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PEGASYSTEMS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements This Quarterly Report on Form 10-Q contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements about our future financial performance and business plans, the adequacy of our liquidity and capital resources, the continued payment of quarterly dividends by the Company, and the timing of recognizing revenue under existing term license agreements. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management's beliefs and assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as "expect," "anticipate," "intend," "plan," "believe," "could," "estimate," "may," "target," "project," or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Important factors that could cause actual future activities and results to differ include, among others, variation in demand for our products and services and the difficulty in predicting the completion of product acceptance and other factors affecting the timing of license revenue recognition, the ongoing uncertainty and volatility in the global financial markets, the ongoing consolidation in the financial services and healthcare markets, reliance on third party relationships, the potential loss of vendor specific objective evidence for our consulting services, and management of the Company's growth. These risks are described more completely in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2013. We do not intend to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Business overview We develop, market, license, and support Better Business Software® solutions that help clients improve their business results by giving them the power to engage customers, simplify their operations, and adapt to change. Our unified software platform enables our clients to build, deploy, and change enterprise applications easily and quickly, by directly capturing business objectives, automating programming, and automating work. We also provide consulting services, maintenance, and training related to our software. We focus our sales efforts primarily on target accounts, which are large companies or divisions within companies and typically leaders in their industry. Our strategy is to sell a series of licenses that are focused on a specific purpose or area of operations. Our license revenue is primarily derived from sales of our Pega Build for Change® platform (PegaRULES Process Commander ("PRPC")) and related business solutions. PRPC is a comprehensive platform for building and managing Business Process Management ("BPM") applications that unifies business rules and business processes. Our solutions, built on the capabilities of PRPC, are purpose or industry-specific collections of best practice functionality, which allow organizations to quickly implement new customer-facing practices and processes, bring new offerings to market, and provide customized or specialized processing. Our products are simpler, easier to use and often result in shorter implementation periods than competitive enterprise software products. PRPC and related business solutions can be used by a broad range of clients across markets including financial services, insurance, healthcare, communications and media, life sciences, manufacturing and high technology, and government markets. Our business solution products include Customer Relationship Management ("CRM") software, which enables unified predictive decisioning and analytics and optimizes the overall customer experience. Our decision management products and capabilities are designed to manage processes so that actions optimize the process outcomes based on business objectives. We continue to invest in the development of new products and intend to remain a leader in BPM, CRM, and decision management. We also offer Pega Cloud®, a service offering that allows our clients to immediately build, test, and deploy their applications in a secure cloud environment, while minimizing their infrastructure and hardware costs. Revenue from our Pega Cloud offering is included in services revenue. Our acquisition of Profeatable Corporation ("Profeatable") on July 1, 2014, allows us to integrate Profeatable's Firefly cloud-based collaboration technology into our Build for Change® platform and customer service and sales applications. This should enable organizations to enhance customer experience and increase employee productivity through collaboration. Firefly will also continue to be offered as a stand-alone solution. The Firefly technology enables users to securely share content by simultaneously browsing web pages. It empowers agents to proactively engage customers when and where they need it most, improving customer satisfaction, and driving adoption of self-service tools to increase revenue. It also increases productivity, enabling employees to more easily collaborate on work, regardless of location. 