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PEGASYSTEMS INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Business overview
We develop, market, license, and support software, which allows organizations to
build, deploy, and change enterprise applications easily and quickly. Our
unified software platform enables our customers to build enterprise applications
in a fraction of the time it would take with competitive disjointed
architectures, by directly capturing business objectives, automating
programming, and automating work. We also provide consulting services,
maintenance, and training related to our software.
We focus our sales efforts on target accounts, which are large companies or
divisions within companies and typically leaders in their industry. Our strategy
is to sell a series of licenses that are focused on a specific purpose or area
of operations, rather than to sell a large enterprise license.
Our license revenue is primarily derived from sales of our PRPC software and
related solution frameworks. PRPC is a comprehensive platform for building and
managing BPM applications that unifies business rules and business processes.
Our solution frameworks, built on the capabilities of PRPC, are purpose or
industry-specific collections of best practice functionality, which allow
organizations to quickly implement new customer-facing practices and processes,
bring new offerings to market, and provide customized or specialized processing.
Our products are simpler, easier to use and often result in shorter
implementation periods than competitive enterprise software products. PRPC and
related solution frameworks can be used by a broad range of customers within
financial services, insurance, healthcare, communications, energy and government
markets.
Our solution frameworks products include customer relationship management
("CRM") software, which enables unified predictive decisioning and analytics and
optimizes the overall customer experience. Our decision management products and
capabilities are designed to manage processes so that actions optimize the
process outcomes based on business objectives. We continue to invest in the
development of new products and intend to remain a leader in BPM, CRM, and
decision management.
We also offer Pega Cloud, a service offering that allows customers to create
and/or deploy Pega applications using an Internet-based infrastructure. This
offering enables our customers to immediately build, test, and deploy their
applications in a secure cloud environment while minimizing their infrastructure
and hardware costs. Revenue from our Pega Cloud offering is included in
consulting services revenue.
We offer training for our staff, customers, and partners at our regional
training facilities, at third party facilities, and at customer sites. In 2012,
we began offering training online through Pega Academy, which provides an
alternative way to learn our software in a virtual environment quickly and
easily. We expect that this online training will help expand the number of
trained experts at a faster pace.
Our total revenue increased 11% in 2012 compared to 2011 and reflects revenue
growth in each of software license, maintenance, and professional services
revenue. License revenue increased 18%, primarily driven by the increase in term
license revenue. Maintenance revenue increased 14%, primarily due to the
increase in the aggregate value of the installed base of our software and
continued strong renewal rates. Professional services gross margin increased to
17% in 2012 largely due to lower on-boarding time and expenses associated with
reduced hiring as more of our customers became enabled and more implementation
projects were led by our partners. In 2012, we generated approximately $43.6
million in cash from operations due to our strong collections, and ended the
year with $123 million in cash, cash equivalents, and marketable securities.
We believe our growth and success in 2012 were due to:
• Our disciplined and focused global sales strategy to targeted customers;
• The return on investment our clients achieve from the use of Pega
technology, leading to repeat purchases;
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• Demand for our industry-leading software solutions and services;
• Investment in making our products faster and easier to use; and
• Expansion of our solutions frameworks offerings.
We believe that the ongoing challenges for our business include our ability to
drive revenue growth, expand our expertise in new and existing industries,
remain a leader in CRM and the decision management markets, and maintain our
leadership position in the BPM market.
To support our growth and successfully address these challenges through 2013 we
plan to:
• Extend our product leadership through continued innovation;
• Improve the end user experience with enhanced user interface;
• Maintain our focused global sales strategy to targeted customers;
• Invest in our research and development by significantly increasing
headcount;
• Build-out our sales capacity by hiring additional sales professionals;
• Invest in self-study enablement to expand the Pega ecosystem;
• Further develop and leverage our partner alliances; and
• Develop and increase our solutions frameworks.
RESULTS OF OPERATIONS
2012 Compared to 2011
(Dollars in thousands) Year Ended December 31, Increase
2012 2011
Total revenue $ 461,710 $ 416,675 $ 45,035 11 %
Gross profit 304,330 251,877 52,453 21 %
Total operating expenses 272,904 241,383 31,521 13 %
Income from operations 31,426 10,494 20,932 199 %
Income before provision for income taxes 30,945 10,813 20,132 186 %
The aggregate value of new license arrangements executed in 2012 was slightly
higher than in 2011. The aggregate value of new license arrangements executed
fluctuates quarter to quarter. During 2012 and 2011, approximately 74% and 58%,
respectively, of new license arrangements were executed with existing customers.
We believe the continued demand for our software products and related services
is due to the strong value proposition, short implementation period, and variety
of licensing models we offer our customers.
The increase in gross profit was primarily due to the increase in license
revenue and to a lesser extent the increase in maintenance revenue.
The increase in operating expenses was primarily due to the increase in selling
and marketing expenses and to a lesser extent the increase in research and
development expenses, associated with higher headcount.
The increase in income from operations and income before provision for income
taxes was primarily due to the higher increases in license and maintenance gross
profit compared to the increase in operating expenses.
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Revenue
(Dollars in thousands) Year Ended December 31, Increase
2012 2011
License revenue
Perpetual licenses $ 102,438 63 % $ 94,129 68 % $ 8,309 9 %
Term licenses 46,638 28 % 34,453 25 % 12,185 35 %
Subscription 14,830 9 % 10,225 7 % 4,605 45 %
Total license revenue $ 163,906 100 % $ 138,807 100 % $ 25,099 18 %
In both 2011 and 2012, more than 50% of the aggregate value of new license
arrangements for the fiscal year was executed in our fourth quarter. A large
proportion of the value of these arrangements was term licenses that contributed
very little to the increase in our term license revenue in 2012, but will be
recognized as revenue in future periods. As a result, the aggregate value of
future payments due under non-cancelable term licenses increased significantly
in both 2011 and 2012 from $90.9 million as of December 31, 2010 to $161.4
million as of December 31, 2011 and to $211.5 million as of December 31, 2012.
The increase in term license revenue for 2012 is a result of the increase in the
aggregate value of future payments due under non-cancelable term licenses
arrangements from prior years. See the table of future cash receipts by year
from these term licenses on page 33.
The increases in the aggregate value of term license arrangements executed in a
certain period is not necessarily indicative of the volume level in future
periods.
