10-Q 1 q2201610-q.htm 10-Q Document

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, 2016
 
¨
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, 2016, there were 48,476,691 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, 2016
INDEX

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

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets

(In thousands, except share data)
May 31,
2016
 
November 30, 2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
179,733

 
$
212,379

Short-term investments
49,376

 
28,900

Total cash, cash equivalents and short-term investments
229,109

 
241,279

Accounts receivable (less allowances of $1,538 and $2,193, respectively)
48,294

 
66,459

Other current assets
21,970

 
15,671

Total current assets
299,373

 
323,409

Property and equipment, net
51,760

 
54,226

Intangible assets, net
99,864

 
114,113

Goodwill
370,025

 
369,985

Deferred tax assets
9,537

 
10,971

Other assets
3,671

 
4,419

Total assets
$
834,230

 
$
877,123

Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
11,250

 
$
9,375

Accounts payable
9,630

 
11,188

Accrued compensation and related taxes
19,951

 
29,720

Income taxes payable
4,059

 
2,941

Other accrued liabilities
17,528

 
21,465

Short-term deferred revenue
133,006

 
125,227

Total current liabilities
195,424

 
199,916

Long-term debt
127,500

 
135,000

Long-term deferred revenue
9,229

 
8,844

Deferred tax liabilities
6,918

 
7,112

Other noncurrent liabilities
3,756

 
3,787

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, 48,903,292 shares in 2016 and 50,579,539 shares in 2015
231,043

 
227,930

Retained earnings
282,918

 
319,162

Accumulated other comprehensive loss
(22,558
)
 
(24,628
)
Total shareholders’ equity
491,403

 
522,464

Total liabilities and shareholders’ equity
$
834,230

 
$
877,123

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,
2016
 
May 31,
2015
 
May 31,
2016
 
May 31,
2015
Revenue:
 
 
 
 
 
 
 
Software licenses
$
28,787

 
$
28,722

 
$
52,742

 
$
53,953

Maintenance and services
67,331

 
60,095

 
132,857

 
116,245

Total revenue
96,118

 
88,817

 
185,599

 
170,198

Costs of revenue:
 
 
 
 
 
 
 
Cost of software licenses
1,233

 
1,365

 
2,715

 
3,085

Cost of maintenance and services
11,063

 
10,288

 
21,392

 
21,563

Amortization of acquired intangibles
3,939

 
4,093

 
7,878

 
8,726

Total costs of revenue
16,235

 
15,746

 
31,985

 
33,374

Gross profit
79,883

 
73,071

 
153,614

 
136,824

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
29,138

 
31,852

 
58,796

 
62,602

Product development
22,297

 
22,290

 
44,094

 
45,111

General and administrative
12,264

 
13,673

 
24,644

 
27,988

Amortization of acquired intangibles
3,185

 
3,171

 
6,370

 
6,373

Restructuring expenses
331

 
3,810

 
265

 
6,153

Acquisition-related expenses
324

 
1,010

 
396

 
2,518

Total operating expenses
67,539

 
75,806

 
134,565

 
150,745

Income (loss) from operations
12,344

 
(2,735
)
 
19,049

 
(13,921
)
Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(1,013
)
 
(947
)
 
(2,070
)
 
(2,086
)
Interest income and other, net
264

 
454

 
426

 
968

Foreign currency (loss) gain, net
(612
)
 
(532
)
 
(1,542
)
 
1,025

Total other (expense) income, net
(1,361
)
 
(1,025
)
 
(3,186
)
 
(93
)
Income (loss) before income taxes
10,983

 
(3,760
)
 
15,863

 
(14,014
)
Provision (benefit) for income taxes
3,708

 
(9,529
)
 
