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COMMVAULT SYSTEMS INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion and analysis along with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. The statements in this discussion regarding our expectations of our future performance, liquidity and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under "Risk Factors" and elsewhere in this Annual Report on Form 10-K. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Overview We are a leading provider of data and information management software applications and related services in terms of product breadth and functionality and market penetration. We develop, market and sell a unified suite of data and information management software applications under the Simpana® brand. Simpana software is built from the ground up on a single platform and unified code base for integrated data and information management. The Simpana platform contains licensable modules that work together seamlessly, sharing a single code and common function set to deliver Backup and Recovery, Archive, Replication, Search and Analytic capabilities across physical, virtual and cloud environments. With a single platform approach, Simpana software is specifically designed to protect, manage and access data throughout its lifecycle in less time, at lower cost and with fewer resources than alternative solutions. Our product features and capabilities enable our customers to deploy solutions for data protection, business continuance, corporate compliance and centralized management and reporting. We also provide our customers with a broad range of professional services that are delivered by our worldwide support and field operations. As of March 31, 2013, we had licensed our software applications to approximately 18,200 registered customers. History and Background In early 2000, we launched CommVault Galaxy for backup and recovery, a storage industry award winner. In the years since, CommVault has forged numerous alliances with top software application and hardware vendors, such as Dell, HP, Hitachi Data Systems, Microsoft, Network Appliance, Fujitsu, Novell and Oracle, to enhance capabilities and to create a premiere suite of data and information management solutions. In 2002, we launched our single-platform technology that provides the foundation of our information management approach to storing, managing, and accessing data. Our Simpana software suite is one product that contains the following licensable modules, all built on a single unified code base and platform to protect, manage and access data and information: Backup and Recovery, Archive, Replication, Search, and Analyze. In addition to Backup and Recovery, the subsequent release of our other software application modules has substantially increased our addressable market. Each application module can be used individually or in combination with other application modules from our single platform suite. In January 2009, CommVault Simpana 8.0 ("Simpana 8") was made available for public release. Simpana 8 included advances in recovery management, data reduction, virtual server protection and content organization. In addition, we believe that Simpana 8 met a broad spectrum of customer's discovery and recovery management requirements and eliminated the need for a myriad of point level products. In August 2010, our CommVault Simpana 9.0 software suite ("Simpana 9") was made available for public release. We believe that Simpana 9, which built on and significantly expanded Simpana 8, allows customers to deploy a modern data management solution to achieve gains in efficiency, cost optimization and scale. We believe that Simpana 9 solves real-world IT challenges with major technology advancements, including increased virtualization scalability and performance, integrated source and target data deduplication, automatic and transparent integration with hardware array-based snapshots, as well as new tools that ease migration to our next generation Simpana 9 platform. 38-------------------------------------------------------------------------------- Table of Contents In January 2012, we released enhancements to our existing Simpana 9 software suite. These enhancements included new capabilities that converges backup, archive and reporting processes; additional SnapProtect technology that delivers hardware snapshot integration; enhancements to virtual server protection; new innovations to protect data on laptops and desktops with embedded source deduplication for optimized efficiency; and new integration with Microsoft SharePoint. In February 2013, our CommVault Simpana 10.0 software suite ("Simpana 10") was made available for public release. We believe Simpana 10 extends our data protection and archiving leadership to deliver secure, self-service access from mobile devices, speed the adoption of cloud computing and extract value from Big Data. Simpana 10 includes major technology advancements such as Enhanced IntelliSnap™ snapshot management; Simpana OnePass™ with Exchange; tighter integration with Microsoft Hyper-V, VMware vSphere 5.1 and vCloud Director 5.1; workflow automation; fourth-generation parallel deduplication; and customizable web-based reporting, dashboards and cloud-based analytics. Our Simpana 10 architecture efficiently stores all protected data in a virtual repository, called ContentStore, and opens access to simplify the way end users search, analyze and repurpose data across an enterprise. Our software licenses typically provide for a perpetual right to use our software and are sold on a capacity basis, on a per-copy basis or as site licenses. During the fiscal year ended March 31, 2013, approximately 69% of software license revenue was sold on a capacity basis. Capacity based software licenses provide our customers with unlimited licenses of specified software products based on a defined level of terabytes of data under management. As a result, when we sell our platform through a capacity license, many of the various Simpana functionalities are bundled into one capacity based price. We anticipate that capacity based licenses will continue to account for the majority of our software license revenue for the foreseeable future. The industry in which we currently operate continues to go through accelerating changes as the result of compounding data growth and the introduction of new technologies. We are continuing to pursue an aggressive product development program in both data and information management solutions. Our data management solutions include not only traditional backup, but also new innovations in de-duplication, data movement, virtualization, snap-based backups and enterprise reporting. Our information management innovations are primarily in the areas of archiving, eDiscovery, records management, governance and compliance. We remain focused on both the data and information management trends in the marketplace and, in fact, a material portion of our existing research and development expenses are utilized toward the development of such new technologies discussed above. While we are confident in our ability to meet these changing industry demands with our Simpana suite and potential future releases, the development, release and timing of any features or functionality remain at our sole discretion and our solutions or other technologies may not be widely adopted. The rapid growth of data, and the need to securely protect, manage and access this data is driving substantial opportunities for managed service providers (MSPs) to help organizations deploy and manage solutions that deliver data management capabilities. The result is reduced long-term management costs with increased offerings to customers, which we believe represents a long-term industry trend in the way that services are offered. Given the nature of the industry in which we operate, our software applications are subject to obsolescence. As noted above, we continually develop and introduce updates to our existing software applications in order to keep pace with evolving industry technologies. In addition, we must address evolving industry standards, changing customer requirements and competitive software applications that may render our existing software applications obsolete. For each of our software applications, we provide full support for the current generally available release and one prior release. When we declare a product release obsolete, a customer notice is delivered twelve months prior to the effective date of obsolescence announcing continuation of full product support for the first six months. We provide an additional six months of extended assistance support in which we only provide existing workarounds or fixes that do not require additional development activity. We do not have existing plans to make any of our software products permanently obsolete. 