JDAS Jda Software Grp., Inc. (MM)

JDA® Software Group, Inc. (NASDAQ: JDAS), The Supply Chain Company®, today announced financial results for the second quarter ended June 30, 2010. JDA reported record total revenues of $158.4 million, a 59 percent increase from $99.5 million of revenue reported in second quarter 2009. Software license and subscription revenues in the second quarter 2010 increased 38 percent to $38.0 million from $27.6 million in second quarter 2009.

Adjusted EBITDA increased 44 percent to $41.3 million in second quarter 2010 from $28.7 million in the second quarter of 2009. JDA also reported adjusted non-GAAP earnings per share for second quarter 2010 of $0.48, an increase from the $0.47 per share reported in second quarter 2009. Adjusted non-GAAP earnings exclude amortization of acquired software technology and intangibles, restructuring charges, stock-based compensation and costs related to the acquisition and transition of i2. GAAP net income for second quarter 2010 was $7.9 million or $0.19 per share, compared to GAAP net income of $8.9 million or $0.25 per share in second quarter 2009.

Results for 2010 include the completion of the acquisition of i2 Technologies, Inc. (i2) as of January 28, 2010.

“Record license sales were a primary feature of the second quarter and once again the contribution from i2 products was significant,” said JDA president and chief executive officer Hamish Brewer. “Six months into the integration of i2, we fully expected to be delivering the cost synergies we are seeing, but this accelerated license revenue growth is far better than we had planned. Further work remains to be done, but so far the integration process is going very well.”

Software and Subscription

Software and subscription revenue increased 38 percent to $38.0 million in the second quarter 2010 from $27.6 million in the second quarter 2009. This increase was driven by the acquisition of i2 and by strong sales in the Americas region, which continued to show a strong pipeline. The average sales price for the trailing 12 months ended June 30, 2010 was $608,000 compared to $618,000 for the trailing 12 months ended March 31, 2010.

Maintenance and Support Services

Maintenance revenue increased 37 percent to $60.6 million in the second quarter 2010 from $44.4 million in the second quarter 2009. This increase was driven primarily by the acquisition of i2 and the year-over-year improvement in retention rates. The annualized retention rate in the second quarter 2010 increased to 97.3 percent from 93.8 percent in the second quarter 2009. The renewal rate in 2009 was negatively impacted by the adverse economic conditions, and the current year renewals are trending better than JDA historical averages. Maintenance gross margins increased to 76 percent in the current quarter from 75 percent in the second quarter 2009 primarily due to increased software sales with maintenance attachments and a greater proportion of maintenance being performed in the more cost effective Centers of Excellence (“CoE”) in India.

Consulting Services

Consulting services revenue increased 117 percent to $59.8 million in the second quarter 2010 from $27.5 million in the second quarter 2009. This increase was primarily due to the acquisition of i2 and increased implementation services work associated with larger JDA software product sales in 2009. Consulting services gross margins increased to 24 percent in second quarter 2010 from 18 percent in the second quarter 2009. This increase was driven primarily by the higher volume of consulting services revenue together with higher margin projects and greater utilization of the lower cost CoE resources.