5,372

 
(18,812
)
Net income
$
7,275

 
$
5,769

 
$
10,491

 
$
4,798

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.15

 
$
0.11

 
$
0.21

 
$
0.10

Diluted
$
0.14

 
$
0.11

 
$
0.21

 
$
0.09

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
49,873

 
50,342

 
50,341

 
50,505

Diluted
50,354

 
51,085

 
50,897

 
51,224

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, 2016
 
May 31, 2015
 
May 31, 2016
 
May 31, 2015
Net income
$
7,275

 
$
5,769

 
$
10,491

 
$
4,798

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
2,907

 
(2,672
)
 
1,817

 
(8,154
)
Reclassification adjustment for losses included in net income, net of tax of $0 for the second quarter and first six months of 2016
256

 

 
256

 

Unrealized losses on investments, net of tax of $0 for the second quarter and first six months of 2016 and 2015
(43
)
 
(33
)
 
(3
)
 
(35
)
Total other comprehensive income (loss), net of tax
3,120

 
(2,705
)
 
2,070

 
(8,189
)
Comprehensive income (loss)
$
10,395

 
$
3,064

 
$
12,561

 
$
(3,391
)

See notes to unaudited condensed consolidated financial statements.


5


Condensed Consolidated Statements of Cash Flows
 
 
Six Months Ended
(In thousands)
May 31,
2016
 
May 31,
2015
Cash flows from operating activities:
 
 
 
Net income
$
10,491

 
$
4,798

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property and equipment
4,382

 
4,999

Amortization of intangibles and other
15,527

 
16,496

Stock-based compensation
13,231

 
12,275

Loss on disposal of property
298

 
14

Asset impairment

 
3,947

Deferred income taxes
1,441

 
(28,966
)
Excess tax benefit from stock plans
(258
)
 
(710
)
Allowances for accounts receivable
(504
)
 
307

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
19,364

 
15,226

Other assets
(5,444
)
 
2,114

Accounts payable and accrued liabilities
(17,557
)
 
(3,702
)
Income taxes payable
962

 
1,340

Deferred revenue
7,329

 
29,793

Net cash flows from operating activities
49,262

 
57,931

Cash flows used in investing activities:
 
 
 
Purchases of investments
(25,970
)
 
(19,266
)
Sales and maturities of investments
4,885

 
5,941

Purchases of property and equipment
(2,617
)
 
(4,405
)
Capitalized software development costs

 
(1,383
)
Payments for acquisitions, net of cash acquired

 
(246,275
)
Proceeds from divestitures, net

 
4,500

Net cash flows used in investing activities
(23,702
)
 
(260,888
)
Cash flows (used in) from financing activities:
 
 
 
Proceeds from stock-based compensation plans
6,007

 
6,356

Purchases of stock related to withholding taxes from the issuance of restricted stock units
(2,751
)
 
(2,851
)
Repurchases of common stock
(58,516
)
 
(32,868
)
Excess tax benefit from stock plans
258

 
710

Proceeds from the issuance of debt

 
150,000

Payment of long-term debt
(5,625
)
 
(3,750
)
Payment of issuance costs for long-term debt

 
(1,707
)
Net cash flows (used in) from financing activities
(60,627
)
 
115,890

Effect of exchange rate changes on cash
2,421

 
(9,995
)
Net decrease in cash and cash equivalents
(32,646
)
 
(97,062
)
Cash and cash equivalents, beginning of period
212,379

 
263,082

Cash and cash equivalents, end of period
$
179,733

 
$
166,020


6


Condensed Consolidated Statements of Cash Flows, continued
 
Six Months Ended
 
May 31,
2016
 
May 31,
2015
Supplemental disclosure:
 
 
 
Cash paid for income taxes, net of refunds of $647 in 2016 and $1,335 in 2015
$
7,778

 
$
3,850

Cash paid for interest
$
1,559

 
$
1,427

Non-cash financing activities:
 
 
 
Total fair value of restricted stock awards, restricted stock units and deferred stock units on date vested
$
7,769

 
$
9,942

Unsettled repurchases of common stock
$
1,516

 
$

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 leader in application development, empowering the digital transformation organizations need to create and sustain engaging user experiences in today's evolving marketplace. With offerings spanning web, mobile and data for on-premise and cloud environments, we power startups and industry titans worldwide. Our solutions are used across a variety of industries.

