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| INFA > SEC Filings for INFA > Form 10-K on 28-Feb-2013 | All Recent SEC Filings |
28-Feb-2013
Annual Report
purchasing controls and approval processes. As a result, while our total
revenues in 2012 slightly increased by 4% to $811.6 million compared to $783.8
million in 2011, our license revenues decreased by 9% to $321.0 million from
$353.7 million in 2011. The decline in license revenues reflected a reduced
number of license transactions as a result of lower pipeline conversion rate in
certain geographies and vertical sectors, partially offset by an increase in the
average size of license transactions in 2012 compared to 2011. Service revenues
increased by 14% year over year due to a 15% growth in maintenance revenues and
a 12% increase in consulting, education, and subscription services. The
maintenance revenue growth was attributable to the increased size of our
installed customer base, and the increase in consulting, education, and
subscription services was due to increases in subscriptions revenues and
consulting revenues due to higher customer demand. Our operating income as a
percentage of revenues decreased to 17% in 2012 from 21% in 2011.
Due to our dynamic market, we face both significant opportunities and
challenges, and as such, we focus on the following key factors:
• Macroeconomic Conditions: The United States and many foreign economies,
particularly in Europe, continue to experience uncertainty driven by
varying macroeconomic conditions. Although some of these economies have
shown signs of improvement, macroeconomic recovery remains uncertain and
uneven. Uncertainty in the macroeconomic environment and associated global
economic conditions have resulted in extreme volatility in credit, equity,
and foreign currency markets, particularly with respect to the European
sovereign debt markets and potential ramifications of U.S. debt issues,
income tax and budget concerns, and future delays in approving the U.S.
budget. Such uncertainty and associated conditions have also resulted in
volatility in several of our vertical markets, particularly financial
services and public sector. These conditions have also adversely affected
the buying patterns of customers and our overall pipeline conversion rate,
as well as our revenue growth expectations. Furthermore, we have made
incremental investments in Asia-Pacific and Latin America, and have
continued investing in EMEA. There are significant risks with overseas
investments, and our growth prospects in these regions are uncertain.
• Competition: Inherent in our industry are risks arising from competition with existing software solutions, including solutions from IBM, Oracle, and SAP, technological advances from other vendors, and the perception of cost savings by solving data integration challenges through customer hand-coding development resources. Our prospective customers may view these alternative solutions as more attractive than our offerings. Additionally, the consolidation activity in our industry pose challenges as competitors market a broader suite of software products or solutions and bundled pricing arrangements to our existing or prospective customers. Moreover, because of current macroeconomic uncertainty, there is increased competition for the allocation of customers' IT budget dollars.
• Product Introductions and Enhancements: To address the expanding data integration and data quality needs of our customers and prospective customers, we introduce new products and technology enhancements on a regular basis, including products we acquire. The introduction of new products, integration of acquired products and enhancement of existing products, is a complex process involving inherent risks, and to which we devote significant resources. We cannot predict the impact of new or enhanced products on our overall sales and we may not generate sufficient revenues to justify their costs.
• Quarterly and Seasonal Fluctuations: Historically, purchasing patterns in the software industry have followed quarterly and seasonal trends that are likely to continue in the future. Specifically, it is normal for us to recognize a substantial portion of our new license orders in the last month of each quarter and sometimes in the last few weeks or days of each quarter, though such fluctuations are mitigated somewhat by recognition of backlog orders. In recent years, the fourth quarter has had the highest level of license revenues and license orders, and we generally had weaker demand for our software products and services in the first and third quarters of the year. The first and fourth quarters of 2012, and each quarter of 2011 followed these seasonal trends. However, license revenues in the second and third quarters of 2012 were lower as compared to the first quarter of 2012 and the second and third quarter of 2011. The uncertain macroeconomic conditions and continued changes in our sales organization make our future results more difficult to predict based on historical seasonal trends.
We focus on a number of key initiatives to address these factors and other
opportunities and challenges. These key initiatives include certain cost
containment measures, the strengthening of our partnerships, the broadening of
our distribution capability worldwide, the enablement of our sales force and
distribution channel to sell both our existing products and technologies as well
as new products and technologies, the alignment of our worldwide sales and field
operations with company-wide initiatives and the implementation of a more
rigorous sales process, and strategic acquisitions of complementary businesses,
products, and technologies. If we are unable to execute these key initiatives
successfully, we may not be able to continue to grow our business at our
historic growth rates.