Other Financial Data

• Operating expenses as a percent of revenue show the operating leverage effects of the i2 acquisition. Product development expenses as a percent of revenue improved to 12 percent in the second quarter 2010 compared to 13 percent in the second quarter 2009. Sales and marketing expenses as a percent of revenue improved to 15 percent in the second quarter 2010 compared to 16 percent in the second quarter 2009. General and administrative expenses increased as a percent of revenue to 13 percent in the second quarter 2010 compared to 12 percent in the second quarter 2009. This increase is primarily due to increased legal fees in connection with ongoing litigation and increased headcount from the i2 acquisition.
• DSO improved to 66 days at the end of second quarter 2010 from 74 days at the end of first quarter 2010. Compared to the second quarter in the prior year, DSO increased from 57 days primarily due to the receivables acquired from i2. JDA continues to apply its focused collection process to the new receivables as a part of the overall company integration process, with the goal of reducing the overall DSO.
• Net interest and other expense for the second quarter 2010 increased to $6.8 million from $0.3 million in the second quarter of 2009 due to interest on the senior notes issued in connection with the i2 acquisition and currency rate changes.
• Cash flow from operations was a use of ($2.6) million in second quarter 2010 compared to positive cash flow from operations of $27.5 million in second quarter 2009. The negative cash flow was caused by realized deferred revenues from the i2 acquisition where the cash was collected prior to the acquisition close date combined with an increase in receivables and deferred expenses.
• Cash and cash equivalents, including restricted cash, were $158.0 million at June 30, 2010, compared to $363.8 million at December 31, 2009, which included net proceeds from the issuance of $275.0 million of senior notes that were used to complete the acquisition of i2 on January 28, 2010.
• Weighted average shares outstanding for the quarter ended June 30, 2010 were 42.3 million.

Second Quarter 2010 Highlights

The following presents a high-level summary of JDA’s regional sales performance:

• JDA reported $27.1 million in software license and subscription revenues in its Americas region during second quarter 2010, compared to $18.9 million in first quarter 2010 and $14.4 million in second quarter 2009. Customers that signed new software licenses in second quarter 2010 include: Dick’s Sporting Goods, Inc., Guitar Center, Inc. Boscov’s Department Store, LLC, Ripley’s Comercial ECSSA S.A., Sodimac Chile S.A., IFH Retail and Tiendas Peruanas, Michaels Stores, Inc., Syms Corporation, Liz Claiborne, Inc., Delhaize America, Inc. and VMR Electronics, LLC.
• Software license and subscription revenues in the Europe, Middle East and Africa (EMEA) region were $4.8 million in second quarter 2010, compared to $5.4 million in first quarter 2010 and $5.0 million in second quarter 2009. New software deals in the EMEA region included: Esselunga SpA, Crai Secom SpA, and Renault SA.
• JDA’s Asia-Pacific region posted software license and subscription revenues of $6.1 million in second quarter 2010, compared to $4.4 in first quarter 2010 and $8.2 million in second quarter 2009. Wins in this region included: JFE Steel Corporation and Lenovo Group Ltd.

Six Months Ended June 30, 2010 Results

• Revenue for the six months ended June 30, 2010 increased 59 percent to $290.0 million from $182.8 million for the six months ended June 30, 2009. Adjusted EBITDA increased to $72.7 million for the first six months ended June 30, 2010 from $45.4 million in the first half of 2009. The increases were primarily driven by the acquisition of i2 Technologies and growth in the core business.
• Adjusted non-GAAP earnings per share for the six months ended June 30, 2010 was $0.87 compared to $0.73 per share for the six months ended June 30, 2009. Adjusted non-GAAP earnings exclude amortization of acquired software technology and intangibles, restructuring charges, stock-based compensation and costs related to the acquisition and transition of i2.
• The GAAP net income applicable to common shareholders for the six months ended June 30, 2010 was $3.6 million or $0.09 per share, compared to net income of $11.6 million or $0.33 per share for the six months ended June 30, 2009. The decrease was primarily due to costs related to the acquisition and transition of i2.
• Cash flow from operations was $9.6 million for the six months ended June 30, 2010 compared to cash flow from operations of $60.5 million for the six months ended June 30, 2009. The change in operating cash flow in the current period was caused by realized deferred revenues from the i2 acquisition where the cash was collected prior to the acquisition close date, an increase in receivables and deferred expenses and payments related to acquisition accruals.

Conference Call Information

JDA Software Group, Inc. will host a conference call at 4:45 p.m. Eastern time today to discuss earnings results for its second quarter ended June 30, 2010. To participate in the call, dial 1-877-941-8416 (United States) or 1-480-629-9808 (International) and ask the operator for the “JDA Software Group, Inc. Second Quarter 2010 Earnings Conference Call.” A live audio webcast of the conference call can be accessed by logging onto www.jda.com in the Investor Relations section.

