adopted SFAS No. 157, except as it applies to those nonfinancial assets and nonfinancial liabilities as noted in FSP FAS 157-2. The partial adoption of SFAS No. 157 did not have a material impact on our consolidated financial position, results of operations or cash flows. The Company is currently evaluating the accounting and disclosure requirements of SFAS No. 157 for its nonfinancial assets and liabilities.
 
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), including an amendment of FASB Statement No. 115, which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to fair value will be recognized in earnings. Statement No. 159 also establishes additional disclosure requirements. Statement No. 159 is effective for fiscal years beginning after November 15, 2007, and its adoption is not expected to have an impact on the consolidated financial statements since the Company has not elected to use fair value to measure any of its existing financial assets and liabilities.

In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), Business Combinations, which addresses the accounting and reporting standards for the business combinations. This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company will adopt this statement as required, and is currently evaluating the related accounting and disclosure requirements.

In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS No. 160”), which addresses accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This pronouncement also amends certain of ARB 51’s consolidation procedures for consistency with requirements of FASB 141 (revised 2007). This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company will adopt this consensus as required, and its adoption is not expected to have an impact on the consolidated financial statements.

20

 
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

  In March 2008, the FASB issued FASB Statement No. 161 (SFAS 161), Disclosures about Derivative Instruments and Hedging Activities. SFAS 161 requires companies with derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will adopt this consensus as required, and its adoption is not expected to have an impact on the consolidated financial statements.


Note 13. Subsequent Event

On April 17, 2008, Informatica Corporation entered into a stock purchase agreement with Nokia Inc. and Intellisync Corporation, pursuant to which Informatica will acquire all of the issued and outstanding shares of Identity Systems, Inc., a Delaware corporation and a wholly-owned subsidiary of Intellisync, for approximately $85 million in cash.  The transaction is subject to customary closing conditions and is expected to close by the end of May 2008.
 




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

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

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

Overview

We are the leading independent provider of enterprise data integration software. We generate revenues from sales of software licenses for our enterprise data integration software products and from sales of services, which consist of maintenance, consulting, and education services.

We receive revenues from licensing our products under perpetual licenses directly to end users and indirectly through resellers, distributors, and OEMs in the United States and internationally. We also receive a small amount of revenues under subscription-based licenses for on-demand offerings from customers and partners. Our software license revenues also include software upgrades, which are not part of post-contract services. Most of our international sales have been in Europe, and revenue outside of Europe and North America has comprised 6% or less of total consolidated revenues during the last three years. 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.

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

Despite the uncertainties in the financial markets, and the slowdown in certain sectors of the United States economy, we were able to grow our revenues in the first quarter of 2008 such that our total revenues increased 19% to $103.7 million compared to $87.1 million in the first quarter of 2007. License revenues increased 18% year-over-year, primarily as a result of increases in the volume of our transactions, increased sales productivity, and growth in international revenues. Services revenues increased 20% due to increased contribution from the new releases of our existing products that resulted in a 21% increase in our training and consulting revenues. We also had a 20% increase in maintenance revenues, mainly due to the increased size of our installed customer base.

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

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

New Product Introductions: To address the expanding data integration and data integrity needs of our customers and prospective customers, we continue to introduce new products and technology enhancements on a regular basis. In September 2007, we announced a new Informatica On Demand service: Informatica Data Quality Assessment for salesforce.com which uses pre-defined rules to identify missing, invalid, and duplicate data. In October 2007, we delivered the generally available release of PowerCenter 8.5, PowerExchange 8.5, and Informatica Data Quality 8.5, a version upgrade to our entire data integration platform. New product introductions and/or enhancements have inherent risks including, but not limited to, product availability, product quality and interoperability, and customer adoption or the delay in customer purchases. Given the risks and new nature of the products, we cannot predict their impact on our overall sales and revenues.

Quarterly and Seasonal Fluctuations: Historically, purchasing patterns in the software industry have followed quarterly and seasonal trends and are likely to do so in the future. Specifically, it is normal for us to recognize a substantial portion of our new license orders in the last month of each quarter and sometimes in the last few weeks 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 revenue and order backlog, and we have generally had weaker demand for our software products and services in the first and third quarters.

To address these potential risks, we have focused on a number of key initiatives, including the strengthening of our partnerships, the broadening of our distribution capability worldwide, and the targeting of our sales force and distribution channel on new products.

