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EXA CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Result of Operations appearing in our Annual Report on Form 10-K, filed with the SEC on April 9, 2013. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, assumptions and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies and operations, financing plans, potential growth opportunities, potential market opportunities and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as "anticipates," "believes," "could," "seeks," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" or similar expressions and the negatives of those terms. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management's plans, estimates, assumptions and beliefs only as of the date of this report. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. As used herein, except as otherwise indicated by context, references to "we," "us," "our," or the "Company" refer to Exa Corporation. Overview We develop, sell and support simulation software and services that vehicle manufacturers use to enhance the performance of their products, reduce product development costs and improve the efficiency of their design and engineering processes. Our core product, PowerFLOW, is an innovative software solution for simulating complex fluid flow problems, including aerodynamics, thermal management, and aeroacoustics, or wind noise. Our solutions enable engineers and designers to augment or replace conventional methods of evaluating design alternatives that rely on expensive and inefficient physical prototypes and test facilities, such as wind tunnels, with accurate digital simulations that are more useful and timely. Our simulation solutions enable our customers to gain crucial insights about design performance early in the design cycle, reducing the likelihood of expensive redesigns and late-stage engineering changes. As a result, our customers realize significant cost savings and fundamental improvements in their vehicle development process. Simulation-driven design has enabled product and process improvements in many industries, and as a result, the process in which products are conceptualized and developed is undergoing a radical transformation. Digital simulation not only provides feedback earlier and in a more useful form than traditional approaches, but in many areas simulation has reached a level of accuracy and robustness that is sufficient to enable a manufacturer to rely solely on its results for design decisions, without prototype testing. Global vehicle manufacturers face increasing pressure, from government mandates as well as from consumers, to improve the efficiency of their products and to reduce particulate and greenhouse gas emissions. This requires different powertrain choices (diesel, electric, hybrid), changes in the shape of the vehicle, and reductions in vehicle weight. Consumers also demand improved quality and durability, and equally important, innovative and emotionally expressive designs. In addition, manufacturers are offering a broader array of vehicles for different niche customer segments and geographies on a faster design refresh schedule than in the past. We believe these industry forces favor the adoption of simulation-driven design. One of the most critical challenges for our customers in their vehicle development processes is measuring or predicting how a vehicle feature or a mechanical system will interact with air, water or other fluids. For example, developing vehicles with reduced aerodynamic drag is critical to achieving the improvements in fuel efficiency that are increasingly desired by customers and mandated by government regulations. Our core product, PowerFLOW, is an innovative software solution for simulating complex fluid flow problems, including aerodynamics, thermal management, and aeroacoustics, or wind noise. PowerFLOW relies upon a proprietary technology that we refer to as Digital Physics, based on algorithms known as the lattice Boltzmann method. Our proprietary technology enables PowerFLOW to predict complex fluid flows with a level of reliability comparable to or better than physical testing. The combination of PowerFLOW's accuracy and timeliness provides results that are superior to those of alternative computational fluid dynamics, or CFD, methods. We currently focus primarily on the ground transportation market, including manufacturers in the passenger vehicle, highway truck, off-highway vehicle and train markets, as well as their suppliers. Over 90 manufacturers currently utilize our products and services, including 14 of the global top 15 passenger vehicle manufacturer groups such as BMW, Ford, Hyundai, Jaguar Land Rover, Nissan, Porsche, Renault, Toyota and Volkswagen; truck and off-highway vehicle manufacturers such as AGCO, Hyundai, Kenworth, Kobelco, MAN, Peterbilt, Scania and Volvo Truck; and suppliers to these manufacturers, such as Cummins, Denso and Magna Steyr. We are also beginning to explore other markets in which we believe the capabilities of PowerFLOW have broad application, such as the aerospace, oil and gas production, chemical processing, architecture, engineering and construction, power generation, biomedical and electronics industries. 