10-Q 1 q2201510-q.htm 10-Q Q2 2015 10-Q
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, 2015
 
¨
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)
 
 
DELAWARE
(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 29, 2015, there were 49,999,266 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, 2015
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,
2015
 
November 30, 2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
166,020

 
$
263,082

Short-term investments
33,101

 
20,186

Total cash, cash equivalents and short-term investments
199,121

 
283,268

Accounts receivable (less allowances of $2,278 and $2,592, respectively)
56,440

 
68,311

Other current assets
19,454

 
24,028

Deferred tax assets
37,564

 
10,066

Total current assets
312,579

 
385,673

Property and equipment, net
57,653

 
59,351

Intangible assets, net
128,605

 
20,578

Goodwill
370,533

 
232,836

Deferred tax assets
2,976

 
2,259

Other assets
4,672

 
2,364

Total assets
$
877,018

 
$
703,061

Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
7,500

 
$

Accounts payable
10,191

 
11,749

Accrued compensation and related taxes
22,816

 
20,815

Income taxes payable
3,974

 
2,246

Other accrued liabilities
24,873

 
25,936

Short-term deferred revenue
127,037

 
92,557

Total current liabilities
196,391

 
153,303

Long-term debt
138,750

 

Long-term deferred revenue
2,588

 
3,683

Deferred tax liabilities
9,703

 
305

Other noncurrent liabilities
6,587

 
2,525

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, 49,982,674 shares in 2015 and 50,676,769 shares in 2014
212,157

 
209,778

Retained earnings
332,757

 
347,193

Accumulated other comprehensive loss
(21,915
)
 
(13,726
)
Total shareholders’ equity
522,999

 
543,245

Total liabilities and shareholders’ equity
$
877,018

 
$
703,061

See notes to unaudited condensed consolidated financial statements.

3


Condensed Consolidated Statements of Operations
 
 
Three Months Ended
 
Six Months Ended
(In thousands, except per share data)
May 31,
2015
 
May 31,
2014
 
May 31,
2015
 
May 31,
2014
Revenue:
 
 
 
 
 
 
 
Software licenses
$
28,722

 
$
27,988

 
$
53,953

 
$
50,252

Maintenance and services
60,095

 
52,839

 
116,245

 
105,113

Total revenue
88,817

 
80,827

 
170,198

 
155,365

Costs of revenue:
 
 
 
 
 
 
 
Cost of software licenses
1,365

 
1,139

 
3,085

 
3,146

Cost of maintenance and services
10,288

 
5,709

 
21,563

 
11,054

Amortization of acquired intangibles
4,093

 
530

 
8,726

 
1,059

Total costs of revenue
15,746

 
7,378

 
33,374

 
15,259

Gross profit
73,071

 
73,449

 
136,824

 
140,106

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
31,852

 
24,359

 
62,602

 
48,868

Product development
22,290

 
15,480

 
45,111

 
30,593

General and administrative
13,673

 
11,428

 
27,988

 
23,155

Amortization of acquired intangibles
3,171

 
148

 
6,373

 
312

Restructuring expenses
3,810

 
124

 
6,153

 
320

Acquisition-related expenses
1,010

 
1,630

 
2,518

 
2,576

Total operating expenses
75,806

 
53,169

 
150,745

 
105,824

(Loss) income from operations
(2,735
)
 
20,280

 
(13,921
)
 
34,282

Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(947
)
 
(158
)
 
(2,086
)
 
(308
)
Interest income and other, net
454

 
754

 
968

 
1,417

Foreign currency gain (loss), net
(532
)
 
(725
)
 
1,025

 
(1,232
)
Total other (expense) income, net
(1,025
)
 
(129
)
 
(93
)
 
(123
)
(Loss) income before income taxes
(3,760
)
 
20,151

 
(14,014
)
 
34,159

(Benefit) provision for income taxes
(9,529
)
 
7,352

 
(18,812
)
 
10,260

Net income
$
5,769

 
$
12,799

 
$
4,798

 
$
23,899

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.11

 
$
0.25

 
$
0.10

 
$
0.47

Diluted
$
0.11

 
$
0.25

 
$
0.09

 
$
0.46

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
50,342

 
51,049

 
50,505

 
51,271

Diluted
51,085

 
51,673

 
51,224

 
51,919

See notes to unaudited condensed consolidated financial statements.

4


Condensed Consolidated Statements of Comprehensive Income (Loss)

 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2015
 
May 31, 2014
 
May 31, 2015
 
May 31, 2014
Net income
$
5,769

 
$
12,799

 
$
4,798

 
$
23,899

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(2,672
)
 
989

 
(8,154
)
 
1,138

Unrealized (losses) gains on investments, net of tax of $0 for the second quarter and first six months of 2015, and $28 and $159 for the second quarter and first six months of 2014, respectively
(33
)
 
(118
)
 
(35
)
 
107

Total other comprehensive (loss) income, net of tax
(2,705
)
 
871

 
(8,189
)
 
1,245

Comprehensive income (loss)
$
3,064

 
$
13,670

 
$
(3,391
)
 
$
25,144


See notes to unaudited condensed consolidated financial statements.


5


Condensed Consolidated Statements of Cash Flows
 
 
Six Months Ended
(In thousands)
May 31,
2015
 
May 31,
2014
Cash flows from operating activities:
 
 
 
Net income
$
4,798

 
$
23,899

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property and equipment
4,999

 
4,887

Amortization of intangibles and other
16,496

 
2,160

Stock-based compensation
12,275

 
11,254

Loss on disposal of property
14

 
33

Asset impairment
3,947

 

Deferred income taxes
(28,966
)
 
294

Excess tax benefit from stock plans
(710
)
 
(160
)
Allowances for accounts receivable
307

 
208

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
15,226

 
8,914

Other assets
2,114

 
6,815

Accounts payable and accrued liabilities
(3,702
)
 
(19,061
)
Income taxes payable
1,340

 
410

Deferred revenue
29,793

 
2,887

Net cash flows from operating activities
57,931

 
42,540

Cash flows used in investing activities:
 
 
 
Purchases of investments
(19,266
)
 
(1,900
)
Sales and maturities of investments
5,941

 
9,435

Purchases of property and equipment
(4,405
)
 
(6,099
)
Capitalized software development costs
(1,383
)
 
(1,938
)
Payments for acquisitions, net of cash acquired
(246,275
)
 
(12,493
)
Proceeds from divestitures, net
4,500

 
3,300

Decrease in other noncurrent assets

 
104

Net cash flows used in investing activities
(260,888
)
 
(9,591
)
Cash flows from (used in) financing activities:
 
 
 
Proceeds from stock-based compensation plans
6,356

 
6,904

Purchases of common stock related to withholding taxes from the issuance of restricted stock units
(2,851
)
 
(3,141
)
Repurchases of common stock
(32,868
)
 
(34,999
)
Excess tax benefit from stock plans
710

 
160

Payment of contingent consideration

 
(210
)
Proceeds from the issuance of debt
150,000

 

Payment of long-term debt
(3,750
)
 

Payment of issuance costs for long-term debt
(1,707
)
 

Net cash flows from (used in) financing activities
115,890

 
(31,286
)
Effect of exchange rate changes on cash
(9,995
)
 
1,490

Net (decrease) increase in cash and cash equivalents
(97,062
)
 
3,153

Cash and cash equivalents, beginning of period
263,082

 
198,818

Cash and cash equivalents, end of period
$
166,020

 
$
201,971


6




Condensed Consolidated Statements of Cash Flows, continued
 
Six Months Ended
 
May 31,
2015
 
May 31,
2014
Supplemental disclosure:
 
 
 
Cash paid for income taxes, net of refunds of $1,335 in 2015 and $153 in 2014
$
3,850

 
$
3,831

Cash paid for interest
$
1,427

 
$

Non-cash financing activities:
 
 
 
Total fair value of restricted stock awards, restricted stock units and deferred stock units on date vested
$
9,942

 
$
10,494

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 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 cloud-based offerings use 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.