39-------------------------------------------------------------------------------- Table of Contents Sources of Revenues We derive a significant portion of our total revenues from sales of licenses of our software applications. We do not customize our software for a specific end-user customer. We sell our software applications to end-user customers both directly through our sales force and indirectly through our global network of value-added reseller partners, systems integrators, corporate resellers and original equipment manufacturers. Our software revenue was 51% of our total revenues for fiscal 2013, 50% for fiscal 2012 and 48% for fiscal 2011. In recent fiscal years, we have generated approximately two-thirds of our software revenue from our existing customer base and approximately one-third of our software revenue from new customers. In addition, our total software revenue in any particular period is, to a certain extent, dependent upon our ability to generate revenues from large customer software deals, which we refer to as enterprise software transactions. We expect the number of enterprise software transactions (transactions greater than $0.1 million) and resulting software revenue to increase throughout fiscal 2014, although the size and timing of any particular software transaction is more difficult to forecast. Such software transactions represented approximately 57% of our software revenue in fiscal 2013, approximately 52% of our software revenue in fiscal 2012 and approximately 48% of our software revenue in fiscal 2011. Software revenue generated through indirect distribution channels was 89% of total software revenue in fiscal 2013, 84% in fiscal 2012 and 84% in fiscal 2011. Software revenue generated through direct distribution channels was 11% of total software revenue in fiscal 2013, 16% in fiscal 2012 and 16% in fiscal 2011. The dollar value of software revenue generated through indirect distribution channels increased approximately $53.2 million, or 31%, in fiscal 2013 compared to fiscal 2012. The dollar value of software revenue generated through direct distribution decreased $3.5 million, or 11%, in fiscal 2013 compared to fiscal 2012. The increase in the dollar value of software revenue growth generated through our indirect distribution channels compared to our direct sales force in fiscal 2013 is primarily the result of an increase in software revenue from our international operations, which is almost exclusively transacted through indirect distribution. The decrease in the dollar value of the software revenue generated through our direct sales channel is due to a lower value of direct enterprise transactions in the United States. Deals initiated by our direct sales force are sometimes transacted through indirect channels based on end-user customer requirements, which are not always in our control and can cause this overall percentage split to vary from fiscal year to fiscal year. As such, there may be fluctuations in the dollars and percentage of software revenue generated through our direct distribution channels from time to time. We believe that the growth of our software revenue, derived from both our indirect channel partners and direct sales force, are key attributes to our long-term growth strategy. We will continue to invest in both our channel relationships and direct sales force in the future, but we continue to expect more revenue to be generated through indirect distribution channels over the long term. The failure of our indirect distribution channels or our direct sales force to effectively sell our software applications could have a material adverse effect on our revenues and results of operations. We have a worldwide reseller and an original equipment agreement with Dell. Our reseller agreement with Dell provides them the right to market, resell and distribute certain of our products to their customers. Our original equipment manufacturer agreement with Dell is discussed more fully below. Sales through our agreements with Dell accounted for 20% of our total revenues for fiscal 2013, 22% of our total revenues for fiscal 2012 and 23% of our total revenues in fiscal 2011. In recent fiscal quarters, we have begun to shift most of our small and medium business segment transactions to non-Dell distribution partners as Dell is now focused on this segment of the market with their own intellectual property. As a result, the majority of the revenue that is still transacted through Dell comes from add-on purchases from our existing install base and from new enterprise software transactions where our sales force is directly involved. We have also recently begun to take proactive steps to broaden our distribution related to enterprise software transactions. Over time, we believe it is likely that these actions will result in a decline in the percentage of our total revenues transacted through Dell. Due to the timing of enterprise software transactions that are currently in our sales and marketing pipeline, there will likely be some fluctuations in the amount of revenue transacted through Dell from quarter to quarter. 40 -------------------------------------------------------------------------------- Table of Contents In May 2011, we entered into a global OEM agreement with NetApp under which NetApp will integrate elements of our Simpana software suite with NetApp SnapShot™ and replication technology, under the NetApp SnapProtect® brand. During the fiscal years ended March 31, 2013 and March 31, 2012, we did not recognize a material amount of revenue under our OEM agreement with NetApp. Overall, we have original equipment manufacturer agreements primarily with Dell, Hitachi Data Systems and NetApp for them to market, sell and support our software applications and services on a stand-alone basis and/or incorporate our software applications into their own hardware products. Dell, Hitachi Data Systems and NetApp have no obligation to recommend or offer our software applications exclusively or at all, and they have no minimum sales requirements and can terminate our relationship at any time. A material portion of our software revenue is sometimes generated through our original equipment manufacturer agreements. Sales through our original equipment manufacturer agreements accounted for 15% of our total revenues for fiscal 2013, 12% of our total revenues for fiscal 2012 and 10% of our total revenues for fiscal 2011. We also have non-exclusive distribution agreements covering our North American commercial markets and our U.S. Federal Government market with Arrow Enterprise Computing Solutions, Inc. ("Arrow"), a subsidiary of Arrow Electronics, Inc., and Avnet Technology Solutions ("Avnet"), a subsidiary of Avnet, Inc. Pursuant to these distribution agreements, these distributors' primary role is to enable a more efficient and effective distribution channel for our products and services by managing our reseller partners and leveraging their own industry experience. We generated approximately 29% of our total revenues through Arrow in fiscal 2013, approximately 26% of our total revenues in fiscal 2012 and approximately 25% of our total revenues in fiscal 2011. Avnet's total revenue contribution was not material in fiscal 2013, 2012 or 2011. If Arrow or Avnet were to discontinue or reduce the sales of our products or if our agreement with Arrow or Avnet was terminated, and if we were unable to take back the management of our reseller channel or find another North American distributor to replace Arrow or Avnet, then it could have a material adverse effect on our future revenues. We also derive a significant portion of our total revenues from services revenue. Our services revenue is made up of fees from the delivery of customer support and other professional services, which are typically sold in connection with the sale of our software applications. Customer support agreements provide technical support and unspecified software updates on a when-and-if-available basis for an annual fee based on licenses purchased and the level of service subscribed. Other professional services include consulting, assessment and design services, implementation and post-deployment services and training, all of which to date have predominantly been sold in connection with the sale of software applications. Our services revenue was 49% of our total revenues for fiscal 2013, 50% for fiscal 2012 and 52% for fiscal 2011. The gross margin of our services revenue was 74.6% for fiscal 2013, 75.3% for fiscal 2012 and 76.6% for fiscal 2011. The decrease in the gross margin of our services revenue in the fiscal year ended March 31, 2013 compared to the fiscal year ended March 31, 2012 was primarily due to higher costs of services associated with the expansion of our worldwide customer support operations. Overall, our services revenue has lower gross margins than our software revenue. The gross margin of our software revenue was 98.9% for fiscal 2013, 98.6% for fiscal 2012 and 98.4% for fiscal 2011. An increase in the percentage of total revenues represented by services revenue may adversely affect our overall gross margins. Description of Costs and Expenses Our cost of revenues is as follows: • Cost of Software Revenue, consists primarily of third-party royalties and other costs such as media, manuals, translation and distribution costs; and • Cost of Services Revenue, consists primarily of salary and employee benefit costs in providing customer support and other professional services. 