13 -------------------------------------------------------------------------------- Table of Contents We derive our revenue primarily from the sale of our simulation software, using an annual capacity-based licensing model. Customers usually purchase PowerFLOW simulation capacity under one-year licenses. Simulation capacity may be purchased as software-only, to be run on the customer's own computer hardware, or provided in the form of software-as-a-service, via our hosted PowerFLOW OnDemand offering. To introduce new customers to our simulation solutions, we typically perform fixed-price projects that include simulation services accessed via our OnDemand facilities, along with engineering and consulting services. Customers typically license our products for one application, such as aerodynamics, and over time expand to other applications such as thermal management or aeroacoustics. We sell our products and project services primarily through our direct sales force, including sales executives and applications engineering teams deployed near our customers in the United States, United Kingdom, France, Germany, Italy, Japan, Korea and China and through a distributor in India and through a sales agent in Brazil. In our customer engagement model, our applications management teams engage with our customers in long-term relationships focused on identifying problems that we can help them solve, demonstrating the value of our solutions and ensuring that the customer achieves maximum benefit from them. In this process we interact continuously with our customers to improve our software and services and add new solutions, and at the same time deepen our knowledge of their industry. We were founded in 1991 and had 241 employees worldwide at April 30, 2013. Our corporate headquarters, including our principal administrative, marketing, technical support, research and product development facilities, are located in Burlington, Massachusetts. 14 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following tables set forth, for the periods presented, data from our consolidated statements of operation, as well as that data as a percentage of revenues. Three Months Ended April 30, (in thousands) 2013 2012 Revenue: License revenue $ 10,692 $ 10,013 Project revenue 1,796 1,281 Total revenues 12,488 11,294 Operating expenses: (1) Cost of revenues 3,671 3,223 Sales and marketing 2,117 1,600 Research and development 4,386 4,140 General and administrative 2,771 1,958 Total operating expenses 12,945 10,921 (Loss) income from operations (457 ) 373 Other expense, net: Foreign exchange gain 37 - Interest expense (381 ) (414 ) Interest income 4 2 Other income, net 2 66 Total other expense, net (338 ) (346 ) (Loss) income before income taxes (795 ) 27 Benefit for income taxes 254 35 Net (loss) income $ (541 ) $ 62 (1) Amounts include stock-based compensation expense as follows: Three Months Ended April 30, (in thousands) 2013 2012 Cost of revenues $ 31 $ 27 Sales and marketing 50 46 Research and development 77 81 General and administrative 87 87 Total stock-based compensation expense $ 245 $ 241 15 -------------------------------------------------------------------------------- Table of Contents Three Months Ended April 30, (as a percent of total revenue) 2013 2012 Revenue: License revenue 85.6 % 88.7 % Project revenue 14.4 % 11.3 % Total revenues 100.0 % 100.0 % Operating expenses: Cost of revenues 29.4 % 28.5 % Sales and marketing 17.0 % 14.2 % Research and development 35.1 % 36.7 % General and administrative 22.2 % 17.3 % Total operating expenses 103.7 % 96.7 % (Loss) income from operations (3.7 )% 3.3 % Other expense, net: Foreign exchange gain 0.3 % 0.0 % Interest expense (3.1 )% (3.7 )% Interest income 0.0 % 0.0 % Other income, net 0.0 % 0.6 % Total other expense, net (2.7 )% (3.1 )% (Loss) income before income taxes (6.4 )% 0.2 % Benefit for income taxes 2.0 % 0.3 % Net (loss) income (4.3 )% 0.5 % Due to rounding, totals may not equal the sum of line items in the table above. Comparison of Three Months Ended April 30, 2013 and 2012 Revenue Three Months Ended April 30, (in thousands, except percentages) 2013 2012 Increase % Change License revenue $ 10,692 $ 10,013 $ 679 6.8 % Project revenue 1,796 1,281 515 40.2 Total revenues $ 12,488 $ 11,294 $ 1,194 10.6 % License revenue increased 6.8%, from $10.0 million for the three months ended April 30, 2012 to $10.7 million for the three months ended April 30, 2013. The $0.7 million increase was driven almost entirely by increased consumption of simulation capacity by existing customers. Project revenue increased $0.5 million during the three months ended April 30, 2013 compared to the three months ended April 30, 2012 due to increased activity on existing projects and the initiation of new projects. Foreign exchange fluctuations, particularly the weakness of the Euro and Japanese yen, negatively impacted total revenue in the three months ended April 30, 2013 by $0.4 million as compared to the three months ended April 30, 2012. On a constant currency basis, our total revenues in the three months ended April 30, 2013 increased 14.2%, compared with the three months ended April 30, 2012. 