10-Q 1 tibx531201410q.htm 10-Q TIBX 5.31.2014 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _____________________________________________________________
FORM 10-Q
 _____________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 1, 2014
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             
Commission File Number: 000-26579
 _____________________________________________________________
TIBCO SOFTWARE INC.
(Exact name of registrant as specified in its charter)
 _____________________________________________________________
Delaware
 
77-0449727
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)

3303 Hillview Avenue
Palo Alto, California 94304-1213
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: (650) 846-1000
 _____________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
x
 
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of June 29, 2014 was 165,676,908 shares.




TIBCO SOFTWARE INC.
Table of Contents
 
 
 
Page No.
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 4.
 
 
 
Item 6.
 
 
 
 


2


TIBCO SOFTWARE INC.
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value per share)
 
 
 
May 31,
2014
 
November 30,
2013
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
405,169

 
$
662,109

Short-term investments
 
175,851

 
83,842

Accounts receivable, net of allowances of $5,822 and $5,145
 
212,489

 
231,194

Prepaid expenses and other current assets
 
100,003

 
74,725

Total current assets
 
893,512

 
1,051,870

Property and equipment, net
 
107,904

 
101,050

Goodwill
 
712,328

 
582,091

Acquired intangible assets, net
 
159,626

 
119,418

Long-term deferred income tax assets
 
65,643

 
78,853

Other assets
 
67,582

 
72,831

Total assets
 
$
2,006,595

 
$
2,006,113

Liabilities and Equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
32,113

 
$
37,701

Accrued liabilities
 
102,246

 
125,112

Accrued restructuring costs
 
2,716

 
5,819

Deferred revenue
 
279,946

 
258,315

Total current liabilities
 
417,021

 
426,947

Long-term deferred revenue
 
26,698

 
24,036

Long-term deferred income tax liabilities
 
2,979

 
1,334

Long-term income tax liabilities
 
57,154

 
55,733

Other long-term liabilities
 
7,145

 
4,788

Convertible senior notes, net
 
548,123

 
540,022

Total liabilities
 
1,059,120

 
1,052,860

Commitments and contingencies (Note 10)
 

 

Equity:
 
 
 
 
Common stock, $0.001 par value; 1,200,000 shares authorized; 164,336 and 163,169 shares issued and outstanding
 
164

 
163

Additional paid-in capital
 
946,722

 
925,581

Accumulated other comprehensive income (loss)
 
(8,452
)
 
(9,048
)
Retained earnings
 
8,040

 
35,521

Total TIBCO Software Inc. stockholders’ equity
 
946,474

 
952,217

Noncontrolling interest
 
1,001

 
1,036

Total equity
 
947,475

 
953,253

Total liabilities and equity
 
$
2,006,595

 
$
2,006,113

See accompanying Notes to Condensed Consolidated Financial Statements

3


TIBCO SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 
 
 
Three Months Ended
May 31,
 
Six Months Ended
May 31,
 
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
 
Software
 
$
82,321

 
$
85,711

 
$
168,828

 
$
167,254

Service and maintenance
 
169,978

 
160,135

 
336,349

 
316,382

Total revenue
 
252,299

 
245,846

 
505,177

 
483,636

Cost of revenue:
 
 
 
 
 
 
 
 
Software
 
14,272

 
12,799

 
28,454

 
25,509

Service and maintenance
 
65,185

 
61,172

 
128,535

 
122,099

Total cost of revenue
 
79,457

 
73,971

 
156,989

 
147,608

Gross profit
 
172,842

 
171,875

 
348,188

 
336,028

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
42,697

 
42,575

 
86,313

 
84,200

Sales and marketing
 
90,330

 
85,224

 
176,121

 
165,313

General and administrative
 
18,771

 
17,924

 
35,256

 
36,849

Amortization of acquired intangible assets
 
4,813

 
4,713

 
9,856

 
9,034

Acquisition related and other
 
873

 
568

 
908

 
895

Restructuring charges
 
1,821

 
(22
)
 
1,062

 
(15
)
Total operating expenses
 
159,305

 
150,982

 
309,516

 
296,276

Income from operations
 
13,537

 
20,893

 
38,672

 
39,752

Interest income
 
243

 
225

 
522

 
423

Interest expense
 
(8,566
)
 
(8,663
)
 
(17,086
)
 
(17,445
)
Other income (expense), net
 
(684
)
 
(569
)
 
(1,007
)
 
(1,411
)
Income before provision for income taxes and noncontrolling interest
 
4,530

 
11,886

 
21,101

 
21,319

Provision for income taxes
 
3,000

 
3,100

 
7,400

 
3,000

Net income
 
1,530

 
8,786

 
13,701

 
18,319

Less: Net income attributable to noncontrolling interest
 
(22
)
 
71

 

 
99

Net income attributable to TIBCO Software Inc.
 
$
1,552

 
$
8,715

 
$
13,701

 
$
18,220

Net income per share attributable to TIBCO Software Inc.:
 
 
Basic
 
$
0.01

 
$
0.05

 
$
0.08

 
$
0.11

Diluted
 
$
0.01

 
$
0.05

 
$
0.08

 
$
0.11

Shares used to compute net income per share attributable to TIBCO Software Inc.:
 
 
 
 
 
 
 
 
Basic
 
162,984

 
160,877

 
162,642

 
161,199

Diluted
 
166,858

 
167,507

 
167,114

 
168,320


See accompanying Notes to Condensed Consolidated Financial Statements

4


TIBCO SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)

 
 
Three Months Ended
May 31,
 
Six Months Ended
May 31,
 
 
2014
 
2013
 
2014
 
2013
Net income
 
$
1,530

 
$
8,786

 
$
13,701

 
$
18,319

Cumulative translation adjustment
 
(8,270
)
 
(3,916
)
 
259

 
(8,497
)
Net unrealized gain (loss) on available-for-sale securities
 
129

 
101

 
302

 
118

Comprehensive income
 
(6,611
)
 
4,971

 
14,262

 
9,940

Comprehensive income attributable to noncontrolling interest
 
(5
)
 
(35
)
 
(35
)
 
(155
)
Comprehensive income attributable to TIBCO Software Inc.
 
$
(6,606
)
 
$
5,006

 
$
14,297

 
$
10,095



See accompanying Notes to Condensed Consolidated Financial Statements


5


TIBCO SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
 
Six Months Ended
May 31,
 
 
2014
 
2013
Operating activities:
 
 
 
 
Net income
 
$
13,701

 
$
18,319

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation of property and equipment
 
9,455

 
7,839

Amortization of acquired intangible assets
 
20,197

 
17,377

Amortization of debt discount and transaction costs
 
9,851

 
9,460

Stock-based compensation
 
23,323

 
31,335

Deferred income tax
 
2,171

 
(15,007
)
Tax benefits related to stock benefit plans
 
3,824

 
5,278

Excess tax benefits from stock-based compensation
 
(8,119
)
 
(7,139
)
Other non-cash adjustments, net
 
652

 
506

Changes in assets and liabilities, net of acquisitions:
 
 
 
 
Accounts receivable
 
22,451

 
43,573

Prepaid expenses and other assets
 
22,432

 
(2,633
)
Accounts payable
 
(5,973
)
 
10,698

Accrued liabilities and restructuring costs
 
(54,446
)
 
(17,264
)
Deferred revenue
 
11,399

 
(14,264
)
Net cash provided by operating activities
 
70,918

 
88,078

Investing activities:
 
 
 
 
Purchases of short-term investments
 
(192,570
)
 
(38,261
)
Maturities and sales of short-term investments
 
101,118

 
8,829

Acquisitions, net of cash acquired
 
(182,828
)
 
(4,261
)
Purchases of property and equipment
 
(15,677
)
 
(5,768
)
Other investing activities, net
 
1,381

 
(380
)
Net cash used in investing activities
 
(288,576
)
 
(39,841
)
Financing activities:
 
 
 