41 -------------------------------------------------------------------------------- Table of Contents Our operating expenses are as follows: • Sales and Marketing, consists primarily of salaries, commissions, employee benefits, stock-based compensation and other direct and indirect business expenses, including travel and related expenses, sales promotion expenses, public relations expenses and costs for marketing materials and other marketing events (such as trade shows and advertising); • Research and Development, which is primarily the expense of developing new software applications and modifying existing software applications, consists principally of salaries, stock-based compensation and benefits for research and development personnel and related expenses; contract labor expense and consulting fees as well as other expenses associated with the design, certification and testing of our software applications; and legal costs associated with the patent registration of such software applications; • General and Administrative, consists primarily of salaries, stock-based compensation and benefits for our executive, accounting, human resources, legal, information systems and other administrative personnel. Also included in this category are other general corporate expenses, such as outside legal and accounting services, compliance costs and insurance; and • Depreciation and Amortization, consists of depreciation expense primarily for computer equipment we use for information services and in our development and test labs. We anticipate that each of the above categories of operating expenses will increase in dollar amounts, but will decline as a percentage of total revenues in the long-term. Foreign Currency Exchange Rates' Impact on Results of Operations Sales outside the United States were approximately 42% of our total revenue for fiscal 2013, 39% for fiscal 2012 and 39% for fiscal 2011. The income statements of our non-U.S. operations are translated into U.S. dollars at the average exchange rates for each applicable month in a period. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions generally results in increased revenue, operating expenses and income from operations for our non-U.S. operations. Similarly, our revenue, operating expenses and net income will generally decrease for our non-U.S. operations if the U.S. dollar strengthens against foreign currencies. Using the average foreign currency exchange rates from the corresponding fiscal 2012 period, our total revenues, cost of revenues and operating expenses from non-U.S. operations for fiscal 2013 would have been higher by approximately $5.1 million, $0.6 million and $3.2 million, respectively. Using the average foreign currency exchange rates from the corresponding fiscal 2011 period, our total revenues, cost of revenues and operating expenses from non-U.S. operations for fiscal 2012 would have been lower by approximately $6.4 million, $1.0 million and $3.5 million, respectively. In addition, we are exposed to risks of foreign currency fluctuation primarily from cash balances, accounts receivables and intercompany accounts denominated in foreign currencies and are subject to the resulting transaction gains and losses, which are recorded as a component of general and administrative expenses. We recognized net foreign currency transaction losses of $0.3 million, $0.2 million, and $0.6 million in fiscal 2013, 2012 and 2011, respectively. Critical Accounting Policies In presenting our consolidated financial statements in conformity with U.S. generally accepted accounting principles, we are required to make estimates and judgments that affect the amounts reported therein. Some of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they 42 -------------------------------------------------------------------------------- Table of Contents pertain to future events. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable and appropriate. Actual results may differ significantly from these estimates. The following is a description of our accounting policies that we believe require subjective and complex judgments, which could potentially have a material effect on our reported financial condition or results of operations. Revenue Recognition Our revenue recognition policy is based on complex rules that require us to make significant judgments and estimates. In applying our revenue recognition policy, we must determine which portions of our revenue are recognized currently (generally software revenue) and which portions must be deferred and recognized in future periods (generally services revenue). We analyze various factors including, but not limited to, the sales of undelivered services when sold on a stand-alone basis, our pricing policies, the credit-worthiness of our customers and resellers, accounts receivable aging data and contractual terms and conditions in helping us to make such judgments about revenue recognition. Changes in judgment on any of these factors could materially impact the timing and amount of revenue recognized in a given period. Currently, we derive revenues from two primary sources: software licenses and services. Services include customer support, consulting, assessment and design services, installation services and training. A typical sales arrangement includes both of these sources. For sales arrangements involving multiple elements, we recognize revenue using the residual method. Under the residual method, we allocate and defer revenue for the undelivered elements based on fair value and recognize the difference between the total arrangement fee and the amount deferred for the undelivered elements as revenue. The determination of fair value of the undelivered elements in multiple-element arrangements is based on the price charged when such elements are sold separately, which is commonly referred to as vendor-specific objective evidence ("VSOE"). Our software licenses typically provide for a perpetual right to use our software and are sold on a per-copy basis, on a capacity basis or as site licenses. Software licenses sold on a capacity basis provide the customer with unlimited licenses of specified software products based on a defined level of terabytes of data under management. Site licenses give the customer the additional right to deploy the software on a limited basis during a specified term. We recognize software revenue through direct sales channels upon receipt of a purchase order or other persuasive evidence and when the other three basic revenue recognition criteria are met as described in the revenue recognition section in Note 2 of our "Notes to Consolidated Financial Statements." We recognize software revenue through all indirect sales channels on a sell-through model. A sell-through model requires that we recognize revenue when the basic revenue recognition criteria are met and these channels complete the sale of our software products to the end-user. Revenue from software licenses sold through an original equipment manufacturer partner is recognized upon the receipt of a royalty report or purchase order from that original equipment manufacturer partner. Services revenue includes revenue from customer support and other professional services. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year. To determine the price for the customer support element when sold separately, we primarily use historical renewal rates. Historical renewal rates are supported by a rolling 12-month VSOE analysis in which we segregate our customer support renewal contracts into different classes based on specific criteria including, but not limited to, dollar amount of software purchased, level of customer support being provided and distribution channel. The purpose of such an analysis is to determine if the customer support element that is deferred at the time of a software sale is consistent with how it is sold on a stand-alone renewal basis. 