We are concentrating on maintaining and strengthening our relationships with our existing strategic partners and building relationships with additional strategic partners. These partners include systems integrators, resellers and distributors, and strategic technology partners, including enterprise application providers, database vendors, and enterprise information integration vendors, in the United States and internationally. In February 2008, we launched our new worldwide partner program, INFORM, which is comprised of a set of programs and services to help partners develop and promote solutions in conjunction with Informatica. In March 2008, we announced that Wipro Technologies selected Informatica Data Migration Suite to power its Data Migration Services. Within the past year, we signed OEM agreements with Cognos (acquired by IBM), FAST (which recently received an acquisition offer from Microsoft), and other vendors. These are in addition to our global OEM partnerships with Oracle (Hyperion Solutions and Siebel), and our partnership with salesforce.com. See “Risk Factors - We rely on our relationships with our strategic partners. If we do not maintain and strengthen these relationships, our ability to generate revenue and control expenses could be adversely affected, which could cause a decline in the price of our common stock” in Part II, Item 1A.

We have broadened our distribution efforts, and we have continued to expand our sales both in terms of selling data warehouse products to the enterprise level and of selling more strategic data integration solutions beyond data warehousing, including data quality, data migrations, data consolidations, data synchronizations, data hubs, and cross-enterprise data integration to our customers’ enterprise architects and chief information officers. We have expanded our international sales presence by opening new offices and increasing headcount. This included opening sales offices in Brazil, China, India, Italy, Japan, Mexico, South Korea, and Taiwan in 2005, 2006, and 2007. We also established training partnerships in late 2006 in India, Latin America, and the United States to provide hands-on product training for customers and partners. As a result of this international expansion, as well as the increase in our direct sales headcount in the United States, our sales and marketing expenses have increased accordingly during 2005, 2006, and 2007. We expect these investments to result in increased revenues and productivity and ultimately higher profitability. However, 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. We have experienced some increases in revenues and sales productivity in the United States in the past few years. During the past year, we have also experienced increases in revenues and sales productivity internationally, but we have not yet achieved the same level of sales productivity internationally as domestically.

To address the risks of introducing new 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 differentiations, and key business values. These programs include Informatica World for customers and partners, our annual sales kickoff conference for all sales and key marketing personnel in January, “Webinars” 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 have also invested in partner enablement programs, including product-specific briefings to partners and the inclusion of several partners in our beta programs.

 
 
Critical Accounting Policies and Estimates

In preparing our condensed consolidated financial statements, we make assumptions, judgments, and estimates that can have a significant impact on amounts reported in our condensed consolidated financial statements. We base our assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis we evaluate our assumptions, judgments, and estimates and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of the Board of Directors. We believe that the assumptions, judgments, and estimates involved in the accounting for revenue recognition, facilities restructuring charges, income taxes, accounting for impairment of goodwill, acquisitions, and share-based payments have the greatest potential impact on our condensed consolidated financial statements, so we consider these to be our critical accounting policies. We discuss below the critical accounting estimates associated with these policies. Historically, our assumptions, judgments, and estimates relative to our critical accounting policies have not differed materially from actual results. For further information on our significant accounting policies, see the discussion in Note 1. Summary of Significant Accounting Policies, and Note 12. Recent Accounting Pronouncements, of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Report.

     Revenue Recognition

We follow detailed revenue recognition guidelines, which are discussed below. We recognize revenue in accordance with generally accepted accounting principles (“GAAP”) in the United States that have been prescribed for the software industry. The accounting rules related to revenue recognition are complex and are affected by interpretations of the rules, which are subject to change. Consequently, the revenue recognition accounting rules require management to make significant judgments, such as determining if collectibility is probable.

We derive revenues from software license fees, maintenance fees (which entitle the customer to receive product support and unspecified software updates), and professional services, consisting of consulting and education services. We follow the appropriate revenue recognition rules for each type of revenue. The basis for recognizing software license revenue is determined by the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2 Software Revenue Recognition, together with other authoritative literature including, but not limited to, the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 104, Revenue Recognition. Other authoritative literature is discussed in the subsection Revenue Recognition in Note 1. Summary of Significant Accounting Policies, of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Report. Substantially all of our software licenses are perpetual licenses under which the customer acquires the perpetual right to use the software as provided and subject to the conditions of the license agreement. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable. In applying these criteria to revenue transactions, we must exercise judgment and use estimates to determine the amount of software, maintenance, and professional services revenue to be recognized each period.

We assess whether fees are fixed or determinable prior to recognizing revenue. We must make interpretations of our customer contracts and exercise judgments in determining if the fees associated with a license arrangement are fixed or determinable. We consider factors including extended payment terms, financing arrangements, the category of customer (end-user customer or reseller), rights of return or refund, and our history of enforcing the terms and conditions of customer contracts. If the fee due from a customer is not fixed or determinable due to extended payment terms, revenue is recognized when payment becomes due or upon cash receipt, whichever is earlier. If we determine that a fee due from a reseller is not fixed or determinable upon shipment to the reseller, we do not recognize the revenue until the reseller provides us with evidence of sell-through to an end-user customer and/or upon cash receipt. Further, we make judgments in determining the collectibility of the amounts due from our customers that could possibly impact the timing of revenue recognition. We assess credit worthiness and collectibility, and, when a customer is not deemed credit worthy, revenue is recognized when payment is received.