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, 2014.

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, 2014. 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. In April 2015, the FASB voted to propose a delay in the effective date of this ASU for reporting periods beginning after December 15, 2017, with early adoption permitted as of the original effective date. As a result, the proposed new effective date for the Company will be December 1, 2018. This update could impact the timing and amounts of revenue recognized. Management is currently assessing the impact the adoption of this ASU will have on the Company’s consolidated financial statements.

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). ASU 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The guidance in ASU 2015-03 is required for annual reporting periods beginning after December 15, 2015, including interim periods within the reporting period. Early adoption is permitted for financial statements that have not been previously issued. The Company is considering early adoption of the new standard and expects the impact on the Company's consolidated balance sheets to be a reclassification of approximately $1.4 million from other assets to long-term debt as of December 1, 2015.


8


Note 2: Cash, Cash Equivalents and Investments

A summary of our cash, cash equivalents and available-for-sale investments at May 31, 2015 is as follows (in thousands):
 
 
Amortized Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
144,175

 
$

 
$

 
$
144,175

Money market funds
21,845

 

 

 
21,845

State and municipal bond obligations
33,050

 
63

 
(12
)
 
33,101

Total
$
199,070

 
$
63

 
$
(12
)
 
$
199,121


A summary of our cash, cash equivalents and available-for-sale investments at November 30, 2014 is as follows (in thousands):
 
 
Amortized Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
195,189

 
$

 
$

 
$
195,189

Money market funds
67,893

 

 

 
67,893

State and municipal bond obligations
20,100

 
86

 

 
20,186

Total
$
283,182

 
$
86

 
$

 
$
283,268


Such amounts are classified on our condensed consolidated balance sheets as follows (in thousands):
 
 
May 31, 2015
 
November 30, 2014
 
Cash and
Equivalents
 
Short-Term
Investments
 
Cash and
Equivalents
 
Short-Term
Investments
Cash
$
144,175

 
$

 
$
195,189

 
$

Money market funds
21,845

 

 
67,893

 

State and municipal bond obligations

 
33,101

 

 
20,186

Total
$
166,020

 
$
33,101

 
$
263,082

 
$
20,186


The fair value of debt securities by contractual maturity is as follows (in thousands):
 
 
May 31,
2015
 
November 30,
2014
Due in one year or less
$
10,384

 
$
11,140

Due after one year (1)
22,717

 
9,046

Total
$
33,101

 
$
20,186

 
(1)
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.

We did not hold any investments with continuous unrealized losses as of May 31, 2015 or November 30, 2014.


9


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 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, other current liabilities, or other noncurrent liabilities on the condensed consolidated balance sheets at the end of each reporting period and expire from 90 days to two years. In the three and six months ended May 31, 2015, realized and unrealized losses of $1.2 million and $2.5 million, respectively, from our forward contracts were recognized in foreign currency gain (loss), net in the condensed consolidated statements of operations. 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 foreign currency gain (loss), net in the condensed consolidated statements of operations. 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, 2015
 
November 30, 2014
 
Notional Value
 
Fair Value
 
Notional Value
 
Fair Value
Forward contracts to sell U.S. dollars
$
83,747

 
$
(2,455
)
 
$
21,738

 
$
(13
)
Forward contracts to purchase U.S. dollars
9,980

 
6

 
15,534

 
(89
)
Total
$
93,727

 
$
(2,449
)
 
$
37,272

 
$
(102
)

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, 2015 (in thousands):
 
 
 
 
Fair Value Measurements Using
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Money market funds
$
21,845

 
$
21,845

 
$

 
$

State and municipal bond obligations
33,101

 

 
33,101

 

Liabilities
 
 
 
 
 
 
 
Foreign exchange derivatives
(2,449
)
 

 
(2,449
)
 

Contingent consideration
$
(504
)
 
$

 
$
(209
)
 
$
(295
)

The following table details the fair value measurements within the fair value hierarchy of our financial assets and liabilities at November 30, 2014 (in thousands):
 
 
 
 
Fair Value Measurements Using
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Money market funds
$
67,893

 
$
67,893

 
$

 
$

State and municipal bond obligations
20,186

 

 
20,186

 

Foreign exchange derivatives
(102
)
 

 
(102
)
 

Liabilities
 
 
 
 
 
 
 
Contingent consideration
$
(1,717
)
 
$

 
$

 
$
(1,717
)


10


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.

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, 2015 related to the contingent consideration for the acquisition of Modulus used in the model are probabilities of 0% and approximately 40% that the year one and year two milestones associated with the contingent consideration will be achieved, respectively, and a discount rate of 33.0%. The year one milestone was not achieved as of May 31, 2015, which was the end of the first milestone period. A decrease in the probability of achievement of the year two milestone could result in a decrease to the estimated fair value of the contingent consideration liability.

In regard to the contingent consideration related to the acquisition of Rollbase, the contingency was relieved as of May 31, 2015 as the milestones associated with the contingent consideration were achieved as of this date. As such, the amount of the payment related to the contingent consideration was known as of May 31, 2015 and was based on actual results. We transferred the contingent earn out liability to a Level 2 fair value measurement as the value as of May 31, 2015 was based on observable inputs. The payment was made in June 2015 in the amount of $0.2 million.

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,
2015
 
May 31,
2014
 
May 31,
2015
 
May 31,
2014
Balance, beginning of period
$
1,615

 
$
393

 
$
1,717

 
$
388

Incurrence of contingent purchase price liability

 
1,450

 

 
1,450

Payments of contingent consideration

 
(210
)
 

 
(210
)
Changes in fair value of contingent consideration obligation
(1,111
)
 
16

 
(1,213
)
 
21

Transfer to Level 2 fair value measurement
(209
)
 

 
(209
)
 

Balance, end of period
$
295

 
$
1,649

 
$
295

 
$
1,649


We recorded credits of approximately $1.1 million and $1.2 million during the three and six months ended May 31, 2015, respectively, due to the change in fair value of the contingent consideration obligation, which is included in acquisition-related expenses in our condensed consolidated statement of operations.

Nonrecurring Fair Value Measurements

Certain assets have been measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3). The following table presents nonrecurring fair value measurements as of May 31, 2015 (in thousands):

 
Total Fair Value
 
Total Losses
Long-lived assets
$
60

 
$
3,947


11



During the second quarter of fiscal year 2015, we recorded a $3.9 million asset impairment charge related to our cloud-based mobile application development technology as a result of our decision to replace our existing cloud-based mobile application development technology with technology acquired in connection with the acquisition of Telerik (Note 11). The fair value measurement was determined using an income-based valuation methodology, which incorporates unobservable inputs, including discounted expected cash flows over the remaining estimated useful life of the technology, thereby classifying the fair value as a Level 3 measurement within the fair value hierarchy. The expected cash flows include subscription fees to be collected from existing customers using the platform, offset by hosting fees and compensation related costs to be incurred over the remaining estimated useful lives.