43-------------------------------------------------------------------------------- Table of Contents Our other professional services include consulting; implementation and post deployment services; and education services. Other professional services provided by us are not mandatory and can also be performed by the customer or a third-party. In addition to a signed purchase order, our consulting, assessment and design services and installation services are, in some cases, evidenced by a Statement of Work, which defines the specific scope of the services to be performed when sold and performed on a stand-alone basis or included in multiple-element sales arrangements. Revenues from consulting, assessment and design services and installation services are based upon a daily, weekly or monthly rate and are recognized when the services are completed. Training includes courses taught by our instructors or third-party contractors either at one of our facilities or at the customer's site. Training fees are recognized as revenue after the training course has been provided. Based on our analysis of such other professional services transactions sold on a stand-alone basis, we have concluded we have established VSOE for such other professional services when sold in connection with a multiple-element sales arrangement. In summary, we have analyzed all of the undelivered elements included in our multiple-element sales arrangements and determined that we have VSOE of fair value to allocate revenues to services. Our analysis of the undelivered elements has provided us with results that are consistent with the estimates and assumptions used to determine the timing and amount of revenue recognized in our multiple-element sales arrangements. Accordingly, assuming all basic revenue recognition criteria are met, software revenue is recognized upon delivery of the software license using the residual method. We are not likely to materially change our pricing and discounting practices in the future. Our sales arrangements generally do not include acceptance clauses. However, if an arrangement does include an acceptance clause, we defer the revenue for such an arrangement and recognize it upon acceptance. Acceptance occurs upon the earliest of receipt of a written customer acceptance, waiver of customer acceptance or expiration of the acceptance period. Stock-Based Compensation As of March 31, 2013, we maintain two stock incentive plans, which are described more fully in Note 7 of our "Notes to Consolidated Financial Statements." We account for our stock incentive plans based on the grant date fair value recognition provisions in accordance with ASC 718. We estimated the fair value of stock options granted using the Black-Scholes formula. The fair value of restricted stock units awarded is determined based on the number of shares granted and the closing price of our common stock on the date of grant. Compensation for all share-based payment awards is recognized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. Forfeitures are estimated based on a historical analysis of our actual stock award forfeitures. We anticipate that future grants under our stock incentive plans will include both non-qualified stock options and restricted stock units. The average expected life for fiscal 2012 was determined according to the "simplified" method, which is the mid-point between the vesting date and the end of the contractual term. During fiscal 2013, we began incorporating our historical data into the expected term calculation for stock options granted. We are now able to demonstrate significant stock option exercise activity for options granted subsequent to our initial public offering to provide a reasonable basis for incorporating historical data into our expected term of future stock option grants. As a result, for twelve months ended March 31, 2013, our calculation of expected term includes a combination of actual exercise data and an assumption on when the remaining outstanding options with similar characteristics will be exercised based on our historical data. In determining expected life, we separate employees into groups that have historically exhibited similar behavior with regard to option exercises. Expected volatility through September 30, 2012 was calculated based on a blended approach that included the historical volatility of a peer group, the implied volatility of the our traded options with a remaining maturity greater than six months and the historical realized volatility of our common stock. Effective October 1, 2012, we excluded the historical volatility of a peer group in our expected volatility calculation due to the fact that our 44-------------------------------------------------------------------------------- Table of Contents common stock has been publicly traded for a period that approximates our weighted average expected term. As a result, expected volatility subsequent to October 1, 2012 was calculated based on a blended approach that included the implied volatility of our traded options with a remaining maturity greater than six months and the historical realized volatility of our common stock. The risk-free interest rate is determined by reference to U.S. Treasury yield curve rates with a remaining term that is approximately the expected life assumed at the date of grant. Forfeitures are estimated based on our historical analysis of actual stock option forfeitures. The assumptions used in the Black-Scholes option-pricing model in the fiscal years ended March 31, 2013 and 2012 are as follows: Year Ended March 31, 2013 2012 Dividend yield None None Expected volatility 45% - 50% 42% - 47% Weighted average expected volatility 47% 45% Risk-free interest rates 0.60% - 1.40% 1.06% -2.56% Weighted average expected life (in years) 6.2 6.2 The weighted average fair value of stock options granted was $27.28 per option during the year ended March 31, 2013 and $18.77 per option during the year ended March 31, 2012. In addition, the weighted average fair value of restricted stock units awarded was $57.01 per share during the year ended March 31, 2013 and $42.07 per share during the year ended March 31, 2012. As of March 31, 2013, there was approximately $93.3 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested stock option and restricted stock unit awards that is expected to be recognized over a weighted average period of 2.70 years. The intrinsic value of the options outstanding as of March 31, 2013 was $345.6 million, of which $251.7 million related to vested options and $93.9 million related to unvested options. We anticipate that future grants under our stock incentive plans will include both non-qualified stock options and restricted stock units. Accounting for Income Taxes As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, and assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. As of March 31, 2013, we had net deferred tax assets of approximately $40.5 million, which were primarily related to federal and state research tax credit carryforwards, stock-based compensation and foreign net operating loss carryforwards. We assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent that we believe recovery is not likely, we establish a valuation allowance. As of March 31, 2013, we maintain a valuation allowance against our deferred tax assets totaling $1.4 million. Substantially all of the valuation allowance we have recorded at March 31, 2013 is against New Jersey state research tax credits due to uncertainties related to the ability to utilize such state research tax credits before they expire. We based our valuation allowance on our estimates of taxable income by legal entity and the period over which our state research tax credits will be recoverable. 45-------------------------------------------------------------------------------- Table of Contents At March 31, 2013, we have state net operating loss (NOL) carryforwards of approximately $2.1 million and also have NOL carryforwards for foreign tax purposes of approximately $6.0 million. At March 31, 2013, we have federal and state research tax credit (R&D) carryforwards of approximately $8.3 million and $4.8 million, respectively. The federal research tax credit carryforwards expire from 2022 through 2033, and the state research tax credit carryforwards expire from 2014 through 2028. At March 31, 2013, we have federal Alternative Minimum Tax credit carryforwards of $1.6 million. As of March 31, 2013, we had unrecognized tax benefits of $4.6 million, all of which, if recognized, would favorably affect the effective tax rate. In addition, we have accrued interest and penalties of $0.8 million related to the unrecognized tax benefits. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense. Components of the reserve are classified as either current or long-term in the Consolidated Balance Sheet based on when we expect each of the items to be settled. Accordingly, our unrecognized tax benefits of $4.6 million and the related accrued interest and penalties of $0.8 million are included in Other Liabilities on the Consolidated Balance Sheet. We believe that it is reasonably possible that approximately $0.1 million of our currently remaining unrecognized tax benefits and approximately less than $0.1 million of related accrued interest and penalties may be realized by the end of fiscal 2014 as a result of the lapse of the statute of limitations. We conduct business globally and as a result, file income tax returns in the United States and in various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, Australia, Canada, Germany, Netherlands and United Kingdom. Our U.S. Federal income tax return for the fiscal year ended March 31, 2011 is currently under audit by the U.S. Internal Revenue Service. In addition, our German subsidiary's income tax returns for the fiscal years ended March 31, 2006 through March 31, 2010 are currently under audit by the German tax authorities. The following table summarizes the tax years in the major tax jurisdictions that remain subject to income tax examinations by tax authorities as of March 31, 2013. The years subject to income tax examination in our foreign jurisdictions cover the maximum time period with respect to these jurisdictions. Due to NOL carryforwards, in some cases the tax years continue to remain subject to examination with respect to such NOLs. Years Subject to Income Tax Jurisdiction Tax Examination U.S. Federal 2002 - Present New Jersey 2002 - Present Foreign jurisdictions 2006 - Present Software Development Costs Research and development expenditures are charged to operations as incurred. Based on our software development process, technological feasibility is established upon completion of a working model, which also requires certification and extensive testing. Costs incurred by us between completion of the working model and the point at which the product is ready for general release are immaterial. 46 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth each of our sources of revenues and costs of revenues for the specified periods as a percentage of our total revenues for those periods (due to rounding numbers in column may not sum to totals): Year Ended March 31, 2013 2012 2011 Revenues: Software 51 % 50 % 48 % Services 49 % 50 % 52 % Total revenues 100 % 100 % 100 % Cost of revenues: Software 1 % 1 % 1 % Services 13 % 12 % 12 % Total cost of revenues 13 % 13 % 13 % Gross margin 87 % 87 % 87 % Fiscal year ended March 31, 2013 compared to fiscal year ended March 31, 2012 Revenues Total revenues increased $89.2 million, or 22%, from $406.6 million in fiscal 2012 to $495.9 million in fiscal 2013. Software Revenue. Software revenue increased $49.7 million, or 25%, from $201.8 million in fiscal 2012 to $251.5 million in fiscal 2013. Software revenue represented 51% of our total revenues in fiscal 2013 compared to 50% in fiscal 2012. The overall increase in software revenue was primarily driven by higher enterprise software transactions (transactions greater than $0.1 million), which increased by $37.0 million, or 35% in fiscal 2013 compared to fiscal 2012. As a result, enterprise software transactions represented approximately 57% of our software revenue in fiscal 2013 and approximately 52% of our software revenue in fiscal 2012. The increase in enterprise software transactions is due to both a 23% increase in the number of transactions of this type and a 10% increase in the average dollar amount of such transactions. The average dollar amount of enterprise transactions was approximately $266,000 in fiscal 2013 and approximately $241,000 in fiscal 2012. Software revenue derived from transactions less than $0.1 million increased $12.7 million, or 13%, in fiscal 2013 compared to fiscal 2012. Software revenue derived from our international operations in fiscal 2013 increased 40% compared to fiscal 2012. The growth in software revenue in our international locations is primarily due to increases in Canada, Europe and Australia as we expand our international operations. Software revenue derived from the United States in fiscal 2013 increased 14% compared to fiscal 2012. Software revenue derived from our indirect distribution channel (resellers and original equipment manufacturers) increased $53.2 million, or 31% in fiscal 2013 compared to fiscal 2012, and software revenue through our direct sales force decreased $3.5 million, or 11% in fiscal 2013 compared to fiscal 2012. The increase in the dollar value of the software revenue through our indirect distribution channel is primarily due to the increase in software revenue generated in foreign locations, which is substantially sold through our channel partners. The decrease in the dollar value of the software revenue generated through our direct sales channel is due to a lower value of direct enterprise transactions in the United States. Software revenue that is derived from both our indirect channel partners and direct sales force are key attributes to our long-term growth strategy. We 47-------------------------------------------------------------------------------- Table of Contents will continue to invest in both our channel relationships and direct sales force in the future, but we continue to expect more revenue to be generated through indirect distribution channels over the long term as more fully discussed above in the "Sources of Revenue" section. Services Revenue. Services revenue increased $39.5 million, or 19%, from $204.8 million in fiscal 2012 to $244.3 million in fiscal 2013. Services revenue represented 49% of our total revenues in fiscal 2013 compared to 50% in fiscal 2012. The increase in services revenue is primarily due to a $34.1 million increase in revenue from customer support agreements as a result of software sales to new customers and renewal agreements with our installed software base. Cost of Revenues Total cost of revenues increased $11.5 million, or 22%, from $53.4 million in fiscal 2012 to $65.0 million in fiscal 2013. Total cost of revenues represented 13% of our total revenues in both fiscal 2013 and fiscal 2012. Cost of Software Revenue. Cost of software revenue increased approximately $0.1 million, or 4%, from $2.7 million in fiscal 2012 to $2.9 million in fiscal 2013. Cost of software revenue represented 1% of our total software revenue in both fiscal 2013 and fiscal 2012. The increase in cost of software revenue is primarily due to higher third party royalty costs associated with our Simpana software suite in fiscal 2013 compared to fiscal 2012. Cost of Services Revenue. Cost of services revenue increased $11.4 million, or 23%, from $50.7 million in fiscal 2012 to $62.1 million in fiscal 2013. Cost of services revenue represented 25% of our services revenue in both fiscal 2013 and fiscal 2012. The increase in the dollar amount of cost of services revenue is primarily the result of higher employee compensation and travel expenses totaling approximately $6.1 million as well as a $2.8 million increase in third-party outsourcing costs to facilitate our delivery of services. Operating Expenses Sales and Marketing. Sales and marketing expenses increased $28.7 million, or 13%, from $219.0 million in fiscal 2012 to $247.7 million in fiscal 2013. The increase is primarily due to a $15.7 million increase in employee compensation and related expenses attributable to the expansion of our sales force from the prior year. The increase in sales and marketing expenses also includes a $4.6 million increase in advertising and marketing related expense as we continue to build brand awareness for our Simpana products and a $3.7 million increase in stock-based compensation expenses. Sales and marketing expenses as a percentage of total revenues decreased to 50% in fiscal 2013 compared to 54% in fiscal 2012, primarily due to cost containment in our field operations, as well as our sales segmentation strategy that we implemented at the beginning of fiscal 2013, which aligned our sales and marketing team as we penetrate the enterprize segment. Research and Development. Research and development expenses increased $7.4 million, or 19%, from $39.9 million in fiscal 2012 to $47.4 million in fiscal 2013. The increase is primarily due to higher salary and related expenses resulting from the expansion of our engineering group and higher fiscal 2013 bonus expense totaling approximately $4.8 million. The increase in research and development also includes a $0.7 million increase in stock-based compensation expenses and a $0.7 million increase in legal fees. Research and development expenses as a percentage of total revenues remained flat at 10% in both fiscal 2013 and fiscal 2012. Investing in research and development has been a priority for CommVault, and we anticipate continued spending related to the development of our data and information management software applications. General and Administrative. General and administrative expenses increased $9.5 million, or 23%, from $40.6 million in fiscal 2012 to $50.1 million in fiscal 2013. This increase is primarily due to a $3.9 million increase in stock-based compensation expenses, a $2.9 million increase in employee and related compensation due to higher headcount and higher fiscal 2013 bonus expense and a $1.2 million increase in settlement reserves. 