10-Q 1 q2201410qmaster.htm 10-Q Q2 2014 10Q (Master)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2014
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-19417
 
PROGRESS SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
 
 
MASSACHUSETTS
(State or other jurisdiction of
incorporation or organization)
 
04-2746201
(I.R.S. Employer
Identification No.)
14 Oak Park
Bedford, Massachusetts 01730
(Address of principal executive offices)(Zip code)
Telephone Number: (781) 280-4000
 
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  ý    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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    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 “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
ý
Accelerated filer
 
¨
Non-accelerated filer
 
¨
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  ý
As of June 27, 2014, there were 50,659,561 shares of the registrant’s common stock, $.01 par value per share, outstanding.



PROGRESS SOFTWARE CORPORATION
FORM 10-Q
FOR THE SIX MONTHS ENDED MAY 31, 2014
INDEX

 
 
 
PART I
 
 
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 
 
 

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets

(In thousands, except share data)
May 31,
2014
 
November 30, 2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
201,971

 
$
198,818

Short-term investments
24,605

 
32,622

Total cash, cash equivalents and short-term investments
226,576

 
231,440

Accounts receivable (less allowances of $2,690 and $3,153, respectively)
58,023

 
66,784

Other current assets
25,116

 
30,716

Deferred tax assets
11,392

 
8,871

Total current assets
321,107

 
337,811

Property and equipment, net
59,865

 
57,030

Intangible assets, net
16,090

 
9,950

Goodwill
230,681

 
224,286

Deferred tax assets
17,387

 
20,386

Investments in auction rate securities
25,056

 
24,761

Other assets
3,163

 
7,963

Total assets
$
673,349

 
$
682,187

Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
8,906

 
9,560

Accrued compensation and related taxes
16,135

 
26,697

Income taxes payable
3,195

 
2,584

Other accrued liabilities
23,510

 
29,345

Short-term deferred revenue
98,413

 
96,393

Total current liabilities
150,159

 
164,579

Long-term deferred revenue
2,533

 
1,144

Deferred tax liabilities
355

 
340

Other noncurrent liabilities
1,776

 
2,470

Commitments and contingencies

 

Shareholders’ equity:
 
 
 
Preferred stock, $0.01 par value; authorized, 1,000,000 shares; issued, none

 

Common stock, $0.01 par value, and additional paid-in capital; authorized, 200,000,000 shares; issued and outstanding, 50,649,989 shares in 2014 and 51,512,595 shares in 2013
200,003

 
205,307

Retained earnings, including accumulated other comprehensive loss of $10,414 in 2014 and $11,659 in 2013
318,523

 
308,347

Total shareholders’ equity
518,526

 
513,654

Total liabilities and shareholders’ equity
$
673,349

 
$
682,187

See notes to unaudited condensed consolidated financial statements.

3


Condensed Consolidated Statements of Income
 
 
Three Months Ended
 
Six Months Ended
(In thousands, except per share data)
May 31,
2014
 
May 31,
2013
 
May 31,
2014
 
May 31,
2013
Revenue:
 
 
 
 
 
 
 
Software licenses
$
27,988

 
$
29,347

 
$
50,252

 
$
59,254

Maintenance and services
52,839

 
52,358

 
105,113

 
106,184

Total revenue
80,827

 
81,705

 
155,365

 
165,438

Costs of revenue:
 
 
 
 
 
 
 
Cost of software licenses
1,139

 
1,356

 
3,146

 
3,446

Cost of maintenance and services
5,709

 
6,990

 
11,054

 
14,640

Amortization of acquired intangibles
530

 
143

 
1,059

 
282

Total costs of revenue
7,378

 
8,489

 
15,259

 
18,368

Gross profit
73,449

 
73,216

 
140,106

 
147,070

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
24,359

 
25,890

 
48,868

 
54,532

Product development
15,480

 
14,671

 
30,593

 
28,293

General and administrative
11,428

 
14,064

 
23,155

 
28,730

Amortization of acquired intangibles
148

 
167

 
312

 
338

Restructuring expenses
124

 
2,766

 
320

 
3,726

Acquisition-related expenses
1,630

 
1,272

 
2,576

 
1,272

Total operating expenses
53,169

 
58,830

 
105,824

 
116,891

Income from operations
20,280

 
14,386

 
34,282

 
30,179

Other income (expense):
 
 
 
 
 
 
 
Interest income and other
596

 
244

 
1,109

 
775

Foreign currency loss, net
(725
)
 
(536
)
 
(1,232
)
 
(1,615
)
Total other income (expense), net
(129
)
 
(292
)
 
(123
)
 
(840
)
Income from continuing operations before income taxes
20,151

 
14,094

 
34,159

 
29,339

Provision for income taxes
7,352

 
5,952

 
10,260

 
11,384

Income from continuing operations
12,799

 
8,142

 
23,899

 
17,955

Income (loss) from discontinued operations, net

 
(4,232
)
 

 
17,073

Net income
$
12,799

 
$
3,910

 
$
23,899

 
$
35,028

Earnings per share:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations
$
0.25

 
$
0.15

 
$
0.47

 
$
0.32

Discontinued operations

 
(0.08
)
 

 
0.30

Net income per share
$
0.25

 
$
0.07

 
$
0.47

 
$
0.62

Diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.25

 
$
0.15

 
$
0.46

 
$
0.31

Discontinued operations

 
(0.08
)
 

 
0.30

Net income per share
$
0.25

 
$
0.07

 
$
0.46

 
$
0.61

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
51,049

 
54,919

 
51,271

 
56,410

Diluted
51,673

 
55,736

 
51,919

 
57,244

See notes to unaudited condensed consolidated financial statements.

4


Condensed Consolidated Statements of Comprehensive Income

 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2014
 
May 31, 2013
 
May 31, 2014
 
May 31, 2013
Net income
$
12,799

 
$
3,910

 
$
23,899

 
$
35,028

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
989

 
(2,017
)
 
1,138

 
(2,462
)
Unrealized (losses) gains on investments, net of tax of $28 and $159 for the second quarter and first six months of 2014, and $3 and $51 for the second quarter and first six months of 2013, respectively
(118
)
 
5

 
107

 
87

Total other comprehensive income (loss), net of tax
871

 
(2,012
)
 
1,245

 
(2,375
)
Comprehensive income
$
13,670

 
$
1,898

 
$
25,144

 
$
32,653


See notes to unaudited condensed consolidated financial statements.