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

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

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

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

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

     Facilities Restructuring Charges

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

These liabilities include management’s estimates pertaining to sublease activities. Inherent in the assessment of the costs related to our restructuring efforts are estimates related to the most likely expected outcome of the significant actions to accomplish the restructuring. We will continue to evaluate the commercial real estate market conditions periodically to determine if our estimates of the amount and timing of future sublease income are reasonable based on current and expected commercial real estate market conditions. Our estimates of sublease income may vary significantly depending, in part, on factors that may be beyond our control, such as the time periods required to locate and contract suitable subleases and the market rates at the time of such subleases. Currently, we have subleased our excess facilities in connection with our 2004 and 2001 facilities restructuring but for durations that are generally less than the remaining lease terms.

If we determine that there is a change in the estimated sublease rates or in the expected time it will take us to sublease our vacant space, we may incur additional restructuring charges in the future and our cash position could be adversely affected. See Note 7. Facilities Restructuring Charges, of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Report. Future adjustments to the charges could result from a change in the time period that the buildings will be vacant, expected sublease rates, expected sublease terms, and the expected time it will take to sublease. We will periodically assess the need to update the original restructuring charges based on current real estate market information, trend analysis, and executed sublease agreements.

     Accounting for Income Taxes

We use the asset and liability method of accounting for income taxes in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 109, Accounting for Income Taxes. Under this method, income tax expenses or benefits are recognized for the amount of taxes payable or refundable for the current year and for deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Effective January 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainties in Income Taxes – an Interpretation of FASB Statement 109 (“FIN 48”) to account for any income tax contingencies. The measurement of current and deferred tax assets and liabilities is based on provisions of currently enacted tax laws. The effects of future changes in tax laws or rates are not contemplated.

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

We released our valuation allowance in the quarter ended September 30, 2007 for our non-stock option related deferred tax assets. As required under SFAS 109, we do not anticipate the need to establish valuation allowance for deferred tax assets built during the current year. The remaining deferred tax assets subject to valuation allowance are related to stock option deductions, the benefit of which will be recorded in stockholders’ equity when realized. These remaining deferred tax assets will not provide a reduction in our effective tax rate.

Accounting for Impairment of Goodwill

We assess goodwill for impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets, which requires that goodwill be tested for impairment at the “reporting unit level” (“Reporting Unit”) at least annually and more frequently upon the occurrence of certain events, as defined by SFAS No. 142. Consistent with our determination that we have only one reporting segment, we have determined that there is only one Reporting Unit. Goodwill was tested for impairment in our annual impairment tests on October 31 in each of the years 2007, 2006, and 2005 using the two-step process required by SFAS No. 142. First, we reviewed the carrying amount of the Reporting Unit compared to the “fair value” of the Reporting Unit based on quoted market prices of our common stock. If such comparison reflected potential impairment, we would then prepare the discounted cash flow analyses. Such analyses are based on cash flow assumptions that are consistent with the plans and estimates being used to manage the business. An excess carrying value compared to fair value would indicate that goodwill may be impaired. Finally, if we determined that goodwill may be impaired, then we would compare the “implied fair value” of the goodwill, as defined by SFAS No. 142, to its carrying amount to determine the impairment loss, if any.

Based on these estimates, we determined in our annual impairment tests at October 31, 2007 that the fair value of the Reporting Unit exceeded the carrying amount and, accordingly, goodwill was not impaired. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including such external factors as industry and economic trends and such internal factors as changes in our business strategy and our internal forecasts. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results.

Acquisitions

We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired, liabilities assumed, as well as purchased in-process research and development (“IPR&D”) based on their estimated fair values. This valuation requires management to make significant estimates and assumptions, especially with respect to long-lived and intangible assets.

Critical estimates in valuing certain of the intangible assets include but are not limited to future expected cash flows from customer contracts, customer lists, distribution agreements, and acquired developed technologies and patents; expected costs to develop the IPR&D into commercially viable products and estimating cash flows from the projects when completed; the acquired company’s brand awareness and market position, as well as assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio; and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.

Share-Based Payments

We account for share-based payments related to share-based transactions in accordance with the provisions of SFAS No. 123(R). Under the fair value recognition provisions of SFAS No. 123(R), share-based payment is estimated at the grant date based on the fair value of the award and is recognized as an expense ratably over its requisite service period. Determining the appropriate fair value model and calculating the fair value of share-based awards requires judgment, including estimating stock price volatility, forfeiture rates, and expected life.