48-------------------------------------------------------------------------------- Table of Contents General and administrative expenses in fiscal 2013 includes $0.3 million of net foreign currency transaction losses compared to $0.2 million of net foreign currency transaction losses recognized in general and administrative expenses in fiscal 2012. General and administrative expenses as a percentage of total revenues remained flat at 10% in both fiscal 2013 and fiscal 2012. Depreciation and Amortization. Depreciation expense increased $0.5 million, from $4.4 million in fiscal 2012 to $4.8 million in fiscal 2013. This reflects higher depreciation associated with increased capital expenditures primarily over the past 12 months as we continue to expand our worldwide operations. Interest Income Interest income increased $0.3 million, from $0.8 million in fiscal 2012 to $1.1 million in fiscal 2013. The increase in interest income is primarily due to higher balances in our cash and related investment accounts. Income Tax Expense Income tax expense was $28.7 million in fiscal 2013 compared to $18.1 million in fiscal 2012. The effective tax rate in fiscal 2013 was 35% as compared to 36% in fiscal 2012. In fiscal 2013, the effective rate was benefited by the reenactment of the research and development credit which had previously expired on December 31, 2011 and includes an additional benefit related to periods prior to March 31, 2012 as tax law is accounted for in the period of enactment. In addition, the effective rate was benefited by foreign tax credits, offset by state income taxes and permanent differences in both the United States and foreign jurisdictions. In fiscal 2012, the effective rate was higher than the expected federal statutory rate of 35% primarily due to state income taxes and permanent differences in both the United States and foreign jurisdictions, partially offset by income tax benefits from recording research and foreign tax credits; domestic production activities deductions; and reversing $1.6 million of our valuation allowance against New Jersey state research tax credits due to the passage of state laws. Fiscal year ended March 31, 2012 compared to fiscal year ended March 31, 2011 Revenues Total revenues increased $91.9 million, or 29%, from $314.8 million in fiscal 2011 to $406.6 million in fiscal 2012. Software Revenue. Software revenue increased $52.0 million, or 35%, from $149.8 million in fiscal 2011 to $201.8 million in fiscal 2012. Software revenue represented 50% of our total revenues in fiscal 2012 compared to 48% in fiscal 2011. The overall increase in software revenue was primarily driven by higher enterprise software transactions (transactions greater than $0.1 million), which increased by $33.1 million in fiscal 2012 compared to fiscal 2011. As a result, enterprise software transactions represented approximately 52% of our software revenue in fiscal 2012 and approximately 48% of our software revenue in fiscal 2011. The increase in enterprise software transactions is due to both a 37% increase in the number of transactions of this type and a 7% increase in the average dollar amount of such transactions. The average dollar amount of enterprise transactions was approximately $241,000 in fiscal 2012 and approximately $226,000 in fiscal 2011. Software revenue derived from transactions less than $0.1 million increased $18.9 million, or 24%, in fiscal 2012 compared to fiscal 2011. Software revenue derived from the United States in fiscal 2012 increased 40% compared to fiscal 2011 and software revenue derived from our international operations in fiscal 2012 increased 28% compared to fiscal 2011. The growth in software revenue in our international locations is primarily due to increases in Europe, Australia and Canada as we expand our international operations. 49-------------------------------------------------------------------------------- Table of Contents Software revenue derived from our indirect distribution channel (resellers and original equipment manufacturers) increased $44.0 million in fiscal 2012 compared to fiscal 2011, and software revenue through our direct sales force increased $8.0 million in fiscal 2012 compared to fiscal 2011. The increase in the dollar value of the software revenue through our indirect distribution channel is primarily due to the increase in software revenue generated in foreign locations, which is substantially sold through our channel partners. The increase in the dollar value of the software revenue through our direct sales channel is primarily due certain of our enterprise software transactions in the United States in the first quarter and fourth quarter of fiscal 2012 being sold through our direct sales channel. Software revenue that is derived from both our indirect channel partners and direct sales force are key attributes to our long-term growth strategy. We will continue to invest in both our channel relationships and direct sales force in the future, but we continue to expect more revenue to be generated through indirect distribution channels over the long term as more fully discussed above in the "Sources of Revenue" section. Services Revenue. Services revenue increased $39.9 million, or 24%, from $165.0 million in fiscal 2011 to $204.8 million in fiscal 2012. Services revenue represented 50% of our total revenues in fiscal 2012 compared to 52% in fiscal 2011. The increase in services revenue is primarily due to a $31.8 million increase in revenue from customer support agreements as a result of software sales to new customers and renewal agreements with our installed software base. Cost of Revenues Total cost of revenues increased $12.4 million, or 30%, from $41.0 million in fiscal 2011 to $53.4 million in fiscal 2012. Total cost of revenues represented 13% of our total revenues in both fiscal 2012 and fiscal 2011. Cost of Software Revenue. Cost of software revenue increased approximately $0.4 million, or 16%, from $2.4 million in fiscal 2011 to $2.7 million in fiscal 2012. Cost of software revenue represented 1% of our total software revenue in fiscal 2012 and 2% of our total software revenue in fiscal 2011. The increase in cost of software revenue is primarily due to higher third party royalty costs associated with our Simpana software suite in fiscal 2012 compared to fiscal 2011. Cost of Services Revenue. Cost of services revenue increased $12.0 million, or 31%, from $38.6 million in fiscal 2011 to $50.7 million in fiscal 2012. Cost of services revenue represented 25% of our services revenue in fiscal 2012 compared to 23% in fiscal 2011. The increase in the cost of services as a percentage of total services revenue in fiscal 2012 compared to fiscal 2011 was primarily due to a higher percentage of our services revenue being derived from professional services engagements as well as higher costs of services associated with the expansion of our worldwide customer support operations. The increase in the dollar amount of cost of services revenue is primarily the result of higher employee compensation and travel expenses totaling approximately $5.6 million as well as a $3.6 million increase in third-party outsourcing costs to facilitate our delivery of services. Operating Expenses Sales and Marketing. Sales and marketing expenses increased $56.0 million, or 34%, from $163.1 million in fiscal 2011 to $219.0 million in fiscal 2012. The increase is primarily due to a $42.7 million increase in employee compensation and related expenses attributable to the expansion of our sales force from the prior year as well as higher commissions expense due to record revenues and higher headcount. The increase in sales and marketing expenses also includes $3.0 million in higher travel and related expenses due to the expansion of our sales force, a $2.8 million increase in stock-based compensation expenses and a $2.1 million increase in advertising and marketing related expenses as we continue to build brand awareness for our Simpana software products. Sales and marketing expenses as a percentage of total revenues increased to 54% in fiscal 2012 compared to 52% in fiscal 2011. 