5


Condensed Consolidated Statements of Cash Flows
 
 
Six Months Ended
(In thousands)
May 31,
2014
 
May 31,
2013
Cash flows from operating activities:
 
 
 
Net income
$
23,899

 
$
35,028

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization of property and equipment
4,887

 
5,567

Amortization of acquired intangibles and other
2,160

 
1,910

Stock-based compensation
11,254

 
10,787

Loss on disposal of property
33

 

Gain on dispositions

 
(35,106
)
Asset impairment

 
111

Deferred income taxes
466

 
(750
)
Tax deficiency from stock plans
(172
)
 
(806
)
Excess tax benefit from stock plans
(160
)
 
(721
)
Allowances for accounts receivable
208

 
(35
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
8,914

 
21,410

Other assets
6,815

 
(4,930
)
Accounts payable and accrued liabilities
(19,061
)
 
(23,298
)
Income taxes payable and uncertain tax positions
410

 
(22,534
)
Deferred revenue
2,887

 
1,949

Net cash flows from (used in) operating activities
42,540

 
(11,418
)
Cash flows from investing activities:
 
 
 
Purchases of investments
(1,900
)
 

Sales and maturities of investments
9,435

 
15,210

Redemptions and sales of auction rate securities

 
25

Purchases of property and equipment
(6,099
)
 
(2,386
)
Capitalized software development costs
(1,938
)
 

Payments for acquisitions, net of cash acquired
(12,493
)
 
(9,450
)
Proceeds from divestitures, net
3,300

 
73,381

Increase in other noncurrent assets
104

 
172

Net cash flows (used in) from investing activities
(9,591
)
 
76,952

Cash flows from financing activities:
 
 
 
Proceeds from stock-based compensation plans
6,904

 
32,443

Purchases of common stock related to withholding taxes from the issuance of restricted stock units
(3,141
)
 
(1,915
)
Repurchases of common stock
(34,999
)
 
(176,537
)
Excess tax benefit from stock plans
160

 
721

Payment of contingent consideration
(210
)
 

Net cash flows used in financing activities
(31,286
)
 
(145,288
)
Effect of exchange rate changes on cash
1,490

 
(3,651
)
Net increase (decrease) in cash and cash equivalents
3,153

 
(83,405
)
Cash and cash equivalents, beginning of period
198,818

 
301,792

Cash and cash equivalents, end of period
$
201,971

 
$
218,387


6




Condensed Consolidated Statements of Cash Flows, continued
 
Six Months Ended
 
May 31,
2014
 
May 31,
2013
Supplemental disclosure:
 
 
 
Cash paid for income taxes, net of refunds of $153 in 2014 and $1,812 in 2013
$
3,831

 
$
52,266

Non-cash financing activities:
 
 
 
Total fair value of restricted stock awards, restricted stock units and deferred stock units on date vested
$
10,494

 
$
7,592

See notes to unaudited condensed consolidated financial statements.

7


Notes to Condensed Consolidated Financial Statements

Note 1: Basis of Presentation

Company Overview - We are a global software company that simplifies the development, deployment and management of business applications on-premise or in the cloud, on any platform or device, to any data source, with enhanced performance, minimal IT complexity and low total cost of ownership. Our comprehensive portfolio of products provides leading solutions for rapid application development, broad data integration and efficient data analysis. Our solutions are used across a variety of industries.

Our products are generally sold as perpetual licenses, but certain products and business activities also use term licensing models and our new Progress Pacific platform offering uses a subscription based model. More than half of our worldwide license revenue is realized through relationships with indirect channel partners, principally application partners and original equipment manufacturers (OEMs). Application partners are independent software vendors (ISVs) that develop and market applications using our technology and resell our products in conjunction with sales of their own products that incorporate our technology. OEMs are companies that embed our products into their own software products or devices.

During fiscal years 2012 and 2013, we completed divestitures of the eleven product lines which were not considered core product lines of our business. The divestitures were part of our strategic plan announced during fiscal year 2012. After the closing of all these divestitures, we now operate as one reportable segment. In addition, the revenues and direct expenses of the product lines divested are included in discontinued operations in our condensed consolidated statements of income, including prior period amounts which have been revised to reflect the presentation.

We operate in North America and Latin America (the Americas); Europe, the Middle East and Africa (EMEA); and the Asia Pacific region, through local subsidiaries as well as independent distributors.

Basis of Presentation and Significant Accounting Policies - We prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements and these unaudited financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2013.

We made no significant changes in the application of our significant accounting policies that were disclosed in our Annual Report on Form 10-K for the fiscal year ended November 30, 2013. We have prepared the accompanying unaudited condensed consolidated financial statements on the same basis as the audited financial statements included in our Annual Report on Form 10-K, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full fiscal year.

Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new guidance is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016; early adoption is not permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. This update could impact the timing and amounts of revenue recognized. The Company is currently evaluating the effect that implementation of this update will have on its consolidated financial position and results of operations upon adoption.

In July 2013, the FASB issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11). ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance is effective on a prospective basis for fiscal years and interim reporting periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on our financial position, results of operations or cash flows.
In March 2013, the FASB issued Accounting Standards Update No. 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within

8


a Foreign Entity or of an Investment in a Foreign Entity (ASU 2013-05). ASU 2013-05 provides guidance on releasing cumulative translation adjustments when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or a business within a foreign entity. ASU 2013-05 is effective on a prospective basis for fiscal years and interim reporting periods within those years, beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU 2013-05 is not expected to have a material impact on our financial position, results of operations or cash flows.

Note 2: Cash, Cash Equivalents and Investments

A summary of our cash, cash equivalents and available-for-sale investments at May 31, 2014 is as follows (in thousands):
 
 
Amortized Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
127,279

 
$

 
$

 
$
127,279

Money market funds
74,692

 

 

 
74,692

State and municipal bond obligations
24,470

 
135

 

 
24,605

Auction rate securities – municipal bonds
25,250

 

 
(3,063
)
 
22,187

Auction rate securities – student loans
3,500

 

 
(631
)
 
2,869

Total
$
255,191

 
$
135

 
$
(3,694
)
 
$
251,632


A summary of our cash, cash equivalents and available-for-sale investments at November 30, 2013 is as follows (in thousands):
 
 
Amortized Cost Basis
 
Realized Losses
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
144,305

 
$

 
$

 
$

 
$
144,305

Money market funds
54,513

 

 

 

 
54,513

State and municipal bond obligations
30,938

 

 
164

 

 
31,102

Auction rate securities – municipal bonds
27,150

 
(380
)
 

 
(3,317
)
 
23,453

Auction rate securities – student loans
3,500

 

 

 
(672
)
 
2,828

Total
$
260,406

 
$
(380
)
 
$
164

 
$
(3,989
)
 
$
256,201


Such amounts are classified on our condensed consolidated balance sheets as follows (in thousands):
 
 
May 31, 2014
 
November 30, 2013
 
Cash and
Equivalents
 
Short-Term
Investments
 
Long-Term
Investments
 
Cash and
Equivalents
 
Short-Term
Investments
 
Long-Term
Investments
Cash
$
127,279

 
$

 
$

 
$
144,305

 
$

 
$

Money market funds
74,692

 

 

 
54,513

 

 

State and municipal bond obligations

 
24,605

 

 

 
31,102

 

Auction rate securities – municipal bonds

 

 
22,187

 

 
1,520

 
21,933

Auction rate securities – student loans

 

 
2,869

 

 

 
2,828

Total
$
201,971

 
$
24,605

 
$
25,056

 
$
198,818

 
$
32,622

 
$
24,761


For each of our auction rate securities (ARS) for which the issuer is not in default, we evaluated the risks related to the structure, collateral and liquidity of the investment and forecasted the probability of issuer default, auction failure and a successful auction at par or a redemption at par for each future auction period. The weighted average cash flow for each period was then discounted back to present value for each security. Based on this methodology, we determined that the fair value of our ARS investments is $25.1 million and $24.8 million at May 31, 2014 and November 30, 2013, respectively. The temporary impairment recorded in accumulated other comprehensive loss to reduce the value of our available-for-sale ARS investments was $3.7 million and $4.0 million at May 31, 2014 and November 30, 2013, respectively. We will not be able to access the funds associated with our ARS investments until future auctions for these ARS are successful, we sell the securities in a secondary market, or they are redeemed by the issuer. As such, these remaining investments currently lack short-term liquidity

9


and are therefore classified as long-term investments on the condensed consolidated balance sheets at May 31, 2014 and November 30, 2013.