The mix between perpetual and term license arrangements executed in a particular
period varies based on customer needs. A change in the mix between perpetual and
term license arrangements executed over time may cause our revenues to vary
materially from period to period. The increase in perpetual license revenue was
primarily due to the increase in the aggregate value of new perpetual license
arrangements executed during the fourth quarter of 2012.
Subscription revenue primarily consists of the ratable recognition of license,
maintenance and bundled services revenue on perpetual license arrangements that
include a right to unspecified future products. Subscription revenue does not
include revenue from our Pega Cloud offerings. The timing of scheduled payments
under customer arrangements may limit the amount of revenue that can be
recognized in a reporting period. Consequently, our subscription revenue may
vary quarter to quarter. The increase in subscription revenue was primarily due
to the full year of revenue recognized in 2012 on some arrangements for which we
began recognizing revenue in the fourth quarter of 2011.
(Dollars in thousands) Year Ended December 31, Increase
2012 2011
Maintenance revenue
Maintenance $ 133,527 $ 117,110 $ 16,417 14 %
The increase in maintenance revenue was primarily due to the growth in the
aggregate value of the installed base of our software and continued strong
renewal rates.
(Dollars in thousands) Year Ended December 31, Increase (Decrease)
2012 2011
Professional services revenue
Consulting services $ 157,792 96 % $ 153,919 96 % $ 3,873 3 %
Training 6,485 4 % 6,839 4 % (354 ) (5 )%
Total Professional services $ 164,277 100 % $ 160,758
100 % $ 3,519 2 %
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Professional services are primarily consulting services related to new license
implementations. Revenue from our Pega Cloud offerings is included in consulting
services revenue and was the primary driver for the increase in professional
services revenue in 2012. In addition, our consulting services revenue increased
due to higher realization rates in 2012 compared to 2011. As more of our
customers are becoming enabled and our partners are leading the majority of
implementation projects, our consulting services revenue may be lower in future
periods.
(Dollars in thousands) Year Ended December 31, Increase
2012 2011
Gross Profit
Software license $ 157,567 $ 132,114 $ 25,453 19 %
Maintenance 118,740 104,033 14,707 14 %
Professional services 28,023 15,730 12,293 78 %
Total gross profit $ 304,330 $ 251,877 $ 52,453 21 %
Total gross profit % 66 % 60 %
Software license gross profit % 96 % 95 %
Maintenance gross profit % 89 % 89 %
Professional services gross profit % 17 % 10 %
As a result of the increased number of customer and partner led implementations,
we have slowed the hiring of consulting services personnel, reducing
non-billable on-boarding time and increasing utilization rates of our staff,
resulting in higher gross profit percentages. If we increase our hiring pace in
future periods, we may again incur on-boarding and enablement costs that may
result in lower professional services gross profit percentages.
(Dollars in thousands) Year Ended December 31, (Decrease)
2012 2011
Amortization of intangibles:
Cost of software license $ 6,189 $ 6,284 $ (95 ) (2 )%
Selling and marketing 4,928 4,928 - -
General and administrative 20 103 (83 ) (81 )%
$ 11,137 $ 11,315 $ (178 ) (2 )%
The decrease in amortization expense was due to the amortization in full of our
trade name intangible asset in 2011 and our technology designs intangible asset
in the first quarter of 2012.
Operating expenses
(Dollars in thousands) Year Ended December 31, Increase
2012 2011
Selling and marketing
Selling and marketing $ 167,263 $ 147,457 $ 19,806 13 %
As a percent of total revenue 36 % 35 %
Selling and marketing headcount 520 464 56 12 %
Selling and marketing expenses include compensation, benefits, and other
headcount-related expenses associated with our selling and marketing personnel
as well as advertising, promotions, trade shows, seminars, and other programs.
Selling and marketing expenses also include the amortization of customer related
intangibles.
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We continue to create additional sales capacity by increasing sales headcount to
target new accounts in existing industries, as well as to expand coverage in new
industries and geographies. The increase in selling and marketing expenses was
primarily due to a $19.3 million increase in compensation and benefit expenses
associated with higher headcount, partially offset by a $1.1 million decrease in
commission expense.
(Dollars in thousands) Year Ended December 31, Increase
2012 2011
Research and development
Research and development $ 76,726 $ 65,308 $ 11,418 17 %
As a percent of total revenue 17 % 16 %
Research and development headcount 727 523 204 39 %
Research and development expenses include compensation, benefits, contracted
services, and other headcount-related expenses associated with research and
development. The increase in headcount reflects growth in our India research
facility as we have been replacing contractors with employees. The increase in
offshore headcount lowered our average compensation expense per employee.
The increase in research and development expenses was primarily due to a $9.9
million increase in compensation and benefit expenses associated with higher
headcount and a $3.3 million increase in rent and facilities related expenses
associated with the build-out of our U.S. and India facilities, partially offset
by a $2.3 million decrease in engineering contractor expenses.
(Dollars in thousands) Year Ended December 31, Increase
2012 2011
General and administrative
General and administrative $ 28,915 $ 28,198 $ 717 3 %
As a percent of total revenue 6 % 7 %
General and administrative headcount 251 216 35 16 %
General and administrative expenses include compensation, benefits, and other
headcount-related expenses associated with the finance, legal, corporate
governance, and other administrative headcount. It also includes accounting,
legal, and other professional consulting, and administrative fees.
The general and administrative headcount includes employees in human resources,
information technology and corporate services departments whose costs are
allocated to the rest of our functional departments.
We completed the move to our new office headquarters in the third quarter of
2012 and ceased use of the former office space in the fourth quarter of 2012,
resulting in approximately $0.2 million in lease exit costs. We recorded
approximately $5.7 million and $1.9 million of rent expense under the new lease
arrangement during 2012 and 2011, respectively.
Stock-based compensation
We recognize stock-based compensation expense associated with equity awards in
our consolidated statements of operations based on the fair value of these
awards at the date of grant.
(Dollars in thousands) Year Ended December 31, Increase
2012 2011
Stock-based compensation:
Cost of services $ 3,655 $ 2,737 $ 918 34 %
Operating expenses 7,851 6,291 1,560 25 %
Total stock-based compensation
before tax 11,506 9,028 $ 2,478 27 %
Income tax benefit (3,699 ) (2,854 )
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The increase in stock-based compensation expense was primarily due to the higher
value of the annual periodic equity grant, the annual executive grant and new
hire grants. See Note 14 "Stock-Based Compensation" in the notes to the
accompanying audited consolidated financial statements for further information
on our stock-based awards.