We concentrate on maintaining and strengthening our relationships with our
existing strategic partners and building relationships with additional strategic
partners. These partners include systems integrators, resellers and
distributors, and strategic
technology partners, including enterprise application providers, database
vendors, and enterprise information integration vendors, in the United States
and internationally. For example, we are partners with Cloudera, Dun &
Bradstreet, EMC, Hewlett-Packard, Intel, Microsoft, MicroStrategy, NetSuite,
Oracle, salesforce.com, SAP, and Symantec, among others. 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 I, Item 1A of this Report.
We have broadened our distribution efforts, and we have continued to expand our
sales both in terms of traditional data warehousing products and more strategic
data integration solutions beyond data warehousing, including enterprise data
integration, data quality, master data management, B2B data exchange,
application information lifecycle management, complex event processing, ultra
messaging, and cloud data integration. We also operate the Informatica
Marketplace, which allows buyers and sellers to share and leverage data
integration solutions. To address the risks of introducing new products or
enhancements to our existing products, we have continued to invest in programs
to help train our internal sales force and our external distribution channel on
new product functionalities, key differentiators, and key business values. These
programs include user conferences for customers and partners, our annual sales
kickoff conference for all sales and key marketing personnel, "webinars" and
other informational seminars and materials for our direct sales force and
indirect distribution channel, in-person technical seminars for our pre-sales
consultants, the building of product demonstrations, and creation and
distribution of targeted marketing collateral.
We continue to implement changes in our worldwide sales, marketing and field
operations to address recent sales execution challenges and improve performance,
particularly with respect to our pipeline generation and management
capabilities, the reliability of our pipeline estimates and our pipeline
conversion rates. In addition to the sales leadership transitions, we are also
implementing pipeline generation and management initiatives and more rigorous
sales planning and processes. Additionally, we have expanded our international
sales presence in recent years by opening new offices, increasing headcount, and
through acquisitions. As a result of this international expansion, as well as
the increase in our direct sales headcount in the United States, our sales and
marketing expenses have increased. In the long term, we expect these investments
to result in increased revenues and productivity and ultimately higher
profitability. As we continue to implement further changes, we may experience
increased sales force turnover and additional disruption to our ongoing
operations. These changes may also take longer to implement than expected, which
may adversely affect our sales force productivity. If we experience an increase
in sales personnel turnover, do not achieve expected increases in our sales
pipeline, experience a decline in our sales pipeline conversion ratio, or do not
achieve increases in sales productivity and efficiencies from our new sales
personnel as they gain more experience, then it is unlikely that we will achieve
our expected increases in revenue, sales productivity, or profitability.
For further discussion regarding these and related risks, see Risk Factors in
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") in the United States, which require us
to make estimates, judgments, and assumptions. We believe that the estimates,
judgments, and assumptions upon which we rely are reasonable based upon
information available to us at the time that these assumptions, judgments, and
estimates are made. These estimates, judgments, and assumptions can affect the
reported amounts of assets and liabilities as of the date of the financial
statements as well as the reported amounts of revenues and expenses during the
periods presented. Any material differences between these estimates and actual
results will impact our consolidated financial statements. On a regular basis,
we evaluate our estimates, judgments, and assumptions and make changes
accordingly. We also discuss our critical accounting estimates with the Audit
Committee of the Board of Directors. We believe that the estimates, judgments,
and assumptions involved in the accounting for revenue recognition, facilities
restructuring charges, income taxes, impairment of goodwill and intangible
assets, business combinations, share-based compensation, and allowance for
doubtful accounts have the greatest potential impact on our consolidated
financial statements, so we consider these to be our critical accounting
policies. We discuss below the critical accounting estimates associated with
these policies. Historically, our estimates, judgments, and assumptions relative
to our critical accounting policies have not differed materially from actual
results. See Note 2. Summary of Significant Accounting Policies of Notes to
Consolidated Financial Statements in Part II, Item 8 of this Report for further
information on our significant accounting policies.
Revenue Recognition
We recognize revenue in accordance with GAAP prescribed for the software
industry. The accounting rules related to revenue recognition are complex and
are affected by interpretations of such rules. These rules and their
interpretations are often subject to change. Consequently, the revenue
recognition process requires management to make significant judgments; for
example, to determine if collectability is probable.