During the fourth quarter of fiscal year 2013, the exit bankruptcy plan for an issuer of one of our ARS, which was in default and on whose behalf the underlying bond insurer was making interest payments, was approved by a federal bankruptcy judge in federal court. The exit bankruptcy plan included a settlement provision with the holders of the ARS, which were given the option to receive 80% of the par value of their holdings, but renounce their claim with the bond issuer, or receive 65% of the par value of their holdings and retain their insurance rights. We accepted the 80% settlement offer and as a result we adjusted the fair value of this ARS to the amount of the settlement as of November 30, 2013. The previously recorded unrealized loss associated with this ARS has been recorded as a realized loss in fiscal year 2013 due to the settlement. As this investment no longer lacked short-term liquidity, it was classified as a short-term investment on our consolidated balance sheet at November 30, 2013. We received the settlement in December 2013 and the related ARS is no longer held and, accordingly, is not included in our ARS investments as of May 31, 2014.

Based on our cash, cash equivalents and short-term investments balance of $226.6 million, expected operating cash flows and the availability of funds under our revolving credit facility, we do not anticipate that the lack of liquidity associated with our ARS will adversely affect our ability to conduct business and believe we have the ability to hold the affected securities throughout the currently estimated recovery period. Therefore, the impairment of these securities is considered only temporary in nature. If the credit rating of either the security issuer or the third-party insurer underlying the investments deteriorates significantly, we may be required to adjust the carrying value of the ARS through an other-than-temporary impairment charge to earnings.

The fair value of debt securities by contractual maturity is as follows (in thousands):
 
 
May 31,
2014
 
November 30,
2013
Due in one year or less (1)
$
39,943

 
$
42,198

Due after one year (2)
9,718

 
15,185

Total
$
49,661

 
$
57,383

 
(1)
Includes ARS which are tendered for interest-rate setting purposes periodically throughout the year. Beginning in February 2008, auctions for these securities began to fail, and therefore these investments currently lack short-term liquidity. The remaining contractual maturities of these securities range from 10 to 29 years.
(2)
Includes state and municipal bond obligations, which are securities representing investments available for current operations and are classified as current in the consolidated balance sheets.

Investments with continuous unrealized losses and their related fair values are as follows at May 31, 2014 (in thousands):
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Auction rate securities – municipal bonds
$

 
$

 
$
22,187

 
$
(3,063
)
 
$
22,187

 
$
(3,063
)
Auction rate securities – student loans

 

 
2,869

 
(631
)
 
2,869

 
(631
)
Total
$

 
$

 
$
25,056

 
$
(3,694
)
 
$
25,056

 
$
(3,694
)


10


Investments with continuous unrealized losses and their related fair values are as follows at November 30, 2013 (in thousands):
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Auction rate securities – municipal bonds
$

 
$

 
$
21,933

 
$
(3,317
)
 
$
21,933

 
$
(3,317
)
Auction rate securities – student loans

 

 
2,828

 
(672
)
 
2,828

 
(672
)
Total
$

 
$

 
$
24,761

 
$
(3,989
)
 
$
24,761

 
$
(3,989
)

Note 3: Derivative Instruments

We generally use forward contracts that are not designated as hedging instruments to hedge economically the impact of the variability in exchange rates on accounts receivable and collections denominated in certain foreign currencies. We generally do not hedge the net assets of our international subsidiaries. All forward contracts are recorded at fair value in other current assets or other current liabilities on the condensed consolidated balance sheets at the end of each reporting period and expire within 90 days. In the three and six months ended May 31, 2014, realized and unrealized losses of $(0.8) million and $(1.1) million, respectively, from our forward contracts were recognized in other income (expense) in the condensed consolidated statements of income. In the three and six months ended May 31, 2013, realized and unrealized gains (losses) of $0.6 million, and $(0.5) million, respectively, from our forward contracts were recognized in other income (expense) in the condensed consolidated statements of income. These losses were substantially offset by realized and unrealized gains on the offsetting positions.

The table below details outstanding foreign currency forward contracts where the notional amount is determined using contract exchange rates (in thousands):
 
 
May 31, 2014
 
November 30, 2013
 
Notional Value
 
Fair Value
 
Notional Value
 
Fair Value
Forward contracts to sell U.S. dollars
$
24,324

 
$
(42
)
 
$
26,016

 
$
79

Forward contracts to purchase U.S. dollars
10,747

 
(110
)
 
22,483

 
92

Total
$
35,071

 
$
(152
)
 
$
48,499

 
$
171


Note 4: Fair Value Measurements

Recurring Fair Value Measurements

The following table details the fair value measurements within the fair value hierarchy of our financial assets and liabilities at May 31, 2014 (in thousands):
 
 
 
 
Fair Value Measurements Using
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Money market funds
$
74,692

 
$
74,692

 
$

 
$

State and municipal bond obligations
24,605

 

 
24,605

 

Auction rate securities – municipal bonds
22,187

 

 

 
22,187

Auction rate securities – student loans
2,869

 

 

 
2,869

Foreign exchange derivatives
(152
)
 

 
(152
)
 

Liabilities
 
 
 
 
 
 
 
Contingent consideration
$
(1,649
)
 
$

 
$

 
$
(1,649
)


11


The following table details the fair value measurements within the fair value hierarchy of our financial assets and liabilities at November 30, 2013 (in thousands):
 
 
 
 
Fair Value Measurements Using
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Money market funds
$
54,513

 
$
54,513

 
$

 
$

State and municipal bond obligations
31,102

 

 
31,102

 

Auction rate securities – municipal bonds
23,453

 

 
1,520

 
21,933

Auction rate securities – student loans
2,828

 

 

 
2,828

Foreign exchange derivatives
171

 

 
171

 

Liabilities
 
 
 
 
 
 
 
Contingent consideration
(388
)
 

 

 
(388
)

When developing fair value estimates, we maximize the use of observable inputs and minimize the use of unobservable inputs. When available, we use quoted market prices to measure fair value. The valuation technique used to measure fair value for our Level 1 and Level 2 assets is a market approach, using prices and other relevant information generated by market transactions involving identical or comparable assets. If market prices are not available, the fair value measurement is based on models that use primarily market based parameters including yield curves, volatilities, credit ratings and currency rates. In certain cases where market rate assumptions are not available, we are required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument.

The valuation technique used to measure fair value for our Level 3 assets, which consists of ARS, is primarily an income approach, where the expected weighted average future cash flows are discounted back to present value for each asset. The significant unobservable inputs used in the fair value measurement of our ARS are the probability of earning the maximum rate until maturity, the probability of principal return prior to maturity, the probability of default, the liquidity risk premium and the recovery rate in default. Generally, interrelationships are such that a change in the assumptions used for the probability of principal return prior to maturity is accompanied by a directionally opposite change in one or more the following assumptions: the probability of earning the maximum rate until maturity, the probability of default and the liquidity risk premium. The recovery rate in default is somewhat independent and based upon the ARS' specific underlying assets and published recovery rate studies.

The following table provides additional quantitative information about the unobservable inputs used in our Level 3 asset valuations as of May 31, 2014:

 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
Auction rate securities
Discounted cash flow
 
Probability of earning the maximum rate until maturity
 
0.2% - 12.1% (2.1%)
 
 
 
Probability of principal return prior to maturity
 
74.9% - 94.4% (86.2%)
 
 
 
Probability of default
 
4.4% - 24.9% (11.7%)
 
 
 
Liquidity risk premium
 
3.5%
 
 
 
Recovery rate in default
 
50.0% - 70.0% (56.5%)

Significant increases or decreases in the underlying assumptions used to value the ARS could significantly increase or decrease the fair value estimates recorded in the consolidated balance sheets.