We have estimated the expected volatility as an input into the Black-Scholes-Merton valuation formula when assessing the fair value of options granted. Our current estimate of volatility was based upon a blend of average historical and market-based implied volatilities of our stock price that we have used consistently since the adoption of SFAS No. 123(R). Our historical volatility rates decreased in 2008 from 2007 primarily due to more stable stock prices in recent quarters and exclusion of more volatile years from the calculation of our historical volatility rates. Our implied volatility rates have remained relatively unchanged. Our weighted-average volatility rates were at 39% in the first quarter of 2008 down from 41% in the first quarter of 2007. To the extent volatility of our stock price increases in the future, our estimates of the fair value of options granted in the future will increase accordingly. For instance, a 10 percentage points higher volatility would have resulted in a $1.4 million increase in the fair value of options granted during the first quarter of 2008.

Our expected life of options granted was derived from the historical option exercises, post-vesting cancellations, and estimates concerning future exercises and cancellations for vested and unvested options that remain outstanding. We assumed an expected life of 3.3 years in 2007 and the first quarter of 2008.

In addition, we apply an expected forfeiture rate in determining the grant date fair value of our option grants. Our estimate of the forfeiture rate is based on an average of actual forfeited options for the past four quarters. During the quarter ended March 31, 2008, we lowered our forfeiture rate from 13% to 10% based on the average of actual forfeited options during the past four quarters, which increased our share-based payments in the first quarter of 2008 by approximately $0.5 million.

We believe that the estimates that we have used for the calculation of the variables to arrive at share-based payments are accurate. We will, however, continue to monitor the historical performance of these variables and will modify our methodology and assumptions in the future as needed.

Recent Accounting Pronouncements

For recent accounting pronouncements see Note 12. Recent Accounting Pronouncements, of Notes to Condensed Consolidated Financial Statements under Part I, Item 1 of this Report.


Results of Operations

The following table presents certain financial data for the three months ended March 31, 2008 and 2007 as a percentage of total revenues:

   
Three Months
Ended March 31,
 
   
2008
   
2007
 
Revenues:
           
License
    43 %     43 %
Service
    57       57  
Total revenues
    100       100  
Cost of revenues:
               
License
    1       1  
Service
    19       19  
Amortization of acquired technology
    1       1  
Total cost of revenues
    21       21  
Gross profit
    79       79  
Operating expenses:
               
Research and development
    17       21  
Sales and marketing
    41       40  
General and administrative
    8       9  
Amortization of intangible assets
           
Facilities restructuring charges
    1       1  
Total operating expenses
    67       71  
Income from operations
    12       8  
Interest income
    5       6  
Interest expense
    (2 )     (2 )
Other income (expense), net
    1       (1 )
Income before provision for income taxes
    16       11  
Provision for income taxes
    5       1  
Net income
    11 %     10 %

Revenues

Our total revenues increased to $103.7 million for the three months ended March 31, 2008 from $87.1 million for the three months ended March 31, 2007, representing an increase of $16.6 million (or 19%).

The following table sets forth, for the periods indicated, our revenues (in thousands, except percentages):

   
Three Months Ended March 31,
 
   
2008
   
2007
   
Change
 
License revenues
  $ 44,209     $ 37,562       18 %
Service revenues:
                       
Maintenance
    41,415       34,629       20 %
Consulting and education
    18,086       14,923       21 %
Total service revenues
    59,501       49,552       20 %
    $ 103,710     $ 87,114       19 %

License Revenues

Our license revenues increased to $44.2 million (or 43% of total revenues) for the three months ended March 31, 2008, compared to $37.6 million (or 43% of total revenues) for the three months ended March 31, 2007. The $6.6 million (or 18%) increase in license revenues in the three months ended March 31, 2008, compared to the same period in 2007, was primarily due to an increase in the volume of transactions, which was partially offset by a slight decrease in the average size of the transactions. We have 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) unspecified upgrades that are part of the post-contract services that we provide to our customers at no additional charge. The average transaction amount for orders greater than $100,000 in the first quarter of 2008, including upgrades, slightly declined to $299,000 from $303,000 in the first quarter of 2007. Further, we had three transactions of $1.0 million or more in the first quarter of 2008 as well as in the first quarter of 2007.

 
 
Services Revenues

Maintenance Revenues

Maintenance revenues increased to $41.4 million (or 40% of total revenues) for the three months ended March 31, 2008, compared to $34.6 million (or 40% of total revenues) for the three months ended March 31, 2007. The $6.8 million (or 20%) increase in the three months ended March 31, 2008, compared to the same period in 2007, was primarily due to  an increase in the size of our customer base. For the remainder of 2008, based on our growing installed customer base, we expect maintenance revenues to increase from the comparable 2007 levels.

Consulting and Education Services Revenues

Consulting and education services revenues increased to $18.1 million (or 17% of total revenues) for the three months ended March 31, 2008, compared to $14.9 million (or 17% of total revenues) for the three months ended March 31, 2007. The $3.2 million (or 21%) increase in the three months ended March 31, 2008, compared to the same period in 2007, was primarily due to an increase in demand and an increase in capacity to meet the demand for consulting services in North America, Europe, and Latin America. For the remainder of 2008, we expect to maintain our current utilization rates and continue to add overall consulting capacity, and thus we expect revenues from consulting and education services to increase from comparable 2007 levels.