Non-operating income and (expenses), net
(Dollars in thousands) Year Ended December 31, Change
2012 2011
Foreign currency transaction
gain (loss) $ 780 $ (935 ) $ 1,715 n/m
Interest income, net 419 398 21 5 %
Other (expense) income, net (1,680 ) 856 (2,536 ) n/m
$ (481 ) $ 319 $ (800 ) n/m
n/m - not meaningful
We hold foreign currency denominated accounts receivable, intercompany payables,
and cash in our U.S. operating company where the functional currency is the U.S.
dollar. As a result, these receivables, intercompany payables, and cash are
subject to foreign currency transaction gains and losses when there are changes
in exchange rates between the U.S. dollar and the foreign currencies. The
fluctuations in foreign currency transaction gains and losses were primarily due
to the changes in the value of the British pound and Euro relative to the U.S.
dollar during 2012 and 2011.
Beginning in the second quarter of 2011, we entered into foreign currency
forward contracts to manage our exposure to changes in foreign currency exchange
rates affecting the foreign currency denominated accounts receivable,
intercompany payables, and cash held by our U.S. operating company. We have not
designated these foreign currency forward contracts as hedging instruments and
as a result, we record the fair value of the outstanding contracts at the end of
the reporting period in our consolidated balance sheet, with any fluctuations in
the value of these contracts recognized in other (expense) income, net. The
fluctuations in the value of these foreign currency forward contracts recorded
in other (expense) income, net, partially offset in net income the gains and
losses from the remeasurement or settlement of the foreign currency denominated
accounts receivable, intercompany payables, and cash held by the U.S. operating
company recorded in foreign currency transaction gain (loss).
The total change in the fair value of our foreign currency forward contracts
recorded in other (expense) income, net, during 2012 and 2011 was a loss of $1.7
million and a gain of $0.8 million, respectively.
Provision for income taxes
The provision for income taxes represents current and future amounts owed for
federal, state, and foreign taxes. During 2012 and 2011, we recorded a $9.1
million provision and a $0.7 million provision, respectively, which resulted in
an effective tax rate of 29.3% and 6.5%, respectively
Our effective income tax rate for 2012 was below the statutory federal income
tax rate due to a $1.2 million benefit related to the current period domestic
production activities and a $1.2 million benefit related to lower foreign income
tax rates. These benefits were partially offset by $1 million of permanent
differences related to nondeductible meals and foreign stock compensation.
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The American Taxpayer Relief Act of 2012 (the "Act") was signed into law by
President Obama on January 2, 2013. Among other things, the Act retroactively
extends the research and experimentation ("R&E") credit through the end of 2013.
Under ASC 740, Income Taxes, the effects of new legislation are recognized upon
enactment, which in the U.S. federal jurisdiction is the date the president
signs a tax bill into law. For the Company this means that both the retroactive
tax effects for the 2012 R&E credit and the tax effects for the 2013 R&E credit
will be recognized in the 2013 financial statements. If the Company had
recognized the effects of the 2012 credit in 2012, the effective tax rate in
2012 would have been lowered by approximately 2.6%.
Our effective income tax rate for 2011 was below the statutory federal income
tax rate due to a $2.5 million reduction in liabilities established for
unrecognized tax benefits and a corresponding reduction in income tax expense
related to uncertain tax positions of prior years for which the statute of
limitations expired, a $1.5 million benefit related to the current period
domestic production activities and a $0.6 million benefit related to tax credits
from our continued investment in research and development activities. These
benefits were partially offset by a $0.3 million increase in our valuation
allowances and $0.6 million of permanent differences related to nondeductible
meals.
As of December 31, 2012, the Company had approximately $26.3 million of total
unrecognized tax benefits, of which $16 million would decrease the Company's
effective tax rate if recognized. However, approximately $9.2 million of these
unrecognized tax benefits relate to acquired NOLs and research tax credits,
which are subject to limitations on use. The Company expects that the changes in
the unrecognized benefits within the next twelve months will be approximately
$0.6 million, which would reduce the Company's effective tax rate if realized.
2011 Compared to 2010
(Dollars in thousands) Year Ended December 31, Increase (Decrease)
2011 2010
Total revenue $ 416,675 $ 336,599 $ 80,076 24 %
Gross profit 251,877 207,865 44,012 21 %
Acquisition-related costs 482 5,924 (5,442 ) (92 )%
Restructuring costs (62 ) 8,064 (8,126 ) n/m
Other operating expenses 240,963 196,457 44,506 23 %
Total operating expenses 241,383 210,445 30,938 15 %
Income (loss) before provision
(benefit) for income taxes 10,813 (6,197 ) 17,010 n/m
n/m - not meaningful
The aggregate value of license arrangements executed in 2011 was significantly
higher than in 2010 or in any prior year. We believe the continued demand for
our software products and related services is due to the strong value
proposition, short implementation period, and variety of licensing models we
offer our customers. In addition, our significant investment in hiring sales
personnel has generated license sales to customers in new and existing
industries and geographies.
The increase in gross profit was primarily due to the increase in maintenance
revenue and to a lesser extent the increase in license revenue.
The increase in operating expenses was primarily due to the increase in selling
and marketing expenses associated with higher headcount and higher sales
commissions related to the increase in the value of license arrangements
executed.
The increase in income (loss) before provision (benefit) for income taxes was
primarily due to the increase in maintenance and license gross profit and the
decrease in foreign exchange losses in 2011 compared to 2010, partially offset
by the increase in total operating expenses.
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Revenue
(Dollars in thousands) Year Ended December 31, Increase
2011 2010
License revenue
Perpetual licenses $ 94,129 68 % $ 79,041 66 % $ 15,088 19 %
Term licenses 34,453 25 % 31,940 27 % 2,513 8 %
Subscription 10,225 7 % 8,858 7 % 1,367 15 %
Total license revenue $ 138,807 100 % $ 119,839 100 % $ 18,968 16 %
The aggregate value of license arrangements executed in 2011 was significantly
higher than in 2010 or any prior year. The aggregate value of license agreements
executed in the fourth quarter of 2011 set a quarterly record for the Company
primarily due to a significant increase in the value of term license
arrangements executed. A change in the mix between perpetual and term license
arrangements executed in a period varies based on customer needs, which may
cause our revenues to vary materially quarter to quarter.