12


The following table reflects the activity for our financial assets measured at fair value using Level 3 inputs for each period presented (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
May 31,
2014
 
May 31,
2013
 
May 31,
2014
 
May 31,
2013
Balance, beginning of period
$
25,110

 
$
26,442

 
$
24,761

 
$
26,321

Redemptions and sales

 

 

 
(25
)
Unrealized (losses) gains included in accumulated other comprehensive loss
(54
)
 
58

 
295

 
204

Balance, end of period
$
25,056

 
$
26,500

 
$
25,056

 
$
26,500


We have also classified contingent consideration related to the Rollbase, Inc. (Rollbase) and Modulus LLC (Modulus) acquisitions, which occurred in the second quarter of fiscal years 2013 and 2014, respectively, within Level 3 of the fair value hierarchy because the fair values are derived using significant unobservable inputs, which include discount rates and probability-weighted cash flows. We determined the fair value of our contingent consideration obligations based on a probability-weighted income approach derived from probability assessments of the attainment of certain milestones. We establish discount rates to be utilized in our valuation models based on the cost to borrow that would be required by a market participant for similar instruments. In determining the probability of attaining certain milestones, we utilize data regarding similar milestone events from our own experience. On a quarterly basis, we reassess the probability factors associated with the milestones for our contingent consideration obligations. Significant judgment is employed in determining the appropriateness of these key assumptions as of the acquisition date and for each subsequent period.

The key assumptions as of May 31, 2014 related to the contingent consideration for the acquisition of Rollbase used in the model are probabilities in excess of 95% that the milestones associated with the contingent consideration will be achieved and a discount rate of 4.8%. The key assumptions as of May 31, 2014 related to the contingent consideration for the acquisition of Modulus used in the model are probabilities in excess of 75% that the milestones associated with the contingent consideration will be achieved and a discount rate of 33.0%. A decrease in the probabilities of achievement could result in a decrease to the estimated fair value of the contingent consideration liabilities.

The following table reflects the activity for our liabilities measured at fair value using Level 3 inputs for each period presented (in thousands):

 
Three Months Ended
 
Six Months Ended
 
May 31,
2014
 
May 31,
2013
 
May 31,
2014
 
May 31,
2013
Balance, beginning of period
$
393

 
$

 
$
388

 
$

Incurrence of contingent purchase price liability
1,450

 
379

 
1,450

 
379

Payments of contingent consideration
(210
)
 

 
(210
)
 

Changes in fair value included in operating expenses
16

 

 
21

 

Balance, end of period
$
1,649

 
$
379

 
$
1,649

 
$
379


We did not have any nonrecurring fair value measurements as of May 31, 2014 and November 30, 2013.


13


Note 5: Intangible Assets and Goodwill

Intangible Assets

Intangible assets are comprised of the following significant classes (in thousands):
 
 
May 31, 2014
 
November 30, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
Purchased technology
$
52,079

 
$
(37,733
)
 
$
14,346

 
$
44,793

 
$
(36,712
)
 
$
8,081

Customer-related and other
19,733

 
(17,989
)
 
1,744

 
19,543

 
(17,674
)
 
1,869

Total
$
71,812

 
$
(55,722
)
 
$
16,090

 
$
64,336

 
$
(54,386
)
 
$
9,950


As a result of the Modulus acquisition in May 2014 (Note 7), we recorded $7.3 million of purchased technology and $0.2 million of the trade name as intangible assets during the six months ended May 31, 2014. These intangibles have a weighted average useful life of 7 years.

In the three and six months ended May 31, 2014, amortization expense related to intangible assets was $0.7 million and $1.4 million, respectively. In the three and six months ended May 31, 2013, amortization expense related to intangible assets was $0.3 million and $0.6 million, respectively.

Future amortization expense for intangible assets as of May 31, 2014, is as follows (in thousands):
 
Remainder of 2014
$
1,851

2015
3,482

2016
2,979

2017
2,979

2018
2,162

Thereafter
2,637

Total
$
16,090


Goodwill

Changes in the carrying amount of goodwill in the six months ended May 31, 2014, are as follows (in thousands):

Balance, November 30, 2013
$
224,286

Additions
6,433

Translation adjustments
(38
)
Balance, May 31, 2014
$
230,681


The addition to goodwill during fiscal year 2014 is related to the acquisition of Modulus in May 2014 (Note 7).

During the first quarter of fiscal year 2014, we completed our annual testing for impairment of goodwill and, based on those tests, concluded that no impairment of goodwill existed as of December 15, 2013. Through the date and time our condensed consolidated financial statements were issued, no triggering events have occurred that would indicate a potential impairment of goodwill exists.


14


Note 6: Divestitures

During fiscal years 2012 and 2013, we completed divestitures of the eleven product lines which were not considered core product lines of our business: Actional, Apama, Artix, DataXtend, FuseSource, ObjectStore, Orbacus, Orbix, Savvion, Shadow and Sonic. The FuseSource and Shadow product lines were divested in fiscal year 2012. The remaining product lines, excluding Apama, were divested in the first quarter of fiscal year 2013. The divestitures were part of our strategic plan announced during fiscal year 2012. The Apama product line was divested in the third quarter of fiscal year 2013.

Revenues and direct expenses of the divested product lines have been reclassified as discontinued operations for all periods presented. Specifically, the fiscal year 2013 income from discontinued operations now includes the revenues and direct expenses of the product lines which had not been divested prior to the start of fiscal year 2013.

The components included in discontinued operations on the condensed consolidated statements of income are as follows (in thousands):

 
Three Months Ended
 
Six Months Ended
 
May 31, 2014
 
May 31, 2013
 
May 31, 2014
 
May 31, 2013
Revenue
$

 
$
4,431

 
$

 
$
15,606

Income (loss) before income taxes

 
(4,802
)
 

 
(3,117
)
Income tax (benefit) provision

 
(570
)
 

 
(433
)
Gain on sale, net of tax

 

 

 
19,757

Income (loss) from discontinued operations, net
$

 
$
(4,232
)
 
$

 
$
17,073


Note 7: Business Combinations

Modulus Acquisition

On May 13, 2014, we acquired 100% of the membership interests in Modulus LLC (Modulus), a privately held platform-as-a-service (PaaS) provider based in Cincinnati, Ohio, for $15.0 million. The purchase consideration consisted of $12.5 million in cash paid and $2.5 million of contingent consideration, expected to be paid out over a two year period, if earned. The fair value of the contingent consideration was estimated to be $1.5 million at the date of acquisition; as such, the fair value of the purchase consideration allocated to the assets acquired totaled $14.0 million. Modulus provides a PaaS for easily hosting, deploying, scaling and monitoring data-intensive, real-time applications using powerful, rapidly growing Node.js and MongoDB technologies. The purpose of the acquisition is to capitalize on the expected market growth of the core technologies that Modulus supports and drive new revenue through the Pacific platform. The acquisition was accounted for as a business combination, and accordingly, the results of operations of Modulus are included in our operating results from the date of acquisition. We paid the purchase price in cash from available funds.