50-------------------------------------------------------------------------------- Table of Contents Research and Development. Research and development expenses increased $3.0 million, or 8%, from $37.0 million in fiscal 2011 to $39.9 million in fiscal 2012. The increase is primarily due to higher salary and related expenses resulting from the expansion of our engineering group and higher fiscal 2012 bonus expense totaling approximately $2.8 million. Research and development expenses as a percentage of total revenues decreased to 10% in fiscal 2012 from 12% in fiscal 2011. Investing in research and development has been a priority for CommVault, and we anticipate continued spending related to the development of our data and information management software applications. General and Administrative. General and administrative expenses increased $6.4 million, or 19%, from $34.2 million in fiscal 2011 to $40.6 million in fiscal 2012. This increase is primarily due to a $3.7 million increase in employee and related compensation due to higher headcount and higher fiscal 2012 bonus expense as well as a $2.2 million increase in stock-based compensation expenses. These increases were partially offset by lower net foreign currency transaction losses of $0.4 million. General and administrative expenses in fiscal 2012 includes $0.2 million of net foreign currency transaction losses compared to $0.6 million of net foreign currency transaction losses recognized in general and administrative expenses in fiscal 2011. General and administrative expenses as a percentage of total revenues decreased to 10% in fiscal 2012 from 11% in fiscal 2011. Depreciation and Amortization. Depreciation expense increased $0.6 million, from $3.8 million in fiscal 2011 to $4.4 million in fiscal 2012. This reflects higher depreciation associated with increased capital expenditures primarily over the past 12 months as we expand our worldwide operations. Interest Income Interest income increased $0.1 million, from $0.7 million in fiscal 2011 to $0.8 million in fiscal 2012. The increase in interest income is primarily due to higher balances in our cash and related investment accounts. Income Tax Expense Income tax expense was $18.1 million in fiscal 2012 compared to $15.3 million in fiscal 2011. The effective tax rate in fiscal 2012 was 36% as compared to 42% in fiscal 2011. In fiscal 2012, the effective rate is higher than the expected federal statutory rate of 35% primarily due to state income taxes and permanent differences in both the United States and foreign jurisdictions, partially offset by income tax benefits from recording research and foreign tax credits; domestic production activities deductions; and reversing $1.6 million of our valuation allowance against New Jersey state research tax credits due to the passage of state laws. In fiscal 2011, the effective rate is higher than the expected federal statutory rate of 35% primarily due to recording a valuation allowance against New Jersey research tax credits as well as the impact of state income taxes and permanent differences in both the United States and foreign jurisdictions. These items were partially offset by the reversal of certain tax reserves as a result of the expiration of a statute of limitations in a foreign jurisdiction as well as recording additional research tax credits. Liquidity and Capital Resources As of March 31, 2013, our cash and cash equivalents balance of $434.0 million primarily consisted of money market funds. In addition, we have approximately $1.9 million of short-term investments invested in certificates of deposit at March 31, 2013. In recent fiscal years, our principal sources of liquidity have been cash provided by operations. As of March 31, 2013, the amount of cash and cash equivalents held outside of the United States by our foreign legal entities was approximately $87.6 million. These balances are dispersed across many international locations around the world. We believe that such dispersion meets the current and anticipated future liquidity needs of our foreign legal entities. In addition, it is our intention to indefinitely reinvest undistributed earnings of our foreign legal entities. In the event we needed to repatriate funds from outside of the United States, such 51 -------------------------------------------------------------------------------- Table of Contents repatriation would likely be subject to restrictions by local laws and/or tax consequences including foreign withholding taxes or U.S. income taxes. It is not currently practical to estimate the legal restrictions or tax liability that would arise from such repatriations. As of March 31 2013, we are authorized to repurchase up to a total of $220.0 million of our common stock through March 31, 2014 under our stock repurchase program. Under our stock repurchase program, repurchased shares are constructively retired and returned to unissued status. Our stock repurchase program has been funded by our existing cash and cash equivalent balances as well as cash flows provided by our operations. There were no repurchases of our common stock during fiscal 2013. As of March 31, 2013, we have repurchased approximately $117.2 million, or 5.7 million shares, under our stock repurchase plan at an average purchase price of $20.43 per share. As a result, we may repurchase an additional $102.8 million of our common stock through March 31, 2014. The primary business reason for our stock repurchase program is to reduce the dilutive impact on our common shares outstanding associated with stock option exercises and our previous public and private stock offerings. Under our stock repurchase program, we have bought back approximately 13% of the common stock that was outstanding at the time the stock repurchase program was announced. In addition, at the time we implemented our stock repurchase program in late fiscal 2008 we believed that our share price was undervalued and the best use for a portion of our cash balance was to repurchase some of our outstanding common stock. Our future stock repurchase activity is subject to the business judgment of our management and Board of Directors, taking into consideration our historical and projected results of operations, financial condition, cash flows and other anticipated capital requirements or investment alternatives. On January 29, 2013, we closed on a purchase of land located in Tinton Falls, New Jersey for our future corporate campus headquarters to support the long-term growth of our business. We are in the process of completing the design and construction of the headquarters, which we expect to finalize over approximately the next 2 years. Our estimate of the build-out, including the land purchase, building and campus infrastructure, is approximately $125 million to $135 million. We expect to fund this capital expenditure from our existing cash and cash equivalent balances and our cash generated from operations. Our summarized annual cash flow information is as follows (in thousands): Year Ended March 31, 2013 2012 2011 Net Cash provided by operating activities $ 112,683 $ 100,000 $ 52,410 Net Cash provided by (used in) investing activities (15,832 ) (7,792 ) 28 Net Cash provided by (used in) financing activities 41,208 (11,507 ) (7,304 ) Effects of exchange rate - changes in cash (1,183 ) (783 ) 2,518 Net increase in cash and cash equivalents $ 136,876 $ 79,918 $ 47,652 Net cash provided by operating activities was $112.7 million in fiscal 2013, $100.0 million in fiscal 2012 and $52.4 million in fiscal 2011. In fiscal 2013, cash generated by operating activities was primarily due to net income adjusted for the impact of non-cash charges; an increase in deferred services revenue as a result of customer support agreements from new customers and renewal agreements with our installed software base; and an increase in accrued liabilities. These increases were partially offset by an increase in accounts receivable due to higher revenues and timing of cash receipts. In fiscal 2012 and fiscal 2011, cash generated by operating activities was primarily due to net income adjusted for the impact of non-cash charges; an increase in deferred services revenue as a result of customer support agreements from new customers and renewal agreements with our installed software base; and an increase in accrued liabilities. 