The increase in perpetual license revenue was primarily due to an increase in
the aggregate value of perpetual license arrangements executed. Many of our
perpetual license arrangements include extended payment terms and/or additional
rights of use that delay the recognition of revenue to future periods. The
aggregate value of payments due under these licenses was $48.4 million as of
December 31, 2011 compared to $32.8 million as of December 31, 2010.
We recognize revenue for our term license arrangements over the term of the
agreement as payments become due or earlier if prepaid. The increase in our term
license revenue was primarily due to revenue from the increased aggregate value
of term license arrangements executed during 2011, partially offset by higher
prepayments in 2010. Prepayments can cause our term license revenue to vary
quarter to quarter. Total future payments due under term licenses increased to
$161.4 million as of December 31, 2011 compared to $90.9 million as of
December 31, 2010.
Subscription revenue primarily consists of the ratable recognition of license,
maintenance and bundled services revenue on perpetual license arrangements that
include a right to unspecified future products. Subscription revenue does not
include revenue from our Pega Cloud offerings. The timing of scheduled payments
under customer arrangements determines the amount of revenue that can be
recognized in a reporting period. Consequently, our subscription revenue may
vary quarter to quarter.
(Dollars in thousands) Year Ended December 31, Increase
2011 2010
Maintenance revenue
Maintenance $ 117,110 $ 83,878 $ 33,232 40 %
The increase in maintenance revenue was primarily due the continued increase in
the aggregate value of the installed base of our software and a full year of
maintenance revenue attributed to license arrangements executed by Chordiant
prior to the acquisition.
(Dollars in thousands) Year Ended December 31, Increase
2011 2010
Professional services revenue
Consulting services $ 153,919 96 % $ 126,283 95 % $ 27,636 22 %
Training 6,839 4 % 6,599 5 % 240 4 %
Total Professional services $ 160,758 100 % $ 132,882 100 % $ 27,876 21 %
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Professional services are primarily consulting services related to new license
implementations. The increase in consulting services revenue was primarily due
to higher demand for these services as a result of the significant increase in
the number of license arrangements executed in the fourth quarter of 2010 and
2011.
(Dollars in thousands) Year Ended December 31, Increase (Decrease)
2011 2010
Gross Profit
Software license $ 132,114 $ 115,536 $ 16,578 14 %
Maintenance 104,033 72,837 31,196 43 %
Professional services 15,730 19,492 (3,762 ) (19 )%
Total gross profit $ 251,877 $ 207,865 $ 44,012 21 %
Total gross profit percent 60 % 62 %
Software license gross profit
percent 95 % 96 %
Maintenance gross profit percent 89 % 87 %
Professional services gross
profit percent 10 % 15 %
The decrease in software license gross profit percent was primarily due to the
full year of amortization expense in 2011 for the technology intangibles we
acquired as part of the Chordiant acquisition in April 2010.
The increase in maintenance gross profit percent was primarily due to the
increase in maintenance revenue.
During 2010, we continued to hire professional services employees to support our
growth and expand our expertise across various industries. The decrease in
professional services gross profit percent was primarily due to lower
utilization as a result of an increased number of newly hired personnel that
required training before they could be assigned to customer projects. It was
also due to the participation of an increased number of existing professional
services personnel in expert training programs. These advanced training programs
are part of our strategy to increase the pool of expertly trained professional
services personnel to fulfill increased demand for these services. The lower
utilization was partially offset by an increase in our overall realization rates
in 2011 compared to 2010.
(Dollars in thousands) Year Ended December 31, Increase (Decrease)
2011 2010
Amortization of intangibles:
Cost of software license $ 6,284 $ 4,231 $ 2,053 49 %
Selling and marketing 4,928 3,285 1,643 50 %
General and administrative 103 185 (82 ) (44 )%
$ 11,315 $ 7,701 $ 3,614 47 %
The increase in amortization expense was due to a full year of amortization in
2011 associated with $88 million of intangible assets we acquired as part of the
Chordiant acquisition in April 2010. The decrease in amortization expense
included in general and administrative expense was due to the Chordiant trade
name intangible asset being fully amortized in 2011.
Operating expenses
(Dollars in thousands) Year Ended December 31, Increase
2011 2010
Selling and marketing
Selling and marketing $ 147,457 $ 116,230 $ 31,227 27 %
As a percent of total revenue 35 % 35 %
Selling and marketing headcount 464 377 87 23 %
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We continue to increase sales headcount to target new accounts in new and
existing industries and across expanded geographies and to create additional
sales capacity for future periods. The increase in selling and marketing
expenses was primarily due to a $15.1 million increase in compensation and
benefit expenses associated with higher headcount, a $7.6 million increase in
commissions expense associated with the record value of license arrangements
executed in 2011, a $1.6 million increase in amortization expense related to the
acquired Chordiant customer related intangibles, a $2.1 million increase in
partner commissions expenses, a $1.7 million increase in travel expenses, and a
$1.2 million increase in sales and marketing program expenses, including our
PegaWORLD user conference.
(Dollars in thousands) Year Ended December 31, Increase
2011 2010
Research and development
Research and development $ 65,308 $ 55,193 $ 10,115 18 %
As a percent of total revenue 16 % 16 %
Research and development headcount 523 397 126 32 %
The increase in headcount reflects growth in our India research facility. The
increase in offshore headcount lowered our average compensation expense per
employee.
The increase in research and development expenses was primarily due to an $8.9
million increase in compensation and benefit expenses associated with higher
headcount, a $2.1 million increase in rent expense, partially offset by a $2.5
million decrease in engineering contractor expenses.
(Dollars in thousands) Year Ended December 31, Increase
2011 2010
General and administrative
General and administrative $ 28,198 $ 25,034 $ 3,164 13 %
As a percent of total revenue 7 % 7 %
General and administrative headcount 216 180 36 20 %
The increase in general and administrative expenses was primarily due to a $1.1
million increase in compensation and benefit expenses associated with higher
headcount and a $1.8 million increase in accounting fees and tax consulting and
legal fees primarily related to the expansion of our international operations.