 
Principal payments on debt
 

 
(35,711
)
Proceeds from issuance of common stock
 
17,289

 
9,255

Repurchases of the Company’s common stock
 
(55,938
)
 
(81,208
)
Withholding taxes related to restricted stock net share settlement
 
(8,538
)
 
(9,899
)
Excess tax benefits from stock-based compensation
 
8,119

 
7,139

Net cash used in financing activities
 
(39,068
)
 
(110,424
)
Effect of foreign exchange rate changes on cash and cash equivalents
 
(214
)
 
(2,353
)
Net decrease in cash and cash equivalents
 
(256,940
)
 
(64,540
)
Cash and cash equivalents at beginning of period
 
662,109

 
727,309

Cash and cash equivalents at end of period
 
$
405,169

 
$
662,769

Supplemental disclosures:
 
 
 
 
Interest paid
 
$
7,259

 
$
7,475

Income taxes paid
 
$
8,938

 
$
10,767

See accompanying Notes to Condensed Consolidated Financial Statements

6


TIBCO SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.
BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by TIBCO Software Inc. (“TIBCO,” the “Company,” “we” or “us”) in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in Consolidated Financial Statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted in accordance with such rules and regulations. The condensed consolidated balance sheet data as of November 30, 2013 was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of our financial position and our results of operations and cash flows. These Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in our 2013 Annual Report on Form 10-K for the fiscal year ended November 30, 2013.
Our fiscal year ends on November 30 of each year. For purposes of presentation, we have indicated the second quarter of fiscal years 2014 and 2013 as ended on May 31, 2014 and May 31, 2013, respectively; whereas in fact, the second quarter of fiscal years 2014 and 2013 actually ended on June 1, 2014 and June 2, 2013, respectively. There were 91 days in the second quarter of each of fiscal years 2014 and 2013.
The Condensed Consolidated Financial Statements include the accounts of us and our wholly-owned and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. For majority-owned subsidiaries, we reflect the noncontrolling interest of the portion we do not own on our Condensed Consolidated Balance Sheets in Equity and our Condensed Consolidated Statements of Operations.
The results of operations for the three and six months ended May 31, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending November 30, 2014, or any other future period, and we make no representations related thereto.
Reclassifications
During the second quarter of 2014, we adopted a revised presentation, which we believe better reflects our evolving product and service offerings and related consumption models. A change was made to combine subscription revenue and license revenue as software revenue. Subscription revenue consists of revenue (i) from subscription-based licenses and related support for a variety of on-premise and hosted offerings, which we previously presented under services revenue, and (ii) from certain term licenses, which we previously presented under license revenue. Subscription revenue is recognized ratably over the subscription or license term.
A corresponding change was made to combine cost of license revenue and cost of subscription revenue as cost of software revenue. Cost of subscription revenue was previously part of cost of service revenue. This change in presentation does not affect total revenue, total cost of revenue or gross margin. Conforming changes have been made for all prior periods.
For the first quarter of fiscal year 2014, subscription revenue of $3.5 million and cost of subscription revenue of $2.2 million were reclassified from service revenue and cost of service revenue to software revenue and cost of software revenue, respectively.
For the three and six months ended May 31, 2013, subscription revenue of $3.4 million and $6.7 million, and cost of subscription revenue of $1.7 million and $3.1 million were reclassified from service revenue and cost of service revenue to software revenue and cost of software revenue, respectively.

2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies and recent accounting pronouncements were described in Note 2 to our Consolidated Financial Statements included in our 2013 Annual Report on Form 10-K for the fiscal year ended November 30, 2013. There have been no significant changes in our accounting policies since November 30, 2013 other than as presented below.


7

TIBCO SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an amendment to the revenue recognition accounting guidance. The amendment clarifies the principles for recognizing revenue and develops a common revenue standard for all industries. The new guidance is effective prospectively for us in the first quarter of fiscal year 2018. Early application is not permitted. We are evaluating the impact of adopting this prospective guidance on our consolidated results of operations and financial condition.
In July 2013, the FASB issued a new accounting standard that will require the presentation of certain unrecognized tax benefits as reductions to deferred tax assets rather than as liabilities in the Consolidated Condensed Balance Sheets when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. We adopted this new standard in fiscal 2013. There was no significant impact on our consolidated results of operations and financial condition upon adoption of this new standard.

3.
BUSINESS COMBINATIONS
While we use our best estimates and assumptions as part of the purchase price allocation process to value assets acquired and liabilities assumed at the business combination date, our estimates and assumptions are subject to refinement. As a result, during the preliminary purchase price allocation period, which may be up to one year from the business combination date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. We record adjustments to assets acquired or liabilities assumed subsequent to the purchase price allocation period in our operating results in the period in which the adjustments were determined.
The total purchase price allocated to the tangible assets acquired is assigned based on the fair values as of the date of the acquisition. The fair value assigned to identifiable intangible assets acquired is determined using the income approach which discounts expected future cash flows to present value using estimated assumptions determined by management. We believe that these identified intangible assets will have no residual value after their estimated economic useful lives. The identifiable intangible assets are subject to amortization on a straight-line basis as this best approximates the benefit period related to these assets.
The excess of the purchase price over the identified tangible and intangible assets, less liabilities assumed, is recorded as goodwill and primarily reflects the value of the synergies expected to be generated from combining our and the acquired entities’ technology and operations. Generally none of the goodwill recorded in connection with the acquisitions is deductible for income tax purposes.
As a result of our acquisitions, we typically assume facility leases, certain liabilities and other commitments of the acquired entity.

Acquisitions in Fiscal Year 2014
Acquisition of Jaspersoft Corporation
On April 28, 2014, we acquired Jaspersoft Corporation ("Jaspersoft"), a private company based in California and incorporated in the State of Delaware. Jaspersoft is a provider of embedded business intelligence and reporting software. We paid $182.8 million, net of cash acquired, to acquire all of the outstanding shares of capital stock of Jaspersoft. We have also incurred $0.3 million of transaction costs associated with the acquisition.

8

TIBCO SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

The allocation of the purchase price for the Jaspersoft acquisition is as follows (in thousands):
 
Cash
 
$
6,741

Accounts receivable
 
4,103

Other assets
 
875

Identifiable intangible assets
 
60,100

Goodwill
 
126,946

Deferred income tax asset, net
 
8,863

Liabilities
 
(5,139
)
Deferred Revenue
 
(12,920
)
Total purchase price
 
$
189,569


Identifiable intangible assets (in thousands, except amortization period):
 
 
 
Gross Amount
at Acquisition
Date
 
Weighted
Average
Amortization
Period
Existing technology
 
$
23,000

 
5.0 years
Customer base
 
34,200

 
8.0 years
Trademarks
 
2,900

 
7.0 years
 
 
$
60,100

 
 

Acquisitions in Fiscal Year 2013
Acquisition of Extended Results
On September 13, 2013, we acquired Extended Results, Inc. (“Extended Results”), a private company based and incorporated in the State of Washington. Extended Results is a provider of mobile business intelligence software and services. We paid $21.0 million, to acquire all of the outstanding shares of capital stock of Extended Results. We have also incurred $0.3 million of transaction costs associated with the acquisition.
Acquisition of StreamBase Systems, Inc.
On June 3, 2013, we acquired StreamBase Systems, Inc. (“StreamBase”), a private company based in Massachusetts and incorporated in the State of Delaware. StreamBase is a provider of high performance event processing and real-time analytics software. We paid $49.7 million, net of cash acquired, to acquire all of the outstanding shares of capital stock of StreamBase. We have also incurred $0.5 million of transaction costs associated with the acquisition.
Acquisition of Maporama Solutions
On March 20, 2013, we acquired Maporama Solutions (“Maporama”), a private company based in Paris, France and organized under the laws of France. Maporama is a provider of location intelligence and geospatial analytics solutions. We have incurred $0.3 million of transaction costs associated with the acquisition.
Pro Forma Adjusted Summary

The results of operations of Jaspersoft, Extended Results, StreamBase and Maporama have been included in the Consolidated Financial Statements subsequent to the respective acquisition dates. The following unaudited pro forma adjusted summary reflects our condensed results of operations for the periods ended May 31, 2013. The summary assumes that the businesses had been acquired at the beginning of fiscal year 2013 and include pro forma adjustments for amortization charges for acquired intangible assets, stock-based compensation charges, if any, and related tax effects. The summary is presented for informational purposes only and is not intended to be indicative of future results of operations or whether similar results would have been achieved if the acquisition had taken place at the beginning of fiscal year 2013 (in thousands, except per share data):

9

TIBCO SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

 
 
 
Three Months Ended
May 31,
 
Six Months Ended
May 31,
 
 
2014
 
2013
 
2014
 
2013
Pro forma adjusted total revenue
 
$
258,110

 
$
264,449

 
$
519,739

 
$
520,193

Pro forma adjusted net income attributable to TIBCO Software Inc.
 