We derive revenues from software license fees, maintenance fees (which entitle
the customer to receive product support and unspecified software updates),
professional services, consisting of consulting and education services, and
other revenues, primarily consisting of subscriptions for address validation and
cloud services. We follow the appropriate revenue recognition rules for each
type of revenue. The basis for recognizing software license revenue is
determined by ASC 985-605, Software Revenue Recognition, ASC 605-35, Revenue
Recognition for Construction-Type and Production-Type Contracts, and the
Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") 104,
Revenue Recognition, which is discussed in the subsection Revenue Recognition in
Note 2. Summary of Significant Accounting Policies of Notes to Consolidated
Financial Statements in Part II, Item 8 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 at each period.
We assess whether fees are fixed or determinable prior to recognizing revenue.
We must make interpretations of our customer contracts and exercise judgments in
determining if the fees associated with a license arrangement are fixed or
determinable. We consider factors including extended payment terms, financing
arrangements, the category of customer (end-user customer or reseller), rights
of return or refund, and our history of enforcing the terms and conditions of
customer contracts. If the fee due from a customer is not fixed or determinable
due to extended payment terms, revenue is recognized when payment becomes due or
upon cash receipt, whichever is earlier. We require evidence of sell-through
from resellers and distributors for order acceptance. We then recognize revenue
from resellers and distributors upon shipment if all other revenue recognition
criteria are met, which in substantially all cases is when cash is collected or
when the reseller or distributor is deemed credit-worthy based on their payment
history and credit profile to conclude that collectability is probable. Further,
we make judgments in determining the collectability of the amounts due from our
customers that could possibly impact the timing of revenue recognition. We
assess credit worthiness and collectability, and when a customer is not deemed
credit worthy, revenue is recognized when payment is received.
Our software license arrangements include the following multiple elements:
license fees from our core software products and/or product upgrades that are
not part of post-contract services, maintenance fees, consulting, and/or
education services. We use the residual method to recognize license revenue upon
delivery when the arrangement includes elements to be delivered at a future date
and vendor-specific objective evidence ("VSOE") of fair value exists to allocate
the fee to the undelivered elements of the arrangement. VSOE is based on the
price charged when an element is sold separately. If VSOE does not exist for any
undelivered software product element of the arrangement, all revenue is deferred
until all elements have been delivered, or VSOE is established. If VSOE does not
exist for any undelivered services elements of the arrangement, all revenue is
recognized ratably over the period that the services are expected to be
performed. We are required to exercise judgment in determining if VSOE exists
for each undelivered element.
Consulting services, if included as part of the software arrangement, generally
do not require significant modification or customization of the software. If, in
our judgment, the software arrangement includes significant modification or
customization of the software, then software license revenue is recognized as
the consulting services revenue is recognized.
Consulting revenues are primarily related to implementation of services and
product configurations. These services are performed on a time-and-materials
basis and, occasionally, on a fixed-fee basis. Revenue is generally recognized
as these services are performed. If uncertainty exists about our ability to
complete the project, our ability to collect the amounts due, or in the case of
fixed-fee consulting arrangements, our ability to estimate the remaining costs
to be incurred to complete the project, revenue is deferred until the
uncertainty is resolved.
Other revenues, primarily consisting of subscriptions for address validation and
cloud services, are recognized as the services are delivered.
Multiple contracts with a single counterparty executed within close proximity of
each other are evaluated to determine if the contracts should be combined and
accounted for as a single arrangement.
We recognize revenues net of applicable sales taxes, financing charges that we
have absorbed, and amounts retained by our resellers and distributors, if any.
Our agreements do not permit returns, and historically we have not had any
significant returns or refunds; therefore, we have not established a sales
return reserve at this time.
Multiple Element Arrangements - Nonsoftware Arrangements or Arrangements with
Software and Nonsoftware Elements
In October 2009, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2009-13, Revenue Recognition (Topic
605): Multiple-Deliverable Revenue Arrangements, which amended the accounting
standards applicable to revenue recognition for multiple-deliverable revenue
arrangements that are outside the scope of industry-specific software revenue
recognition guidance. The new guidance amends the criteria for allocating the
consideration in multiple-
deliverable revenue arrangements by establishing a selling price hierarchy. The
selling price used for each deliverable will be based on VSOE if available,
third-party evidence ("TPE") if VSOE is not available, or estimated selling
price ("ESP") if neither VSOE nor TPE is available. The guidance also eliminates
the use of the residual method of allocation and requires that the arrangement
consideration be allocated at the inception of the arrangement to all
deliverables using the relative selling price method.