As a result of our lease arrangement for our new office headquarters, we ceased
use of our former offices in the fourth quarter of 2012. In June 2011, because
of our expectation that we would cease use of our former offices, we revised the
remaining useful lives of certain leasehold improvements and furniture and
fixtures and recorded incremental depreciation expense of approximately $0.9
million during 2011. We recorded approximately $1.9 million of rent expense
under the new lease arrangement during 2011. We recorded approximately $0.8
million of this rent and depreciation in cost of services and approximately $2
million in operating expenses.
Acquisition-related costs
Acquisition-related costs are expensed as incurred and include direct and
incremental costs associated with an impending or completed acquisition. During
2011, the $0.5 million of acquisition-related costs were primarily legal fees
associated with litigation assumed from our acquisition of Chordiant. During
2010, the $5.9 million of acquisition-related costs consisted of approximately
$3.1 million of due diligence costs and advisory and legal transaction fees,
approximately $0.8 million of valuation and tax consulting fees, approximately
$1.6 million of legal costs associated with acquired litigation, and
approximately $0.4 million of integration and other expenses related to our
acquisition of Chordiant.
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Restructuring costs
Restructuring costs included approximately $6.5 million of severance and related
benefit costs recognized during the second and third quarters of 2010 for the
reduction of personnel within redundant roles as a result of our integration of
Chordiant.
In connection with our evaluation of our combined facilities, we ceased use of
space within a redundant facility during the fourth quarter of 2010 and recorded
approximately $1.6 million of restructuring expenses, consisting of future lease
payments and demising costs, net of estimated sublease income for this space.
During the first quarter of 2011, we incurred an additional $0.1 million of exit
costs related to this space and as a result of signing a sublease for this space
during the third quarter of 2011, we revised our estimate of exit costs and
recorded a $0.2 million reduction of restructuring costs.
Stock-based compensation
We recognize stock-based compensation expense associated with equity awards in
our consolidated statements of operations based on the fair value of these
awards at the date of grant.
(Dollars in thousands) Year Ended December 31, Increase
2011 2010
Stock-based compensation:
Cost of services $ 2,737 $ 1,825 $ 912 50 %
Operating expenses 6,291 4,920 1,371 28 %
Total stock-based compensation
before tax 9,028 6,745 $ 2,283 34 %
Income tax benefit (2,854 ) (2,185 )
The increase in stock-based compensation expense was primarily due to the higher
headcount and the related expense associated with the December 2010 periodic
grant and 2011 new hire stock-based grants. See Note 14 "Stock-Based
Compensation" in the notes to the accompanying audited consolidated financial
statements for further information on our stock-based awards.
Non-operating income and (expenses), net
(Dollars in thousands) Year Ended December 31, Change
2011 2010Foreign currency transaction loss $ (935 ) $ (5,569 )
$ 4,634 n/m
Interest income, net 398 1,138 (740 ) (65 )%
Other income, net 856 814 42 5 %
$ 319 $ (3,617 ) $ 3,936 n/m
n/m - not meaningful
We hold foreign currency denominated accounts receivable, intercompany payables,
and cash in our U.S. operating company where the functional currency is the U.S.
dollar. As a result, these receivables, intercompany payables, and cash are
subject to foreign currency transaction gains and losses when there are changes
in exchange rates between the U.S. dollar and foreign currencies. The
fluctuations in foreign currency transaction gains and losses were primarily due
to the changes in the value of the British pound and Euro relative to the U.S.
dollar during 2011 and 2010.
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During 2011, the total change in the fair value of our foreign currency forward
contracts recorded in other income, net, was a net gain of $0.8 million. The
impact on net income of the gains recorded on the foreign currency forward
contracts and the foreign currency transaction losses recorded on the
remeasurement and settlement of the foreign currency denominated assets, was a
net loss of approximately $1.2 million for the year ended December 31, 2011.
This net loss was primarily due to the timing of settlement of intercompany
balances and foreign currency denominated cash held as of the end of the period,
for which we did not have foreign currency forward contracts.
The decrease in interest income was primarily due to lower yields earned and a
lower weighted-average value of marketable securities held throughout the year
ended December 31, 2011 compared to the same period in 2010.
Provision (benefit) for income taxes
The provision (benefit) for income taxes represents current and future amounts
owed for federal, state, and foreign taxes. During 2011 and 2010, we recorded a
$0.7 million provision and a $0.3 million benefit, respectively, which resulted
in an effective tax rate of 6.5% and (4.9%), respectively.
Our effective income tax rate for 2011 was below the statutory federal income
tax rate due to a $2.5 million reduction in unrecognized tax benefits and a
corresponding reduction in income tax expense related to uncertain tax positions
of prior years for which the statute of limitations expired, a $1.5 million
benefit related to the current period domestic production activities and a $0.6
million benefit related to tax credits from our continued investment in research
and development activities. These benefits were partially offset by a $0.3
million increase in our valuation allowances and $0.6 million of permanent
differences related to nondeductible meals.
During 2010, we recorded a valuation allowance against state credits and a
discrete item related to the nondeductible portion of acquisition-related costs
we incurred during 2010, which reduced our tax benefit by approximately $2.3
million and $0.7 million, respectively. The consolidation of Chordiant's
operations had a significant impact on our consolidated state apportionment
factors. As a result of this change, we recorded a valuation allowance against
certain state credits.
As of December 31, 2011, unrecognized tax benefits totaled approximately $25.3
million, of which $18.2 million, if recognized, would decrease our effective tax
rate. However, approximately $11.1 million of these unrecognized tax benefits
related to acquired net operating losses ("NOLs") and research tax credits,
which if recognized, would be subject to limitations on use.
LIQUIDITY AND CAPITAL RESOURCES
(in thousands) Year Ended December 31,
2012 2011 2010
Cash provided by (used in):
Operating activities $ 43,579 $ 39,815 $ 18,414
Investing activities (19,238 ) (45,388 ) 6,841
Financing activities (8,091 ) (6,312 ) (13,251 )
Effect of exchange rate on cash 922 1,111 (4,734 )
Net increase (decrease) in cash and cash
equivalents $ 17,172 $ (10,774 ) $ 7,270
As of December 31,
2012 2011 2010
Total cash, cash equivalents, and
marketable securities $ 122,985 $ 111,432 $ 87,251
We believe that our current cash, cash equivalents, and cash flow from
operations will be sufficient to fund our operations and our share repurchase
program for at least the next 12 months.