$
336

 
$
5,355

 
$
10,860

 
$
11,269

Pro forma adjusted net income per share attributable to TIBCO Software Inc.:
 
 
 
 
 
 
 
 
Basic
 
$

 
$
0.03

 
$
0.07

 
$
0.07

Diluted
 
$

 
$
0.03

 
$
0.06

 
$
0.07



10

TIBCO SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

4.
INVESTMENTS
Short-term investments and cash equivalents, which are classified as available-for-sale, are summarized below as of May 31, 2014 and November 30, 2013 (in thousands):
 
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Aggregate
Fair Value
As of May 31, 2014
 
 
 
 
 
 
 
 
Money market funds
 
$
18,810

 
$

 
$

 
$
18,810

Corporate bonds and commercial paper
 
158,585

 
341

 

 
158,926

U.S. Government debt and agency securities
 
16,575

 
2

 

 
16,577

Mortgage-backed securities
 
202

 
146

 

 
348

 
 
$
194,172

 
$
489

 
$

 
$
194,661

As of November 30, 2013
 
 
 
 
 
 
 
 
Money market funds
 
$
245,953

 
$

 
$

 
$
245,953

Corporate bonds and commercial paper
 
77,442

 
66

 

 
77,508

U.S. Government debt and agency securities
 
6,012

 
1

 

 
6,013

Term deposits
 
536

 

 

 
536

Mortgage-backed securities
 
200

 
121

 

 
321

 
 
$
330,143

 
$
188

 
$

 
$
330,331


Fixed income securities included in short-term investments above are summarized by their contractual maturities as follows (in thousands):
 
 
May 31,
2014
 
November 30,
2013
Contractual maturities:
 
 
 
 
Less than one year
 
$
79,029

 
$
36,084

One to three years
 
96,822

 
47,758

 
 
$
175,851

 
$
83,842


Realized and unrealized gains and losses on our investments were primarily due to changes in interest rates and market and credit conditions of the underlying securities and were insignificant for any period presented.

5.
FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS
Fair Value Measurements
FASB guidance for fair value measurements clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require us to develop our own assumptions. This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, we measure certain financial assets and liabilities at fair value, including our marketable securities and foreign currency contracts.
Our cash equivalents and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.

11

TIBCO SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

The types of instruments valued based on other observable inputs include U.S. government and agency securities, sovereign government obligations, investment-grade corporate bonds, mortgage-backed and asset-backed securities, term deposits and state, municipal and provincial obligations. Such instruments are generally classified within Level 2 of the fair value hierarchy.
We execute our foreign currency contracts primarily in the retail market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large multi-national and regional banks. Our foreign currency contracts valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy. There were no transfers between Level 1, Level 2 and Level 3 during the six months ended May 31, 2014.
The fair value hierarchy of our cash equivalents, short-term investments and foreign currency contracts is as follows (in thousands):
 
 
 
 
 
Fair Value Measurements at
Reporting Date using
Description
 
Total Fair
Value
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
other
Observable
Inputs
(Level 2)
As of May 31, 2014
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Money market funds
 
$
18,810

 
$
18,810

 
$

Corporate bonds and commercial paper
 
158,926

 

 
158,926

U.S. Government debt and agency securities
 
16,577

 

 
16,577

Mortgage-backed securities
 
348

 

 
348

Foreign currency forward contracts
 
290

 

 
290

Liabilities:
 
 
 
 
 
 
Foreign currency forward contracts
 
$
462

 
$

 
$
462

As of November 30, 2013
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Money market funds
 
$
245,953

 
$
245,953

 
$

Corporate bonds and commercial paper
 
77,508

 

 
77,508

U.S. Government debt and agency securities
 
6,013

 

 
6,013

Term deposits
 
536

 

 
536

Mortgage-backed securities
 
321

 

 
321

Foreign currency forward contracts
 
625

 

 
625

Liabilities:
 
 
 
 
 
 
Foreign currency forward contracts
 
$
547

 
$

 
$
547


Derivative Instruments
We conduct business in the Americas; Europe, the Middle East and Africa (“EMEA”); and Asia Pacific and Japan (“APJ”). As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or changes in economic conditions in foreign markets. The U.S. dollar is our major transaction currency; we also transact business in approximately 25 foreign currencies worldwide, of which the most significant to our operations are the Euro, British pound, and Australian dollar. We enter into forward contracts with financial institutions to manage our currency exposure related to net assets and liabilities denominated in foreign currencies, and these forward contracts are generally settled monthly. Our forward contracts reduce, but do not eliminate, the impact of currency exchange rate movements. Gains and losses on forward contracts are included in Other Income (Expense) in our Condensed Consolidated Statements of Operations.

12

TIBCO SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

We had the following forward contracts outstanding as of May 31, 2014 (in thousands):
 
 
 
Notional
Value Local  Currency
 
Notional
Value
USD
 
Fair Value
Gain (Loss)
USD
Forward contracts sold:
 
 
 
 
 
 
Australian dollar
 
2,900

 
$
2,697

 
$
(24
)
British pound
 
6,200

 
10,394

 
46

Euro
 
17,500

 
24,005

 
(134
)
Japanese yen
 
113,000

 
1,111

 
(5
)
Korean won
 
765,000

 
749

 
(9
)
Mexican peso
 

 

 
(13
)
Polish zloty
 
1,500

 
494

 
1

South African rand
 
27,000

 
2,551

 
3

New Taiwan dollar
 
27,000

 
1

 
(6
)
Forward contracts bought:
 
 
 
 
 
 
Brazilian real
 
2,100

 
935

 
6

Indian rupee
 
148,888

 
2,513

 
14

Swedish krona
 
12,000

 
1,794

 
(51
)
 
 
 
 
 
 
$
(172
)
 
 
 
Derivatives not Designated
as Hedging Instruments (in thousands)
 
 
May 31,
2014
 
November 30,
2013
Foreign currency forward contracts, fair value included in:
 
 
 
 
Other Current Assets
 
$
290

 
$
625

Accrued Liabilities
 
462

 
547

 
 
 
 
 
Amount of Gain or (Loss) Recognized
In Income on Derivative (in thousands)
 
 
 
 
Three Months Ended
May 31,
 
Six Months Ended
May 31,
Derivatives not Designated as Hedging Instruments
 
Location
 
2014
 
2013
 
2014
 
2013
Foreign Currency Contracts
 
Other income/(exp.)
 