A replay of the conference call will begin on July 27, 2010 at 8:00 p.m. Eastern time and will end on August 27, 2010. To hear a replay of the call over the Internet, access JDA’s website at www.jda.com.

About JDA Software Group, Inc.

JDA® Software Group, Inc. (NASDAQ: JDAS), The Supply Chain Company®, is a leading global provider of innovative supply chain management, merchandising and pricing excellence solutions. JDA empowers more than 6,000 companies of all sizes to make optimal decisions that improve profitability and achieve real results in the discrete and process manufacturing, wholesale distribution, transportation, retail and services industries. With an integrated solutions offering that spans the entire supply chain from materials to the consumer, JDA leverages the powerful heritage and knowledge capital of acquired market leaders including i2 Technologies®, Manugistics®, E3®, Intactix® and Arthur®. JDA’s multiple service options provide customers with flexible configurations, rapid time-to-value, lower total cost of ownership and 24/7 functional and technical support and expertise. To learn more, visit www.jda.com or e-mail info@jda.com.

JDA SOFTWARE GROUP, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(In thousands, except share amounts, unaudited)

       

 

June 30,2010

December 31,2009

ASSETS Current Assets:

Cash and cash equivalents

$ 146,179 $ 75,974

Restricted cash

11,780 287,875

Accounts receivable, net

116,091 68,883

Deferred tax asset

57,630 19,142

Prepaid expenses and other current assets

  33,251     15,667  

Total current assets

  364,931     467,541     Non-Current Assets:

Property and equipment, net

44,648 40,842

Goodwill

197,813 135,275 Other Intangibles, net:

Customer-based intangibles

156,614 99,264

Technology-based intangibles

41,161 20,240

Marketing-based intangibles

13,226 157

Deferred tax asset

269,421 44,350

Other non-current assets

  17,381     13,997  

Total non-current assets

  740,264     354,125    

Total Assets

$ 1,105,195   $ 821,666     LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities:

Accounts payable

$ 14,423 $ 7,192

Accrued expenses and other liabilities

68,840 45,523 Income taxes payable 3,152 3,489

Deferred revenue

  121,818     65,665  

Total current liabilities

  208,233     121,869     Non-Current Liabilities: Long-term debt 272,451 272,250 Accrued exit and disposal obligations 6,626 7,341 Liability for uncertain tax positions 10,306 8,770

Deferred revenue

  14,601  

--

 

Total non-current liabilities

  303,984     288,361    

Total Liabilities

  512,217     410,230     Stockholders' Equity:

Preferred stock, $.01 par value; authorized 2,000,000 shares; none issued or outstanding

--

--

Common stock, $.01 par value; authorized, 50,000,000 shares; issued 43,628,080 and 36,323,245 shares, respectively

436

363

Additional paid-in capital

554,579 361,362 Deferred compensation (12,783 ) (5,297 )

Retained earnings

77,612 74,014

Accumulated other comprehensive income (loss)

(1,014 ) 3,267 Less treasury stock, at cost, 1,920,105 and 1,785,715 shares, respectively   (25,852 )   (22,273 )

Total stockholders' equity

  592,978     411,436  

Total liabilities and stockholders' equity

$ 1,105,195   $ 821,666  

JDA SOFTWARE GROUP, INC.CONDENSED CONSOLIDATED STATEMENTS OF INCOME(in thousands, except earnings per share data, unaudited)

         

Three Months EndedJune 30,

Six Months EndedJune 30,

  2010       2009     2010     2009   REVENUES: Software licenses $ 32,152 $ 26,589 $ 56,589 $ 40,946 Subscriptions and other recurring revenues 5,806 996 10,093 1,964