19-------------------------------------------------------------------------------- Table of Contents Our acquisition of MeshLabs Software Private Limited ("MeshLabs") on April 28, 2014, unified MeshLabs' social listening, text analytics, and natural language processing with the existing capabilities of our customer service, marketing, and case management solutions. The combined solution enables our clients to collect social content, such as tweets, blogs, posts on Facebook or in other social communities, and enrich it by detecting language, topic, taxonomy and sentiment to deliver actionable social insight and intelligence. With this combination, our clients can monitor, triage, and respond to social content across all channels, and turn it into actionable social intelligence to improve customer engagement, increase customer retention and more effectively market and sell on social networks. Our acquisition of Antenna Software, Inc. and its subsidiaries ("Antenna") on October 9, 2013 expanded our Application Mobility Platform, which provides clients with a mobile application development platform to build, manage, and deploy mobile applications as part of a seamless omnichannel experience. Enterprises can manage the complex elements of the mobile application lifecycle including security, integration, testing, and management of mobile applications and devices. Our mobile application development solutions help businesses to significantly reduce their development time, deployment costs, and the complexity associated with run-the-business mobile applications. The operations of Antenna are included in our operating results from the date of acquisition. For the three and six months ended June 30, 2014, revenue of approximately $4.1 million and $8.7 million, respectively, and a net loss of approximately $2.8 million and $5.2 million, respectively, was attributable to Antenna and included in our unaudited condensed consolidated statements of operations. Due to the rapid integration of the products, sales force, and operations of Antenna, other than the maintenance and hosting revenue attributable to the recognition of the fair value of acquired deferred maintenance and hosting revenue, it may not be feasible for us to identify revenue from new arrangements solely attributable to Antenna. We offer training for our staff, clients, and partners at our regional training facilities, at third party facilities, and at client sites. Our online training through PegaACADEMY provides an alternative way to learn our software in a virtual environment quickly and easily. We believe that this online training will continue to expand the number of trained experts at a faster pace. Critical accounting policies Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and the rules and regulations of the SEC for interim financial reporting. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions, and beliefs of what could occur in the future given available information. There have been no changes in our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013. For more information regarding our critical accounting policies, we encourage you to read the discussion contained in Item 7 under the heading "Critical Accounting Policies, Significant Judgments, and Estimates" and Note 2 "Significant Accounting Policies" included in the notes to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2013. Results of Operations Three Months Ended Six Months Ended June 30, Increase (Decrease) June 30, Increase (Decrease) (Dollars in thousands) 2014 2013 2014 2013 Total revenue $ 142,985 $ 117,315 $ 25,670 22 % $ 283,449 $ 233,561 $ 49,888 21 % Gross profit $ 96,294 $ 79,437 $ 16,857 21 % $ 190,845 $ 158,030 $ 32,815 21 % Total operating expenses $ 94,072 $ 72,384 $ 21,688 30 % $ 173,996 $ 138,026 $ 35,970 26 % Income from operations $ 2,222 $ 7,053 $ (4,831) (68)% $ 16,849 $ 20,004 $ (3,155 ) (16)% Income before provision for income taxes $ 2,387 $ 6,657 $ (4,270) (64)% $ 16,928 $ 18,675 $ (1,747 ) (9)% 20 -------------------------------------------------------------------------------- Table of Contents Revenue Three Months Ended Increase Six Months Ended June 30, (Decrease) June 30, Increase (Dollars in thousands) 2014 2013 2014 2013 License revenue Perpetual licenses $ 33,272 62 % $ 24,647 61 % $ 8,625 $ 56,657 53 % $ 51,007 61 % $ 5,650 Term licenses 19,040 35 % 13,230 33 % 5,810 45,866 43 % 28,910 35 % 16,956 Subscription 1,700 3 % 2,329 6 % (629) 4,103 4 % 3,498 4 % 605 Total license revenue $ 54,012 100 % $ 40,206 100 % $ 13,806 34 % $ 106,626 100 % $ 83,415 100 % $ 23,211 28 % The aggregate value of new license arrangements executed during the second quarter and first six months of 2014 significantly increased compared to the same periods in 2013 due to a higher number and higher value of license arrangements executed in these periods compared to the same periods in 2013. The increase in the aggregate value of license arrangements executed was primarily due to one perpetual license arrangement larger than $10 million executed in the second quarter of 2014. The aggregate value of new license arrangements executed fluctuates quarter to quarter. During the first six months of 2014 and 2013, approximately 84% and 64%, respectively, of the value of new license arrangements were executed with existing clients. The mix between perpetual and term license arrangements executed in a particular period varies based on client needs. A change in the mix between perpetual and term license arrangements executed may cause our revenues to vary materially from period to period. A higher proportion of term license arrangements executed would result in more license revenue being recognized over longer periods as payments become due or earlier if prepaid. Some of our perpetual license arrangements include extended payment terms or