Our products are generally sold as perpetual licenses, but certain products 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, 2015.

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, 2015. 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 for the fiscal year ended November 30, 2015, 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 March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 is intended to simplify various aspects of the accounting for employee share-based payment transactions, including accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance in ASU 2016-09 is required for annual reporting periods beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the effect that implementation of this update will have on our consolidated financial position and results of operations upon adoption.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (ASU 2016-02), which requires lessees to record most leases on their balance sheets, recognizing a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The guidance in ASU 2016-02 is required for annual reporting periods beginning after December 15, 2018, with early adoption permitted. We currently expect that most of our operating lease commitments will be subject to the update and recognized as operating lease liabilities and right-of-use assets upon adoption. However, we are currently evaluating the effect that implementation of this update will have on our consolidated financial position and results of operations upon adoption.

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. We estimate that the impact on our consolidated balance sheets will be a reclassification of up to $1.1 million from other assets to long-term debt as of December 1, 2016.

In May 2014, the 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

8


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 July 2015, the FASB voted to defer the effective date of this ASU by one year for reporting periods beginning after December 15, 2017, with early adoption permitted as of the original effective date. As a result, the new effective date for the Company will be December 1, 2018. This update will 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.

Note 2: Cash, Cash Equivalents and Investments

A summary of our cash, cash equivalents and available-for-sale investments at May 31, 2016 is as follows (in thousands):
 
 
Amortized Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
174,198

 
$

 
$

 
$
174,198

Money market funds
5,535

 

 

 
5,535

State and municipal bond obligations
39,584

 
3

 

 
39,587

U.S. treasury bonds
4,658

 

 
(6
)
 
4,652

U.S. government agency bonds
1,633

 

 

 
1,633

Corporate bonds
3,501

 
3

 

 
3,504

Total
$
229,109

 
$
6

 
$
(6
)
 
$
229,109


A summary of our cash, cash equivalents and available-for-sale investments at November 30, 2015 is as follows (in thousands):
 
 
Amortized Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
186,241

 
$

 
$

 
$
186,241

Money market funds
26,138

 

 

 
26,138

State and municipal bond obligations
20,387

 
30

 

 
20,417

U.S. treasury bonds
3,109

 

 
(15
)
 
3,094

U.S. government agency bonds
1,645

 

 
(4
)
 
1,641

Corporate bonds
3,756

 

 
(8
)
 
3,748

Total
$
241,276

 
$
30

 
$
(27
)
 
$
241,279


Such amounts are classified on our condensed consolidated balance sheets as follows (in thousands):
 
 
May 31, 2016
 
November 30, 2015
 
Cash and
Equivalents
 
Short-Term
Investments
 
Cash and
Equivalents
 
Short-Term
Investments
Cash
$
174,198

 
$

 
$
186,241

 
$

Money market funds
5,535

 

 
26,138

 

State and municipal bond obligations

 
39,587

 

 
20,417

U.S. treasury bonds

 
4,652

 

 
3,094

U.S. government agency bonds

 
1,633

 

 
1,641

Corporate bonds

 
3,504

 

 
3,748

Total
$
179,733

 
$
49,376

 
$
212,379

 
$
28,900



9


The fair value of debt securities by contractual maturity is as follows (in thousands):
 
 
May 31,
2016
 
November 30,
2015
Due in one year or less
$
27,380

 
$
15,945

Due after one year (1)
21,996

 
12,955

Total
$
49,376

 
$
28,900

 
(1)
Includes state and municipal bond obligations and corporate bonds, 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, 2016 or November 30, 2015.