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In June 2011, we entered into a lease arrangement for our new office
headquarters in Cambridge, Massachusetts commencing on July 1, 2011 and
terminating on December 31, 2023, subject to our option to extend for two
additional five-year periods. We completed the move to our new office
headquarters in the third quarter of 2012 and ceased use of the former office
space in the fourth quarter of 2012, resulting in approximately $0.2 million in
lease exit costs. The remaining $0.5 million of lease payments for this space
will be paid by the end of the second quarter of 2013.
We invested approximately $12.8 million in 2012, net of our landlord tenant
improvement allowance for furniture, fixtures, IT equipment, and leasehold
improvements for our new office headquarters.
We evaluate acquisition opportunities from time to time, which if pursued, could
require use of our funds. Approximately $51.5 million of our cash and cash
equivalents is held in our foreign subsidiaries. If it became necessary to
repatriate these funds, we may be required to pay U.S. tax, net of any
applicable foreign tax credits, upon repatriation. We consider the earnings of
our foreign subsidiaries to be permanently reinvested and, as a result, U.S.
taxes on such earnings are not provided. It is impractical to estimate the
amount of U.S. tax we could have to pay upon repatriation due to the complexity
of the foreign tax credit calculations and because we consider our earnings
permanently reinvested. There can be no assurance that changes in our plans or
other events affecting our operations will not result in materially accelerated
or unexpected expenditures.
Cash provided by operating activities
The primary drivers of cash provided by operating activities during 2012 were
net income of $21.9 million and a $24.8 million increase in deferred revenue
primarily resulting from the difference in timing of billings and revenue
recognition for annual maintenance.
The primary drivers of cash provided by operating activities during 2011 were
$10.1 million of net income and a $14.6 million increase in deferred revenue
primarily resulting from the difference in timing of billings and revenue
recognition for annual maintenance.
Cash used in operating activities during 2010 was primarily due to our net loss
of $5.9 million and a $23.4 million increase in accounts receivable.
Future Cash Receipts from License Arrangements
Total contractual future cash receipts due from our existing license agreements
was approximately $255 million as of December 31, 2012 compared to $209.9
million as of December 31, 2011. The future cash receipts due as of December 31,
2012 are summarized as follows:
Contractual Other contractual
payments for term license payments not
licenses not recorded on recorded on the
As of December 31, (in thousands) the balance sheet (1) balance sheet (2) Total
2013 $ 55,170 $ 18,161 $ 73,331
2014 54,529 12,194 66,723
2015 48,272 5,793 54,065
2016 38,544 7,389 45,933
2017 and thereafter 14,980 - 14,980
Total $ 211,495 $ 43,537 $ 255,032
(1) These amounts will be recognized as revenue in the future over the term of
the agreement as payments become due or earlier if prepaid.
(2) These amounts will be recognized as revenue in future periods and relate to
perpetual and subscription licenses with extended payment terms and/or
additional rights of use.
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Cash (used in) provided by investing activities
During 2012, we invested $23.6 million primarily in leasehold improvements,
furniture and fixtures and equipment for the build-out of our U.S. and India
offices.
During 2011, cash used in investing activities was primarily for purchases of
marketable debt securities for $57.2 million, partially offset by the proceeds
received from the sales, maturities and called marketable debt securities of
$21.7 million. We also invested $9.8 million in property and equipment,
primarily leasehold improvements, computer equipment and furniture and fixtures
for our U.S. and UK offices.
During the first quarter of 2010, we sold our marketable securities to pay for
the Chordiant acquisition. During the second quarter of 2010, we paid $109.2
million, net of cash acquired, to complete the Chordiant acquisition. During
2010, we invested $3.6 million in computer equipment, leasehold improvements and
furniture and fixtures primarily for our Cambridge location and $1.2 million in
capitalized software primarily related to our implementation of an accounting
system.
Cash used in financing activities
Net cash used in financing activities during 2012, 2011, and 2010, was primarily
for repurchases of our common stock and the payment of our quarterly dividend.
Since 2004, our Board of Directors has approved annual stock repurchase programs
that have authorized the repurchase up to $92.4 million of our common stock. As
of December 31, 2012, approximately $71.2 million has been repurchased,
approximately $14.8 million remains available for repurchase and approximately
$6.4 million expired. Purchases under these programs have been made on the open
market.
Common stock repurchases
The following table is a summary of our repurchase activity under all of our
stock repurchase programs during 2012, 2011, and 2010:
(Dollars in thousands) 2012 2011 2010
Shares Amount Shares Amount Shares Amount
Prior year authorizations
at January 1, $ 13,963 $ 13,237 $ 15,779
Authorizations 6,036 5,590 5,750
Repurchases paid 181,803 (5,130 ) 137,429 (4,815 ) 294,059 (8,272 )
Repurchases unsettled 3,399 (76 ) 1,688 (49 ) 538 (20 )
Authorized dollars
remaining as of
December 31, $ 14,793 $ 13,963 $ 13,237
In addition to the share repurchases made under our repurchase programs, we net
settled the majority of our employee stock options exercised and RSUs vested.
During 2012 and 2011, option and RSU holders net settled stock options and
vested RSUs representing the right to purchase a total of 548,000 shares and
704,000 shares, respectively, of which only 319,000 shares and 426,000 shares,
respectively, were issued to the option and RSU holders and the balance of the
shares were surrendered to us to pay for the exercise price and the applicable
taxes. During 2012 and 2011, instead of receiving cash from the equity holders,
we withheld shares with a value of $4.4 million and $6.3 million, respectively,
for withholding taxes, and $2.7 million and $4.3 million, respectively, for the
exercise price. The value of share repurchases and shares withheld for net
settlement of our employee stock option exercises and vesting of RSUs offset the
proceeds received under our various share-based compensation plans during 2012,
2011 and 2010.
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Dividends
We declared $0.12 per share for the year ended December 31, 2012, but our Board
of Directors authorized us to accelerate the payment of the fourth quarter
dividend to be paid in December 2012 rather than in January 2013. Therefore, we
paid $5.7 million in dividends in 2012. For the years ended December 31, 2011
and 2010, we declared $0.12 per share and paid cash dividends of $4.5 million,
and $4.4 million, respectively. It is our current intention to pay a quarterly
cash dividend of $0.03 per share, however, the Board of Directors may terminate
or modify this dividend program at any time without notice.