additional rights of use, which also result in the recognition of revenue over longer periods. The increases in perpetual license revenue during the second quarter and first six months of 2014 compared to the same periods in 2013 were primarily due to the higher value of perpetual arrangements executed during the first six months of 2014 than during the same period in 2013. The aggregate value of payments due under noncancellable perpetual licenses was $46.7 million as of June 30, 2014 compared to $34 million as of June 30, 2013. We expect to recognize $39.4 million of the $46.7 million as revenue during the remainder of 2014. The increases in term license revenue were primarily due to revenue recognized on term license arrangements executed in the second half of 2013 and a $1.5 million prepayment of a customer arrangement in the first quarter of 2014. The aggregate value of payments due under noncancellable term licenses and our Pega Cloud arrangements grew to $252 million as of June 30, 2014 compared to 212.8 million as of June 30, 2013. We expect to recognize $36.5 million of the $252 million as revenue during the remainder of 2014 in addition to new term license and Pega Cloud agreements we may complete or prepayments we may receive from existing term license agreements. See the table of future cash receipts in Liquidity and Capital Resources - Cash Provided by Operating Activities. Subscription revenue primarily consists of the ratable recognition of license, maintenance and bundled services revenue on license arrangements that include a right to successor products or unspecified future products. Subscription revenue does not include revenue from our Pega Cloud arrangements, which is included in services. The timing of scheduled payments under client arrangements may limit the amount of revenue recognized in a reporting period. Consequently, our subscription revenue may vary quarter to quarter. The decrease in subscription revenue during the second quarter of 2014 and the increase in subscription revenue for the first six months of 2014 compared to the same periods in 2013 were primarily due to the timing of payments for a customer arrangement. Three Months Ended Six Months Ended June 30, Increase June 30, Increase (Dollars in thousands) 2014 2013 2014 2013 Maintenance revenue Maintenance $ 45,393 $ 37,937 $ 7,456 20 % $ 90,274 $ 74,259 $ 16,015 22 % 21 -------------------------------------------------------------------------------- Table of Contents The increases in maintenance revenue were primarily due to the growth in the aggregate value of the installed base of our software and continued strong renewal rates. Maintenance revenue primarily attributable to recognition of the fair value of the acquired Antenna deferred maintenance revenue was $0.2 million and $0.5 million in the second quarter and first six months of 2014, respectively. Three Months Ended Increase Six Months Ended Increase June 30, (Decrease) June 30, (Decrease) 2014 2013 2014 2013 (Dollars in thousands) Services revenue Consulting services $ 38,835 89 % $ 36,189 92 % $ 2,646 7 % $ 76,911 89 % 69,372 91 % $ 7,539 11 % Cloud 3,727 9 % 1,945 5 % 1,782 92 % 7,585 9 % 3,803 5 % 3,782 99 % Training 1,018 2 % 1,038 3 % (20 ) (2 ) % 2,053 2 % 2,712 4 % (659 ) (24 ) % Total services $ 43,580 100 % $ 39,172 100 % $ 4,408 11 % $ 86,549 100 % $ 75,887 100 % $ 10,662 14 % Consulting services primarily relate to new license implementations. The increase in consulting services revenue during the second quarter of 2014 was primarily due to the higher number of projects at higher realization rates compared to the second quarter of 2013, and $1.1 million of revenue from Antenna. The increase in consulting services revenue during the first six months of 2014 was a result of unusually low services revenue in the first quarter of 2013 mainly because many of our large fourth quarter 2012 license arrangements were for the purchase of additional usage, which did not require implementation services. In addition, the increase in consulting services revenue during the first six months of 2014 was due to $2.2 million in revenue from Antenna. Our consulting services may be lower in future periods as our clients are becoming enabled and our partners may be leading more projects. Cloud represents revenue from our Pega Cloud offerings. The increases in cloud revenue during the second quarter and first six months of 2014 were primarily due to $1 million and $2.2 million, respectively, in revenue attributable to Antenna. The decrease in our training revenue during the first six months of 2014 was primarily due to the increased adoption of our PegaACADEMY self-service online training by our partners, which has a significantly lower average price per student as compared to our traditional instructor-led training. Gross profit Three Months Ended Six Months Ended June 30, Increase (Decrease) June 30, Increase (Decrease)(Dollars in thousands) 2014 2013 2014 2013 Gross Profit Software license $ 52,835 $ 38,630 $ 14,205 37 % $ 103,870 $ 80,256 $ 23,614 29 % Maintenance 40,349 34,165 6,184 18 % 80,566 66,752 13,814 21 % Services 3,110 6,642 (3,532) (53) % 6,409 11,022 (4,613) (42) % Total gross profit $ 96,294 $ 79,437 $ 16,857 21 % $ 190,845 $ 158,030 $ 32,815 21 % Total gross profit % 67 % 68 % 67 % 68 % Software license gross profit % 98 % 96 % 97 % 96 % Maintenance gross profit % 89 % 90 % 89 % 90 % Services gross profit % 7 % 17 % 7 % 15 % The increases in total gross profit were primarily due to increases in software license and maintenance revenue. The decreases in services gross profit percent were primarily due to $1.8 million of gross margin loss associated with Antenna projects and approximately $1.2 million of costs incurred on several consulting projects in the second quarter and first six months of 2014, for which the corresponding revenue will be recognized in future periods, as revenue recognition criteria had not been met. In addition, these services gross profit decreases were due to subcontractor and employee-related expenses as a result of the increased on-boarding and enablement costs due to demand for consulting projects. 