$
247

 
$
(2,909
)
 
$
1,411

 
$
(86
)



13

TIBCO SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

6.
GOODWILL AND ACQUIRED INTANGIBLE ASSETS
The change in the carrying value of goodwill for the six months ended May 31, 2014 is as follows (in thousands):
 
Balance as of November 30, 2013
 
$
582,091

Goodwill recorded for the Jaspersoft acquisition
 
126,946

Post-acquisition goodwill adjustment for the Streambase acquisition
 
615

Post-acquisition goodwill adjustment for the Extended Results acquisition
 
(50
)
Foreign currency translation
 
2,726

Balance as of May 31, 2014
 
$
712,328

 
Certain of our intangible assets were recorded in foreign currencies, and therefore, the gross carrying amount and accumulated amortization are subject to foreign currency translation adjustments. The carrying values of our amortized acquired intangible assets as of May 31, 2014 and November 30, 2013 are as follows (in thousands):
 
 
 
May 31, 2014
 
November 30, 2013
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Developed technologies
 
$
234,951

 
$
(147,912
)
 
$
87,039

 
$
204,918

 
$
(137,758
)
 
$
67,160

Maintenance agreements
 
88,001

 
(63,182
)
 
24,819

 
87,888

 
(58,777
)
 
29,111

Customer base
 
95,470

 
(54,855
)
 
40,615

 
67,707

 
(50,623
)
 
17,084

Patents/core technologies
 
28,841

 
(27,036
)
 
1,805

 
28,649

 
(26,080
)
 
2,569

Trademarks
 
15,343

 
(9,995
)
 
5,348

 
12,871

 
(9,377
)
 
3,494

Non-compete agreements
 
580

 
(580
)
 

 
580

 
(580
)
 

Total intangible assets
 
$
463,186

 
$
(303,560
)
 
$
159,626

 
$
402,613

 
$
(283,195
)
 
$
119,418



7.
ACCRUED RESTRUCTURING COSTS
2013 Restructuring Plan
 In order to achieve cost efficiencies and realign our resources and operations, our Board of Directors approved a restructuring plan initiated by management during the third quarter of fiscal year 2013 (the "2013 Restructuring Plan"). The restructuring charges are primarily intended to increase efficiencies and reduce redundancies, including those arising from recent acquisitions. The total restructuring costs associated with the 2013 Restructuring Plan are estimated to be $14.0 million. Changes in estimates, if any, will be reflected in our future results of operations. We expect to fulfill most of the obligations associated with this restructuring by the end of fiscal year 2014.

The following is a summary of activities in accrued restructuring costs for the six months ended May 31, 2014 under the 2013 restructuring plan (in thousands):
 
 
 
Accrued
Facilities
Restructuring
 
Accrued
Severance
and Other
 
Total
As of November 30, 2013
 
$
1,209

 
$
4,697

 
$
5,906

Restructuring charges
 
239

 
823

 
1,062

Cash utilized
 
(552
)
 
(3,700
)
 
(4,252
)
As of May 31, 2014
 
$
896

 
$
1,820

 
$
2,716


The remaining accrued excess facilities costs represent the estimated loss on abandoned excess facilities, which is expected to be paid over the next year.


14

TIBCO SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

8.
DEBT AND CREDIT FACILITIES

Mortgage Note Payable
In connection with the purchase of our corporate headquarters in June 2003, we recorded a $54.0 million mortgage note payable to a financial institution collateralized by the commercial real property acquired. The balance on the mortgage note of $34.7 million was satisfied in full in May 2013.
Credit Facility
In December 2011, we and one of our subsidiaries entered into an Amended and Restated Credit Agreement (the “2011 Credit Facility”). In May 2012, we amended certain covenants and other terms of the 2011 Credit Facility. The 2011 Credit Facility matures on December 19, 2016 and provides for borrowings of up to $250.0 million with a sublimit for swing line loans of up to $10.0 million and standby letters of credit in a face amount of up to $50.0 million. We have an option to request that the lenders increase the available commitments by up to an additional $100.0 million for total borrowings of up to $350.0 million.
Revolving loans accrue interest at a per annum rate based on, at our option, either (i) the base rate plus a margin ranging from 0.25% to 1.25%, depending on TIBCO’s consolidated leverage ratio or (ii) the London Interbank Offered Rate (“LIBOR”) rate plus a margin ranging from 1.25% to 2.25%, depending on TIBCO’s consolidated leverage ratio, for various interest periods. The base rate is defined as the highest of (i) the administrative agent’s prime rate, (ii) the federal funds rate plus a margin equal to 0.50%, and (iii) the LIBOR rate for a one month interest period plus a margin of 1.00%. We are also obligated to pay commitment fees for the unused amount of the 2011 Credit Facility, letter of credit fees and other customary fees. Loan origination fees and issuance costs of approximately $3.4 million were incurred since consummation of the 2011 Credit Facility which will be amortized through interest expense over a period of five years. Under certain circumstances, a default interest rate of 2.00% above the applicable interest rate will apply on all obligations during the existence of an event of default under the 2011 Credit Facility.
We are currently required to maintain a minimum consolidated interest coverage ratio of 3.5:1.0 and a maximum consolidated leverage ratio of 2.75:1.00 in addition to other customary affirmative and negative covenants. As of May 31, 2014, we were in compliance with all covenants under the 2011 Credit Facility and we had no outstanding borrowings under the 2011 Credit Facility.
Line of Credit
We have a $10.0 million revolving line of credit (the “Line of Credit”) that matures in June 2015. The Line of Credit is available for cash borrowings and for the issuance of letters of credit up to $10.0 million. The Line of Credit contains financial covenants substantially identical to those of the 2011 Credit Facility, as well as other customary affirmative and negative covenants. As of May 31, 2014, we were in compliance with all covenants under the Line of Credit.
As of May 31, 2014, we had a total of $1.8 million outstanding under the Line of Credit with respect to letters of credit in connection with sales and lease transactions.
Guarantee Credit Line and Restricted Cash
We have a revolving guarantee credit line of approximately $16.3 million available for the issuance of bank guarantees denominated in foreign currency. Issued bank guarantees were approximately $13.2 million and $13.7 million as of May 31, 2014 and November 30, 2013, respectively, and were collateralized by pledging the equivalent amount under restricted cash as required under our guarantee credit line. Various other contractual commitments also require us to pledge cash as security and record this cash under restricted cash. As of May 31, 2014 and November 30, 2013, we had restricted cash of $14.1 million and $15.7 million, respectively, which is included in Other Assets on our Condensed Consolidated Balance Sheets.

9.
CONVERTIBLE SENIOR NOTES
Description of Convertible Senior Notes
In April 2012, we issued convertible senior notes (the “Notes”) in an aggregate principal amount of $600.0 million due May 1, 2032. The Notes bear interest at a rate of 2.25% per annum. The Notes do not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness, or the issuance or repurchase of