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

Note 5: Intangible Assets and Goodwill

Intangible Assets

Intangible assets are comprised of the following significant classes (in thousands):
 
 
May 31, 2015
 
November 30, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
Purchased technology
$
118,148

 
$
(47,842
)
 
$
70,306

 
$
53,789

 
$
(39,575
)
 
$
14,214

Customer-related and other
67,617

 
(20,329
)
 
47,288

 
20,554

 
(15,195
)
 
5,359

Trademarks and trade names
15,330

 
(4,319
)
 
11,011

 
4,130

 
(3,125
)
 
1,005

Total
$
201,095

 
$
(72,490
)
 
$
128,605

 
$
78,473

 
$
(57,895
)
 
$
20,578


As a result of the acquisition of Telerik AD in December 2014 (Note 6), we recorded $64.8 million of purchased technology, $47.1 million of customer-related and other, and $11.2 million of trademarks and trade names as intangible assets during the six months ended May 31, 2015. These intangibles have a weighted average useful life of 5 years.

In the three and six months ended May 31, 2015, amortization expense related to intangible assets was $7.3 million and $15.1 million, respectively. 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.

Future amortization expense for intangible assets as of May 31, 2015, is as follows (in thousands):
 
Remainder of 2015
$
14,496

2016
28,499

2017
28,499

2018
27,686

2019
26,561

Thereafter
2,864

Total
$
128,605


12



Goodwill

Changes in the carrying amount of goodwill in the six months ended May 31, 2015, are as follows (in thousands):

Balance, November 30, 2014
$
232,836

Additions
137,921

Translation adjustments
(224
)
Balance, May 31, 2015
$
370,533


The addition to goodwill during the first six months of fiscal year 2015 is related to the acquisition of Telerik AD in December 2014 (Note 6).

As of May 31, 2015, the amount of goodwill allocated to each of our three reporting units is as follows (in thousands):

OpenEdge
$
212,079

Data Connectivity and Integration
19,040

Application Development and Deployment
139,414

Balance, May 31, 2015
$
370,533


During the fourth 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 October 31, 2014. As of May 31, 2015, no triggering events have occurred that would indicate a potential impairment of goodwill exists.

Note 6: Business Combinations

Telerik Acquisition

On December 2, 2014, we, through a wholly owned subsidiary, completed the acquisition of all of the outstanding securities of Telerik AD (Telerik), a leading provider of application development tools based in Sofia, Bulgaria, for total consideration of $262.5 million. Approximately $10.5 million of the total consideration was paid to Telerik’s founders and certain other key employees in restricted stock units, subject to a vesting schedule and continued employment. Under the Securities Purchase Agreement, 10% of the total consideration was deposited into an escrow account to secure certain indemnification and other obligations of the sellers to Progress.

Through this acquisition, we now provide comprehensive cloud and on-premise platform offerings that enable developers to rapidly create applications, driven by data for any web, desktop or mobile platform. We funded the acquisition through a combination of existing cash resources and a $150 million term loan (Note 7).

The total consideration, less the fair value of the granted restricted stock units discussed above, which are considered compensation arrangements, has been allocated to Telerik’s tangible assets, identifiable intangible assets and assumed liabilities based on their estimated fair values. The preliminary fair value estimates of the net assets acquired are based upon preliminary calculations and valuations, and those estimates and assumptions are subject to change as we obtain additional information for those estimates during the measurement period (up to one year from the acquisition date). The excess of the total consideration, less the fair value of the restricted stock units, over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.


13


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

 
Total
 
Weighted Average Life
Net working capital
$
6,612

 
 
Property, plant and equipment
3,108

 
 
Identifiable intangible assets
123,100

 
5 years
Deferred taxes
(10,401
)
 
 
Deferred revenue
(7,915
)
 
 
Other non-current liabilities
(472
)
 
 
Goodwill
137,921

 
 
Net assets acquired
$
251,953

 
 

The preliminary fair value of the intangible assets has been estimated using the income approach in which the after-tax cash flows are discounted to present value. The cash flows are based on estimates prepared by management, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model as well as the weighted average cost of capital. Based on the preliminary valuation, the acquired intangible assets are comprised of existing technology of approximately $64.8 million, customer relationships of approximately $47.1 million, and trademarks and trade names of approximately $11.2 million.

Deferred taxes include deferred tax liabilities resulting from the tax effects of fair value adjustments related to identifiable intangible assets and deferred revenue, partially offset by the fair value of deferred tax assets acquired from Telerik. Tangible assets acquired and assumed liabilities were recorded at fair value. The valuation of the assumed deferred revenue was based on our contractual commitment to provide post-contract customer support to Telerik customers and future contractual performance obligations under existing hosting arrangements. The fair value of this assumed liability was based on the estimated cost plus a reasonable margin to fulfill these service obligations. A significant portion of the deferred revenue is expected to be recognized in the 12 months following the acquisition.

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 $137.9 million of goodwill, which is not deductible for tax purposes.

As discussed above, approximately $10.5 million of the total consideration was paid to Telerik’s founders and certain other key employees in restricted stock units, subject to a vesting schedule and continued employment. We concluded that the restricted stock units are compensation arrangements and we have been recognizing stock-based compensation expense in accordance with the vesting schedule over the service period of the awards, which is 2 years. We recorded $0.7 million and $1.4 million of stock-based compensation expense related to these restricted stock units for the three and six months ended May 31, 2015, respectively. This amount is recorded as operating expenses in our condensed consolidated statement of operations.

Acquisition-related transaction costs (e.g., legal, due diligence, valuation, and other professional fees) and certain acquisition restructuring and related charges are not included as a component of consideration transferred, but are required to be expensed as incurred. During the three and six months ended May 31, 2015, we incurred approximately $1.1 million and $1.9 million of acquisition-related costs, respectively, which are included in acquisition-related expenses in our condensed consolidated statement of operations.

In connection with the acquisition of Telerik, we agreed to provide retention bonuses to certain Telerik employees as an incentive for those employees to remain with Telerik for at least one year following the acquisition. We concluded that the retention bonuses for these individuals, which total approximately $2.5 million, are compensation arrangements and we have been accruing the maximum payouts ratably over the one-year service period. We have incurred $0.6 million and $1.2 million of expense related to the retention bonuses for the three and six months ended May 31, 2015, respectively, which are included in the acquisition-related expenses in our condensed consolidated statement of operations discussed above.

The operations of Telerik are included in our operating results as part of the Application Development and Deployment business unit from the date of acquisition. The amount of revenue of Telerik included in our unaudited condensed consolidated statement of operations during the three and six months ended May 31, 2015 were approximately $9.2 million and $13.7

14


million, respectively. The amount of pretax losses of Telerik included in our unaudited condensed consolidated statement of operations during the three and six months ended May 31, 2015 were approximately $7.8 million and $18.7 million, respectively. The revenue of Telerik is primarily being recognized ratably over the maintenance period, which is generally one year, as vendor specific objective evidence (or VSOE) of fair value cannot be established for such maintenance. The pretax loss does not include the amortization expense of approximately $12.3 million related to the acquired intangible assets discussed above as the intangible assets and related amortization were recorded by the acquiring entity.