22-------------------------------------------------------------------------------- Table of Contents Operating expenses Three Months Ended Six Months Ended June 30, Increase (Decrease) June 30, Increase (Dollars in thousands) 2014 2013 2014 2013 Amortization of intangibles: Cost of revenue $ 1,444 $ 1,541 $ (97) (6) % $ 3,284 $ 3,082 $ 202 7 % Selling and marketing 1,499 1,232 267 22 % 2,995 2,464 531 22 % General and administrative 481 - 481 n/m 901 4 897 n/m $ 3,424 $ 2,773 $ 651 23 % $ 7,180 $ 5,550 $ 1,630 29 % n/m - not meaningful The increases in amortization expense during the second quarter and first six months of 2014 were due to the amortization associated with $10.4 million of intangibles acquired from Antenna in October 2013. Three Months Ended Six Months Ended June 30, Increase June 30, Increase (Dollars in thousands) 2014 2013 2014 2013 Selling and marketing Selling and marketing $ 56,342 $ 45,346 $ 10,996 24 % $ 102,149 $ 84,616 $ 17,533 21 % As a percent of total revenue 39 % 39 % 36 % 36 % Selling and marketing headcount at June 30, 614 539 75 14 % Selling and marketing expenses include compensation, benefits, and other headcount-related expenses associated with our selling and marketing personnel as well as advertising, promotions, trade shows, seminars, and other programs. Selling and marketing expenses also include the amortization of customer related intangibles. The increase in selling and marketing expenses during the second quarter of 2014 compared to the same period in 2013 was primarily due to a $4.6 million increase in compensation and benefit expenses associated with higher headcount, a $3 million increase in commission expense associated with the higher value of new license arrangements executed during the second quarter of 2014 compared to the second quarter of 2013, a $1.6 million increase in marketing and sales program expenses primarily related to PegaWORLD, our annual user conference, a $0.8 million increase in employee travel and entertainment expenses, a $0.3 million increase in rent and rent-related expenses, and a $0.3 million increase in amortization expense due to the Antenna customer-related intangible assets. The increase in selling and marketing expenses during the first six months of 2014 compared to the same period in 2013 was primarily due to a $7.7 million increase in compensation and benefit expenses associated with higher headcount, a $3.7 million increase in commission expense associated with the higher value of new license arrangements executed during the first six months of 2014 compared to the first six months of 2013, a $2 million increase in marketing and sales program expenses primarily related to PegaWORLD, a $1.5 million increase in employee travel and entertainment expenses, a $0.5 million increase in rent and rent-related expenses, and a $0.5 million increase in amortization expense due to the Antenna customer-related intangible assets. Effective January 1, 2014, we realigned the organizational structure of our product management and design team. As a result of this realignment, we changed the classification of this team's expenses from selling and marketing to research and development as the roles of the members of this team are now aligned with our research and development efforts. The decrease caused by this realignment partially offset the increase in headcount as well as the overall increase in selling and marketing expenses during the second quarter and first six months of 2014 compared to the same periods in 2013. 23-------------------------------------------------------------------------------- Table of Contents Three Months Ended Increase Six Months Ended Increase June 30, June 30,(Dollars in thousands) 2014 2013 2014 2013 Research and development Research and development $ 27,323 $ 19,761 $ 7,562 38 % $ 51,932 $ 39,337 $ 12,595 32 % As a percent of total revenue 19 % 17 % 18 % 17 % Research and development headcount at June 30, 1,020 792 228 29 % Research and development expenses include compensation, benefits, contracted services, and other headcount-related expenses associated with the creation and development of our products as well as enhancements and engineering changes to existing products. The realignment of the organizational structure of our product management and design team as discussed above contributed to the increase in headcount as well as the overall increase in research and development expense during the second quarter and first six months of 2014 compared to the same periods in 2013. The increase in headcount also reflects the impact of Antenna and the