15

TIBCO SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

securities by us. Each $1,000 principal amount of Notes is initially convertible, at the option of the holders, at a rate of 19.7750 shares of our common stock, which represents an initial conversion price of approximately $50.57 per share, which is subject to adjustment upon the occurrence of certain events specified in the indenture. On conversion of a Note, we will deliver cash in an amount generally equal to the lesser of the conversion value and the principal amount of each Note and, for any conversion value greater than the principal amount, we will deliver shares of common stock. Holders may convert Notes prior to February 1, 2032, and other than during the period from February 1, 2017 to May 5, 2017, under the following circumstances: (1) if the Notes are called for redemption, at any time prior to the redemption date; (2) during any fiscal quarter, if our last reported sale price of a share of common stock for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (3) during any five consecutive trading day period when the trading price per $1,000 principal amount of Notes is less than 98% of the product of the last reported sale price of a share of common stock and the conversion rate; and (4) upon the occurrence of certain distributions or corporate events as specified in the indenture governing the Notes. From February 1, 2017 to May 5, 2017, and from February 1, 2032 until the maturity date, holders may convert Notes at any time, regardless of the foregoing circumstances.
After May 5, 2017, we may redeem for cash all or part of the Notes. The redemption price will be equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest. Holders may require us to repurchase all or a portion of their Notes on May 5, 2017, May 1, 2022 and May 1, 2027 in cash at a price equal to the principal amount, plus accrued and unpaid interest.
Upon the occurrence of a fundamental change under the indenture for the Notes such as in the event of a change in control, the holders may require us to repurchase all or a portion of their Notes at the principal amount of the Notes plus accrued and unpaid interest. Following certain corporate transactions that constitute a fundamental change, the conversion rate may increase for a holder who elects to convert the Notes. Upon conversion, we will deliver an amount of cash and a number of shares of common stock, if any, equal to the sum of the daily settlement amounts for each daily volume weighted average price in the 35 day observation period for such Note as determined pursuant to the indenture for the Notes.
Accounting of Convertible Senior Notes
Accounting guidance requires that convertible debt that can be settled for cash, such as the Notes, be separated into the liability and equity component at issuance and each be assigned a value. The value assigned to the liability component is the estimated fair value, as of the issuance date, of a similar debt without the conversion feature. The difference between the cash proceeds and estimated fair value of the liability component, representing the value of the conversion premium assigned to the equity component, is recorded as a debt discount on the issuance date. This debt discount is amortized to interest expense using the effective interest method over the period from the issuance date through the first stated repurchase date on May 5, 2017. We estimated the straight debt borrowing rates at debt origination to be 5.50% for the Notes and determined the debt discount to be $84.6 million. As a result, a conversion premium after tax of $52.6 million was recorded in additional paid-in capital.
As of May 31, 2014, the carrying value of the Notes was $548.1 million, which consisted of $600.0 million outstanding principal amount net of $51.9 million unamortized debt discount.
In connection with the issuance of the Notes, we incurred $15.6 million of issuance costs, which primarily consisted of investment banker fees and legal and other professional service fees. Deferred issuance costs of $13.4 million attributable to the liability component are being amortized to interest expense through May 5, 2017, and $2.2 million ($1.4 million net of tax) of transaction costs attributable to the equity component were netted with the equity component in additional paid-in capital at the issuance date. The deferred debt issuance costs are recorded within other assets in accordance with short- and long-term classification. If the holders require conversion of some or all of the Notes when the conversion requirements are met, we would accelerate amortization of the pro rata share of the unamortized balance of the issuance cost to additional paid-in capital on such date.
For the second quarter ended May 31, 2014, we recognized interest expense of $8.1 million related to the Notes, comprised of $3.3 million for the contractual coupon interest, $4.1 million related to the amortization of debt discount and $0.7 million related to the amortization of deferred debt issuance costs.
The Notes are carried at face value less any unamortized debt discount and also require disclosure of an estimate of fair value (Level 2 of the three-tier value hierarchy). The fair value of the Notes at each balance sheet date is determined based on recent quoted market prices or dealer quotes for the Notes, if available. Otherwise, the fair value is determined using cash-flow

16

TIBCO SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

models of the scheduled payments discounted at market interest rates for comparable debt without the conversion feature. As of May 31, 2014, the estimated fair value of the Notes was approximately $608.1 million.

10.
COMMITMENTS AND CONTINGENCIES
Prepaid Land Lease
In June 2003, we entered into a 51-year lease of the land upon which our corporate headquarters is located. The lease was paid in advance for a total of $28.0 million, but is subject to adjustments every ten years based upon changes in the fair market value of the land. The first adjustment to the rent as a result of the increase in the fair market value since 2003 occurred in April 2014. The total additional lease obligation over the remaining 41-year lease term was $115.9 million. We exercised our prepayment option to settle the entire $115.9 million future lease obligations at a discount and paid $1.4 million and $25.3 million in April 2014 and July 2014, respectively.
The prepaid land lease is being amortized using the straight-line method over the life of the lease.
Commitments
At various locations worldwide, we lease office space and equipment under non-cancelable operating leases with various expiration dates through March 2032. Rental expense was $5.2 million and $3.9 million for the three months ended May 31, 2014 and 2013, respectively, and $9.6 million and $8.1 million for the six months ended May 31, 2014 and 2013, respectively.
As of May 31, 2014, contractual commitments associated with indebtedness, lease obligations (excluding the corporate headquarter land lease, which obligation was settled in its entirety in July 2014), and restructuring were as follows (in thousands):
 
 
 
Total
 
Remainder of
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
Commitments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt principal
 
$
600,000

 
$

 
$

 
$

 
$
600,000

 
$

 
$

Debt interest
 
40,500

 
6,750

 
13,500

 
13,500

 
6,750

 

 

Operating leases (1)
 
44,692

 
5,412

 
10,321

 
9,678

 
8,394

 
6,161

 
4,726

Total commitments
 
$
685,192

 
$
12,162

 
$
23,821

 
$
23,178

 
$
615,144

 
$
6,161

 
$
4,726


(1)
Operating leases included future minimum rent payments, net of estimated sublease income of $4.7 million, for facilities that we have vacated pursuant to our restructuring activities, as discussed in Note 7.
Future minimum lease payments under restructured non-cancelable operating leases are included in Accrued Restructuring Costs on our Condensed Consolidated Balance Sheets.
The above commitment table does not include approximately $57.2 million of long-term uncertain income tax liabilities due to the fact that we are unable to reasonably estimate the timing of these potential future payments.
Indemnification
Our software license agreements typically provide for indemnification of customers for intellectual property infringement claims. We also warrant to customers that software products operate substantially in accordance with the software product’s specifications. Historically, we have incurred minimal costs related to product warranties, and, as such, no accruals for warranty costs have been made. In addition, we indemnify our officers and directors under the terms of indemnity agreements entered into with them, as well as pursuant to our certificate of incorporation, bylaws and applicable Delaware law.

11.
LEGAL PROCEEDINGS

From time to time, we are involved in or subject to legal, administrative and regulatory proceedings, claims, demands and investigations arising in the ordinary course of business, including direct claims brought by or against us with respect to intellectual property, contracts, employment and other matters, as well as claims brought against our customers for whom we

17

TIBCO SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

have a contractual indemnification obligation. We accrue for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. After we determine the probability of a loss and whether that loss is reasonably estimable, we then analyze whether the litigation, based on that determination, could have a material and adverse effect on our financial statements, taken as a whole and including our statement of cash flows. The accruals or estimates, if any, resulting from the foregoing analysis, are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, we will, as applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to our financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.
InvestPic, LLC v. TIBCO, et al.
On November 24, 2010, InvestPic, LLC ("InvestPic") filed a complaint for patent infringement against us and fourteen other defendants in the United States District Court for the District of Delaware, Case No. 1:10cv1028-SLR. The complaint alleges that TIBCO Spotfire® S+® "and other similar products" infringe U.S. Patent No. 6,349,291 (the "’291 patent"). On March 29, 2011, defendant SAS Institute Inc. ("SAS") filed a motion to dismiss the complaint for failure to state a claim for relief on the basis that all the asserted claims of the ’291 patent are invalid as being directed to unpatentable subject matter. On May 13, 2011, TIBCO, along with other defendants, filed a motion to dismiss the complaint on the same grounds as SAS’ motion. On September 30, 2011, the Court denied this motion to dismiss. However, the Court declined to address the merits of defendants’ arguments that the claims of the ’291 patent are directed to unpatentable subject matter, in the absence of discovery or claim construction. On May 3, 2012, defendants SAS, Algorithmics (U.S.), Inc. and International Business Machines Corp. filed a motion to stay the litigation pending the reexamination of the ’291 patent. On July 10, 2012, the Court entered an order to stay the litigation and administratively close the case during the pendency of the reexamination of the '291 patent.

InvestPic seeks injunctive relief and unspecified damages. We intend to defend the action vigorously. While we believe that we have valid defenses to InvestPic's claims, litigation is inherently unpredictable and we cannot make any predictions as to the outcome of this litigation. It is possible that our business, financial position, results of operations, cash position or cash flow could be negatively affected by an unfavorable resolution of this action. As InvestPic has made no specific demand for damages in this matter other than injunctive relief, we cannot currently estimate a reasonably possible range of loss for this action.
Vasudevan Software, Inc. v. TIBCO, et al.