Pro Forma Information

The following pro forma financial information presents the combined results of operations of Progress and Telerik as if the acquisition had occurred on December 1, 2013 after giving effect to certain pro forma adjustments. The pro forma adjustments reflected herein include only those adjustments that are directly attributable to the Telerik acquisition and factually supportable. These pro forma adjustments include (i) a decrease in revenue from Telerik due to the beginning balance of deferred revenue being adjusted to reflect the fair value of the acquired balance, (ii) a net increase in amortization expense to eliminate historical amortization of Telerik intangible assets and to record amortization expense for the $123.1 million of acquired identifiable intangible assets, (iii) stock-based compensation expense relating to the consideration paid to Telerik’s founders and certain other key employees in restricted stock units, as discussed above, (iv) a net increase in interest expense to eliminate historical interest expense of Telerik as a result of the repayment of all Telerik outstanding debt in connection with the acquisition and to record interest expense for the period presented as a result of the new credit facility entered into by Progress in connection with the acquisition, (v) acquisition-related costs, including transaction costs incurred by Progress related to the accrual of retention bonuses discussed above, and (vi) the income tax effect of the adjustments made at either the statutory tax rate of Bulgaria (10%) or the statutory tax rate of the U.S. (approximately 37%) depending on which jurisdiction the adjustment impacts.

The pro forma financial information does not reflect any adjustments for anticipated synergies resulting from the acquisition and is not necessarily indicative of the operating results that would have actually occurred had the transaction been consummated on December 1, 2013.

(In thousands, except per share data)
Pro Forma
Three Months Ended May 31, 2014
 
Pro Forma
Six Months Ended May 31, 2014
Revenue
$
87,822

 
$
165,929

Net loss
$
(5,944
)
 
$
(16,032
)
Net loss per basic and diluted share
$
(0.12
)
 
$
(0.32
)

BravePoint Acquisition

On October 1, 2014, we acquired 100% of the capital stock of BravePoint, Inc. (BravePoint) from Chesapeake Utilities Corporation in exchange for $12.0 million in cash. BravePoint is based in Norcross, Georgia and is a provider of OpenEdge consulting, training and application development services designed to increase customers' profitability and competitiveness through the use of technology. This acquisition significantly extends our services capabilities and enhances our ability to quickly enable our partners and customers to take greater advantage of new technologies.  The acquisition was accounted for as a business combination, and accordingly, the results of operations of BravePoint are included in our operating results as part of the OpenEdge business unit from the date of acquisition. We paid the purchase price in cash from available funds.

15



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

 
Total
 
Weighted Average Life
Net working capital
$
2,902

 
 
Property and equipment
735

 
 
Other assets
16

 
 
Deferred revenue
(680
)
 
 
Customer-related and other
4,110

 
7 Years
Trade name
850

 
7 Years
Purchased technology
1,810

 
3 Years
Goodwill
2,257

 
 
Net assets acquired
$
12,000

 
 

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 $2.3 million of goodwill. The goodwill is deductible for tax purposes. The allocation of the purchase price was completed in the fourth quarter of fiscal year 2014 upon the finalization of our valuation of identifiable intangible assets.

We incurred approximately $0.6 million and $0.9 million of acquisition-related costs during the three and six months ended May 31, 2015, respectively, which are included in acquisition-related expenses in our condensed consolidated statement of operations. We have not disclosed the amount of revenues and earnings of BravePoint since acquisition, nor pro forma financial information, as those amounts are not significant to our consolidated financial statements.

Modulus Acquisition

On May 13, 2014, we acquired 100% of the membership interests of 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, payable 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. Note that the year one milestone was not achieved as of May 31, 2015, which was the end of the first milestone period (Note 4).

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

 
Total
 
Weighted Average Life
Net working capital
$
7

 
 
Purchased technology
7,320

 
7 Years
Trade name
190

 
7 Years
Goodwill
6,433

 
 
Net assets acquired
$
13,950

 
 

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

16


deductible for tax purposes. The allocation of the purchase price was completed in the third quarter of fiscal year 2014 upon the finalization of our valuation of identifiable intangible assets.

We recorded credits of approximately $1.1 million and $1.2 million during the three and six months ended May 31, 2015, respectively, due to the change in fair value of the contingent consideration obligation, which is included in acquisition-related expenses in our condensed consolidated statement of operations. 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.

Note 7: Term Loan and Line of Credit

On December 2, 2014, we entered into a credit agreement (the Credit Agreement) with each of the lenders party thereto (the Lenders), JPMorgan Chase Bank, N.A., as Administrative Agent, Wells Fargo Bank, N.A. and Citizens Bank, N.A., as Syndication Agents, Bank of America, N.A., Citibank, N.A. and Silicon Valley Bank, as Documentation Agents, and J.P. Morgan Securities LLC, as Sole Bookrunner and Sole Lead Arranger, providing for a $150 million secured term loan and a $150 million secured revolving credit facility, which may be made available in U.S. Dollars and certain other currencies. The revolving credit facility may be increased by up to an additional $75 million if the existing or additional lenders are willing to make such increased commitments.

This Credit Agreement replaces our previous unsecured revolving credit facility dated August 15, 2011. The previous credit facility was to mature on August 15, 2016. Loans under the previous credit agreement could be paid before maturity in whole or in part at our option without penalty or premium. There were no revolving loans and $0.7 million of letters of credit outstanding at the time of the termination of the previous credit agreement, which letters of credit were incorporated into the new credit facility. In addition, there was $0.3 million of unamortized debt issuance costs related to the previous credit agreement remaining at the time of the termination that was written off to interest income (expense) and other, net in the condensed consolidated statement of operations.

The term loan included in the Credit Agreement was used to partially fund our acquisition of Telerik, as described in Note 6. The revolving credit facility has sublimits for swing line loans up to $25.0 million and for the issuance of standby letters of credit in a face amount up to $25.0 million. We expect to use the revolving credit facility for general corporate purposes, including acquisitions of other businesses, and may also use it for working capital.

Interest rates for the term loan and revolving credit facility are determined based on an index selected at our option and would range from 1.50% to 2.25% above the Eurodollar rate for Eurodollar-based borrowings or would range from 0.50% to 1.25% above the defined base rate for base rate borrowings, in each case based upon our leverage ratio. Additionally, we may borrow certain foreign currencies at rates set in the same range above the respective London interbank offered interest rates (LIBOR) for those currencies, based on our leverage ratio. A quarterly commitment fee on the undrawn portion of the revolving credit facility is required, ranging from 0.25% to 0.40% per annum, based upon our leverage ratio. The average interest rate of the credit facility during the fiscal quarter ended May 31, 2015 was 1.94%.