Maintenance services

  60,594     44,371     117,654     87,368  

Product revenues

  98,552     71,956     184,336     130,278    

Consulting services

55,255 25,079 98,257 48,113

Reimbursed expenses

  4,566     2,450     7,411     4,427  

Service revenues

  59,821     27,529     105,668     52,540  

Total revenues

  158,373     99,485     290,004     182,818     COST OF REVENUES: Cost of software licenses 909 1,235 1,917 1,837 Amortization of acquired software technology 1,803 980 3,379 1,988 Cost of maintenance services   14,227     10,984     26,260     21,533  

Cost of product revenues

  16,939     13,199     31,556     25,358    

Cost of consulting services

40,742 20,131 76,011 39,513

Reimbursed expenses

  4,566     2,450     7,411     4,427  

Cost of service revenues

  45,308     22,581     83,422     43,940  

Total cost of revenues

  62,247     35,780     114,978     69,298     GROSS PROFIT 96,126 63,705 175,026 113,520   OPERATING EXPENSES: Product development 19,481 12,664 36,758 25,237

Sales and marketing

24,460 16,170 45,572 30,422

General and administrative

19,801 11,670 37,498 22,696

Amortization of intangibles

9,915 6,051 18,481 12,127

Restructuring charges

4,548 2,732 12,306 4,162 Acquisition-related costs   865    

--

    7,608    

--

 

Total operating expenses

  79,070     49,287     158,223     94,644    

OPERATING INCOME

17,056 14,418 16,803 18,876   Interest expense and amortization of loan fees (6,182 ) (386 ) (12,268 ) (625 )

Interest income and other, net

  (642 )   123     481     (120 )   INCOME BEFORE INCOME TAXES 10,232 14,155 5,016 18,131

Income tax provision

  2,366     5,220     1,418     6,552    

NET INCOME

$ 7 ,866   $ 8,935   $ 3,598   $ 11,579     BASIC EARNINGS PER SHARE $ .19   $ .26   $ .09   $ .33   DILUTED EARNINGS PER SHARE $ .19   $ .25   $ .09   $ .33     SHARES USED TO COMPUTE:

Basic earnings per share

  41,672     35,004     40,514     34,983  

Diluted earnings per share

  42,265     35,232     41,151     35,154  

 JDA SOFTWARE GROUP, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands, unaudited)

       

Three Months EndedJune 30,

Six Months EndedJune 30,

2010   2009 2010   2009   CASH FLOW INFORMATION   Net cash provided by (used in) operating activities: Net Income $ 7,866 $ 8,935 $ 3,598 $ 11,579 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,862 9,431 28,010 18,842 Provision for doubtful accounts 500 300 500 300 Amortization of loan fees 495

--

922

--

Share-based compensation expense 3,292 2,157 6,569 3,567 Net gain on disposal of property and equipment (4 ) (38 ) (9 ) (54 ) Deferred income taxes 2,242 4,663 (304 ) 5,670 Changes in assets and liabilities, net of effects from business acquisitions: Accounts receivable (7,645 ) 3,226 (14,856 ) 16,820 Income tax receivable 955 (586 ) 2,031 (1,434 ) Prepaid expenses and other current assets (6,022 ) (3,918 ) (13,911 ) (6,882 ) Accounts payable 3,084 2,665 3,634 7,139 Accrued expenses and other liabilities (2,974 ) 1,912 (14,075 ) (13,507 ) Income tax payable (1,610 ) 248 (3,737 ) 365 Deferred revenue   (17,668 )   (1,541 )   11,196     18,107   $ (2,627 ) $ 27,454   $ 9,568   $ 60,512     Net cash provided by (used in) investing activities: Change in restricted cash $ (82 )

$

--

$ 276,095

$

--

Purchase of i2 Technologies, Inc

--

--

(213,427 )