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 intercompany accounts receivable and loans 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 or other accrued liabilities on the consolidated balance sheets at the end of each reporting period and expire from 30 days to one year. In the three and six months ended May 31, 2016, realized and unrealized gains of $2.3 million and $0.8 million, respectively, from our forward contracts were recognized in foreign currency (loss) gain, net, in the condensed consolidated statements of operations. 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. The gains and losses were substantially offset by realized and unrealized losses and 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, 2016
 
November 30, 2015
 
Notional Value
 
Fair Value
 
Notional Value
 
Fair Value
Forward contracts to sell U.S. dollars
$
87,259

 
$
(3,644
)
 
$
76,748

 
$
(4,026
)
Forward contracts to purchase U.S. dollars
3,383

 
(5
)
 
2,077

 
5

Total
$
90,642

 
$
(3,649
)
 
$
78,825

 
$
(4,021
)

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, 2016 (in thousands):
 
 
 
 
Fair Value Measurements Using
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Money market funds
$
5,535

 
$
5,535

 
$

 
$

State and municipal bond obligations
39,587

 

 
39,587

 

U.S. treasury bonds
4,652

 

 
4,652

 

U.S. government agency bonds
1,633

 

 
1,633

 

Corporate bonds
3,504

 

 
3,504

 

Liabilities
 
 
 
 
 
 
 
Foreign exchange derivatives
$
(3,649
)
 
$

 
$
(3,649
)
 
$



10


The following table details the fair value measurements within the fair value hierarchy of our financial assets and liabilities at November 30, 2015 (in thousands):
 
 
 
 
Fair Value Measurements Using
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Money market funds
$
26,138

 
$
26,138

 
$

 
$

State and municipal bond obligations
20,417

 

 
20,417

 

U.S. treasury bonds
3,094

 

 
3,094

 

U.S. government agency bonds
1,641

 

 
1,641

 

Corporate bonds
3,748

 

 
3,748

 

Liabilities
 
 
 
 
 
 
 
Foreign exchange derivatives
$
(4,021
)
 
$

 
$
(4,021
)
 
$


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 following table reflects the activity for our liabilities measured at fair value using Level 3 inputs, which relate to a contingent consideration obligation in connection with a prior acquisition, for each period presented (in thousands):

 
Three Months Ended
 
Six Months Ended
 
May 31,
2016
 
May 31,
2015
 
May 31,
2016
 
May 31,
2015
Balance, beginning of period
$

 
$
1,615

 
$

 
$
1,717

Changes in fair value of contingent consideration obligation

 
(1,111
)
 

 
(1,213
)
Transfer to Level 2 fair value measurement

 
(209
)
 

 
(209
)
Balance, end of period
$

 
$
295

 
$

 
$
295


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 a contingent consideration obligation in connection with a prior acquisition, which is included in acquisition-related expenses in our condensed consolidated statement of operations. The contingent consideration obligation was reduced to $0 during the fiscal year ended November 30, 2015.

We did not have any nonrecurring fair value measurements during the six months ended May 31, 2016.


11


Note 5: Intangible Assets and Goodwill

Intangible Assets

Intangible assets are comprised of the following significant classes (in thousands):
 
 
May 31, 2016
 
November 30, 2015
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
Purchased technology
$
117,204

 
$
(62,895
)
 
$
54,309

 
$
117,151

 
$
(54,963
)
 
$
62,188

Customer-related
67,602

 
(30,676
)
 
36,926

 
67,602

 
(25,493
)
 
42,109

Trademarks and trade names
15,330

 
(6,701
)
 
8,629

 
15,330

 
(5,514
)
 
9,816

Total
$
200,136

 
$
(100,272
)
 
$
99,864

 
$
200,083

 
$
(85,970
)
 
$
114,113


In the three and six months ended May 31, 2016, amortization expense related to intangible assets was $7.1 million and $14.3 million, respectively. 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.