The preliminary allocation of the purchase price is as follows (in thousands):

 
Total
 
Life
Net working capital
$
7

 
 
Acquired intangible assets
7,320

 
7 Years
Trade name
190

 
7 Years
Goodwill
6,433

 
 
Net assets acquired
$
13,950

 
 

The purchase consideration includes contingent earn-out provisions payable by the Company based on the achievement of certain milestones. The Company determined the fair value of the contingent consideration obligations by calculating the probability-weighted earn-out payments based on the assessment of the likelihood that the milestones will be achieved. The probability-weighted earn-out payments were then discounted using a discount rate based on an internal rate of return analysis using the probability-weighted cash flows. During the quarter ended May 31, 2014, the change in the fair value of the contingent consideration payable was immaterial.
       

15


We recorded the excess of the purchase price over the identified tangible and intangible assets as goodwill. We believe that the investment value of the future enhancement of our product and solution offerings created as a result of this acquisition has principally contributed to a purchase price that resulted in the recognition of $6.4 million of goodwill. The goodwill is deductible for tax purposes; as such, our basis in the tax goodwill and other acquired intangible assets will be amortized over a 15 year period.

The preliminary fair value estimates of the acquired assets are based upon preliminary calculations and valuations and our estimates and assumptions are subject to change as we obtain additional information for our estimates during the measurement period (up to one year from the acquisition date). The area of the preliminary estimates that is not yet finalized relates to identifiable intangible assets.

We incurred approximately $0.2 million of acquisition-related costs, which are included in acquisition-related expenses in our consolidated statement of operations for the three and six months ended May 31, 2014. We have not disclosed the amount of revenues and earnings of Modulus since acquisition, nor pro forma financial information, as those amounts are not significant to our condensed consolidated financial statements.

Rollbase Acquisition

On May 24, 2013, we acquired 100% of the equity interests in Rollbase, Inc. (Rollbase), a privately held software vendor based in Saratoga, California, for $9.9 million. The purchase consideration consisted of $9.5 million in cash paid and $0.4 million of contingent consideration, expected to be paid out over a two year period, if earned. The fair value of the contingent consideration was estimated to be $0.4 million at the date of acquisition. Rollbase provides application development software technology that allows the rapid design, development and deployment of on-demand business applications. The purpose of the acquisition was to further our strategic plan in which we intend to become a leading provider of a next-generation, context-aware application development and deployment platform in the cloud for the platform-as-a-service (PaaS) market. The acquisition was accounted for as a business combination, and accordingly, the results of operations of Rollbase are included in our operating results from the date of acquisition. We paid the purchase price in cash from available funds.

The allocation of the purchase price is as follows (in thousands):

 
Total
 
Life
Cash
$
50

 
 
Acquired intangible assets
7,960

 
1 to 5 years
Goodwill
4,798

 
 
Deferred taxes
(2,921
)
 
 
Accounts payable and other liabilities
(8
)
 
 
Net assets acquired
$
9,879

 
 

The stock purchase agreement included contingent earn-out provisions requiring us to make payments to former Rollbase owners now employed by the Company. We concluded that the earn-out provisions for the individuals now employed by the Company, which total approximately $5.3 million, are compensation arrangements and we have been accruing the maximum payouts ratably over the two year performance period, as we believe it is probable that the criteria will be met. During the second quarter of fiscal year 2014, we paid the former Rollbase owners the contingent consideration related to milestones reached as of the one year anniversary of the acquisition closing date. We have incurred $1.2 million and $2.1 million of expense related to the contingent earn-out provisions for the three and six months ended May 31, 2014, respectively. This amount is recorded as acquisition-related expense in our consolidated statement of operations.
        
We recorded the excess of the purchase price over the identified tangible and intangible assets as goodwill. We believe that the investment value of the future enhancement of our product and solution offerings created as a result of this acquisition has principally contributed to a purchase price that resulted in the recognition of $4.8 million of goodwill, which is not deductible for tax purposes. The allocation of the purchase price was completed in the third quarter of fiscal year 2013 upon the finalization of our valuation of identifiable intangible assets and acquired deferred tax liabilities.

We have not disclosed the amount of revenues and earnings of Rollbase since acquisition, nor pro forma financial information, as those amounts are not significant to our condensed consolidated financial statements.


16


Note 8: Line of Credit

Our credit facility provides for a revolving line of credit in the amount of $150.0 million, with a sublimit for the issuance of standby letters of credit in a face amount up to $25.0 million and swing line loans up to $20.0 million. The credit facility also permits us to increase the revolving line of credit by up to an additional $75.0 million subject to receiving further commitments from lenders and certain other conditions. As of May 31, 2014, there were no amounts outstanding under the revolving line and $0.8 million of letters of credit.

Note 9: Common Stock Repurchases

We repurchased and retired 1.6 million shares of our common stock for $35.0 million in the six months ended May 31, 2014. The shares were repurchased as part of our Board of Directors authorized $100.0 million share repurchase program. In the six months ended May 31, 2013, we repurchased 7,613,000 shares of our common stock for $169.5 million.

Note 10: Stock-Based Compensation

Stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date and recognized over the relevant service period. We estimate the fair value of each stock-based award on the measurement date using the current market price of the stock or the Black-Scholes option valuation model. In addition, during the first quarter of fiscal year 2014, we granted performance-based restricted stock units that include a three-year market condition. In order to estimate the fair value of such awards, we used a Monte Carlo Simulation valuation model. The Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to stock price volatility, the expected life of options or awards, a risk-free interest rate and dividend yield. We recognize stock-based compensation expense related to options and restricted stock units on a straight-line basis over the service period of the award, which is generally 4 or 5 years for options and 3 years for restricted stock units. We recognize stock-based compensation expense related to performance stock units and our employee stock purchase plan using an accelerated attribution method.

The following table provides the classification of stock-based compensation as reflected in our condensed consolidated statements of income (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
May 31,
2014
 
May 31,
2013
 
May 31,
2014
 
May 31,
2013
Cost of maintenance and services
$
146

 
$
158

 
$
298

 
$
367

Sales and marketing
991

 
881

 
2,190

 
1,920

Product development
1,425

 
1,225

 
2,778

 
2,688

General and administrative
3,147

 
2,717

 
5,988

 
4,495

Stock-based compensation from continuing operations
5,709

 
4,981

 
11,254

 
9,470

Income from discontinued operations

 
900

 

 
1,317

Total stock-based compensation
$
5,709

 
$
5,881

 
$
11,254

 
$
10,787


Note 11: Accumulated Other Comprehensive Loss

The following table summarizes the changes in accumulated balances of other comprehensive loss during the six months ended May 31, 2014 (in thousands):

 
Foreign Currency Translation Adjustment
 
Unrealized Gains (Losses) on investments
 
Accumulated Other Comprehensive Loss
Balance, December 1, 2013
$
(9,249
)
 
$
(2,410
)
 
$
(11,659
)
Other comprehensive income before reclassifications, net of tax
1,138

 
107

 
1,245

Balance, May 31, 2014
$
(8,111
)
 
$
(2,303
)
 
$
(10,414
)

The tax effect on accumulated unrealized losses on investments was $1.3 million and $1.4 million as of May 31, 2014 and November 30, 2013, respectively.

17



Note 12: Restructuring Charges

2013 Restructuring

During the third quarter of fiscal year 2013, our management approved, committed to and initiated plans to restructure and improve efficiencies in our operations as a result of the sale of the Apama product line and the divestitures completed during the fourth quarter of fiscal year 2012 and the first quarter of fiscal year 2013. We reduced our global workforce primarily within the administrative and sales organizations. This workforce reduction was conducted across all geographies and also resulted in the closing of certain facilities.