International Revenues

Our international revenues were $34.4 million (or 33% of total revenues) and $21.9 million (or 25% of total revenues) for the three months ended March 31, 2008 and 2007, respectively. The $12.5 million (or 57%) increase for the three months ended March 31, 2008, compared to the same period in 2007, was primarily due to an increase in international license revenue, and to a lesser extent, an increase in international services revenue. The increase in international revenues as a percentage of total revenues was mainly driven by an increase in our international sales resources and capacity during the first quarter of 2008.  For the remainder of 2008, we expect international revenues as a percentage of total revenues to be relatively consistent with, or increase slightly from the 2007 levels.

Future Revenues (New Orders, Backlog, and Deferred Revenues)

Our future revenues are dependent upon the following: (1) new orders received, shipped, and recognized in a given quarter and (2) our backlog and deferred revenues entering a given quarter. Our backlog consists primarily of product license orders that have not shipped as of the end of a given quarter and orders to certain distributors, resellers, and OEMs where revenue is recognized upon cash receipt. Our deferred revenues are primarily comprised of the following: (1) maintenance revenues that we recognize over the term of the contract, typically one year, (2) 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 (3) 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 typically decreases from the prior quarter at the end of the first and third quarters and increases at the end of the fourth quarter. Aggregate backlog and deferred revenues at March 31, 2008, were approximately $136.5 million, compared to $114.3 million at March 31, 2007, and $140.4 million at December 31, 2007. 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 March 31,
 
   
2008
   
2007
   
Change
 
Cost of license revenues
  $ 693     $ 805       (14 )%
Cost of service revenues
    19,785       16,314       21 %
Amortization of acquired technology
    620       722       (14 )%
Total cost of revenues
  $ 21,098     $ 17,841       18 %
Cost of license revenues, as a percentage of license revenues
    2 %     2 %     %
Cost of service revenues, as a percentage of service revenues
    33 %     33 %     %

Cost of License Revenues

Our cost of license revenues consists primarily of software royalties, product packaging, documentation, and production costs. Cost of license revenues decreased to $0.7 million (or 2% of license revenues) for the three months ended March 31, 2008 from $0.8 million (or 2% of license revenues) for the three months ended March 31, 2007. The $0.1 million (or 14%) decrease in cost of license revenues for the three months ended March 31, 2008 compared to the same period in 2007 was due to the smaller portfolio of royalty based products being shipped in the first quarter of 2008. For the remainder of 2008, we expect the cost of license revenues as a percentage of license revenues to be relatively consistent with or slightly higher than in the first quarter of 2008.

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 $19.8 million (or 33% of service revenues) for the three months ended March 31, 2008 from $16.3 million (or 33% of service revenues) for the three months ended March 31, 2007. The $3.5 million or 21% increase for the three months ended March 31, 2008, compared to the same period in 2007, was primarily due to headcount growth in the customer support, professional services, and education service groups, and higher subcontractor fees in the consulting services group. For the remainder of 2008, we expect our cost of service revenues as a percentage of service revenues to be relatively consistent with the first quarter of 2008, or increase slightly from the current levels if the growth in our consulting services business, if any, is greater than that experienced by our maintenance and education services business.
 
Amortization of Acquired Technology

The following table sets forth, for the periods indicated, our amortization of acquired technology (in thousands, except percentages):


   
Three Months Ended March 31,
 
   
2008
   
2007
   
Change
 
Amortization of acquired technology
  $ 620     $ 722       (14 )%


Amortization of acquired technology is the amortization of technologies acquired through business acquisitions and technology licenses. Amortization of acquired technology decreased to $0.6 million for the three months ended March 31, 2008, compared to $0.7 million for the three months ended March 31, 2007. The decrease of $0.1 million (or 14%) for the three months ended March 31, 2008, compared to the same period in the prior year, is the result of certain technologies related to the Striva acquisition that were fully amortized as of December 31, 2007. We expect amortization of other acquired technology to be approximately $1.9 million for the remainder of 2008, before the effect of any pending or future acquisitions subsequent to March 31, 2008.