Future amortization expense for intangible assets as of May 31, 2016, is as follows (in thousands):
 
Remainder of 2016
$
14,250

2017
28,499

2018
27,686

2019
26,561

2020
1,786

Thereafter
1,082

Total
$
99,864


Goodwill

Changes in the carrying amount of goodwill in the six months ended May 31, 2016 are as follows (in thousands):

Balance, November 30, 2015
$
369,985

Translation adjustments
40

Balance, May 31, 2016
$
370,025


Changes in the goodwill balances by reportable segment in the six months ended May 31, 2016 are as follows (in thousands):
 
November 30, 2015
 
Translation Adjustments
 
May 31, 2016
OpenEdge
$
211,980

 
$
40

 
$
212,020

Data Connectivity and Integration
19,040

 

 
19,040

Application Development and Deployment
138,965

 

 
138,965

Total goodwill
$
369,985

 
$
40

 
$
370,025


During the fourth quarter of fiscal year 2015, 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, 2015. During the quarter ending May 31, 2016, no triggering events have occurred that would indicate that it is more likely than not that the carrying values of any of our reporting units exceeded their fair values.


12


Note 6: Business Combinations

Telerik Acquisition

On December 2, 2014, we 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. The full amount of the escrow was released by the escrow agent in June 2016.

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).

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. We incurred $0.3 million of acquisition-related costs during the three and six months ended May 31, 2016 and approximately $1.1 million and $1.9 million 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.

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 totaled approximately $2.2 million, are compensation arrangements and recognized these costs over the one-year service period. During the three and six months ended May 31, 2015, we incurred $0.6 million and $1.2 million of expense related to the retention bonuses, respectively, which is included in the acquisition-related expenses in our consolidated statement of operations. There were no additional expenses related to the retention bonuses incurred during the three and six months ended May 31, 2016 and the entire amount accrued during fiscal year 2015 was paid during December 2015.

The operations of Telerik are included in our operating results as part of the Application Development and Deployment segment from the date of acquisition. The amount of revenue of Telerik included in our condensed consolidated statement of operations during the three and six months ended May 31, 2016 was $18.5 million and $36.6 million, respectively. The amount of revenue of Telerik included in our condensed consolidated statement of operations during the three and six months ended May 31, 2015 was $9.2 million and $13.7 million, respectively. The revenue from sales of Telerik products and maintenance is primarily recognized ratably over the maintenance period, which is generally one year, as vendor specific objective evidence of fair value cannot be established for such maintenance. The amount of pretax losses of Telerik included in our condensed consolidated statement of operations during the three and six months ended May 31, 2016 was $7.6 million and $13.0 million, respectively. The amount of pretax losses of Telerik included in our condensed consolidated statement of operations during the three and six months ended May 31, 2015 was $14.0 million and $31.0 million, respectively. The pretax losses in each three and six month period includes the amortization expense of approximately $6.2 million and $12.3 million, respectively, related to the acquired intangible assets discussed above. In addition, the pretax losses in the three and six months ended May 31, 2016 includes stock-based compensation expense of approximately $2.1 million and $4.2 million, respectively.

Note 7: Term Loan and Line of Credit

Our credit agreement provides 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. We borrowed the $150 million term loan included in our credit agreement 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.

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 outstanding balance of the $150 million term loan as of May 31, 2016 was $138.8 million, with $11.3 million due in the next 12 months. 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

13


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, 2016, 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. The interest rate of the credit facility as of May 31, 2016 was 2.19%.

Costs incurred to obtain our long-term debt of $1.8 million were recorded as debt issuance costs within other assets in our consolidated balance sheet as of May 31, 2016 and are being amortized over the term of the debt agreement using the effective interest rate method. Amortization expense related to debt issuance costs of $0.1 million and $0.2 million for the three and six months ended May 31, 2016, respectively, and $0.1 million and $0.2 million for the three and six months ended May 31, 2015, respectively, is recorded within interest expense in our condensed consolidated statements of operations.