16 -------------------------------------------------------------------------------- Table of Contents Cost of revenue Three Months Ended April 30, (in thousands, except percentages) 2013 2012 Increase % Change Cost of revenue $ 3,671 $ 3,223 $ 448 13.9 % Cost of revenue for the three months ended April 30, 2013 was $3.7 million, an increase of $0.4 million, or 13.9%, compared with $3.2 million during the three months ended April 30, 2012. As a percentage of revenues, cost of revenues increased to 29.4% for the three months ended April 30, 2013 compared to 28.5% for the three months ended April 30, 2012. Increased payroll and employee related costs, including travel, accounted for substantially all of the increase, primarily as a result of the net addition of 24 new application engineers, merit-based compensation increases for existing personnel and increased travel due to expanded service and support efforts. Sales and marketing Three Months Ended April 30, (in thousands, except percentages) 2013 2012 Increase % Change Sales and marketing $ 2,117 $ 1,600 $ 517 32.3 % Sales and marketing expenses for the three months ended April 30, 2013 were $2.1 million, an increase of $0.5 million, or 32.3% compared to $1.6 million for the three months ended April 30, 2012. As a percentage of revenues, sales and marketing expenses increased to 17.0% for the three months ended April 30, 2013 compared to 14.2% for the three months ended April 30, 2012. Increased non-commission payroll and employee related costs accounted for approximately $0.2 million of the increase, primarily due to the net addition of 5 new sales people, merit-based compensation increases for existing personnel and recruiting fees relating to new European sales executives. Commission expense increased by approximately $0.3 million, primarily due to an increase in invoicing levels during the current quarter as compared to the prior fiscal year quarter. These increases were partially offset by a slight decrease in travel expenses due to an off-site sales meeting in the prior year fiscal quarter that did not reoccur in the current quarter. Research and development Three Months Ended April 30, (in thousands, except percentages) 2013 2012 Increase % Change Research and development $ 4,386 $ 4,140 $ 246 5.9 % Research and development expenses for the three months ended April 30, 2013 were $4.4 million, an increase of $0.2 million, or 5.9%, compared to $4.1 million for the three months ended April 30, 2012. As a percentage of revenues, research and development expense decreased to 35.1% for the three months ended April 30, 2013 compared to 36.7% for the three months ended April 30, 2012. Increased payroll and employee related costs, including travel, accounted for approximately $0.2 million of the increase, primarily as a result of the net addition of 7 new scientists and software engineers and merit-based compensation increases for existing personnel. In addition, data center hosting fees increased by approximately $0.1 million due to the expansion of our data center capabilities and our research and development efforts. These increases were partially offset by approximately $0.1 million of decreased consulting, royalty and research sponsorship costs incurred in the prior fiscal year quarter that did not reoccur in the current quarter. General and administrative Three Months Ended April 30, (in thousands, except percentages) 2013 2012 Increase % Change General and administrative $ 2,771 $ 1,958 $ 813 41.5 % General and administrative expenses for the three months ended April 30, 2013 were $2.8 million, an increase of $0.8 million, or 41.5%, compared to $2.0 million for the three months ended April 30, 2012. As a percentage of revenues, general and administrative expenses increased to 22.2% for the three months ended April 30, 2013, compared to 17.3% for the three months ended April 30, 2012. The increase is primarily attributed to increased professional costs associated with being a public company after our initial public offering on July 3, 2012, including increased audit, tax and legal fees, investor relations fees, filing fees, insurance premiums and franchise taxes. Approximately $0.3 million of these cost increases are not expected to reoccur in future periods. Payroll and employee related costs decreased slightly as the net addition of 2 new employees (including our chief accounting officer at the end of the third quarter of fiscal year 2013) was offset by a reduction in recruiting fees. 17-------------------------------------------------------------------------------- Table of Contents Other expense, net Three Months Ended April 30, (in thousands, except percentages) 2013 2012 Decrease % Change Other expense, net $ 338 $ 346 $ (8 ) (2.3 )% Total other expense, net for the three months ended April 30, 2013 was