Operating Expenses

Research and Development

The following table sets forth, for the periods indicated, our research and development expenses (in thousands, except percentages):

   
Three Months Ended March 31,
 
   
2008
   
2007
   
Change
 
Research and development
  $ 17,724     $ 18,024       (2 )%

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, the enhancement and localization of existing products, and quality assurance and development of documentation for our products. Research and development expenses increased to $17.7 million (or 17% of total revenues) for the three months ended March 31, 2008, compared to $18.0 million (or 21% of total revenues) for the three months ended March 31, 2007. The $0.3 million (or 2%) decrease for the three months ended March 31, 2008, compared to the same period in 2007, was due to a $2.4 million decrease in legal fees associated with the patent litigation held in the first quarter of 2007, offset partially by a $1.9 million increase in personnel-related costs, and a $0.2 million increase in share-based payments. All of our software development costs have been expensed in the period incurred since the costs incurred subsequent to the establishment of technological feasibility and have not been significant. For the remainder of 2008, we expect the research and development expenses as a percentage of total revenues to be relatively consistent with or slightly decrease from the first quarter of 2008.

Sales and Marketing

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

   
Three Months Ended March 31,
 
   
2008
   
2007
   
Change
 
Sales and marketing
  $ 42,787     $ 35,111       22 %

Our sales and marketing expenses consist primarily of personnel costs, including commissions, as well as costs of public relations, seminars, marketing programs, lead generation, travel, and trade shows. Sales and marketing expenses increased to $42.8 million (or 41% of total revenues) for the three months ended March 31, 2008 from $35.1 million (or 40% of total revenues) for the three months ended March 31, 2007. The $7.7 million (or 22%) increase for the three months ended March 31, 2008, compared to the same period in 2007, was primarily due to a $8.0 million increase in personnel-related costs, as a result of an increase in headcount from 426 in March 2007 to 522 in March 2008, offset by a $0.3 million decrease in share-based payments and a $0.2 million decrease in outside services. For the remainder of 2008, we expect sales and marketing expenses as a percentage of total revenues to decrease slightly from the first quarter of 2008.

General and Administrative

The following table sets forth, for the periods indicated, our general and administrative expenses (in thousands, except percentages):


   
Three Months Ended March 31,
 
   
2008
   
2007
   
Change
 
General and administrative
  $ 8,369     $ 7,725       8 %

Our general and administrative expenses consist primarily of personnel costs for finance, human resources, legal, and general management, as well as professional service expenses associated with recruiting, legal and accounting services. General and administrative expenses increased to $8.4 million (or 8% of total revenues) for the three months ended March 31, 2008, compared to $7.7 million (or 9% of total revenues) for the three months ended March 31, 2007. The $0.6 million or 8% increase for the three months ended March 31, 2008, compared to the same period in 2007, is primarily due to an increase of $0.7 million in personnel related costs due to headcount increases (from 142 in March 2007 to 168 in March 2008) offset by a $0.1 million decrease in outside services. For the remainder of 2008, we expect general and administrative expenses, as a percentage of total revenues, to remain relatively consistent with the first quarter of 2008.


Amortization of Intangible Assets

The following table sets forth, for the periods indicated, our amortization of intangible assets (in thousands, except percentages):

   
Three Months Ended March 31,
 
   
2008
   
2007
   
Change
 
Amortization of intangible assets
  $ 362     $ 356       2 %

Amortization of intangible assets is the amortization of customer relationships acquired, trade names, and covenants not to compete through prior business acquisitions. Amortization of intangible assets was relatively flat during these periods. We expect amortization of the remaining intangible assets to be approximately $1.0 million for the remainder of 2008, before the impact of any amortization for any possible intangible assets acquired as part of the pending or any future acquisitions as of March 31, 2008.

Facilities Restructuring Charges

The following table sets forth, for the periods indicated, our facilities restructuring and excess facilities charges (in thousands, except percentages):

   
Three Months Ended March 31,
 
   
2008
   
2007
   
Change
 
Facilities restructuring charges
  $ 947     $ 1,049       (10 )%

In the three months ended March 31, 2008 and 2007, we recorded $0.9 million and $1.0 million for restructuring charges from accretion charges related to the 2004 Restructuring Plan, respectively.

As of March 31, 2008, $72.8 million of total lease termination costs, net of actual and expected sublease income, less broker commissions and tenant improvement costs related to facilities to be subleased, was included in accrued restructuring charges and is expected to be paid by 2013.

2004 Restructuring Plan

Net cash payments related to the consolidation of excess facilities under the 2004 Restructuring Plan amounted to $2.0 million and $2.6 million for the three months ended March 31, 2008 and 2007, respectively. Actual future cash requirements may differ from the restructuring liability balances as of March 31, 2008 if there are changes to the time period that facilities are expected to be vacant or if the actual sublease income differs from our current estimates.

2001 Restructuring Plan

Net cash payments related to the consolidation of excess facilities under the 2001 Restructuring Plan amounted to $0.3 million and $0.9 million for the three months ended March 31, 2008 and 2007, respectively. Actual future cash requirements may differ from the restructuring liability balances as of March 31, 2008 if there are changes to the time period that facilities are vacant or the actual sublease income is different from current estimates.