Revolving loans may be borrowed, repaid and reborrowed until December 2, 2019, at which time all amounts outstanding must be repaid. As of May 31, 2016, there were no amounts outstanding under the revolving line and $0.5 million of letters of credit.

As of May 31, 2016, aggregate principal payments of long-term debt for the next five years and thereafter are (in thousands):

Remainder of 2016
$
3,750

2017
15,000

2018
15,000

2019
105,000

Total
$
138,750


Note 8: Common Stock Repurchases

We repurchased and retired 1.9 million shares of our common stock for $48.3 million in the three months ended May 31, 2016 and 2.4 million shares for $60.0 million in the six months ended May 31, 2016. In the three and six months ended May 31, 2015, we repurchased and retired 1.0 million shares for $25.0 million and 1.3 million shares for $32.9 million, respectively. The shares were repurchased in both periods as part of our Board of Directors authorized share repurchase program.

In March 2016, our Board of Directors authorized a new $100.0 million share repurchase program, which increased the total authorization to $202.8 million. As of May 31, 2016, there is $154.5 million remaining under this 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, each of the first three quarters of fiscal year 2015, and the first quarter of fiscal year 2016, 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.


14


The following table provides the classification of stock-based compensation as reflected in our condensed consolidated statements of operations (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
May 31,
2016
 
May 31,
2015
 
May 31,
2016
 
May 31,
2015
Cost of maintenance and services
$
180

 
$
154

 
$
376

 
$
319

Sales and marketing
962

 
1,488

 
2,041

 
2,725

Product development
2,397

 
1,062

 
5,077

 
2,564

General and administrative
2,754

 
3,735

 
5,737

 
6,667

Total stock-based compensation
$
6,293

 
$
6,439

 
$
13,231

 
$
12,275


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, 2016 (in thousands):

 
Foreign Currency Translation Adjustment
 
Unrealized Gains (Losses) on Investments
 
Accumulated Other Comprehensive Loss
Balance, December 1, 2015
$
(24,582
)
 
$
(46
)
 
$
(24,628
)
Other comprehensive loss before reclassifications, net of tax
1,817

 
(3
)
 
1,814

Amounts reclassified from accumulated other comprehensive loss to realized losses included in earnings
256

 

 
256

Balance, May 31, 2016
$
(22,509
)
 
$
(49
)
 
$
(22,558
)

The tax effect on accumulated unrealized gains (losses) on investments was minimal as of May 31, 2016 and November 30, 2015.

Note 11: Restructuring Charges

The following table provides a summary of activity for all of the restructuring actions, which are detailed further below (in thousands):

 
Excess
Facilities and
Other Costs
 
Employee Severance and Related Benefits
 
Total
Balance, December 1, 2015
$
412

 
$
2,949

 
$
3,361

Costs incurred
306

 
(41
)
 
265

Cash disbursements
(418
)
 
(2,066
)
 
(2,484
)
Translation adjustments and other
6

 
19

 
25

Balance, May 31, 2016
$
306

 
$
861

 
$
1,167


2015 Restructurings

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 of 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. During the second and third quarters of fiscal year 2015, we incurred additional costs with respect to this restructuring, including reduction of redundant positions primarily within the product development function, as well as an impairment charge discussed further below.


15


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 $4.0 million were no longer recoverable and were 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 this first quarter of fiscal year 2015 restructuring, for the three and six months ended May 31, 2016, we incurred expenses of $0.2 million and $0.3 million, respectively, and 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. We do not expect to incur additional material costs with respect to this restructuring.