growth in our India research facility as we have been replacing contractors with employees. The increase in offshore headcount lowered our average compensation expense per employee. The increase in research and development expenses during the second quarter of 2014 compared to the same period in 2013 was primarily due to a $5.6 million increase in compensation and benefit expenses associated with higher headcount inclusive of the compensation and benefit expenses associated with our product management and design group now included in research and development, a $0.6 million increase in expendable equipment, a $0.5 million increase in contracted professional services, and a $0.4 million increase in rent and rent-related expenses. The increase in research and development expenses during the first six months of 2014 compared to the same period in 2013 was primarily due to a $9.2 million increase in compensation and benefit expenses associated with higher headcount inclusive of the compensation and benefit expenses associated with our product management and design group now included in research and development, a $1.2 million increase in expendable equipment, a $0.6 million increase in contracted professional services, and a $0.6 million increase in rent and rent-related expenses. Three Months Ended Increase Six Months Ended Increase June 30, June 30, (Dollars in thousands) 2014 2013 2014 2013 General and administrative General and administrative $ 10,250 $ 7,277 $ 2,973 41 % $ 19,552 $ 14,073 $ 5,479 39 % As a percent of total revenue 7 % 6 % 7 % 6 % General and administrative headcount at June 30, 286 248 38 15 % General and administrative expenses include compensation, benefits, and other headcount-related expenses associated with finance, legal, corporate governance, and other administrative headcount. It also includes accounting, legal, and other administrative fees. The general and administrative headcount includes employees in human resources, information technology and corporate services departments whose costs are allocated to our other functional departments. The increase in general and administrative expenses during the second quarter of 2014 compared to the same period in 2013 was primarily due to a $1.4 million increase in compensation and benefits associated with higher headcount, a $0.8 million increase in professional fees, and a $0.4 million increase in amortization associated with the Antenna trademark intangible asset. The increase in general and administrative expenses during the first six months of 2014 compared to the same period in 2013 was primarily due to a $2.7 million increase in compensation and benefits associated with higher headcount, $1.7 million increase in professional fees, and a $0.8 million increase in amortization associated with the Antenna trademark intangible asset. 24-------------------------------------------------------------------------------- Table of Contents Stock-based compensation The following table summarizes stock-based compensation expense included in our unaudited condensed consolidated statements of operations: Three Months Ended Six Months Ended June 30, Increase June 30, Increase (Dollars in thousands) 2014 2013 2014 2013 Cost of services $ 1,387 $ 1,014 $ 373 37% $ 2,398 $ 2,187 $ 211 10 % Operating expenses 3,771 2,267 1,504 66% 6,055 4,526 1,529 34 % Total stock-based compensation before tax 5,158 3,281 1,877 57% 8,453 6,713 1,740 26 % Income tax benefit (1,591) (944) (2,582) (2,047) The increases in stock-based compensation expense during the second quarter and first six months of 2014 were primarily due to the timing of the 2013 and 2012 annual periodic equity grants, which occurred in March 2014 and December 2012, respectively, as well as the higher value of the 2013 annual periodic equity grant and executive new hire grants made since June 30, 2013. Non-operating income and expenses, net Three Months Ended Six Months Ended June 30, Change June 30, Change (Dollars in thousands) 2014 2013 2014 2013 Foreign currency transaction (loss) gain $ (4) $ (437) $ 433 (99) % $ 318 $ (2,327) $ 2,645 (114) % Interest income, net 163 135 28 21 % 287 253 34 13 % Other income (expense), net 6 (94) 100 (106) % (526) 745 (1,271) (171) % Non-operating gain (loss) $ 165 $ (396) $ 561 (142) % $ 79 $ (1,329) $ 1,408 (106) % During the second quarter of 2014, we did not enter into any forward contracts as we are in the process of reassessing our hedging strategy. We have historically used foreign currency forward contracts ("forward contracts") to manage our exposure to changes in foreign currency denominated accounts receivable, intercompany payables, and cash primarily held by our U.S. operating company. We have not designated these forward contracts as hedging instruments and as a result, we record the fair value of the outstanding contracts at the end of the reporting period in our consolidated balance sheet, with any fluctuations in the value of these contracts recognized in other income (expense), net. The fluctuations in the value of these forward contracts recorded in other income (expense), net, partially offset in net income, the gains and losses from the remeasurement or settlement of the foreign currency denominated accounts receivable, intercompany payables, and cash held by the U.S. operating company recorded in foreign currency transaction (loss) gain. We have