The credit facility matures on December 2, 2019, when all amounts outstanding will be due and payable in full. The revolving credit facility does not require amortization of principal. The term loan requires repayment of principal at the end of each fiscal quarter, beginning with the fiscal quarter ended February 28, 2015. The first eight payments are in the principal amount of $1.9 million each, the following eight payments are in the principal amount of $3.8 million each, the following three payments are in the principal amount of $5.6 million each, and the last payment is of the remaining principal amount. Any amounts outstanding under the term loan thereafter would be due on the maturity date. The term loan may be prepaid before maturity in whole or in part at our option without penalty or premium. As of May 31, 2015, the carrying value of the term loan approximates the fair value, based on Level 2 inputs (observable market prices in less than active markets), as the interest rate is variable over the selected interest period and is similar to current rates at which we can borrow funds. Based on Level 2 inputs, the fair value of the term loan was $146.3 million as of May 31, 2015, with $7.5 million due in the next 12 months.

Costs incurred to obtain our long-term debt are recorded as debt issuance costs within other assets in our condensed consolidated balance sheet as of May 31, 2015 and are amortized over the term of the debt agreement using the effective interest rate method. During the first six months of fiscal year 2015, we recorded $1.7 million of debt issuance costs. Amortization expense related to the debt issuance costs is recorded within interest expense in our condensed consolidated statements of operations. For the three and six months ended May 31, 2015, this amount was $0.1 million and $0.2 million, respectively. For the three and six months ended May 31, 2014, amortization expense related to the debt issuance costs of our previous credit agreement was minimal and $0.1 million, respectively.


17


Revolving loans may be borrowed, repaid and reborrowed until December 2, 2019, at which time all amounts outstanding must be repaid. Accrued interest on the loans is payable quarterly in arrears with respect to base rate loans and at the end of each interest rate period (or at each three month interval in the case of loans with interest periods greater than three months) with respect to LIBOR rate loans. We may prepay the loans or terminate or reduce the commitments in whole or in part at any time, without premium or penalty, subject to certain conditions and reimbursement of certain costs in the case of LIBOR rate loans. As of May 31, 2015, there were no amounts outstanding under the revolving line and $0.5 million of letters of credit.

We are the sole borrower under the credit facility. Our obligations under the Credit Agreement are guaranteed by each of our material domestic subsidiaries and are secured by substantially all of our assets and such material domestic subsidiaries, as well as 100% of the capital stock of our domestic subsidiaries and 65% of the capital stock of our first-tier foreign subsidiaries, in each case, subject to certain exceptions as described in the Credit Agreement. Future material domestic subsidiaries will be required to guaranty our obligations under the Credit Agreement, and to grant security interests in substantially all of their assets to secure such obligations. The Credit Agreement generally prohibits, with certain exceptions, any other liens on our assets, subject to certain exceptions as described in the Credit Agreement.

The credit facility contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, grant liens, make investments, make acquisitions, incur indebtedness, merge or consolidate, dispose of assets, pay dividends or make distributions, repurchase stock, change the nature of the business, enter into certain transactions with affiliates and enter into burdensome agreements, in each case subject to customary exceptions for a credit facility of this size and type. We are also required to maintain compliance with a consolidated fixed charge coverage ratio, a consolidated total leverage ratio and a consolidated senior secured leverage ratio.

Note 8: Common Stock Repurchases

We repurchased and retired 1.0 million shares of our common stock for $25.0 million in the three months ended May 31, 2015 and 1.3 million shares for $32.9 million in the six months ended May 31, 2015. In the three and six months ended May 31, 2014, we repurchased and retired 1.2 million shares for $25.2 million and 1.6 million shares for $35.0 million, respectively. The shares were repurchased in both periods as part of our Board of Directors authorized $100.0 million share repurchase program, with $14.5 million remaining under the current authorization.

Note 9: 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 and each of the first two quarters of fiscal year 2015, 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,
2015
 
May 31,
2014
 
May 31,
2015
 
May 31,
2014
Cost of maintenance and services
$
154

 
$
146

 
$
319

 
$
298

Sales and marketing
1,488

 
991

 
2,725

 
2,190

Product development
1,062

 
1,425

 
2,564

 
2,778

General and administrative
3,735

 
3,147

 
6,667

 
5,988

Total stock-based compensation
$
6,439

 
$
5,709

 
$
12,275

 
$
11,254



18


Note 10: Accumulated Other Comprehensive Loss

The following table summarizes the changes in accumulated balances of other comprehensive loss during the six months ended May 31, 2015 (in thousands):

 
Foreign Currency Translation Adjustment
 
Unrealized Gains (Losses) on Investments
 
Accumulated Other Comprehensive Loss
Balance, December 1, 2014
$
(13,733
)
 
$
7

 
$
(13,726
)
Other comprehensive (loss) income before reclassifications, net of tax
(8,154
)
 
(35
)
 
(8,189
)
Balance, May 31, 2015
$
(21,887
)
 
$
(28
)
 
$
(21,915
)

The tax effect on accumulated unrealized gains (losses) on investments was minimal as of May 31, 2015 and November 30, 2014.

Note 11: Restructuring Charges

2015 Restructuring

During the first quarter of fiscal year 2015, we restructured our operations in connection with the acquisition of Telerik. This restructuring resulted in a reduction in redundant positions primarily within the administrative functions. This restructuring also resulted in the closing of two facilities as well as asset impairment charges for assets no longer deployed as a result of the acquisition.

Restructuring expenses are related to employee costs, including severance, health benefits and outplacement services (but excluding stock-based compensation), facilities costs, which include fees to terminate lease agreements and costs for unused space, net of sublease assumptions, and other costs, which include asset impairment charges.

During the second quarter of fiscal year 2015, we decided to replace our existing cloud-based mobile application development technology with technology acquired in connection with the acquisition of Telerik. Accordingly, we evaluated the ongoing value of the assets associated with this prior mobile technology and, based on this evaluation, we determined that the long-lived assets with a carrying amount of $3.9 million were no longer recoverable and were in fact impaired and wrote them down to their estimated fair value of $0.1 million. Fair value was based on expected future cash flows using Level 3 inputs under ASC 820.

As part of the 2015 restructuring, for the three and six months ended May 31, 2015, we incurred expenses of $3.9 million and $4.9 million, respectively. The expenses are recorded as restructuring expenses in the condensed consolidated statements of operations. As we continue to evaluate the combined entities, we may incur additional costs with respect to the 2015 restructuring, including excess facilities and other costs as well as asset impairment charges for assets no longer deployed as a result of the acquisition.

A summary of activity for the 2015 restructuring action is as follows (in thousands):

 
Excess
Facilities and
Other Costs
 
Employee Severance and Related Benefits
 
Total
Balance, December 1, 2014
$

 
$

 
$

Costs incurred
4,010

 
858

 
4,868

Cash disbursements
(36
)
 
(782
)
 
(818
)
Asset impairment
(3,947
)
 

 
(3,947
)
Translation adjustments and other
102

 
(4
)
 
98

Balance, May 31, 2015
$
129

 
$
72

 
$
201



19


Cash disbursements for expenses incurred to date under the 2015 restructuring are expected to be made through the first quarter of fiscal year 2016. As a result, the total amount of the restructuring reserve of $0.2 million is included in other accrued liabilities on the condensed consolidated balance sheet at May 31, 2015.

2014 Restructuring

During the third quarter of fiscal year 2014, our management approved, committed to and initiated plans to make strategic changes to our organization to provide greater focus and agility in the delivery of next generation application development, deployment and integration solutions. Effective September 1, 2014, we began to operate as three distinct business units: OpenEdge, Data Connectivity and Integration, and Application Development and Deployment, each with dedicated sales, product management and product marketing functions. In connection with the new organizational structure, we eliminated the position of global head of sales, as well as certain other positions within the sales and administrative organizations.