essentially flat when compared to the three months ended April 30, 2012. Gains from the valuation of our former preferred stock warrant liability in the prior period were offset by a decrease in interest expense during the current period due to lower borrowing levels. Benefit for income taxes Three Months Ended April 30, (in thousands, except percentages) 2013 2012 Increase % Change Benefit for income taxes $ 254 $ 35 $ 219 625.7 % Income taxes changed from a slight benefit in the three months ended April 30, 2012 to a benefit of $0.3 million in the three months ended April 30, 2013, and our effective tax rate changed from 129.6% to 31.9% for the same periods. For the three months ended April 30, 2013, the effective income tax rate differed from the federal statutory rate mainly due to nondeductible compensation offset by the tax benefit of federal and state research and development credits. The effective tax rate for the three months ended April 30, 2012 does not include a benefit for federal research and development credits, as the credit was not extended until the fourth quarter of fiscal year 2013. For the three months ended April 30, 2013 and 2012, the effective income tax rate was impacted discretely by foreign exchange gains, and for 2012 only, mark-to-market adjustments on our former warrants, for which there was no tax provision. We do not expect that our unrecognized tax benefit will change significantly within the next twelve months. We and one or more of our subsidiaries file United States federal income tax returns and tax returns in various state and foreign jurisdictions. With limited exceptions, we are no longer subject to federal, state, local or foreign examinations for years prior to January 31, 2009. However, carryforward attributes that were generated prior to January 31, 2010 may still be adjusted upon examination by state and local tax authorities if they either have been or will be used in a future period. Non-GAAP Measures From time to time we provide certain non-GAAP financial measures to investors as additional information in order to supplement our consolidated financial statements, which are presented in accordance with accounting principles generally accepted in the United States, or GAAP. The non-GAAP financial information presented here should be considered in conjunction with, and not as a substitute for or superior to the financial information presented in accordance with GAAP and should not be considered a measure of our liquidity. There are significant limitations associated with the use of non-GAAP financial measures. Further, these measures may differ from the non-GAAP information, even where similarly titled or used by other companies and therefore should not be used to compare our performance to that of other companies. Revenue on a constant currency basis. Our international operations generate and incur expenses that are denominated in foreign currencies, and changes in currency exchange rates can materially affect our consolidated results of operations. Our principal exposures are to fluctuations in exchange rates for the United States dollar versus the British pound, Chinese yuan, Euro, Japanese yen, and Korean won. To provide investors with information concerning underlying trends in our business, we disclose revenue on a constant currency basis, which we define as GAAP revenue, adjusted to reverse the impact of changes in the exchange rates of the principal currencies in which our international operations generated revenue and incurred expenses. We calculate revenue on a constant currency basis by converting revenue that was generated in the currencies specified above during the three months ended April 30, 2013 to United States Dollars at assumed exchange rates equal to the exchange rates in effect for such currencies during the corresponding period of the previous fiscal year, rather than the exchange rates actually in effect during the current fiscal year. Adjusted EBITDA. We define Adjusted EBITDA as EBITDA, excluding non-cash, stock-based compensation expense. We define EBITDA as net income, excluding depreciation and amortization, interest expense, other income (expense), foreign exchange gain (loss) and provision for income taxes. The GAAP measure most comparable to Adjusted EBITDA is GAAP net income. 18-------------------------------------------------------------------------------- Table of Contents Non-GAAP operating income. We define non-GAAP operating income as GAAP operating income excluding non-cash, stock-based compensation expense and amortization of acquired intangible assets. The GAAP measure most comparable to non-GAAP operating income is GAAP operating income. Non-GAAP net income. We define non-GAAP net income as GAAP net income excluding the after tax impact of non-cash, stock-based compensation expense and amortization of acquired intangible assets. The GAAP measure most comparable to non-GAAP net income is net income. Non-GAAP net income per diluted share. We define non-GAAP net income per diluted share as GAAP net income per diluted share excluding