Contractual obligations
As of December 31, 2012, we had purchase obligations for customer support and
marketing programs and payments under operating leases. Our lease arrangement
for our new office headquarters expires in 2023, subject to our option to extend
for two additional five-year periods. We also lease space for our other offices
under non-cancelable operating leases that expire at various dates through 2020.
As of December 31, 2012, our known contractual obligations, including future
minimum rental payments required under operating leases with non-cancelable
terms in excess of one year were as follows:
Payment due by period
Contractual obligations: 2014 & 2016 & 2018 &
(in thousands) Total 2013 2015 2017 Thereafter Other
Purchase obligations (1) $ 685 $ 685 $ - $ - $ - $ -
Liability for uncertain tax
positions (2) 13,606 - - - - 13,606
Operating lease obligations (3) 90,864 8,929 17,919 17,032 46,984 -
Total $ 105,155 $ 9,614 $ 17,919 $ 17,032 $ 46,984 $ 13,606
(1) Represents the fixed or minimum amounts due under purchase obligations for
customer support and marketing programs.
(2) As of December 31, 2012, our recorded liability for uncertain tax positions
was approximately $13.6 million. We are unable to reasonably estimate the
timing of the cash outflow due to uncertainties in the timing of the
effective settlement of tax positions.
(3) Includes deferred rent of approximately $1.1 million included in accrued
expenses and approximately $8.4 million in other long-term liabilities in the
accompanying audited consolidated balance sheet as of December 31, 2012.
CRITICAL ACCOUNTING POLICIES, SIGNIFICANT JUDGMENTS AND ESTIMATES
Management's discussion and analysis of the financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the U.S.
and the rules and regulations of the SEC for annual financial reporting. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We base
our estimates and judgments on historical experience, knowledge of current
conditions and beliefs of what could occur in the future given available
information. We consider the following accounting policies to be both those most
important to the portrayal of our financial condition and those that require the
most subjective judgment. If actual results differ significantly from
management's estimates and projections, there could be a material effect on our
financial statements.
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Revenue recognition
Our revenue is derived primarily from software licenses, maintenance fees
related to our software licenses, and consulting services. Our license
arrangements, whether involving a perpetual license or a term license, generally
contain multiple elements, including consulting services, training, and software
maintenance services.
Software revenue recognition requires judgment, including whether a software
arrangement includes multiple elements, and if so, whether vendor-specific
objective evidence ("VSOE") of fair value exists for those elements. The amount
of arrangement consideration allocated to undelivered elements is based on the
VSOE of fair value for those elements and recognized as those elements are
delivered. Any remaining portion of the total arrangement fee is allocated to
the software license, the first delivered element. Revenue is recognized for
each element when all of the revenue recognition criteria have been met.
Changes in the mix of the elements in a software arrangement, the ability to
identify VSOE for those elements, the fair value of the respective elements, and
changes to a product's estimated life cycle could materially impact the amount
of earned and unearned revenue.
Before we can recognize revenue, the following four basic criteria must be met:
• Persuasive evidence of an arrangement-As evidence of the existence of an
arrangement, we use a contract or purchase order signed by the customer for
software and maintenance and a statement of work for consulting services. In the
event the customer is a reseller we ensure a binding agreement exists between
the reseller and end user of the software.
• Delivery of product-Software is delivered electronically or shipped via disk
media. Services, including maintenance, are considered delivered as the work is
performed or, in the case of maintenance, over the contractual service period.
• Fee is fixed or determinable-We assess whether a fee is fixed or determinable
at the outset of the arrangement. In addition, we assess whether contract
modifications to an existing term arrangement constitute a concession. Our
agreements do not include a right of return.
• Collection of fee is probable-We assess the probability of collecting from
each customer at the outset of the arrangement based on a number of factors,
including the customer's payment history, its current creditworthiness, economic
conditions in the customer's industry and geographic location, and general
economic conditions. If in our judgment collection of a fee is not probable,
revenue is recognized as cash is collected, provided all other conditions for
revenue recognition have been met.
Software license revenues
Perpetual software license fees are recognized as revenue when the software is
delivered, any acceptance required by contract that is not perfunctory is
obtained, no significant obligations or contingencies exist related to the
software, other than maintenance, and all other revenue recognition criteria are
met.
Term software license fees are payable on a monthly, quarterly, or annual basis
under license agreements that typically have a three to five-year term and may
be renewed for additional terms at the customer's option.
As a result of our focus on frequent sales to our targeted customers, our
strategy to sell initial term licensing agreements to those customers with the
goal to generate follow-on sales, and as a result of extended payment terms and
other factors, such as the risk of concessions, we recognize term license
revenue over the term of the agreement as payments become due or earlier if
prepaid, provided all other criteria for revenue recognition have been met.
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Until 2005, the majority of our term license arrangements were larger agreements
with extended payment terms that did not typically result in follow-on license
agreements. We no longer utilize this business model for software license
transactions and as of December 31, 2012 and 2011, the remaining balance of
these installment receivables totaled zero and $1.3 million, respectively.
Subscription revenue primarily consists of license, maintenance and bundled
services revenue recognized on our license arrangements that include a right to
unspecified future products, which is recognized ratably over the term of the
subscription period.
Maintenance revenues
First-year maintenance typically is sold with the related software license and
renewed on an annual basis thereafter. Maintenance revenue is deferred and
recognized ratably over the term of the support period, which is generally one
year and subject to annual renewals. Perpetual license maintenance obligations
are based on separately stated renewal rates in the arrangement that are
substantive and therefore represent VSOE of fair value. Term license
arrangements include separately stated maintenance fees and we use separate
sales to determine VSOE of fair value.
Professional services revenues
Our professional services revenue is comprised of fees for consulting services,
including software implementation, training, reimbursable expenses and sales of
our Pega Cloud offering ("Pega Cloud"). Consulting services may be provided on a
"stand-alone" basis or bundled with a license and software maintenance services.
Revenue from training services and consulting services under time and materials
contracts is recognized as services are performed. We have VSOE of fair value
for our training services and consulting services under time and materials
contracts in North America, Australia, and Europe.
Consulting services may occasionally be provided on a fixed-price basis. We do
not have VSOE of fair value for fixed-price services or time and materials
services in certain geographical regions. When these services are part of a
multiple element arrangement, and the services are not essential to the
functionality of the software, and when services, including maintenance, are the
only undelivered element, we recognize the revenue from the total arrangement
ratably over the longer of the software maintenance period or the service
period. Revenue from fixed-price services that are not bundled with a software
license is generally recognized ratably during the service period, which is
typically less than four months.