Restructuring expenses relate to employee costs, including severance, health benefits, outplacement services and transition divestiture arrangements (but excluding stock-based compensation), and facilities costs, which include fees to terminate lease agreements and costs for unused space, net of sublease assumptions. Other costs include costs to terminate automobile leases of employees included in the workforce reduction, asset impairment charges for assets no longer deployed as part of cost reduction strategies, costs for unused software licenses as part of the workforce reduction and other costs directly associated with the restructuring actions taken.

As part of the 2013 restructuring, for the three and six months ended May 31, 2014, we incurred minimal expenses. The expenses are recorded as restructuring expenses in the condensed consolidated statements of income. We do not expect to incur additional material costs with respect to the 2013 restructuring.

A summary of activity for the 2013 restructuring action is as follows (in thousands):

 
Excess
Facilities and
Other Costs
 
Employee Severance and Related Benefits
 
Total
Balance, December 1, 2013
$
569

 
$
1,077

 
$
1,646

Costs incurred
169

 
32

 
201

Cash disbursements
(401
)
 
(1,107
)
 
(1,508
)
Translation adjustments and other
5

 
3

 
8

Balance, May 31, 2014
$
342

 
$
5

 
$
347


Cash disbursements for expenses incurred to date under the 2013 restructuring are expected to be made through fiscal year 2017. The short-term portion of the restructuring reserve of $0.1 million is included in other accrued liabilities and the long-term portion of $0.2 million is included in other noncurrent liabilities on the condensed consolidated balance sheet at May 31, 2014.

2012 Restructuring

In the second quarter of fiscal year 2012, our management approved, committed to and initiated certain operational restructuring initiatives to reduce annual costs, including the simplification of our organizational structure and the consolidation of facilities. In addition, as part of the strategic plan announced during fiscal year 2012, we have divested the product lines not considered core to our business. Our restructuring actions include both our cost reduction efforts and qualifying costs associated with our divestitures.

As part of the 2012 restructuring, for the three and six months ended May 31, 2014, we incurred minimal expenses. The expenses are recorded as restructuring expenses in the condensed consolidated statements of income. We do not expect to incur additional material costs with respect to the 2012 restructuring.


18


A summary of activity for the 2012 restructuring action during the six months ended May 31, 2014, is as follows (in thousands):

 
Excess
Facilities and
Other Costs
 
Employee Severance and Related Benefits
 
Total
Balance, December 1, 2013
$
615

 
$
291

 
$
906

Costs incurred
140

 
(21
)
 
119

Cash disbursements
(353
)
 
(272
)
 
(625
)
Translation adjustments and other
(5
)
 
2

 
(3
)
Balance, May 31, 2014
$
397

 
$

 
$
397


Cash disbursements under the 2012 restructuring are expected to be made through fiscal year 2016. The short-term portion of the restructuring reserve of $0.3 million is included in other accrued liabilities and the long-term portion of $0.1 million is included in other noncurrent liabilities on the condensed consolidated balance sheet at May 31, 2014.

Note 13: Income Taxes

Our income tax provision for the second quarter of fiscal year 2014 and 2013 reflects our estimates of the effective tax rates expected to be applicable for the full fiscal years, adjusted for any discrete events which are recorded in the period they occur. The estimates are reevaluated each quarter based on our estimated tax expense for the full fiscal year.

Our Federal income tax returns have been examined or are closed by statute for all years prior to fiscal year 2011, and we are no longer subject to audit for those periods. Our state income tax returns have been examined or are closed by statute for all years prior to fiscal year 2009, and we are no longer subject to audit for those periods.

Note 14: Earnings Per Share

We compute basic earnings per share using the weighted average number of common shares outstanding. We compute diluted earnings per share using the weighted average number of common shares outstanding plus the effect of outstanding dilutive stock options, restricted stock units and deferred stock units, using the treasury stock method. The following table sets forth the calculation of basic and diluted earnings per share from continuing operations on an interim basis (in thousands, except per share data):
 
 
Three Months Ended
 
Six Months Ended
 
May 31,
2014
 
May 31,
2013
 
May 31,
2014
 
May 31,
2013
Income from continuing operations
$
12,799

 
$
8,142

 
$
23,899

 
$
17,955

Weighted average shares outstanding
51,049

 
54,919

 
51,271

 
56,410

Dilutive impact from common stock equivalents
624

 
817

 
648

 
834

Diluted weighted average shares outstanding
51,673

 
55,736

 
51,919

 
57,244

Basic earnings per share from continuing operations
$
0.25

 
$
0.15

 
$
0.47

 
$
0.32

Diluted earnings per share from continuing operations
$
0.25

 
$
0.15

 
$
0.46

 
$
0.31


We excluded stock awards representing approximately 501,000 shares and 399,000 shares of common stock from the calculation of diluted earnings per share in the three and six months ended May 31, 2014, respectively, because these awards were anti-dilutive. In the three and six months ended May 31, 2013, we excluded stock awards representing 775,000 shares and 1,084,000 shares of common stock, respectively, from the calculation of diluted earnings per share.

19


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions regarding forward-looking statements. This Form 10-Q, and other information provided by us or statements made by our directors, officers or employees from time to time, may contain “forward-looking” statements and information, which involve risks and uncertainties. Actual future results may differ materially. Statements indicating that we “expect,” “estimate,” “believe,” “are planning” or “plan to” are forward-looking, as are other statements concerning future financial results, product offerings or other events that have not yet occurred. There are various factors that could cause actual results or events to differ materially from those anticipated by the forward-looking statements, including but not limited to the following: market acceptance of Progress’s strategy and product development initiatives; pricing pressures and the competitive environment in the software industry and Platform-as-a-Service market; Progress's ability to successfully manage transitions to new business models and markets, including an increased emphasis on a cloud and subscription strategy; Progress's ability to make acquisitions and to realize the expected benefits and anticipated synergies from such acquisitions; the continuing uncertainty in the U.S. and international economies, which could result in fewer sales of Progress's products and may otherwise harm Progress's business; business and consumer use of the Internet and the continuing adoption of Cloud technologies; the receipt and shipment of new orders; Progress's ability to expand its relationships with channel partners and to manage the interaction of channel partners with its direct sales force; the timely release of enhancements to Progress's products and customer acceptance of new products; the positioning of Progress's products in its existing and new markets; variations in the demand for professional services and technical support; Progress's ability to penetrate international markets and manage its international operations; changes in exchange rates; and those factors discussed in Part II, Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q, and in Part I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended November 30, 2013. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized. We also cannot assure you that we have identified all possible issues which we might face. We undertake no obligation to update any forward-looking statements that we make.

Use of Constant Currency

Revenue from our international operations has historically represented more than half of our total revenue. As a result, our revenue results have been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. For example, if the local currencies of our foreign subsidiaries weaken, our consolidated results stated in U.S. dollars are negatively impacted.

As exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of revenue growth rates on a constant currency basis enhances the understanding of our revenue results and evaluation of our performance in comparison to prior periods. The constant currency information presented is calculated by translating current period results using prior period weighted average foreign currency exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance with accounting principles generally accepted in the United States of America (GAAP).