52 -------------------------------------------------------------------------------- Table of Contents Net cash provided by (used in) investing activities was ($15.8) million in fiscal 2013, ($7.8) million in fiscal 2012 and less than $0.1 million in fiscal 2011. In fiscal 2013, cash used in investing activities was due to the purchase of property and equipment in the amounts of $9.2 million for purchases relating to our new corporate campus headquarters and $7.8 million of capital expenditures as we continue to invest in and enhance our global infrastructure. These increases were partially offset by net proceeds from the maturity of short-term investments of $1.2 million. In fiscal 2012, cash used in investing activities was due to the purchase of property and equipment of $5.8 million related to growth in our business as well as the net purchases of short-term investments of $2.0 million. In fiscal 2011, cash provided by investing activities was due to the net proceeds from maturity of short-term investments of $3.9 million offset by the purchase of property and equipment of $3.9 million related to growth in our business. Net cash provided by (used in) financing activities was $41.2 million in fiscal 2013, ($11.5) million in fiscal 2012 and ($7.3) million in fiscal 2011. The cash provided by financing activities in fiscal 2013 was due to $23.1 million of excess tax benefits recognized as a result of stock option exercises and $18.1 million of proceeds from the exercise of stock options. The cash used in financing activities in fiscal 2012 was due to $45.6 million used to repurchase shares of our common stock under our repurchase program, partially offset by $18.1 million of proceeds from the exercise of stock options and $16.0 million of excess tax benefits recognized as a result of stock option exercises. The cash used in financing activities in fiscal 2011 was due to $31.5 million used to repurchase shares of our common stock under our share repurchase program partially offset by $17.2 million from the exercise of stock options and $7.0 million of excess tax benefits recognized as the result of stock option exercises and vesting of restricted stock units. A summary of the cash used for the stock repurchase program consists of the following: Year Ended March 31, 2013 2012 2011 Cash used for repurchases (in thousands)* $ - $ 45,639 $ 31,506 Shares repurchased (in thousands)* - 1,323 1,559 Average price per share $ - $ 34.45 $ 20.21 * Based on settlement date, not trade date. Working capital increased $120.8 million from $222.3 million as of March 31, 2012 to $343.1 million as of March 31, 2013. The increase in working capital is primarily due to a $135.7 million increase in cash and short-term investments and a $17.2 million increase in accounts receivable. These increases were partially offset by a $27.7 million increase in deferred revenue and a $9.7 million increase in accrued liabilities. The increase in cash and short-term investments is primarily due to net income generated during the period, cash received from the collection of account receivables and cash received from the exercise of stock options. The increase in deferred revenue is primarily due to higher deferred services revenue from customer support agreements from software sales to new customers and renewal agreements with our installed software base. The increase in accrued expenses is primarily due to higher employee and related compensation accruals. Working capital increased $42.9 million from $179.4 million as of March 31, 2011 to $222.3 million as of March 31, 2012. The increase in working capital is primarily due to an $81.9 million increase in cash and short-term investments. These increases were partially offset by a $27.1 million increase in deferred revenue, a $12.4 million increase in accrued liabilities and a $6.1 million decrease in accounts receivable. The increase in cash and short-term investments is primarily due to net income generated during the period, cash received from the collection of account receivables and cash received from the exercise of stock options, partially offset by cash used to repurchase common stock during fiscal 2012. The increase in deferred revenue is primarily due to higher deferred services revenue from customer support agreements from software sales to new customers and renewal agreements with our installed software base. The increase in accrued expenses is primarily due to higher 53-------------------------------------------------------------------------------- Table of Contents employee and related compensation accruals and the decrease in accounts receivable is primarily due to strong collections efforts and timing of cash receipts. We believe that our existing cash, cash equivalents and our cash from operations will be sufficient to meet our anticipated cash needs for working capital, capital expenditures (including our planned new corporate campus headquarters) and potential stock repurchases for at least the next 12 months. We may seek additional funding through public or private financings or other arrangements during this period. Adequate funds may not be available when needed or may not be available on terms favorable to us, or at all. If additional funds are raised by issuing equity securities, dilution to existing stockholders will result. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to fund additional interest expense. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations. Summary Disclosures about Contractual Obligations and Commercial Commitments Our material capital commitments consist of obligations under facilities and operating leases. Some of these leases have free or escalating rent payment provisions. We recognize rent expense under leases on a straight-line basis. We anticipate that we will experience an increase in our capital expenditures and lease commitments as a result of our anticipated growth in operations, infrastructure, personnel and resources devoted to building our brand name. The following table summarizes our obligations as of March 31, 2013 (dollars in thousands): Payments Due by Period More Less Than Than 5 Total 1 Year 2-3 Years 4-5 Years Years Operating lease obligations $ 25,167 $ 9,639 $ 14,030 $ 1,498 $ - Purchase obligations 6,306 4,403 1,791 112 - Total $ 31,473 $ 14,042 $ 15,821 $ 1,610 $ - We generally do not enter into binding purchase obligations. The purchase obligations above relate primarily to marketing and software development services, IT infrastructure costs and costs associated with the design and construction of our corporate campus headquarters. The contractual obligations table above excludes unrecognized tax benefits recorded in Other Liabilities totaling $5.4 million because we cannot reasonably estimate in which future periods these amounts will ultimately be settled. The $5.4 million is classified as a long-term liability in our consolidated balance sheet as of March 31, 2013 as none of these obligations are anticipated to be paid within one year from April 1, 2013. As of March 31, 2013, we have an outstanding letter of credit for $0.1 million issued in connection with a revenue transaction. This letter of credit will remain outstanding until September 17, 2013. We have certain software royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a fixed cost per unit shipped or a fixed fee for unlimited units shipped over a designated period. Royalty expense, included in cost of software revenues, was $2.1 million in fiscal 2013, $1.6 million in fiscal 2012 and $1.3 million in fiscal 2011. We offer a 90-day limited product warranty for our software. To date, costs relating to this product warranty have not been material. 54-------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements As of March 31, 2013 and 2012, other than our operating leases, we do not have off-balance sheet financing arrangements, including any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. Indemnifications Certain of our software licensing agreements contain certain provisions that indemnify our customers from any claim, suit or proceeding arising from alleged or actual intellectual property infringement. These provisions continue in perpetuity along with our software licensing agreements. We have never incurred a liability relating to one of these indemnification provisions in the past and we believe that the likelihood of any future payout relating to these provisions is remote. Therefore, we have not recorded a liability during any period related to these indemnification provisions. Impact of Recently Issued Accounting Standards In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"), which requires companies to present information about reclassification adjustments from accumulated other comprehensive income in their financial statements or footnotes. ASU 2013-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2012. The new requirements will take effect for us in the first quarter of fiscal 2014 and will be applied prospectively. We do not believe the adoption of ASU 2013-02 will have a significant impact on our consolidated financial statements. In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income ("ASU 2011-05"), to require an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate, but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. ASU 2011-05 became effective for us in the first quarter of fiscal 2013 and was applied retrospectively. There was no significant impact on our consolidated financial statements. The FASB also continues to work on a number of significant accounting rules which may impact our accounting and disclosures in future periods. Since these rules have not yet been issued, the effective dates and potential impact are unknown. |