November 9, 2018

In the Q3 2018 press release, management commented that higher compensation and higher D&A led to strong expense growth. If not for the margin benefit of the one-time upfront licensing revenue lift, margin results would've been down 200 bps versus

We disclosed that a license amendment in the third quarter of 2018 resulted in an upfront license fee that added $10.5 million in revenue to the quarter. The net impact of this revenue benefit to operating income growth was 19.9 percentage points, or 3.1 percentage points to operating margin, which implies that operating margin would have contracted by 1.1 percentage points year over year to 21.9% in the absence of the license amendment.

As we stated in our Q1 2018 and Q2 2018 earnings releases, we have been anticipating sequential increases in the rate of our overall expense growth throughout the year. In particular, we’ve been making certain headcount investments to support growth in high-potential areas of our business, which have contributed to a year-over-year increase in compensation expense for Q3 2018. In addition, strong year-to-date company performance against our internal goals continues to justify higher bonus accruals relative to 2017.

As for depreciation and amortization expense, disaggregating the components as disclosed in our third quarter 10-Q shows that depreciation expense in the third quarter of 2018 increased 19.6% year over year, while amortization expense decreased by 5.5%. The year-over-year increase in depreciation expense is largely driven by higher levels of capitalized software over the past few years in support of product development and enhancement activities that align with our long-term strategy and key investment areas. The year-over-year decrease in amortization expense occurred as certain intangible assets from some of our earlier acquisitions were fully amortized.

While we do not provide specific guidance on our near-term expectations for expense growth, we’ll comment that increases in compensation are directly related to the investments we’re making to support our growth initiatives. We would also expect depreciation related to capitalized software development to continue to increase in the near term.  Through the end of the third quarter, we have capitalized $40.2 million in labor expenses related to software development, up 16.3% versus the prior year period. This compares to $30.6 million in depreciation related to capitalized software activities, up 39.7% versus the prior year period. We would expect the level of capitalized software expense and its associated depreciation to converge over time.

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