Revenue from stand-alone sales of Pega Cloud is recognized ratably over the term
of the service. When implementation services are sold together with our Pega
Cloud offering and these services have stand-alone value to the customer, we
account for these services separately from our Pega Cloud offering as described
earlier. Stand-alone value is established through the customer's ability to buy
these services from many trained partner system integrators and from
transactions sold independently from the sale of Pega Cloud. Since these
multiple-element arrangements are not software license sales, we apply a selling
price hierarchy. Under the selling price hierarchy, third-party evidence of
selling price ("TPE") will be considered if VSOE does not exist, and estimated
selling price ("ESP") will be used if neither VSOE nor TPE is available.
Generally, we are not able to determine TPE as our sales strategy is customized
to the needs of our customers and our products or services are dissimilar to
comparable products or services in the marketplace. In determining ESP, we apply
significant judgment as we weigh a variety of factors, based on the facts and
circumstances of the arrangement. We typically arrive at an ESP for a service
that is not sold separately by considering company-specific factors such as
geographies, competitive landscape, and pricing practices used to establish
bundled pricing and discounting.
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Warranties and Indemnification
We warrant to our customers that our software products will conform to
documented specifications for a limited period. We have not experienced
significant claims related to software warranties beyond the scope of
maintenance support, which we are already obligated to provide, and consequently
we have not established reserves for warranty obligations.
Our agreements with customers generally require us to indemnify the customer
against claims that our software infringes third party patent, copyright,
trademark or other proprietary rights. Such indemnification obligations are
generally limited in a variety of industry-standard respects, including our
right to replace an infringing product. As of December 31, 2012, we had not
experienced any losses related to these indemnification obligations and no
claims were outstanding.
Deferred revenue
Deferred software license revenue typically results from customer billings for
which all of the criteria to recognize revenue have not been met. Deferred
maintenance revenue represents software license updates and product support
contracts that are typically billed in advance and are recognized ratably over
the support periods. Deferred professional services revenue represents advanced
billings for consulting and training services that are recognized as the
services are performed.
Goodwill and Intangible Assets Impairment
Goodwill represents the residual purchase price paid in a business combination
after all identified assets and liabilities have been recorded. Goodwill is not
amortized, but prior to the Company's adoption of the Financial Accounting
Standards Board "FASB" Accounting Standards Update ("ASU") No. 2011-08,
"Intangibles-Goodwill and Other (Topic 350)" ("ASU 2011-08") in the fourth
quarter of 2011, was tested annually in the fourth quarter for impairment or
between annual tests if indicators of potential impairment exist. We performed
our qualitative assessment in the fourth quarter of 2012 and 2011 and concluded
it was not more likely than not that the fair value of our single reporting unit
was less than its carrying value. In 2010, we compared the carrying value of our
reporting unit to its fair value. Had the fair value of the reporting unit been
less than its carrying amount, we would have determined the implied fair value
of the goodwill and evaluated it for impairment.
We evaluate our intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. In evaluating potential impairment of these assets, we specifically
consider whether any indicators of impairment are present, including, but not
limited to:
• whether there has been a significant adverse change in the business
climate that affects the value of an asset;
• whether there has been a significant change in the extent or manner in which an asset is used; and
• whether there is an expectation that the asset will be sold or disposed of
before the end of its originally estimated useful life.
If indicators of impairment are present, we compare the estimated undiscounted
cash flows that the specific asset is expected to generate to its carrying
value. These estimates involve significant subjectivity. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its fair value.
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Accounting for Income Taxes
We recognize deferred tax assets and liabilities due to temporary differences
between the book and tax bases of recorded assets and liabilities. Future
realization of our deferred tax assets ultimately depends on the existence of
sufficient taxable income within the available carryback or carryforward
periods. Sources of taxable income include future reversals of existing taxable
temporary differences, future taxable income, taxable income in prior carryback
years, and tax planning strategies. We record a valuation allowance to reduce
our deferred tax assets to an amount we believe is more likely than not to be
realized. Changes in our valuation allowance impact income tax expense in the
period of adjustment. Our deferred tax valuation allowances require significant
judgment and uncertainties, including assumptions about future taxable income
that are based on historical and projected information.
We determined that we may utilize approximately $150.8 million of acquired
Chordiant federal and foreign net operating losses ("NOLs"), of which
approximately $113.2 million remained available as of December 31, 2012. The
acquired federal NOLs are subject to annual limitations through 2029. As a
result of the purchase price allocation, we recorded deferred tax assets of
approximately $52.3 million related to these acquired NOLs. If our taxable
income is not consistent with our expectations or the timing of income is not
within the applicable carryforward period, we may be required to establish a
valuation allowance on all or a portion of these deferred tax assets.
We assess our income tax positions and record tax benefits based upon
management's evaluation of the facts, circumstances, and information available
at the reporting date. For those tax positions where it is more-likely-than-not
that a tax benefit will be sustained, we record the largest amount of tax
benefit with a greater than 50 percent likelihood of being realized upon
ultimate settlement with a taxing authority having full knowledge of all
relevant information. For those income tax positions where it is not
more-likely-than-not that a tax benefit will be sustained, no tax benefit is
recognized in the financial statements. We classify liabilities for uncertain
tax positions as non-current liabilities unless the uncertainty is expected to
be resolved within one year. We classify interest and penalties on uncertain tax
positions as income tax expense.
As a global company, we use significant judgment to calculate and provide for
income taxes in each of the tax jurisdictions in which we operate. In the
ordinary course of our business, there are transactions and calculations
undertaken whose ultimate tax outcome cannot be certain. Some of these
uncertainties arise as a consequence of transfer pricing for transactions with
our subsidiaries and nexus and tax credit estimates. In addition, the
calculation of acquired tax attributes and the associated limitations are
complex. We estimate our exposure to unfavorable outcomes related to these
uncertainties and estimate the probability of such outcomes.
Although we believe our estimates are reasonable, no assurance can be given that
the final tax outcome will not be different from what is reflected in our
historical income tax provisions, returns, and accruals. Such differences, or
changes in estimates relating to potential differences, could have a material
impact on our income tax provision and operating results in the period in which
such a determination is made.
See Note 15 "Income Taxes" in the notes to the accompanying audited consolidated
financial statements for further information.
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