the after tax impact of non-cash, stock-based compensation expense and amortization of acquired intangible assets. The GAAP measure most comparable to non-GAAP net income per diluted share is GAAP net income per diluted share. Our management uses these non-GAAP financial measures to evaluate our operating performance and for internal planning and forecasting purposes. We believe that these measures help identify underlying trends in our business, are useful for comparing current results with prior period results, and are helpful to investors and financial analysts in assessing our operating performance. For example, our management considers Adjusted EBITDA to be an important indicator of our operational strength and the performance of our business and a good measure of our historical operating trends. However, each of these non-GAAP financial measures may have limitations as an analytical tool. In considering our Adjusted EBITDA, non-GAAP operating income, non-GAAP net income and non-GAAP net income per diluted share, investors should take into account the following reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures: 19 -------------------------------------------------------------------------------- Table of Contents Adjusted EBITDA: Three Months Ended April 30, (in thousands) 2013 2012 Net (loss) income $ (541 ) $ 62 Add back: Depreciation and amortization 496 409 Interest expense, net 377 412 Other income, net (2 ) (66 ) Foreign exchange gain (37 ) - Benefit for income taxes (254 ) (35 ) EBITDA 39 782 Stock-based compensation expense 245 241 Adjusted EBITDA $ 284 $ 1,023 Non-GAAP operating (loss) income: Three Months Ended April 30, (in thousands) 2013 2012 Operating (loss) income $ (457 ) $ 373 Add back: Stock-based compensation expense 245 241 Amortization of acquired intangible assets 88 97 Non-GAAP operating (loss) income $ (124 ) $ 711 Non-GAAP net (loss) income: Three Months Ended April 30, (in thousands) 2013 2012 Net (loss) income $ (541 ) $ 62 Add back: Stock-based compensation expense 245 241 Amortization of acquired intangible assets 88 97 Income tax effect (1) (116 ) (117 ) Non-GAAP net (loss) income $ (324 ) $ 283 Non-GAAP net (loss) income, per diluted share: Three Months Ended April 30, 2013 2012 Net (loss) income $ (0.04 ) $ 0.01 Add back: Stock-based compensation expense 0.02 0.02 Amortization of acquired intangible assets 0.01 0.01 Income tax effect (1) (0.01 ) (0.01 ) Non-GAAP net (loss) income, per diluted share (2)(3): $ (0.02 ) $ 0.03 (1) The tax effect of non-cash stock based compensation expense and non-cash amortization of acquired intangibles is estimated using a blended rate equivalent to our annual estimated United States federal tax rate and our state tax rate, exclusive of our net federal benefit. This rate is based on our estimated annual GAAP income tax rate forecast. Our estimated tax rate on non-GAAP income is 20 -------------------------------------------------------------------------------- Table of Contents determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenues and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities. (2) Share amounts utilized on a fully diluted basis were approximately 13.3 million and 10.5 million for the three months ended April 30, 2013 and 2012, respectively. (3) Due to rounding, totals may not equal the sum of line items in the table above. Liquidity Overview Our primary sources of liquidity during the three months ended April 30, 2013 were cash and cash equivalents on hand and cash flows provided by operating activities. Our primary uses of cash during the three months ended April 30, 2013 were capital expenditures and repayments of our term loan and capital lease obligations. As of April 30, 2013, we had $47.9 million in cash and cash equivalents and $10.0 million of accessible borrowing availability under our line of credit, which subsequently expired on May 23, 2013. On May 31, 2013 we repaid, with available cash on hand, all outstanding obligations under our loan and security agreement with Gold Hill Capital 2008, L.P. and Massachusetts Capital Resource Company. This included $6.9 million of remaining outstanding principal and accrued interest and $0.2 million of deferred origination fees that were accrued for in other long-term liabilities in the accompanying consolidated balance sheet. In addition, in accordance with the agreement terms, we incurred and paid a prepayment interest penalty of $0.3 million. We expect to recognize a loss from the extinguishment of this debt of approximately $0.8 million during the second quarter of fiscal year 2014, representing the prepayment interest penalty and the write-off of unamortized debt discount. As a result of this repayment, we expect to save cash interest of approximately $0.4 million for the remainder of fiscal year 2014, and $0.4 million and $0.2 million for fiscal years 2015 and 2016, respectively. Net Cash Flows from Operating Activities Variations in the amount of our net cash provided or used by operating activities are primarily the result of changes in the amount of our