On December 23, 2011, Vasudevan Software, Inc. ("Vasudevan") filed a complaint for patent infringement against us and Spotfire Inc. in the United States District Court for the Northern District of California, Case No. 3:11-cv-06638-RS. The complaint alleges that TIBCO directly, indirectly, and willfully infringes U.S. Patent No. 7,167,864 B1 based on "Spotfire Analytics and other products." Vasudevan further alleges in its infringement contentions that the accused products "include at least the TIBCO Spotfire Platform (e.g., TIBCO Spotfire Professional, TIBCO Spotfire Server, TIBCO Spotfire Web Player, TIBCO Spotfire Enterprise Player, TIBCO Spotfire for the Apple iPad, TIBCO Spotfire Application Data Services, TIBCO Spotfire Developer, TIBCO Spotfire Metrics, TIBCO Spotfire Network Analytics, TIBCO Spotfire Operations Analytics Bundle, and TIBCO Silver Spotfire) at least versions 4.0 to 2.1, as well as any TIBCO products and services that utilize the TIBCO Spotfire Platform." Vasudevan amended its complaint on March 6, 2012, but continues to accuse the same products of infringement. On May 18, 2012, the Court granted our motion to dismiss Vasudevan's indirect and willful infringement claims. Vasudevan filed a second amended complaint on July 24, 2012, adding a claim for inducement of infringement for alleged acts of indirect infringement occurring after the filing of the original complaint. On September 19, 2012, the Court issued a claim construction order, followed by an order on September 19, 2013, clarifying the prior claim construction. Fact discovery closed on February 15, 2013. Expert discovery closed on June 7, 2013.
 
On October 16, 2013, Vasudevan filed a stipulation of noninfringement based on the court’s claim construction orders. On October 17, 2013, the court granted our motion for summary judgment of invalidity of U.S. Patent No. 7,167,864 for lack of written description and enablement. In light of the stipulation of noninfringement and the order granting summary judgment of invalidity, the court entered judgment in our favor on October 17, 2013.


18

TIBCO SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

Vasudevan filed a notice of appeal to the United States Court of Appeals for the Federal Circuit on November 11, 2013, seeking reversal of the final judgment entered on October 17, 2013, including the claim construction orders of September 19, 2012 and September 19, 2013, and the October 17, 2013 order regarding invalidity. Vasudevan filed its opening appeal brief on January 28, 2014. We filed our opposition brief on March 27, 2014. Vasudevan filed its reply brief on April 28, 2014. The court has yet to schedule oral argument.

We intend to defend the action vigorously. While we believe that we have valid defenses to Vasudevan's claims, litigation is inherently unpredictable and we cannot make any predictions as to the outcome of this litigation. It is possible that our business, financial position, results of operations, cash position or cash flow could be negatively affected by an unfavorable resolution of this action. We cannot currently estimate a reasonably possible range of loss for this action.

12.
STOCK-BASED COMPENSATION
Stock-based compensation cost for the three months ended May 31, 2014 and 2013 was $10.6 million and $14.9 million, respectively. Stock-based compensation cost for the six months ended May 31, 2014 and 2013 was $23.3 million and $31.3 million, respectively. The deferred tax benefit from stock-based compensation expenses for the three months ended May 31, 2014 and 2013 was $2.9 million and $4.3 million, respectively. The deferred tax benefit from stock-based compensation expenses for the six months ended May 31, 2014 and 2013 was $6.5 million and $9.4 million, respectively.

Since fiscal year 2010, certain of our employees received performance-based restricted stock units ("PRSUs"). These PRSUs are subject to the terms and conditions set forth in each applicable PRSU Agreement and have been granted under our 2008 Equity Incentive Plan. During the six months ended May 31, 20141.4 million PRSUs were granted and 1.8 million vested.

The following table summarizes additional information pertaining to our stock-based compensation from stock options and stock awards which are comprised of restricted stock, restricted stock units and performance-based restricted stock units (in thousands, except grant-date fair value and recognition period):
 
 
 
Three Months Ended
May 31,
 
Six Months Ended
May 31,
 
 
2014
 
2013
 
2014
 
2013
Stock options:
 
 
 
 
 
 
 
 
Options exercised
 
(1,866
)
 
(524
)
 
(2,144
)
 
(988
)
Total intrinsic value of stock options exercised
 
$
22,856

 
$
6,798

 
$
26,951

 
$
14,054

Total unrecognized compensation expense at period-end
 
$
3,782

 
$
9,080

 
$
3,782

 
$
9,080

Weighted-average remaining recognition period at period-end
 
1.2 years

 
1.8 years

 
1.2 years

 
1.8 years

Stock awards (excluding PRSUs):
 
 
 
 
 
 
 
 
Weighted-average grant-date fair value
 
$
19.35

 
$
21.86

 
$
19.84

 
$
22.17

Stock awards granted
 
2,032

 
1,428

 
4,072

 
2,747

Stock awards vested
 
(869
)
 
(917
)
 
(1,366
)
 
(1,474
)
Total unrecognized compensation expense at period-end
 
$
95,506

 
$
116,882

 
$
95,506

 
$
116,882

Weighted-average remaining recognition period at period-end
 
3.3 years

 
2.1 years

 
3.3 years

 
2.1 years


 

19

TIBCO SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

13.
PROVISION FOR INCOME TAXES
The effective tax rate was 66% and 26% for the three months ended May 31, 2014 and 2013, respectively and 35% and 14% for the six months ended May 31, 2014 and 2013, respectively.
In the three months ended May 31, 2014, we recognized a discrete tax expense of $0.5 million, primarily related to withholding taxes.

In the six months ended May 31, 2014, we recognized a discrete tax expense of $0.2 million, primarily related to a $2.5 million tax expense for withholding taxes, offset by $1.1 million of tax benefits from the expiration of various statutes of limitations and $1.2 million of the prior year's foreign tax return refund.

In the three months ended May 31, 2013, we recognized a discrete provision of $1.8 million related to estimated withholding taxes in jurisdictions where we do not expect to benefit from a foreign tax credit.

In the six months ended May 31, 2013, we recognized a discrete provision of $0.3 million related to $3.6 million of estimated withholding taxes, offset by $3.3 million of tax benefits from retroactive legislative reinstatement of the federal research and development credit.
We recognize the withholding taxes as discrete items because of the high variability of withholding tax rates by country and the difficulty in forecasting the exact country of future revenue.
The provision for the six month periods ended May 31, 2014 and 2013 reflects a forecasted annual tax rate of 34% and 14%, respectively, offset by discrete items which are recognized in the period they occur. The forecasted tax rate reflects the benefits resulting from the reorganization of certain foreign entities, lower foreign taxes, domestic manufacturing incentives, and federal and state research and development credits, partially offset by the impact of certain stock compensation charges and state income taxes. The federal research and development credits expired on December 31, 2013.
We use the single sales factor apportionment for California state taxation, which is expected to lower our future taxable state income. This reduction in taxable income may affect the extent to which we can benefit from $16.9 million (net of reserve for uncertain tax positions) research and development credit carryforwards and $7.1 million net operating loss carryforwards. If we determine that it is more likely than not that we will not be able to fully utilize these carryforwards, we will recognize a valuation allowance against the related deferred tax assets.
During the three months ended May 31, 2014, the amount of gross unrecognized tax benefits increased by approximately $3.4 million. The total amount of gross unrecognized tax benefits was $90.7 million as of May 31, 2014, of which $76.1 million would benefit tax expense if realized. We elected to include interest expense and penalties accrued on unrecognized tax benefits as a component of our income tax expense. We are subject to routine corporate income tax audits in the United States, India, Netherlands, Sweden, United Kingdom and other foreign jurisdictions. Due to uncertainty of tax audit outcomes and the timing of tax audit settlements, we are unable to estimate the changes to our unrecognized tax benefit over the next twelve months. 