--

Payment of direct costs related to acquisitions (789 ) (669 ) (1,639 ) (1,489 ) Purchase of other property and equipment (5,864 ) (404 ) (6,397 ) (1,407 ) Proceeds from disposal of property and equipment   332     38     349     54   $ (6,403 ) $ (1,035 ) $ 54,981   $ (2,842 )   Net cash provided by financing activities: Issuance of common stock under equity plans $ 706 $ 2,136 $ 11,610 $ 4,642 Purchase of treasury stock and other, net   (366 )   (680 )  

(3,758

)

 

(3,899

)

$ 340   $ 1,456   $ 7,852   $ 743     Effect of exchange rates on cash   (948 )   1,785     (2,196 )   1,566   Net increase (decrease) in cash and cash equivalents (9,638 ) 29,660 70,205 59,979 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   155,817     63,015     75,974     32,696   CASH AND CASH EQUIVALENTS, END OF PERIOD $ 146,179   $ 92,675   $ 146,179   $ 92,675  

JDA SOFTWARE GROUP, INC.NON-GAAP MEASURES OF PERFORMANCE(in thousands, except share data, unaudited)

       

Three Months EndedJune 30,

Six Months EndedJune 30,

2010   2009 2010   2009   Reconciliation of GAAP Net Income to EBITDA and Adjusted EBITDA   Net Income (GAAP BASIS) $ 7,866 $ 8,935 $ 3,598 $ 11,579 Income tax provision 2,366 5,220 1,418 6,552 Interest expense and amortization of loan fees 6,182 386 12,268 625 Amortization of acquired software technology 1,803 980 3,379 1,988 Amortization of intangibles 9,915 6,051 18,481 12,127 Depreciation   3,144     2,400     6,150     4,727   EBITDA (earnings before interest, tax, depreciation and amortization) 31,276 23,972 45,294 37,598 Restructuring charges 4,548 2,732 12,306 4,162 Stock-based compensation 3,292 2,157 6,569 3,567 Acquisition-related costs 865 -- 7,608 -- Non-recurring transition costs to integrate acquisition 723 -- 1,440 -- Interest income and other non-operating (income) expense, net   642     (123 )   (481 )   120   Adjusted EBITDA $ 41,346   $ 28,738   $ 72,736   $ 45,447     EBITDA, as a percentage of revenue   20 %   24 %   16 %   21 %   Adjusted EBITDA, as a percentage of revenue   26 %   29 %   25 %   25 %     NON-GAAP EARNINGS PER SHARE   Income before income taxes (GAAP BASIS) $ 10,232 $ 14,155 $ 5,016 $ 18,131   Amortization of acquired software technology 1,803 980 3,379 1,988 Amortization of intangibles 9,915 6,051 18,481 12,127 Restructuring charges 4,548 2,732 12,306 4,162 Stock-based compensation 3,292 2,157 6,569 3,567 Acquisition-related costs 865 -- 7,608 -- Non-recurring transition costs to integrate acquisition   723     --     1,440     --   Adjusted income before income taxes 31,378 26,075 54,799 39,975 Adjusted income tax expense   10,982     9,387     19,180     14,252   Adjusted net income $ 20,396   $ 16,688   $ 35,619   $ 25,723   Adjusted non-GAAP diluted earnings per share $ 0.48   $ 0.47   $ 0.87   $ 0.73   Shares used to compute non-GAAP diluted earnings per share   42,265     35,232     41,151     35,154  

JDA SOFTWARE GROUP, INC.SUPPLEMENTAL DATA(dollars in thousands)