been primarily exposed to the fluctuation in the British pound and Euro relative to the U.S. dollar. More recently, we have experienced increased levels of exposure to the Australian dollar and Indian rupee. See Note 4 "Derivative Instruments" in the notes to the accompanying unaudited condensed consolidated financial statements for discussion of our use of forward contracts. The total change in the fair value of our forward contracts recorded in other income (expense), net, during the first six months of 2014 and 2013 was a loss of $(0.5) million and a gain of $0.7 million, respectively. Provision for income taxes We account for income taxes at each interim period using our estimated annual effective tax rate and adjust for discrete tax items recorded in the same period. The provision for income taxes represents current and future amounts owed for federal, state, and foreign taxes. During the second quarter of 2014 and 2013, we recorded a tax provision of $0.9 million and $2 million, respectively, which resulted in an effective tax rate of 37% and 29.4%, respectively. During the first six months of 2014 and 2013, we recorded a provision of $5.7 million and $4.9 million, respectively, which resulted in an effective tax rate of 33.4% and 26.3%, respectively. Our effective tax rate for second quarter and first six months of 2013 was below the statutory rate primarily due to a $0.8 million tax benefit related to our 2012 research and experimentation credit recognized in the first quarter of 2013 as a result of the American Taxpayer Relief Act of 2012 that was signed into law in January 2013. Our effective tax rate for the second quarter 25-------------------------------------------------------------------------------- Table of Contents and first six months of 2014 was higher than in the same periods in 2013 primarily because the research and experimentation credit has not yet been extended to 2014 and the increase in non-deductible foreign stock-based compensation expense in the second quarter and first six months of 2014 compared to the same periods in 2013. Liquidity and capital resources Six Months Ended June 30, (in thousands) 2014 2013 Cash provided by (used in): Operating activities $ 73,935 $ 64,280 Investing activities (18,008) (26,122) Financing activities (11,287) (8,678) Effect of exchange rate on cash 2,240 (3,160) Net increase in cash and cash equivalents $ 46,880 $ 26,320 As of As of December 31, June 30, 2014 2013Total cash, cash equivalents, and marketable securities $ 216,213 $ 156,692 The increase in cash and cash equivalents was primarily due to the significant increase in cash provided by operating activities associated with our strong accounts receivable collections during the first six months of 2014, which were generated from our significant arrangements executed in the fourth quarter of 2013 and first six months of 2014. We believe that our current cash, cash equivalents, and cash flow from operations will be sufficient to fund our operations, our dividend payments and our share repurchase program for at least the next 12 months. We evaluate acquisition opportunities from time to time, which if pursued, could require use of our funds. On October 9, 2013, we acquired Antenna for $26.3 million in cash. During the first quarter of 2014, we paid $0.8 million of the remaining merger consideration related to the final working capital adjustment for Antenna. During the second quarter of 2014, we paid $0.8 million in cash consideration to acquire Meshlabs. As of June 30, 2014, approximately $64.2 million of our cash and cash equivalents was held in our foreign subsidiaries. If it becomes necessary to repatriate these funds, we may be required to pay U.S. tax, net of any applicable foreign tax credits, upon repatriation. We consider the earnings of our foreign subsidiaries to be permanently reinvested and, as a result, U.S. taxes on such earnings are not provided. It is impractical to estimate the amount of U.S. tax we could have to pay upon repatriation due to the complexity of the foreign tax credit calculations and because we consider our earnings permanently reinvested. There can be no assurance that changes in our plans or other events affecting our operations will not result in materially accelerated or unexpected expenditures. Cash provided by operating activities The primary drivers of cash provided by operating activities during the first six months of 2014 were net income of $11.3 million and the $46 million net change in assets and liabilities. The net change in assets and liabilities primarily consisted of a decrease in accounts receivable due to our significant strong collections, partially offset by an increase in income taxes receivable due to estimated tax payments and the tax benefits associated with domestic stock-based compensation. The primary drivers of cash provided by operating activities during the first six months of 2013 were net income of $13.8 million, and the $31.8 million net change in assets and liabilities. The net change in assets and liabilities primarily consisted of a decrease in accounts receivable due to higher collections, partially offset by a decrease in accounts payable and accrued expenses due to the timing of payments for compensation-related accruals. 26-------------------------------------------------------------------------------- Table of Contents |