In addition, we will continue to evaluate our current facilities requirements to identify facilities that are in excess of our current and estimated future needs. We will also evaluate the assumptions related to estimated future sublease income for excess facilities. Accordingly, any changes to these estimates of excess facilities costs could result in additional charges that could materially affect our consolidated financial position and results of operations. See Note 7. Facilities Restructuring Charges, of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Report.

Interest Income, Expense and Other

The following table sets forth, for the periods indicated, our interest income, expense and other (in thousands, except percentages):
 
   
Three Months Ended March 31,
 
   
2008
   
2007
   
Change
 
Interest income
  $ 4,857     $ 5,049       (4 )%
Interest expense
    (1,802 )     (1,804 )     %
Other income (expense), net
    503       (86 )     (685 )%
    $ 3,558     $ 3,159       13 %
 
32

 
 
 
 
Interest income, expense and other consist primarily of interest income earned on our cash, cash equivalents, short-term investments, and restricted cash; interest expense; and gains and losses on foreign exchange transactions. The increase of $0.4 million or 13% in the three months ended March 31, 2008, compared to the same period in 2007, was primarily due to a $0.6 million increase in foreign exchange gains due to the decline in the value of U.S. dollar, which was partially offset by a $0.2 million decrease in interest income due to lower investment yields. We currently do not engage in any foreign currency hedging activities and, therefore, are susceptible to fluctuations in foreign exchange gains or losses in our results of operations in future reporting periods. As interest rates continue to decline, we expect our interest income to decline accordingly.

Income Tax Provision

The following table sets forth, for the periods indicated, our provision for income taxes (in thousands, except percentages):


   
Three Months Ended March 31,
 
   
2008
   
2007
   
Change
 
Provision for income taxes
  $ 4,757     $ 1,073       343 %
Effective tax rate
    29.8 %     10.6 %     19.2 %

Our effective tax rate was 29.8% and 10.6% for the three months ended March 31, 2008 and 2007, respectively. The effective tax rate for the three months ended March 31, 2008 differed from the federal statutory rate of 35% primarily due to non-deductibility of share-based payments, as well as the accrual of reserves pursuant to FIN 48, Accounting for Uncertainties in Income Taxes – an Interpretation of FASB Statement 109, offset by the tax rate benefits of certain earnings from our operations in lower-tax jurisdictions throughout the world. We have not provided for U.S. taxes in any of these jurisdictions since we intend to reinvest these earnings in their respective jurisdictions indefinitely. The 10.6% effective tax rate for the three months ended March 31, 2007 primarily represented federal alternative minimum taxes, state minimum taxes, and income and withholding taxes attributable to foreign operations.

The unrecognized tax benefits, if recognized, would impact our income tax provision by $7.6 million and $5.7 million as of March 31, 2008 and 2007, respectively. We have elected to include interest and penalties as a component of tax expense. Accrued interest and penalties at March 31, 2008 and 2007 were approximately $395,000 and $44,000, respectively. We do not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months.

We expect to maintain an effective tax rate close to what was experienced in the first quarter of 2008 on a going forward basis. Our statutory tax rate of 35% is generally affected by lower tax rates applicable to foreign jurisdictions and domestic tax credits.

Liquidity and Capital Resources

We have funded our operations primarily through cash flows from operations and public offerings of our common stock. As of March 31, 2008, we had $522.8 million in available cash and cash equivalents and short-term investments and $12.0 million of restricted cash under the terms of our Pacific Shores property leases and $0.1 million restricted cash under the terms of our Australia lease.
 
Our primary sources of cash are the collection of accounts receivable from our customers and proceeds from the exercise of stock options and sales of our common stock under our employee stock purchase plan. 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. On April 17, 2008, Informatica Corporation entered into a stock purchase agreement with Nokia Inc. and Intellisync Corporation, pursuant to which Informatica will acquire all of the issued and outstanding shares of Identity Systems, Inc., a Delaware corporation and a wholly-owned subsidiary of Intellisync, for approximately $85 million in cash.  The transaction is subject to customary closing conditions and is expected to close by the end of May 2008.

  Operating Activities: Cash provided by operating activities for the three months ended March 31, 2008 was $29.0 million, representing an increase of $2.2 million from the three months ended March 31, 2007. This increase primarily resulted from $2.1 million increase in net income, after adjusting for non-cash expenses, an increase in cash collections against accounts receivable, and an increase in accounts payable, offset by payments to reduce our accrual for excess facilities, excess tax benefits from share-based
 
 
 
payments, and accrued liabilities. We were able to recognize the excess tax benefits from share-based payments for $2.3 million during the three months ended March 31, 2008. This amount is recorded as a use of operating activities and an offsetting amount is recorded as a provision by financing activities. We made cash payments for taxes in different jurisdictions for $4.5 million during the three months ended March 31, 2008. Our “Days Sales Outstanding” in accounts receivable decreased from 47 days at March 31, 2007 to 40 days at March 31, 2008. Days outstanding at March 31, 2008 were primarily impacted by improvements to our collection efforts and also due to more revenue booked and invoiced during the first month of the quarter in 2008 compared to 2007. Cash provided by operating activities for the three months ended March 31, 2007 was $26.9 million, primarily resulted from our net income, after adjusting for non-cash expenses, an increase in cash collections against accounts receivable, and an increase in accounts payable, offset by payments to reduce our accrual for excess facilities, and accrued liabilities. Our operating cash flows will also be impacted in the future by the timing of payments to our vendors and payments for taxes.