As part of the 2014 restructuring, for the three months ended May 31, 2015, we recorded an immaterial credit, and for the six months ended May 31, 2015, we incurred expenses of $1.3 million, which are related to employee costs, including severance, health benefits, and outplacement services, but excluding stock-based compensation, and facilities costs, which include fees to terminate lease agreements and costs for unused space, net of sublease assumptions. The expenses are recorded as restructuring expenses in the condensed consolidated statements of operations. We do not expect to incur additional material costs with respect to the 2014 restructuring.

A summary of the first six months of fiscal year 2015 activity for the 2014 restructuring action is as follows (in thousands):

 
Excess
Facilities and
Other Costs
 
Employee Severance and Related Benefits
 
Total
Balance, December 1, 2014
$

 
$
1,227

 
$
1,227

Costs incurred
125

 
1,204

 
1,329

Cash disbursements
(16
)
 
(1,581
)
 
(1,597
)
Translation adjustments and other

 
(36
)
 
(36
)
Balance, May 31, 2015
$
109

 
$
814

 
$
923


Cash disbursements for expenses incurred to date under the 2014 restructuring are expected to be made through the first quarter of fiscal year 2016. As a result, the $0.9 million is included in other accrued liabilities on the condensed consolidated balance sheet at May 31, 2015.

2013 and 2012 Restructurings

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.

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 divested the product lines not considered core to our business. Our restructuring actions included both cost reduction efforts and qualifying costs associated with our divestitures.

Restructuring expenses for both restructurings related 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.


20


As part of the 2013 and 2012 restructuring actions, for the three and six months ended May 31, 2015, we did not incur any expenses, and for the six months ended May 31, 2014, we incurred expenses of $0.3 million. The expenses are recorded as restructuring expenses in the condensed consolidated statements of operations. We do not expect to incur additional material costs with respect to the 2013 and 2012 restructuring actions.

A summary of the first six months of fiscal year 2015 activity for the 2013 and 2012 restructuring actions is as follows (in thousands):

 
Excess
Facilities and
Other Costs
 
Employee Severance and Related Benefits
 
Total
Balance, December 1, 2014
$
416

 
$

 
$
416

Costs incurred
(44
)
 

 
(44
)
Cash disbursements
(138
)
 

 
(138
)
Translation adjustments and other
(20
)
 

 
(20
)
Balance, May 31, 2015
$
214

 
$

 
$
214


Cash disbursements for expenses incurred to date under the 2013 and 2012 restructuring actions 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 $0.1 million is included in other noncurrent liabilities on the condensed consolidated balance sheet at May 31, 2015.

Note 12: Income Taxes

Our income tax provision for the second quarter of fiscal year 2015 and 2014 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.

The research and development credit was retroactively reinstated in December 2014. As a result, in the first quarter of fiscal year 2015 we recorded a tax benefit of $0.8 million related to qualifying research and development activities for the period from January 2014 to November 2014.

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 13: 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 on an interim basis (in thousands, except per share data):

 
Three Months Ended
 
Six Months Ended
 
May 31,
2015
 
May 31,
2014
 
May 31,
2015
 
May 31,
2014
Net income
$
5,769

 
$
12,799

 
$
4,798

 
$
23,899

Weighted average shares outstanding
50,342

 
51,049

 
50,505

 
51,271

Dilutive impact from common stock equivalents
743

 
624

 
719

 
648

Diluted weighted average shares outstanding
51,085

 
51,673

 
51,224

 
51,919

Basic earnings per share
$
0.11

 
$
0.25

 
$
0.10

 
$
0.47

Diluted earnings per share
$
0.11

 
$
0.25

 
$
0.09

 
$
0.46


We excluded stock awards representing approximately 247,000 shares and 250,000 shares of common stock from the calculation of diluted earnings per share in the three and six months ended May 31, 2015, respectively, because these awards

21


were anti-dilutive. In the three and six months ended May 31, 2014, we excluded stock awards representing 501,000 shares and 399,000 shares of common stock, respectively, from the calculation of diluted earnings per share.

Note 14: Business Segments and International Operations

Operating segments are components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and assess performance. Our chief operating decision maker is our Chief Executive Officer.

Effective September 1, 2014, we began operating as three distinct business units: OpenEdge, Data Connectivity and Integration, and Application Development and Deployment, each with dedicated sales, product management and product marketing functions. As a result of these changes, we began segment reporting for our three business units beginning in the fourth fiscal quarter of 2014. The segment information for the prior periods presented has been restated to reflect the change in our reportable segments.

We do not manage our assets or capital expenditures by segment or assign other income (expense) and income taxes to segments. We manage and report such items on a consolidated company basis.

The following table provides revenue and contribution from our reportable segments and reconciles to the consolidated (loss) income before income taxes:

 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2015
 
May 31, 2014
 
May 31, 2015
 
May 31, 2014
Segment revenue:
 
 
 
 
 
 
 
OpenEdge
$
71,906

 
$
73,192

 
$
141,377

 
$
139,926

Data Connectivity and Integration
7,275

 
7,407

 
14,388

 
15,046

Application Development and Deployment
9,636

 
228

 
14,433

 
393

Total revenue
88,817

 
80,827

 
170,198

 
155,365

Segment costs of revenue and operating expenses:
 
 
 
 
 
 
 
OpenEdge
18,446

 
15,855

 
37,980

 
33,246

Data Connectivity and Integration
3,133

 
2,601

 
6,383

 
5,398

Application Development and Deployment
10,851

 
1,763

 
20,235

 
3,316

Total costs of revenue and operating expenses
32,430

 
20,219

 
64,598

 
41,960

Segment contribution:
 
 
 
 
 
 
 
OpenEdge
53,460

 
57,337

 
103,397

 
106,680

Data Connectivity and Integration
4,142

 
4,806

 
8,005

 
9,648

Application Development and Deployment
(1,215
)
 
(1,535
)
 
(5,802
)
 
(2,923
)
Total contribution
56,387

 
60,608

 
105,600

 
113,405

Other unallocated expenses (1)
59,122

 
40,328

 
119,521

 
79,123

(Loss) income from operations
(2,735
)
 
20,280

 
(13,921
)
 
34,282

Other income (expense), net
(1,025
)
 
(129
)
 
(93
)
 
(123
)
(Loss) income before income taxes
$
(3,760
)
 
$
20,151

 
$
(14,014
)
 
$
34,159

 
 
 
 
 
 
 
 
(1) The following expenses are not allocated to our segments as we manage and report our business in these functional areas on a consolidated basis only: product development, corporate marketing, administration, amortization of acquired intangibles, stock-based compensation, restructuring, and acquisition related expenses.
                                