Overview

We are a global software company that simplifies the development, deployment and management of business applications on-premise or in the cloud, on any platform or device, to any data source, with enhanced performance, minimal IT complexity and low total cost of ownership. In 2013, we introduced the Progress Pacific platform-as-a-service (PaaS) that is the foundation of a strategic plan (the "Plan") we announced in April 2012. In April 2012, we announced our intention to become a leading provider of next-generation application development and deployment capabilities in the cloud for the PaaS market by investing in our OpenEdge, DataDirect, and Corticon product lines and integrating components of those products into a single, cohesive offering.

During fiscal years 2012 and 2013, we completed divestitures of the eleven product lines which were not considered core product lines of our business: Actional, Apama, Artix, DataXtend, FuseSource, ObjectStore, Orbacus, Orbix, Savvion, Shadow and Sonic. The FuseSource and Shadow product lines were divested in fiscal year 2012. The remaining product lines, excluding Apama, were divested in the first quarter of fiscal year 2013. The divestitures were part of our strategic plan announced during fiscal year 2012. The aggregate purchase price for these product lines, excluding Apama, was approximately $130.0 million. The Apama product line was divested in the third quarter of fiscal year 2013 for a purchase price of $44.3 million. Our operating performance was adversely impacted by temporarily higher expense levels and restructuring costs as we transitioned away from the product lines we divested.

20



In furtherance of the Plan, we began to unify the product capabilities of our core product lines with the goal of refining and enhancing our next generation, feature-rich application development and deployment solution targeting the new market category of PaaS. To that end, during fiscal year 2013, we added new functionalities to our existing products. We also completed the acquisition of Rollbase, Inc. (Rollbase), a provider of application development software technology that allows the rapid design, development and deployment of on-demand business applications. In addition, in July 2013, we announced the release of Progress Pacific, which provides users with the freedom to choose the development environment tools, data sources, deployment environments and devices that best fit business and user needs. It is comprised of Rollbase and DataDirect Cloud, together with assets from our OpenEdge, DataDirect and Corticon products.

In fiscal year 2014, we have continued to invest in our existing product lines and also announced the release of Easyl, our latest product offering included in our Pacific platform, which is a data analysis tool that dramatically simplifies the process of accessing, blending, and reporting on your organizational data. We also acquired Modulus LLC (Modulus), a PaaS provider offering a platform for easily hosting, deploying, scaling and monitoring data-intensive, real-time applications using powerful, rapidly growing Node.js and MongoDB technologies. We plan to capitalize on the expected market growth of the core technologies that Modulus supports and drive new revenue through the Pacific platform.

As a result of our renewed focus on our core products, the enhancements to our existing products and improvement in our cost structure, we experienced improved financial performance during fiscal year 2013. However, we are still in the early stages of our transition to becoming a leading vendor in the cloud-based PaaS market. As a result, we anticipate continued reinvestment in our products will be necessary and sustainable increases in revenue may not be foreseeable in the near term. Overall, our investments to improve our product lines require time to impact performance.

In addition, our new business focus and new strategy has required us to restructure our organization and the way we go to market, how we implement product roadmaps and how we operate and report our financial results, all of which caused additional disruption and could cause further disruption in the future as we implement our new go to market plans. Our cloud strategy will require continued investment in product development and cloud operations as well as a change in the way we price and deliver our products.

In the first quarter of fiscal year 2014, we experienced a significant decrease in license revenue, primarily due to lower revenues related to our DataDirect and Corticon products in the North America and EMEA regions. We have made changes to our go to market sales coverage for DataDirect and Corticon and believe these changes will result in increasing our pipeline opportunities as well as our conversion to revenue. These changes may take time to impact performance, but we saw improvements during our second quarter of fiscal year 2014.

In January 2014, our Board of Directors authorized a new $100.0 million share repurchase program. Under this authorization, we have repurchased 1.6 million shares for $35.0 million during the first six months of fiscal year 2014.

We derive a significant portion of our revenue from international operations, which are primarily conducted in foreign currencies. As a result, changes in the value of these foreign currencies relative to the U.S. dollar have significantly impacted our results of operations and may impact our future results of operations.

We have evaluated, and expect to continue to evaluate, possible acquisitions and other strategic transactions designed to expand our business and/or add complementary products and technologies to our existing product sets. As a result, our expected uses of cash could change, our cash position could be reduced and we may incur additional debt obligations to the extent we complete additional acquisitions.

We believe that existing cash balances, together with funds generated from operations and amounts available under our revolving credit line will be sufficient to finance our operations and meet our foreseeable cash requirements through at least the next twelve months.

21



Results of Operations

The following table sets forth certain income and expense items as a percentage of total revenue, and the percentage change in dollar amounts of such items compared with the corresponding period in the previous fiscal year (due to rounding, totals may not equal the sum of the line items in the table below):
 
 
Percentage of Total Revenue
Percentage Change
 
Three Months Ended
 
Six Months Ended
 
Three Months Ended
 
Six Months Ended
 
May 31, 2014
 
May 31, 2013
 
May 31, 2014
 
May 31, 2013
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Software licenses
35
%
 
36
 %
 
32
 %
 
36
 %
 
(5
)%
 
(15
)%
Maintenance and services
65

 
64

 
68

 
64

 
1

 
(1
)
Total revenue
100

 
100

 
100

 
100

 
(1
)
 
(6
)
Costs of revenue:
 
 
 
 
 
 
 
 
 
 
 
Cost of software licenses
1

 
2

 
2

 
2

 
(16
)
 
(9
)
Cost of maintenance and services
7

 
9

 
7

 
9

 
(18
)
 
(24
)
Amortization of acquired intangibles
1

 

 
1

 

 
271

 
276

Total costs of revenue
9

 
11

 
10

 
11

 
(13
)
 
(17
)
Gross profit
91

 
89

 
90

 
89

 

 
(5
)
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
30

 
32

 
31

 
33

 
(6
)
 
(10
)
Product development
19

 
18

 
20

 
17

 
6

 
8

General and administrative
14

 
17

 
15

 
17

 
(19
)
 
(19
)
Amortization of acquired intangibles

 

 

 

 
(11
)
 
(8
)
Restructuring expenses

 
3

 

 
2

 
(96
)
 
(91
)
Acquisition-related expenses
2

 
2

 
2

 
1

 
28

 
103

Total operating expenses
66

 
72

 
68

 
70

 
(10
)
 
(9
)
Income from operations
25

 
17

 
22

 
19

 
41

 
14

Other (expense) income

 

 

 
(1
)
 
56

 
85

Income from continuing operations before income taxes
25

 
17

 
22

 
18

 
43

 
16

Provision for income taxes
9

 
7

 
7

 
7

 
24

 
(10
)
Income from continuing operations
16

 
10

 
15

 
11

 
57

 
33

Income (loss) from discontinued operations, net

 
(5
)
 

 
10

 
100

 
(100
)
Net income
16
%
 
5
 %
 
15
 %
 
21
 %
 
227
 %
 
(32
)%
 
Revenue

 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2014
 
May 31, 2013
 
As Reported
 
Constant
Currency
Revenue
$
80,827

 
$
81,705

 
(1
)%
 
(2
)%

 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2014
 
May 31, 2013
 
As Reported
 
Constant
Currency
Revenue
$
155,365

 
$
165,438

 
(6
)%
 
(6
)%

22




Total revenue decreased $0.9 million, or 1%, in the second quarter of fiscal year 2014 as compared to the same quarter last year. Revenue would have decreased by 2% if exchange rates had been constant in fiscal year 2014 as compared to exchange rates in fiscal year 2013. In addition, total revenue decreased $10.1 million, or 6% on a constant currency basis and using actual exchange rates, in the first six months of fiscal year 2014 as compared to the same period last year. The decrease was primarily a result of a decrease in license revenue as further described below.