20

TIBCO SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

14.
NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per share for the periods indicated (in thousands, except per share data):
 
 
 
Three Months Ended
May 31,
 
Six Months Ended
May 31,
 
 
2014
 
2013
 
2014
 
2013
Net income attributable to TIBCO Software Inc.
 
$
1,552

 
$
8,715

 
$
13,701

 
$
18,220

Weighted-average shares of common stock used to compute basic net income per share
 
162,984

 
160,877

 
162,642

 
161,199

Effect of dilutive common stock equivalents:
 
 
 
 
 
 
 
 
Stock options
 
2,796

 
4,709

 
3,113

 
4,911

Stock awards
 
1,078

 
1,921

 
1,352

 
2,203

Employee stock purchase program
 

 

 
7

 
7

Weighted-average shares of common stock used to compute diluted net income per share
 
166,858

 
167,507

 
167,114

 
168,320

Net income per share attributable to TIBCO Software Inc.:
 
 
 
 
 
 
 
 
Basic
 
$
0.01

 
$
0.05

 
$
0.08

 
$
0.11

Diluted
 
$
0.01

 
$
0.05

 
$
0.08

 
$
0.11


The following potential common stock equivalents are not included in the diluted net income per share calculation above because their effect was anti-dilutive for the periods indicated (in thousands):
 
 
 
Three Months Ended
May 31,
 
Six Months Ended
May 31,
 
 
2014
 
2013
 
2014
 
2013
Stock options
 
1,502

 
1,762

 
1,487

 
1,815

Stock awards
 
811

 
556

 
780

 
1,123

Convertible senior notes
 
11,865

 
11,865

 
11,865

 
11,865

Total anti-diluted common stock equivalents
 
14,178

 
14,183

 
14,132

 
14,803

Anti-dilutive potential common stock equivalents for the three and six months ended May 31, 2014 include the 11.9 million shares that could be issued under the Notes if we experience substantial increases in our stock price. Under the treasury stock method, the Notes will generally have a dilutive impact on net income per share if our average stock price for the period exceeds the conversion price for the Notes. On conversion of a Note, however, we will deliver cash in an amount generally equal to the lesser of the conversion value and the principal amount of each Note and, only for any conversion value greater than the principal amount, we will deliver shares of common stock.

15.
SEGMENT INFORMATION
We operate our business in one operating segment: the development and marketing of a suite of infrastructure software. Our chief operating decision maker is our Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance.

21

TIBCO SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

Our revenue, organized by the following geographic regions: (i) Americas; (ii) EMEA; and (iii) APJ, based on the location at which each sale originates, is summarized as follows (in thousands):
 
 
 
Three Months Ended
May 31,
 
Six Months Ended
May 31,
 
 
2014
 
2013
 
2014
 
2013
Americas:
 
 
 
 
 
 
 
 
United States
 
$
130,004

 
$
130,450

 
$
257,576

 
$
248,104

Other Americas
 
13,991

 
12,180

 
30,717

 
21,941

Total Americas
 
143,995

 
142,630

 
288,293

 
270,045

EMEA:
 
 
 
 
 
 
 
 
United Kingdom
 
17,016

 
18,095

 
36,948

 
40,083

Other EMEA
 
66,810

 
59,429

 
132,742

 
122,865

Total EMEA
 
83,826

 
77,524

 
169,690

 
162,948

APJ
 
24,478

 
25,692

 
47,194

 
50,643

 
 
$
252,299

 
$
245,846

 
$
505,177

 
$
483,636


Our property and equipment by major country are summarized as follows (in thousands):
 
 
 
May 31,
2014
 
November 30,
2013
Property and equipment, net:
 
 
 
 
United States
 
$
92,618

 
$
88,669

United Kingdom
 
2,137

 
1,568

Other
 
13,149

 
10,813

 
 
$
107,904

 
$
101,050



16.
STOCK REPURCHASE PROGRAMS
On April 26, 2013, we announced that our Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $300.0 million of our outstanding common stock from time to time in the open market or through privately negotiated transactions. During the six months ended May 31, 2014, we repurchased 2.6 million shares for $55.9 million.
In connection with the repurchase activities during the six months ended May 31, 2014, we classified $41.2 million of the excess purchase price over the par value of our common stock to retained earnings.


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements relate to expectations concerning future events or matters that are not historical facts. Words such as “projects,” “believes,” “anticipates,” “plans,” “expects,” “intends,” “strategy,” “continue,” “will,” “estimate,” “forecast,” and similar words and expressions are intended to identify forward-looking statements, although these words are not the only means of identifying these statements. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to risks and uncertainties, including, but not limited to, the factors set forth in Part II, Item 1A. “Risk Factors.” This discussion should be read in conjunction with our Consolidated Financial Statements and accompanying notes and with our Annual Report on Form 10-K for the year ended November 30, 2013 and with our quarterly Condensed Consolidated Financial Statements and notes

22


thereto which appear elsewhere in this Quarterly Report on Form 10-Q. All forward-looking statements and reasons why results may differ included in this Quarterly Report on Form 10-Q are made as of the date hereof, and we assume no obligation to update any such forward-looking statements or reasons why actual results may differ.
Executive Overview
Our products are currently licensed by companies worldwide in diverse industries such as financial services, telecommunications, energy, retail, life sciences, manufacturing, transportation, government and insurance and business services. We sell our products through a direct sales force and through alliances with leading software vendors and system integrators.
Starting with the first fiscal quarter of 2014, we are now reporting certain of our financial information based on two product categories: (i) core infrastructure and (ii) event processing and analytics, as opposed to the three product categories (i) integration and core infrastructure, (ii) business optimization, and (iii) process automation and collaboration that we previously used. Our core infrastructure offerings allow our customers to integrate their disparate systems and better coordinate both the manual and automated process flows that span their business. Our event processing and analytic offerings allow customers to track large volumes of real-time events as they occur, apply sophisticated rules in order to identify patterns that signify threats and opportunities, and initiate appropriate notifications or adaptations of processes. We believe this categorization better reflects how we manage our business today. Conforming changes have been made for all prior periods presented.
During the second quarter of 2014, we adopted a revised presentation, which we believe better reflects our evolving product and service offerings and related consumption models. A change was made to combine subscription revenue, which was previously part of service revenue, and license revenue as software revenue. A corresponding change was made to combine cost of license revenue and cost of subscription revenue, which was previously part of cost of service revenue, as cost of software revenue. This change in presentation does not affect total revenue, total cost of revenue or gross margin. Conforming changes have been made for all prior periods presented.
Our revenue consists primarily of software sales and maintenance fees from our customers, distributors and partners (including system integrators, resellers, professional service organizations and business partners) who embed our software in their products. In addition, we receive fees from our customers for providing consulting services. Our revenue is generally derived from a diverse customer base. No single customer represented greater than 10% of our total revenue for the first six months of fiscal year 2014. As of May 31, 2014, no single customer had a balance in excess of 10% of our net accounts receivable.
For the second quarter of fiscal year 2014, we recorded total revenue of $252.3 million, an increase of 3% from the second quarter of fiscal year 2013. Software revenue was $82.3 million, a decrease of 4% from the second quarter of fiscal year 2013. In addition, we generated cash flow from operations of $18.0 million in the second quarter of fiscal year 2014. Diluted earnings per share under generally accepted accounting principles in the United States of America (“GAAP”) was $0.01 in the second quarter of fiscal year 2014 as compared to $0.05 for the second quarter of fiscal year 2013. We ended the quarter with $581.0 million in cash, cash equivalents and short-term investments.
For our analytics business, we expect to expand our subscription offerings and migrate to a subscription-based licensing model starting in the third quarter of fiscal year 2014. Over time, we expect this business model change will help us expand our customer base by acquiring new users through a lower cost of entry and additional features, and drive long-term revenue growth. We plan to continue to offer the perpetual licensing model as we transition our customers to the new subscription-based model. We expect the adoption of the subscription model may initially cause our traditional perpetual license revenue for our analytics business to decline and increase the amount of recurring revenue that is ratably recognized over the term of the subscription.
We intend to grow our business by pursuing key initiatives to: broaden our product platform and adapt our product offerings to new vertical markets through internal development and acquisitions; expand our customer base by introducing more subscription-based product offerings; expand our distribution capacity by growing our direct sales organization and developing our sales channels; and employ marketing programs to increase awareness of us and our products among existing and prospective customers.
Critical Accounting Policies, Judgments and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates, assumptions and judgments that can have significant impact on the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. We base our estimates, assumptions and judgments on historical experience and various other factors that