                                      Software & Subscription Revenues by Geographic Region                       Three Months Ended       6/30/2010     3/31/2010     12/31/2009     9/30/2009     6/30/2009   Americas $ 27,080 $ 18,917 $ 19,084 $ 12,624 $ 14,357 EMEA 4,773 5,403 6,417 4,084 5,012 Asia/Pacific   6,105     4,404     3,125     542     8,216   Total $ 37,958   $ 28,724   $ 28,626   $ 17,250   $ 27,585       Business Segment Data       Three Months Ended       6/30/2010     3/31/2010     12/31/2009     9/30/2009     6/30/2009   Supply Chain Total Revenues $ 152,931 $ 125,233 $ 99,410 $ 88,608 $ 88,161 Operating Income 52,638 39,904 33,882 29,054 29,127 Operating Income Margin 34 % 32 % 34 % 33 % 33 %   Services Industry Total Revenues $ 5,442 $ 6,398 $ 7,713 $ 7,251 $ 11,324 Operating Income (Loss) (453 ) 607 986 1,027 5,744 Operating Income Margin (8 %) 9 % 13 % 14 % 51 %     New vs. Install-Base Software Sales and Subscription Revenues       Three Months Ended       6/30/2010     3/31/2010     12/31/2009     9/30/2009     6/30/2009   New Sales $ 8,080

21

% $ 8,415 29 % $ 4,515 16 % $ 3,317 19 % $ 10,066 36 % Install-Base Sales   29,878   79 %   20,309   71 %   24,111   84 %   13,933   81 %   17,518   64 % Total $ 37,958   $ 28,724   $ 28,626   $ 17,250   $ 27,584       ASP, Multi-Product Deals & Large Deal Counts       Last Twelve Months Ended       6/30/2010     3/31/2010     12/31/2009     9/30/2009     6/30/2009   Average Sales Price (ASP) $ 608 $ 618 $ 630 $ 733 $ 819 Multiple-Product Deals 18 21 20 19 18 Large Deal Count (>= $1 million ) 25 24 19 16 19   Quota Carrying Sales Representatives 92 96 75 75 72                           Summary of Revenue Contribution in Second Quarter 2010   JDA i2 Combined   Software and Subscription Revenues $ 21,728 57 % $ 16,230 43 % $ 37,958 Maintenance Revenues   45,417 75 %   15,177 25 %   60,594 Product Revenues 67,145 68 % 31,407 32 % 98,552   Service Revenues   38,294 64 %   21,527 36 %   59,821   Total Revenues $ 105,439 67 % $ 52,934 33 % $ 158,373                         Summary of Revenue Contribution in First Half 2010     Software and Subscription Revenues $ 37,606 56 % $ 29,076 44 % $ 66,682 Maintenance Revenues   91,908 78 %   25,746 22 %   117,654 Product Revenues 129,514 70 % 54,822 30 % 184,336   Service Revenues   70,295 67 %   35,373 33 %   105,668   Total Revenues $ 199,809 69 % $ 90,195 31 %   290,004

“Safe Harbor” Statement under the U.S. Private Securities Litigation Reform Act of 1995

This press release contains forward-looking statements that are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally accompanied by words such as “will,” and “expect” and other words with forward-looking connotations. In this press release, such forward-looking statements include, without limitation, our statements regarding our record revenue confirming our rationale for the i2 acquisition, any implication of future sales results from our strong sales pipeline in the Americas, and Mr. Brewer’s statements regarding license revenue growth from i2 products and the progress of our i2 integration efforts. We remind our investors and prospective investors that future events may involve risks and uncertainties. Risks and uncertainties that may affect our business are detailed from time to time in the ``Risk Factors'' section and other sections of our filings with the Securities and Exchange Commission. As a result of these and other risks, actual results may differ materially from those predicted. We undertake no obligation to update information in this release, except as required by law.

Use of Non-GAAP Financial Information

This press release and the related conference call contain non-GAAP financial measures. In evaluating the Company’s performance, management uses certain non-GAAP financial measures to supplement consolidated financial statements prepared under GAAP. Management’s presentation of non-GAAP financial measures is intended to be supplemental in nature and should not be considered in isolation or as a substitute for the most directly comparable GAAP measures.

