Income Taxes

The provision for income taxes consists of the following (in thousands):



	Year Ended December 31,						Six Months Ended December 31,				Fiscal Year Ended June 30,
	2013			2012			2011		2010		2011
									(Unaudited)
Current provision:
Federal	$	2		$	187		$	325	$	111	$	62
State	287			200			396		449		988
Foreign	2,454			1,787			329		93		286
	2,743			2,174			1,050		653		1,336
Deferred provision:
Federal	—			(55		)	22		—		—
State	—			(5		)	3		—		—
Foreign	(232		)	(746		)	—		—		—
	(232		)	(806		)	25		—		—
Provision for income taxes	$	2,511		$	1,368		$	1,075	$	653	$	1,336

The components of income (loss) from continuing operations before income taxes by U.S. and foreign jurisdictions were as follows (in thousands):



	Year Ended December 31,						Six Months Ended December 31,					Fiscal Year Ended June 30,
	2013			2012			2011			2010		2011
										(Unaudited)
United States	$	(35,901	)	$	(7,903	)	$	(1,375	)	$	5,368	$	10,585
Foreign	(35,296		)	(28,077		)	(4,234		)	88		581
Total	$	(71,197	)	$	(35,980	)	$	(5,609	)	$	5,456	$	11,166

The effective income tax rate differs from the federal statutory income tax rate applied to the income (loss) before provision for income taxes due to the following (in thousands):



	Year Ended December 31,						Six Months Ended December 31,						Fiscal Year Ended June 30,
	2013			2012			2011			2010			2011
										(Unaudited)
Tax computed at U.S. federal statutory rate	$	(24,207	)	$	(12,234	)	$	(1,907	)	$	1,857		$	3,799
State taxes, net of federal benefit	148			329			82			122			250
Tax rate differential for international subsidiaries	14,542			10,743			1,589			(23		)	(47		)
Stock-based compensation	3,447			3,926			978			244			727
Tax credits	(12,529		)	(1,056		)	(378		)	(150		)	(409		)
Tax contingencies	76			452			178			74			171
Non-deductible expenses	550			532			244			120			305
Change in state rate	14			(68		)	8			295			662
Other	242			(697		)	146			379			344
Valuation allowance	20,228			(559		)	135			(2,265		)	(4,466		)
Provision for income taxes	$	2,511		$	1,368		$	1,075		$	653		$	1,336

Significant components of our deferred tax assets are shown below (in thousands). A valuation allowance has been recognized to offset our deferred tax assets, as necessary, by the amount of any tax benefits that, based on evidence, are not expected to be realized.



	December 31,
	2013			2012
Deferred tax assets:
Net operating loss carryforwards	$	4,306		$	2,647
Deferred revenue	3,739			2,421
Accrued expenses	2,549			1,357
Deferred rent	1,119			322
Credit carryforwards	14,871			2,342
Facility exit obligation	698			1,102
Stock-based compensation	15,464			7,474
Note Hedge and others	48,241			—
Other	1,448			1,367
Total deferred tax assets	92,435			19,032
Less valuation allowance	(25,795		)	(13,270		)
	66,640			5,762
Deferred tax liabilities:
Depreciation	(9,608		)	(5,016		)
Convertible notes	(54,817		)	—
Purchased intangibles	(1,239		)	—
Net deferred tax assets	$	976		$	746

As of December 31, 2013, we had U.S. federal net operating loss and federal tax credit carryforwards of approximately $364.9 million and $10.7 million, respectively. The federal net operating loss carryforwards and federal tax credits will begin to expire in 2024 if not utilized. In addition, we had state net operating loss and state tax credit carryforwards of approximately

$192.6 million and $7.3 million, respectively. The state net operating loss and tax credit carryforwards will begin to expire in

2018 if not utilized. Utilization of our net operating loss and credit carryforwards may be subject to annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carry forwards before utilization.

Approximately $356.9 million of federal net operating losses and $164.8 million of state net operating losses relate to stock-based compensation deductions in excess of book expense, the tax effect of which would be to credit additional paid-in capital, if realized.

We maintain a full valuation allowance against our U.S. deferred tax assets as of December 31, 2013. We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. Due to cumulative losses over recent years and based on all available evidence, we have determined that it is more likely than not that net deferred tax assets in the U.S. will not be realized. We have determined that $1.0 million related to foreign deferred tax assets will be realized. The valuation allowance increased $12.5 million for the year ended December 31, 2013, decreased $0.6 million for the year ended December 31, 2012, increased $0.1 million and decreased $2.2 million for the six months ended December 31, 2011 and 2010 (unaudited), respectively, and decreased $4.5 million for fiscal 2011. The change in valuation allowance between the years ended December 31, 2013 and 2012 is primarily attributable to an increase of deferred tax liabilities related to purchased intangibles, the Notes and depreciation of fixed assets, and an increase of deferred tax assets resulting primarily from stock-based compensation, the extension of the federal research and development tax credit for the year ended December 31, 2013 and the Note Hedge. We will continue to assess the likelihood of realization of the deferred tax assets in each of the applicable jurisdictions in future periods and will adjust the valuation allowance accordingly.

We have not recorded a provision for deferred U.S. tax expense that could result from the remittance of foreign undistributed earnings since we intend to reinvest the earnings of these foreign subsidiaries indefinitely.

Our share of the undistributed earnings of foreign corporations not included in our consolidated federal income tax returns that could be subject to additional U.S. income tax if remitted was approximately $0.5 million and $0.3 million as of December 31, 2013 and 2012, respectively. The determination of the amount of unrecognized U.S federal deferred income tax liability for undistributed earnings is not practicable.

A reconciliation of the beginning and ending balance of total unrecognized tax benefits is as follows (in thousands):



	Year Ended December 31,						Six Months Ended December 31,				Fiscal Year Ended June 30,
	2013			2012			2011		2010		2011
									(Unaudited)
Balance, beginning period	$	1,725		$	710		$	519	$	374	$	374
Tax positions taken in prior period:
Gross increases	333			827			—		—		—
Gross decreases	(14		)	(65		)	—		—		—
Tax positions taken in current period:
Gross increases	2,784			264			191		73		145
Gross decreases	—			—			—		—		—
Lapse of statute of limitations	(18		)	(11		)	—		—		—
Balance, end of period	$	4,810		$	1,725		$	710	$	447	$	519

As of December 31, 2013, we had gross unrecognized tax benefits of approximately $4.8 million, of which $0.9 million would impact the effective tax rate, if recognized. We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense. Accrued interest and penalties included in our liability related to unrecognized tax benefits were $0.4 million at December 31, 2013 and 2012. The amount of unrecognized tax benefits could be reduced upon expiration of the applicable statutes of limitations. The potential reduction in unrecognized tax benefits during the next 12 months is not expected to be material. Interest and penalties accrued on these uncertain tax positions will be released upon the expiration of the statutes of limitations and these amounts are also not material.

We are subject to taxation in the United States and foreign jurisdictions. As of December 31, 2013, our tax years of 2005 to 2013 remain subject to examination in most jurisdictions. We are currently under examination by the U.S. Internal Revenue Service for the June 30, 2011 and December 31, 2011 tax years.

There are differing interpretations of tax laws and regulations, and as a result, disputes may arise with tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. We periodically evaluate our exposures associated with our tax filing positions. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations, and we do not anticipate a significant impact to our gross unrecognized tax benefits within the next twelve months related to these years. Although the timing of the resolution, settlement, and closure of any audit is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next twelve months. However, given the number of years that remain subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.