22


Our revenues are derived from licensing our products, and from related services, which consist of maintenance and consulting and education. Information relating to revenue from customers by revenue type is as follows (in thousands):
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31,
2015
 
May 31,
2014
 
May 31,
2015
 
May 31,
2014
Software licenses
$
28,722

 
$
27,988

 
$
53,953

 
$
50,252

Maintenance
52,656

 
50,305

 
101,894

 
100,486

Professional services
7,439

 
2,534

 
14,351

 
4,627

Total
$
88,817

 
$
80,827

 
$
170,198

 
$
155,365


In the following table, revenue attributed to North America includes sales to customers in the U.S. and sales to certain multinational organizations. Revenue from Europe, the Middle East and Africa (EMEA), Latin America and the Asia Pacific region includes sales to customers in each region plus sales from the U.S. to distributors in these regions. Information relating to revenue from external customers from different geographical areas is as follows (in thousands):
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31,
2015
 
May 31,
2014
 
May 31,
2015
 
May 31,
2014
North America
$
47,520

 
$
36,827

 
$
89,644

 
$
71,413

EMEA
31,146

 
33,698

 
59,010

 
63,013

Latin America
4,388

 
5,703

 
9,356

 
10,811

Asia Pacific
5,763

 
4,599

 
12,188

 
10,128

Total
$
88,817

 
$
80,827

 
$
170,198

 
$
155,365


Note 15: Related Party Transaction

During the first quarter of fiscal year 2015, we entered into a license agreement with Emdeon Inc. (Emdeon) to provide Emdeon access to certain of our software. Philip M. Pead, our President and Chief Executive Officer, is a member of Emdeon’s board of directors. During the second quarter of fiscal year 2015, we deployed the software and recorded revenue of $0.4 million. We also recorded $0.1 million of deferred maintenance revenue related to the arrangement as of May 31, 2015, which will be recorded as revenue on a straight-line basis over the remaining maintenance period. As Emdeon paid us the total amount upon deployment, there is no outstanding accounts receivable balance as of May 31, 2015.


23


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: (1) Market acceptance of Progress’s strategy and product development initiatives; (2) pricing pressures and the competitive environment in the software industry and Platform-as-a-Service market; (3) Progress's ability to successfully manage transitions to new business models and markets, including an increased emphasis on a cloud and subscription strategy; (4) uncertainties relating to Progress’ acquisition of Telerik, including whether Progress will be able to realize expected benefits and anticipated synergies of the acquisition and whether Telerik’s business will be successfully integrated with Progress Software's business; (5) Progress's ability to make acquisitions and to realize the expected benefits and anticipated synergies from such acquisitions; (6) 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; (7) business and consumer use of the Internet and the continuing adoption of Cloud technologies; (8) the receipt and shipment of new orders; (9) Progress's ability to expand its relationships with channel partners and to manage the interaction of channel partners with its direct sales force; (10) the timely release of enhancements to Progress's products and customer acceptance of new products; (11) the positioning of Progress's products in its existing and new markets; (12) variations in the demand for professional services and technical support; (13) Progress's ability to penetrate international markets and manage its international operations; and (14) 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, 2014. 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. We intend to become a leading provider of next-generation application development and deployment capabilities in the cloud for the PaaS market. In furtherance of this strategy, 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.

We made acquisitions in fiscal year 2014 in furtherance of our PaaS strategy and designed to accelerate our growth. In May 2014, we 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. In October, we acquired BravePoint, Inc. (BravePoint), a leading provider of consulting, training and application development services designed to increase customers' profitability and competitiveness through the use of technology. The acquisition of BravePoint significantly extends our services capabilities and enhances our ability to quickly enable our partners and customers to take greater advantage of new technologies.

24



Following the end of fiscal year 2014, we acquired Telerik AD, a leading provider of application development tools. Telerik enables its 1.7 million strong developer community to create compelling user experiences across cloud, web, mobile and desktop applications. Through this acquisition, we now provide comprehensive cloud and on-premise platform offerings that enable developers to rapidly create applications, driven by data for any web, desktop or mobile platform. Our operating performance in fiscal year 2015 may be impacted by the disruption caused by the acquisition of Telerik as we finalize our integration efforts.

In addition, the revenue of Telerik is primarily being recognized ratably over the maintenance period, which is generally one year, as vendor specific objective evidence (or VSOE) of fair value cannot be established for such maintenance. As a result of acquisition accounting, the acquired deferred revenue balance was significantly reduced to reflect its fair value as of the acquisition date. However, we are still incurring the associated costs to fulfill the acquired deferred revenue, which are reflected in our consolidated statement of operations. As a result, our expenses as a percentage of total revenue are higher than we expect they will be in future periods once this acquired deferred revenue balance is recognized.

Effective September 1, 2014, we began operating as three distinct business units: OpenEdge, Data Connectivity and Integration, and Application Development and Deployment, each with dedicated sales, product management and product marketing functions. As a result of these changes, we began segment reporting for our three business units beginning in the fourth fiscal quarter of 2014. The segment information for the prior periods presented has been restated to reflect the change in our reportable segments.

In January 2014, our Board of Directors authorized a $100.0 million share repurchase program. Under this authorization, we repurchased 1.3 million shares for $32.9 million during the first six months of fiscal year 2015. The approximate dollar value of shares that may yet be purchased under the program as of May 31, 2015 is $14.5 million.

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. Beginning in the fourth quarter of 2014, the value of the U.S. dollar strengthened in comparison to certain foreign currencies, including in Europe, Brazil and Australia, and has continued to strengthen during 2015. Since approximately 40% of our revenue is denominated in foreign currency, our revenue results have been negatively impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates.

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 credit facility will be sufficient to finance our operations and meet our foreseeable cash requirements through at least the next twelve months.


25


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, 2015
 
May 31, 2014
 
May 31, 2015
 
May 31, 2014
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Software licenses
32
 %
 
35
%
 
32
 %
 
32
 %
 
3
 %
 
7
 %
Maintenance and services
68

 
65

 
68

 
68

 
14

 
11

Total revenue
100

 
100

 
100

 
100

 
10

 
10

Costs of revenue:
 
 
 
 
 
 
 
 
 
 
 
Cost of software licenses
2

 
1

 
2

 
2

 
20

 
(2
)
Cost of maintenance and services
12

 
7

 
13

 
7

 
80

 
95

Amortization of acquired intangibles
5

 
1

 
5

 
1

 
672

 
724

Total costs of revenue
18

 
9

 
20

 
10

 
113

 
119

Gross profit
82

 
91

 
80

 
90

 
(1
)
 
(2
)
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
36

 
30

 
37

 
31

 
31

 
28

Product development
25

 
19

 
27

 
20

 
44

 
47

General and administrative
15

 
14

 
16

 
15

 
20

 
21

Amortization of acquired intangibles
4

 

 
4

 

 
2,043

 
1,943

Restructuring expenses
4

 

 
4

 

 
2,973

 
1,823

Acquisition-related expenses
1

 
2

 
1

 
2

 
(38
)
 
(2
)
Total operating expenses
85

 
66

 
89

 
68

 
43

 
42

(Loss) income from operations
(3
)
 
25

 
(9
)
 
22

 
(113
)
 
(141
)
Other (expense) income, net
(1
)
 

 

 

 
695

 
24

(Loss) income from operations before income taxes
(4
)
 
25

 
(9
)
 
22

 
(119
)
 
(141
)
(Benefit) provision for income taxes
(11
)
 
9

 
(11
)
 
7

 
(230
)
 
(283
)
Net income
6

 
16

 
3

 
15

 
(55
)
 
(80
)

Revenue

 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2015
 
May 31, 2014
 
As Reported
 
Constant
Currency
Revenue
$
88,817

 
$
80,827

 
10
%
 
19
%
 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2015
 
May 31, 2014
 
As Reported
 
Constant
Currency
Revenue
$
170,198

 
$
155,365

 
10
%
 
17
%

Total revenue increased $8.0 million, or 10%, in the second quarter of fiscal year 2015 as compared to the same quarter last year. Revenue would have increased by 19% if exchange rates had been constant during the period as compared to exchange rates in the same quarter last year. In addition, total revenue increased $14.8 million, or 17% on a constant currency basis and 10% using actual exchange rates, in the first six months of fiscal year 2015 as compared to the same period last year. The

26


increase was primarily a result of the impact of our acquisition of Telerik AD in December 2014 and BravePoint Inc. during the fourth fiscal quarter of 2014. Changes in prices from fiscal year 2014 to 2015 did not have a significant impact on our revenue.