Use and Economic Substance of Non-GAAP Financial Measures Used by JDA

The Company uses non-GAAP measures of performance, including adjusted net income, EBITDA (earnings before interest, taxes, depreciation and amortization) and earnings per share, in its public statements. Management uses, and chooses to disclose, these non-GAAP financial measures because (i) such measures provide an additional analytical tool to clarify the Company’s results from operations and help the Company to identify underlying trends in its results of operations; (ii) the Company uses non-GAAP earnings measures, including EBITDA, as a measure of profitability because such measures help the Company compare its performance on a consistent basis across time periods; and (iii) these non-GAAP measures are employed by the Company’s management in its own evaluation of performance and are utilized in financial and operational decision making processes, such as budget planning and forecasting. The Company also internally uses adjusted EBITDA measures for determining (a) compliance with certain financial covenants in its credit agreement and (b) executive and employee compensation. Set forth below are additional reasons why specific items are excluded from the Company’s non-GAAP financial measures:

• Amortization charges for acquired software technology are excluded because they result from prior acquisitions, rather than ongoing operations, and absent additional acquisitions, are expected to decline over time.
• Amortization charges for other intangibles are excluded because they are non-cash expenses, and while tangible and intangible assets support our business, we do not believe the related amortization costs are directly attributable to the operating performance of our business.
• Restructuring charges are significant non-routine expenses that cannot be predicted and typically relate to a change in our business model or to a change in our estimate of the costs to complete a plan to exit an activity of an acquired company. The exclusion of these charges promotes period-to-period comparisons and transparency. Such charges are primarily related to severance costs and/or the disposition of excess facilities driven by the changes to our business model.
• Stock-based compensation is not an expense that typically requires or will require cash settlement by the Company.
• Acquisition-related costs associated with the acquisition of i2 and the non-recurring transition costs to integrate the acquisition are significant non-routine expenses. Exclusion of these costs promotes period-to-period comparisons and transparency as we do not believe these costs are directly attributable to the operating performance of our business.

Material Limitations (and Compensation thereof) Associated with the Use of Non-GAAP Financial Measures

Non-GAAP financial measures have limitations as an analytical tool and should not be considered in isolation or as a substitute for the Company’s GAAP results. In the future, the Company expects to continue reporting non-GAAP financial measures excluding items described above and the Company expects to continue to incur expenses similar to the non-GAAP adjustments described above. Accordingly, exclusion of these and other similar items in our non-GAAP presentation should not be construed as an inference that these costs are unusual, infrequent or non-recurring.

Some of the limitations in relying on non-GAAP financial measures are:

• Amortization of acquired technology and intangibles, though not directly affecting our current cash position, represent the loss in value as the technology in our industry evolves, is advanced or is replaced over time. The expense associated with this loss in value is not included in the non-GAAP net income presentation and therefore does not reflect the full economic effect of the ongoing cost of maintaining our current technological position in our competitive industry which is addressed through our research and development program.
• The Company may engage in acquisition transactions in the future. In addition, we incur other restructuring charges from time to time when necessary to adjust our business model. Restructuring related charges may therefore continue to be incurred and should not be viewed as non-recurring.
• Stock-based compensation is an important component of our incentive compensation arrangements and will be reflected as expenses in our GAAP results for the foreseeable future.
• Other companies, including other companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting their usefulness as a comparative measure.

We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP financial measures only supplementally. We also provide reconciliations of each non-GAAP financial measure to our most directly comparable GAAP measure, and we encourage investors to review carefully those reconciliations.

Usefulness of Non-GAAP Financial Measures to Investors

The Company believes that the presentation of these non-GAAP financial measures is warranted for several reasons. First, such non-GAAP financial measures provide investors and management an additional analytical tool for understanding the Company’s financial performance by excluding the impact of items which may obscure trends in the core operating performance of the business. Second, since the Company has historically reported non-GAAP results to the investment community, the Company believes the inclusion of non-GAAP numbers provides consistency and enhances investors’ ability to compare the Company’s performance across financial reporting periods.