working capital accounts, mainly accounts receivable and deferred revenue, the timing of cash payments from our customers and of our cash expenditures, principally employee salaries, accounts payable and payments of value added taxes and consumption taxes on the receivables of our foreign subsidiaries. Cash payments from our customers fluctuate due to timing of new and renewal license sales, which typically coincide with our customers' budget cycles. The fourth quarter of each fiscal year generally has the highest license sales, with payment of the license fee becoming due at the commencement of the license term. As a result, our cash flows from operations are typically highest in the first quarter of each fiscal year. Generally, customers are invoiced in advance for their annual subscription fee and the invoices are recorded in accounts receivable and deferred revenue, with deferred revenues being recognized ratably over the term of the subscription agreement. Increases in deferred revenue are attributable to growth in new business, offset by the related license revenues that are recognized ratably over time. For the three months ended April 30, 2013, net cash provided by operating activities totaled $18.5 million, as compared to $8.4 million in the prior period, and was primarily the result of a $23.7 million decrease in accounts receivable associated with the timing of collections from certain large customers, partially offset by a $2.3 million decrease in accrued expenses, a $1.6 million decrease in deferred revenue and a $1.0 million decrease in accounts payable. Net Cash Flows from Investing Activities Net cash used for investing activities for the three months ended April 30, 2013 was $0.3 million, which was attributable to expenditures for purchases of property and equipment to support the growth in our business operations. Net Cash Flows from Financing Activities Net cash used for financing activities for the three months ended April 30, 2013 was $0.8 million, which consisted primarily of payments on our capital lease obligations of $0.5 million and payments on our long-term debt of $0.3 million. Net cash used for financing activities for the three months ended April 30, 2012 was $3.8 million, which consisted primarily of payments on our line of credit of $7.0 million, payments on our capital lease obligations of $0.1 million and payments on our long-term debt of $0.2 million, partially offset by proceeds from long-term debt borrowings of $3.5 million. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of either April 30, 2013 or January 31, 2013. 21 -------------------------------------------------------------------------------- Table of Contents Capital Resources Our future capital requirements may vary materially from those now planned and will depend on many factors, including the costs to develop and implement new solutions and applications, the sales and marketing resources needed to further penetrate our market and gain acceptance of new solutions and applications we develop, the expansion of our operations in the United States and internationally and the response of competitors to our solutions and applications. Historically, we have experienced increases in our expenditures consistent with the growth in our operations and personnel, and we anticipate that our expenditures will continue to increase as we grow our business. Our practice has been to reinvest the undistributed earnings of our foreign subsidiaries in their local jurisdictions, and we currently do not intend to repatriate such earnings. As of April 30, 2013 and January 31, 2013, approximately $18.4 million and $3.5 million, respectively, of our cash is held in bank accounts outside the United States and may not be completely available to fund our domestic operations and obligations without paying taxes upon repatriation. We expect to be able to meet the funding needs of our United States operations without repatriating undistributed earnings that have been reinvested in our international subsidiaries. We believe our cash on hand and cash flows from our operations will be sufficient to meet our working capital and capital expenditure requirements for the foreseeable future. Seasonality We have experienced and expect to continue to experience seasonal variations in the timing of customers' purchases of our software products. Many customers make purchase decisions based on their budget cycles, which typically coincide with the calendar year, except in Japan, where our customer budget cycles typically begin on April 1. Because our software products are sold pursuant to annual subscription agreements and we recognize revenue from these subscriptions over the term of the agreement, downturns or upturns in invoices may not be immediately reflected in our operating results. However, these seasonal trends materially affect the timing of our cash flows, as we generally receive the annual license fee at the time the license term commences. As a result, our cash flows from operations are typically highest in the first quarter of each fiscal year. |