Changes in prices from fiscal year 2013 to 2014 did not have a significant impact on our revenue. Changes in foreign currency exchange rates did not significantly impact our reported revenues on a consolidated basis.

License Revenue

 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2014
 
May 31, 2013
 
As Reported
 
Constant
Currency
License
$
27,988

 
$
29,347

 
(5
)%
 
(6
)%
As a percentage of total revenue
35
%
 
36
%
 
 
 
 

 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2014
 
May 31, 2013
 
As Reported
 
Constant
Currency
License
$
50,252

 
$
59,254

 
(15
)%
 
(15
)%
As a percentage of total revenue
32
%
 
36
%
 
 
 
 

License revenue decreased $1.4 million, or 5%, in the second quarter of fiscal year 2014 as compared to the same quarter last year, and decreased $9.0 million, or 15%, in the first six months of fiscal year 2014 as compared to the same period last year. The decrease in license revenue in the second quarter of fiscal year 2014 as compared to the same quarter last year was primarily in the North America region, mainly as a result of lower revenues related to sales of our DataDirect products. The decrease in license revenue in the first six months of fiscal year 2014 as compared to the same period last year was primarily in the North America and EMEA regions, mainly as a result of lower revenues related to our DataDirect product and lower revenues related to sales of our OpenEdge products, primarily to direct end users.

Maintenance and Services Revenue
 
 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2014
 
May 31, 2013
 
As Reported
 
Constant
Currency
Maintenance
$
50,305

 
$
50,419

 
 %
 
(2
)%
As a percentage of total revenue
62
%
 
62
%
 
 
 
 
Professional services
2,534

 
1,939

 
31
 %
 
25
 %
As a percentage of total revenue
3
%
 
2
%
 
 
 
 
Total maintenance and services revenue
$
52,839

 
$
52,358

 
1
 %
 
(1
)%
As a percentage of total revenue
65
%
 
64
%
 
 
 
 


23


 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2014
 
May 31, 2013
 
As Reported
 
Constant
Currency
Maintenance
$
100,485

 
$
101,875

 
(1
)%
 
(2
)%
As a percentage of total revenue
65
%
 
62
%
 
 
 
 
Professional services
4,628

 
4,309

 
7
 %
 
3
 %
As a percentage of total revenue
3
%
 
2
%
 
 
 
 
Total maintenance and services revenue
$
105,113

 
$
106,184

 
(1
)%
 
(2
)%
As a percentage of total revenue
68
%
 
64
%
 
 
 
 

Maintenance and services revenue increased $0.5 million, or 1%, in the second quarter of fiscal year 2014 as compared to the same quarter last year. Maintenance revenue remained flat in the second quarter of fiscal year 2014 as compared to the second quarter of fiscal year 2013, while professional services revenue increased 31% due to the timing of professional services engagements.

Maintenance and services revenue decreased $1.1 million, or 1%, in the first six months of fiscal year 2014 as compared to the same period last year. Maintenance revenue decreased 1% and professional services revenue increased 7% compared to the prior year. The decrease in maintenance revenue is due to the impact of moving to a distributor model in certain markets in the Latin America region, as well as the loss of revenue from non-renewing customers, primarily in our EMEA region, more than offsetting the growth in maintenance revenue associated with new license sales. Professional services revenue increased in the first six months of fiscal year 2014 due to the timing of professional services engagements.

Revenue by Region

 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2014
 
May 31, 2013
 
As Reported
 
Constant
Currency
North America
$
36,827

 
$
37,540

 
(2
)%
 
(2
)%
As a percentage of total revenue
46
%
 
46
%
 
 
 
 
EMEA
$
33,698

 
$
33,481

 
1
 %
 
(5
)%
As a percentage of total revenue
42
%
 
41
%
 
 
 
 
Latin America
$
5,703

 
$
6,526

 
(13
)%
 
(3
)%
As a percentage of total revenue
7
%
 
8
%
 
 
 
 
Asia Pacific
$
4,599

 
$
4,158

 
11
 %
 
20
 %
As a percentage of total revenue
5
%
 
5
%
 
 
 
 

 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2014
 
May 31, 2013
 
As Reported
 
Constant
Currency
North America
$
71,412

 
$
76,849

 
(7
)%
 
(7
)%
As a percentage of total revenue
46
%
 
46
%
 
 
 
 
EMEA
$
63,013

 
$
66,029

 
(5
)%
 
(9
)%
As a percentage of total revenue
41
%
 
40
%
 
 
 
 
Latin America
$
10,811

 
$
13,348

 
(19
)%
 
(9
)%
As a percentage of total revenue
7
%
 
8
%
 
 
 
 
Asia Pacific
$
10,128

 
$
9,212

 
10
 %
 
21
 %
As a percentage of total revenue
6
%
 
6
%
 
 
 
 

Total revenue generated in North America during the second quarter of fiscal year 2014 decreased $0.7 million, or 2% , as compared to the same quarter last year, and represented 46% of total revenue in both the second quarter of fiscal years 2014 and 2013. Total revenue generated in markets outside North America decreased $0.2 million, or 3% on a constant currency basis and 0% using actual exchange rates, in the second quarter of fiscal year 2014 as compared to the same quarter last year, and represented 54% of total revenue in both the second quarter of fiscal years 2014 and 2013. If exchange rates had remained

24


constant in the second quarter of fiscal year 2014 as compared to the exchange rates in effect in the second quarter of fiscal year 2013, total revenue generated in markets outside North America would have represented 53% of total revenue.

Total revenue generated in North America during the first six months of fiscal year 2014 decreased $5.4 million , or 7% , as compared to the same period last year, and represented 46% of total revenue in the first six months of both fiscal years 2014 and 2013. Total revenue generated in markets outside North America decreased $4.6 million, or 6% on a constant currency basis and 5% using actual exchange rates, in the first six months of fiscal year 2014 as compared to the same period last year, and represented 54% of total revenue in both the first six months of fiscal 2014 and 2013. If exchange rates had remained constant in the first six months of fiscal year 2014 as compared to the exchange rates in effect in the first six months of fiscal year 2013, total revenue generated in markets outside North America would have remained at 54% of total revenue.

In the second quarter and first six months of fiscal year 2014, Latin America and Asia Pacific were hurt by weaker local currencies.

Cost of Software Licenses

 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2014
 
May 31, 2013
 
Percentage
Change
 
May 31, 2014
 
May 31, 2013
 
Percentage
Change
Cost of software licenses
$
1,139

 
$
1,356

 
(16
)%
 
$
3,146

 
$
3,446

 
(9
)%
As a percentage of software license revenue
4
%
 
5
%
 
 
 
6
%
 
6
%
 
 
As a percentage of total revenue
1
%
 
2
%
 
 
 
2
%
 
2
%
 
 

Cost of software licenses consists primarily of costs of royalties, electronic software distribution, duplication and packaging. Cost of software licenses decreased $0.2 million, or 16%, in the second quarter of fiscal year 2014 as compared to the same quarter last year, and decreased as a percentage of software license revenue from 5% to 4%. Cost of software licenses decreased $0.3 million, or 9%, in the first six months of fiscal year 2014 as compared to the same period last year, and remained flat as a percentage of software license revenue. Cost of software licenses as a percentage of software license revenue varies from period to period depending upon the relative product mix.

Cost of Maintenance and Services

 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2014
 
May 31, 2013