We adopted this guidance on a prospective basis on January 1, 2011, and
therefore, it is applicable to relevant revenue arrangements entered into or
materially modified on or after that date.
Our multiple-element arrangements are primarily software or software-related,
which are excluded from the new guidance. Multiple-element arrangements that
include non-software related elements and software or software-related elements,
which are included in the new guidance, are not material to date.
For multiple element arrangements that include software and non-software related
elements, for example, on-site software licenses sold together with
subscriptions for our cloud and hosted address validation services, we allocate
revenue to each software and non-software element as a group based upon the
relative selling price of each in accordance with the selling price hierarchy,
which includes (i) VSOE if available, (ii) TPE if VSOE is not available, and
(iii) ESP if neither VSOE nor TPE is available. Revenue allocated to each
element is then recognized when the basic revenue recognition criteria are met
for each element. The manner in which we account for multiple element
arrangements that contain only software and software-related elements remains
unchanged.
In certain limited instances, we are not able to establish VSOE for all
deliverables in an arrangement with multiple elements. This may be due to the
infrequent selling of each element separately, not pricing products or services
within a narrow range, or only having a limited sales history. When VSOE cannot
be established, we attempt to establish a selling price based on TPE. TPE is
determined based on competitor prices for similar deliverables when sold
separately.
When we are unable to establish a selling price using VSOE or TPE, we use ESP in
our allocation of the arrangement consideration. We determine ESP for a product
or service by considering both market conditions and entity-specific factors.
This includes, but is not limited to, geographies, market conditions,
competitive landscape, internal costs, gross margin objectives, and pricing
practices.
Given the nature of our transactions, which are primarily software or
software-related, the adoption of this new accounting guidance did not have a
significant impact on the timing and pattern of revenue recognition when applied
to multiple-element arrangements. Total net revenue as reported during the year
ended December 31, 2012 is materially consistent with total net revenue that
would have been reported if the transaction entered into or materially modified
after December 31, 2010 were subject to previous accounting guidance. The new
accounting guidance for revenue recognition, if applied in the same manner to
the year ended December 31, 2010, would not have had a material impact on total
net revenues for the fiscal year 2010.
Facilities Restructuring Charges
During the fourth quarter of 2004, we recorded significant charges ("2004
Restructuring Plan") related to the relocation of our corporate headquarters, to
take advantage of more favorable lease terms and reduce our operating expenses.
The accrued restructuring charges represent the net present value of lease
obligations and estimated broker commissions and other costs (principally
leasehold improvements and asset write-offs), partially offset by actual and
estimated gross sublease income, which is net of estimated broker commissions
and tenant improvement allowances, expected to be received over the remaining
lease terms. In addition, we significantly increased the 2001 restructuring
charges ("2001 Restructuring Plan") in the third and fourth quarters of 2004 due
to changes in our assumptions used to calculate the original charges as a result
of our decision to relocate our corporate headquarters. In February 2012, we
purchased the property associated with our former corporate headquarters in
Redwood City, California for approximately $148.6 million in cash, which
reflects a purchase price of $153.2 million less a rent credit of $4.6 million.
As a result of the transaction, we no longer have any further commitments
relating to the original lease agreements. We expect to receive rental payments
from our tenants of approximately $3.0 million as the owner of the buildings,
which include rental income of $1.3 million and reimbursement of certain
property costs such as common area maintenance, insurance, and property taxes,
through the remainder of their respective lease terms of $1.7 million.
The purchase of the buildings discharges our future lease obligations that were
previously accounted for under our 2001 and 2004 Restructuring Plans. The
transaction has been accounted for as a purchase of an asset that was previously
subject to an operating lease in accordance with ASC 840, Leases. We were the
sole lessee of both of these buildings. As a result, in the first quarter of
2012 we reversed our accrued facilities restructuring liability of $20.6
million, which resulted in a corresponding facilities restructuring benefit on
the consolidated statement of income in accordance with ASC 420, Exit or
Disposal Cost Obligations. We also recorded a charge of approximately $21.2
million representing the cost to terminate the operating lease in the
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