23


we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On a regular basis we evaluate our estimates, assumptions and judgments and make changes accordingly. We also discuss our critical accounting estimates on a regular basis with the Audit Committee of our Board of Directors.
We believe that the estimates, assumptions and judgments involved in revenue recognition, allowances for doubtful accounts, returns and discounts, stock-based compensation, business combination, impairment of goodwill, intangible and long-lived assets, and accounting for income taxes have the greatest potential impact on our Condensed Consolidated Financial Statements, so we consider these to be our critical accounting policies. Historically, our estimates, assumptions and judgments relative to our critical accounting policies have not differed materially from actual results. The critical accounting estimates associated with these policies are described in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2013 Annual Report on Form 10-K for the fiscal year ended November 30, 2013. There have been no changes in our critical accounting policies since the end of fiscal year 2013.
Recent Accounting Pronouncements
Recent accounting pronouncements are detailed in Note 2 to our Condensed Consolidated Financial Statements.
Results of Operations
For purposes of presentation, we have indicated the second quarter of fiscal years 2014 and 2013 as ended on May 31, 2014 and May 31, 2013, respectively; whereas in fact, the second quarter of fiscal years 2014 and 2013 actually ended on June 1, 2014 and June 2, 2013, respectively. There were 91 days in the second quarter of each of fiscal years 2014 and 2013. All amounts presented in the tables in the following sections of our Results of Operations are stated in thousands of dollars, except for percentages and unless otherwise stated.

24


The following table sets forth the components of our Results of Operations as percentages of total revenue for the periods indicated:
 
 
 
Three Months Ended
May 31,
 
Six Months Ended
May 31,
 
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
 
Software
 
33
 %
 
35
 %
 
33
 %
 
35
 %
Service and maintenance
 
67

 
65

 
67

 
65

Total revenue
 
100

 
100

 
100

 
100

Cost of revenue:
 
 
 
 
 
 
 
 
Software
 
6

 
5

 
6

 
5

Service and maintenance
 
25

 
25

 
25

 
26

Total cost of revenue
 
31

 
30

 
31

 
31

Gross profit
 
69

 
70

 
69

 
69

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
17

 
17

 
17

 
17

Sales and marketing
 
36

 
35

 
35

 
34

General and administrative
 
8

 
7

 
7

 
8

Amortization of acquired intangible assets
 
2

 
2

 
2

 
2

Acquisition related and other
 

 

 

 

Restructuring adjustment
 
1

 

 

 

Total operating expenses
 
64

 
61

 
61

 
61

Income from operations
 
5

 
9

 
8

 
8

Interest income
 

 

 

 

Interest expense
 
(3
)
 
(4
)
 
(3
)
 
(4
)
Other income (expense), net
 

 

 

 

Income before provision for income taxes and noncontrolling interest
 
2

 
5

 
5

 
4

Provision for (benefit from) income taxes
 
1

 
1

 
2

 
1

Net income
 
1

 
4

 
3

 
3

Less: Net income (loss) attributable to noncontrolling interest
 

 

 

 

Net income attributable to TIBCO Software Inc.
 
1
 %
 
4
 %
 
3
 %
 
3
 %

Our Results of Operations include incremental revenue and costs related to the acquisitions of Jaspersoft, Extended Results, StreamBase, and Maporama. In connection with these acquisitions, we have incurred additional expenses, including amortization of intangible assets and acquired technology; stock-based compensation; personnel and related costs; facility and infrastructure costs; and other charges.
Total Revenue
Our total revenue consisted primarily of software, service and maintenance fees from our customers, distributors and partners.
 
 
 
Three Months Ended
May 31,
 
Six Months Ended
May 31,
 
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Total revenue
 
$
252,299

 
$
245,846

 
3
%
 
$
505,177

 
$
483,636

 
4
%

Total revenue in the second quarter of fiscal year 2014 increased by $6.5 million, or 3%, compared to the same quarter last year. The increase was comprised of a $3.4 million, or 4%, decrease in software revenue offset by a $9.8 million, or 6%, increase in service and maintenance revenue. Total revenue for the six months ended May 31, 2014 increased by $21.5 million or 4%, compared to the same period last year.
For the six months ended May 31, 2014, we experienced an increase in total revenue in the Americas and a decrease in total revenue in each of Asia Pacific and Japan (“APJ”) and Europe, the Middle East and Africa (“EMEA”) compared to the

25


same period last year. See Note 15 to our Condensed Consolidated Financial Statements for total revenue by region. The percentages of total revenue from the geographic regions are summarized as follows:
 
 
 
Three Months Ended
May 31,
 
Six Months Ended
May 31,
 
 
2014
 
2013
 
2014
 
2013
Americas
 
57
%
 
58
%
 
57
%
 
56
%
EMEA
 
33
%
 
32
%
 
33
%
 
34
%
APJ
 
10
%
 
10
%
 
10
%
 
10
%
 
 
100
%
 
100
%
 
100
%
 
100
%

Software Revenue
 
 
 
Three Months Ended
May 31,
 
Six Months Ended
May 31,
 
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
License revenue
 
$
76,502

 
$
82,151

 
(7
)%
 
$
159,403

 
$
160,129

 
 %
Subscription revenue
 
5,819

 
3,560

 
63
 %
 
9,425

 
7,125

 
32
 %
Total software revenue
 
$
82,321

 
$
85,711

 
 
 
$
168,828

 
$
167,254

 
 
Percentage of total revenue
 
33
%
 
35
%
 
 
 
33
%
 
35
%
 
 

Total software revenue in the second quarter of fiscal year 2014 decreased by $3.4 million, or 4%, compared to the same quarter last year. The decrease was comprised of a $5.6 million, or 7%, decrease in license revenue offset by a $2.3 million, or 63%, increase in subscription revenue. Total software revenue for the six months ended May 31, 2014 increased by $1.6 million or 1%, compared to the same period last year.

For the first quarter of fiscal year 2014, subscription revenues of $3.5 million were reclassified from service revenues to software revenues. For the three and six months ended May 31, 2013, subscription revenues of $3.4 million and $6.7 million were reclassified from service revenues to software revenues, respectively.

Our software revenue was derived from the following two product categories: core infrastructure, and event processing and analytics. The percentages of software revenue from the two product categories are summarized as follows:
 
 
 
Three Months Ended
May 31,
 
Six Months Ended
May 31,
 
 
2014
 
2013
 
2014
 
2013
Core infrastructure
 
63
%
 
60
%
 
61
%
 
56
%
Event processing and analytics
 
37
%
 
40
%
 
39
%
 
44
%
 
 
100
%
 
100
%
 
100
%
 
100
%

Our license revenue in a particular period is dependent upon the timing, number and size of our license deals. Selected data about our license deals recognized for the respective periods is summarized as follows:
 
 
 
Three Months Ended
May 31,
 
Six Months Ended
May 31,
 
 
2014
 
2013
 
2014
 
2013
Number of license deals of $1.0 million or more
 
13

 
12

 
31

 
24

Number of license deals of $0.1 million or more
 
127

 
147

 
253

 
251

Average size of license deals of $0.1 million or more (in millions)
 
$
0.5

 
$
0.5

 
$
0.6

 
$
0.6


26



Cost of Software Revenue
 
 
 
Three Months Ended
May 31,
 
Six Months Ended
May 31,
 
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Cost of license revenue
 
$
12,502

 
$
11,108

 
13
%
 
$
24,452

 
$
22,369

 
9
%
Cost of subscription revenue
 
1,770

 
1,691

 
5
%
 
4,002

 
3,140

 
27
%
Total cost of software revenue
 
$
14,272

 
$
12,799

 
12
%
 
$
28,454

 
$
25,509

 
12
%
Percentage of total revenue
 
6
%
 
5
%
 
 
 
6
%
 
5
%
 
 
Percentage of software revenue