Investing Activities: We acquire property and equipment in the normal course of our 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 classified 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 quality rating of the investment declines, the yield on the investment is no longer attractive, or we need additional cash. Since we invest only in money market funds and short-term marketable securities, we believe that the purchase, maturity, or sale of our investments has no material impact on our overall liquidity. 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. The nature of these transactions makes it difficult to predict the amount and timing of such cash requirements. In March 2008, we invested $3.0 million in the preferred stock of a privately held company that we will account for on a cost basis.

Financing Activities: We receive cash from the exercise of common stock options and the sale of common stock under our employee stock purchase plan (“ESPP”). Net cash provided by financing activities for the three months ended March 31, 2008 was $9.7 million due to the issuance of common stock to option holders and to participants of our ESPP program for $13.8 million, and $2.3 million of excess tax benefits from share-based payments which were partially offset by a $6.3 million repurchase and retirement of common stock. Net cash provided by financing activities for the three months ended March 31, 2007 was $7.1 million due to the issuance of common stock to option holders and to participants of our ESPP program for $8.5 million partially offset by $1.4 million repurchase and retirement of common stock. 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.

In March 2006, we issued and sold convertible senior notes with an aggregate principal amount of $230 million due in 2026 (“Notes”). We used approximately $50 million of the net proceeds from the offering to fund the purchase of 3,232,000 shares of our common stock concurrently with the offering of the Notes. We intend to use the balance of the net proceeds for working capital and general corporate purposes, which may include the acquisition of businesses, products, product rights or technologies, strategic investments, or additional purchases of common stock.

In April 2006, our Board of Directors authorized and announced a stock repurchase program of up to $30 million of our common stock until April 2007. As of April 30, 2007, we repurchased 2,238,000 shares of our common stock for $30 million. In April 2007, our Board of Directors authorized a stock repurchase program for up to an additional $50 million of our common stock.  As of March 31, 2008, we repurchased 2,219,000 shares of our common stock for $33.9 million. One purpose of the program is to partially offset the otherwise dilutive impact of stock option exercise activity. The number of shares to be purchased and the timing of purchases are based on several factors, including the price of our common stock, general business and market conditions, and other investment opportunities. These repurchased shares will be retired and reclassified as authorized and unissued shares of common stock. See Part II, Item 2 of this Report for more information regarding the stock repurchase program. The timing and terms of the transactions will depend on market conditions, our liquidity, and other considerations. Further, in April 2008, our Board of Directors authorized a stock repurchase program for up to an additional $75 million of our common stock. Purchases can be made from time to time in the open market and will be funded from our available cash.

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. Given our cash balances, it is less likely but still possible that we may require or desire additional funds for purposes, such as acquisitions, and may raise such additional funds through public or private equity or debt financing or from other sources. We may not be able to obtain adequate or favorable financing at that time, and any financing we obtain might be dilutive to our stockholders.

 
Letters of Credit

A financial institution has issued a $12.0 million letter of credit which requires us to maintain certificates of deposit as collateral until the leases expire in 2013. This letter of credit is for our former corporate headquarters leases at the Pacific Shores Center in Redwood City, California. In May 2007, another financial institution issued a $0.1 million letter of credit for our Australia lease. These certificates of deposit are classified as long-term restricted cash on our condensed consolidated balance sheet. The letters of credit of $12.0 million and $0.1 million currently bear interest of 2.3% and 7.6%, respectively. There are no financial covenant requirements under our letters of credit.

Contractual Obligations

The following table summarizes our significant contractual obligations, including future minimum lease payments as of March 31, 2008, 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
 
   
Total
   
Remaining
2008
   
2009 and
2010
   
2011 and
2012
   
2013 and
Beyond
 
Operating lease obligations:
                             
Operating lease payments
  $ 116,754     $ 18,205     $ 48,039     $ 38,299     $ 12,211  
Future sublease income
    (10,125 )     (2,029 )     (2,029 )     (4,722 )     (1,345 )
Net operating lease obligations
    106,629       16,176       46,010       33,577       10,866  
Debt obligations:
                                       
Principal payments *
    230,000                         230,000  
Interest payments
    124,200       3,450       13,800       13,800       93,150  
Other obligations **
    450       450                    
    $ 461,279     $ 20,076