License Revenue

 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2015
 
May 31, 2014
 
As Reported
 
Constant
Currency
License
$
28,722

 
$
27,988

 
3
%
 
12
%
As a percentage of total revenue
32
%
 
35
%
 
 
 
 

 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2015
 
May 31, 2014
 
As Reported
 
Constant
Currency
License
$
53,953

 
$
50,252

 
7
%
 
15
%
As a percentage of total revenue
32
%
 
32
%
 
 
 
 

License revenue increased $0.7 million, or 3%, in the second quarter of fiscal year 2015 as compared to the same quarter last year and increased $3.7 million, or 7%, in the first six months of fiscal year 2015 as compared to the same period last year. The increase in license revenue in the second quarter and first six months of fiscal year 2015 as compared to the same periods last year was primarily in the North America region, mainly as a result of the addition of Telerik revenues in our Application Development and Deployment business unit due to our acquisition at the beginning of the year.

Maintenance and Services Revenue
 
 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2015
 
May 31, 2014
 
As Reported
 
Constant
Currency
Maintenance
$
52,656

 
$
50,305

 
5
%
 
14
%
As a percentage of total revenue
59
%
 
62
%
 
 
 
 
Services
7,439

 
2,534

 
194
%
 
201
%
As a percentage of total revenue
8
%
 
3
%
 
 
 
 
Total maintenance and services revenue
$
60,095

 
$
52,839

 
14
%
 
23
%
As a percentage of total revenue
68
%
 
65
%
 
 
 
 

 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2015
 
May 31, 2014
 
As Reported
 
Constant
Currency
Maintenance
$
101,894

 
$
100,485

 
1
%
 
9
%
As a percentage of total revenue
60
%
 
65
%
 
 
 
 
Services
14,351

 
4,628

 
210
%
 
216
%
As a percentage of total revenue
8
%
 
3
%
 
 
 
 
Total maintenance and services revenue
$
116,245

 
$
105,113

 
11
%
 
29
%
As a percentage of total revenue
68
%
 
68
%
 
 
 
 

Maintenance and services revenue increased $7.3 million in the second quarter of fiscal year 2015 as compared to the same quarter last year. Maintenance revenue increased 5% and professional services revenue increased 194% in the second quarter of fiscal year 2015 as compared to the second quarter of fiscal year 2014. The increase in maintenance revenue was primarily in the North America region, mainly as a result of the acquisitions of BravePoint and Telerik. Professional services revenue increased 194% quarter over quarter as a result of the BravePoint acquisition, which was completed during the fourth quarter of fiscal year 2014.


27


Maintenance and services revenue increased $11.1 million in the first six months of fiscal year 2015 as compared to the same period last year. Maintenance revenue increased 1% and professional services revenue increased 210% in the first six months of fiscal year 2015 as compared to the same period of fiscal year 2014. The increase in maintenance revenue was primarily in the North America region, mainly as a result of the acquisitions of BravePoint and Telerik. Professional services revenue increased 210% quarter over quarter as a result of the BravePoint acquisition, which was completed during the fourth quarter of fiscal year 2014.

Revenue by Region

 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2015
 
May 31, 2014
 
As Reported
 
Constant
Currency
North America
$
47,520

 
$
36,827

 
29
 %
 
29
 %
As a percentage of total revenue
54
%
 
46
%
 
 
 
 
EMEA
$
31,146

 
$
33,698

 
(8
)%
 
9
 %
As a percentage of total revenue
35
%
 
42
%
 
 
 
 
Latin America
$
4,388

 
$
5,703

 
(23
)%
 
(1
)%
As a percentage of total revenue
5
%
 
7
%
 
 
 
 
Asia Pacific
$
5,763

 
$
4,599

 
25
 %
 
37
 %
As a percentage of total revenue
6
%
 
5
%
 
 
 
 

 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2015
 
May 31, 2014
 
As Reported
 
Constant
Currency
North America
$
89,644

 
$
71,412

 
26
 %
 
26
%
As a percentage of total revenue
53
%
 
46
%
 
 
 
 
EMEA
$
59,010

 
$
63,013

 
(6
)%
 
13
%
As a percentage of total revenue
35
%
 
41
%
 
 
 
 
Latin America
$
9,356

 
$
10,811

 
(13
)%
 
6
%
As a percentage of total revenue
5
%
 
7
%
 
 
 
 
Asia Pacific
$
12,188

 
$
10,128

 
20
 %
 
36
%
As a percentage of total revenue
7
%
 
6
%
 
 
 
 

Total revenue generated in North America increased $10.7 million, and total revenue generated outside North America decreased $2.7 million, in the second quarter of fiscal year 2015 as compared to the same quarter last year. The increase in North America was primarily due to the impact of the Telerik and BravePoint acquisitions during the first quarter of fiscal year 2015 and the fourth quarter of fiscal year 2014, respectively. The decrease in revenue in our international regions was primarily due to the impact of the stronger U.S. dollar. Total revenue generated in markets outside North America represented 46% of total revenue in the second quarter of fiscal year 2015 and 54% of total revenue in the same quarter last year. If exchange rates had remained constant in the second quarter of fiscal year 2015 as compared to the exchange rates in effect in the second quarter of fiscal year 2014, total revenue generated in markets outside North America would have been 51% of total revenue.

Total revenue generated in North America increased $18.2 million, and total revenue generated outside North America decreased $3.4 million, in the first six months of fiscal year 2015 as compared to the same period last year. The increase in North America was primarily due to the impact of the Telerik and BravePoint acquisitions during the first quarter of fiscal year 2015 and the fourth quarter of fiscal year 2014, respectively. In the first six months of fiscal year 2015, revenue in all international regions was negatively impacted by the weaker local currencies. Total revenue generated in markets outside North America represented 47% of total revenue in the first six months of fiscal year 2015 and 54% of total revenue in the same period last year. If exchange rates had remained constant in the first six months of fiscal year 2015 as compared to the exchange rates in effect in the same period of fiscal year 2014, total revenue generated in markets outside North America would have been 53% of total revenue.


28


Revenue by Segment

 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2015
 
May 31, 2014
 
As Reported
 
Constant Currency
OpenEdge segment
$
71,906

 
$
73,192

 
(2
)%
 
8
%
Data Connectivity and Integration segment
7,275

 
7,407

 
(2
)%
 
%
Application Development and Deployment segment
9,636

 
228

 
*

 
*