A summary of the first six months of fiscal year 2016 activity for this restructuring action is as follows (in thousands):

 
Excess
Facilities and
Other Costs
 
Employee Severance and Related Benefits
 
Total
Balance, December 1, 2015
$
209

 
$
309

 
$
518

Costs incurred
293

 
(19
)
 
274

Cash disbursements
(274
)
 
(267
)
 
(541
)
Translation adjustments and other
4

 
3

 
7

Balance, May 31, 2016
$
232

 
$
26

 
$
258


Cash disbursements for expenses incurred to date under this restructuring are expected to be made through the third quarter of fiscal year 2016. As a result, the total amount of the restructuring reserve of $0.3 million is included in other accrued liabilities on the condensed consolidated balance sheet at May 31, 2016.

During the fourth quarter of fiscal year 2015, our management approved, committed to and initiated plans to make strategic changes to our organization to further build on the focus gained from operating under our business segment structure and to enable stronger cross-collaboration among product management, marketing and sales teams and a tighter integration of the product management and product development teams. In connection with the new organizational structure, we no longer have presidents of our three segments, as well as certain other positions within the administrative organization. Our Chief Operating Officer, appointed during fiscal year 2015, assumed responsibility for driving the operations of our three segments. The organizational changes did not result in the closing of any of our facilities.

Restructuring expenses are related to employee costs, including severance, health benefits and outplacement services (but excluding stock-based compensation), and other costs, which include charges for the abandonment of certain assets.

As part of this fourth quarter of fiscal year 2015 restructuring, for the three and six months ended May 31, 2016, we incurred expenses of $0.1 million and recorded a minimal credit to restructuring expenses in the consolidated statements of operations, respectively, due to changes in estimates of severance to be paid. We do not expect to incur additional material costs with respect to this restructuring.

16



A summary of the first six months of fiscal year 2016 activity for this restructuring action is as follows (in thousands):

 
Excess
Facilities and
Other Costs
 
Employee Severance and Related Benefits
 
Total
Balance, December 1, 2015
$

 
$
2,617

 
$
2,617

Costs incurred

 
(22
)
 
(22
)
Cash disbursements

 
(1,799
)
 
(1,799
)
Translation adjustments and other

 
16

 
16

Balance, May 31, 2016
$

 
$
812

 
$
812


Cash disbursements for expenses incurred to date under this restructuring are expected to be made through the fourth quarter of fiscal year 2016. As a result, the total amount of the restructuring reserve of $0.8 million is included in other accrued liabilities on the condensed consolidated balance sheet at May 31, 2016.

2012 - 2014 Restructurings

During fiscal years 2012, 2013, and 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. During each of these fiscal years, we took restructuring actions that involved the elimination of personnel and/or the closure of facilities.

As part of these restructuring actions, for the three and six months ended May 31, 2016, we incurred minimal expenses, and for the three and six months ended May 31, 2015, we incurred expenses of $0 and $1.3 million, respectively, 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 2012, 2013, and 2014 restructuring actions. The restructuring reserve of $0.1 million is included in other accrued liabilities on the condensed consolidated balance sheet as of May 31, 2016.

Note 12: Income Taxes

Our income tax provision for the second quarter of fiscal years 2016 and 2015 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 decrease in our effective tax rate in the six months ended May 31, 2016 compared to the same period in the prior year is primarily due to the jurisdictional mix of profits as a result of the acquisition of Telerik, where substantial losses were incurred in Bulgaria in fiscal year 2015 and tax effected at a 10% statutory rate and other jurisdictions’ earnings, primarily in the United States, were taxed at higher rates.

In addition, during the preparation of our condensed consolidated financial statements for the three months ended May 31, 2016, we identified an error in our prior year income tax provision whereby income tax expense was overstated for the year ended November 30, 2015 by $2.7 million related to our tax treatment of an intercompany gain. We determined that the error is not material to the prior year financial statements. We also concluded that recording an out-of-period correction would not be material and have therefore corrected this error by recording an out-of-period $2.7 million tax benefit in our interim financial statements for the periods ended May 31, 2016.

The Internal Revenue Service is currently examining our U.S. Federal income tax returns for fiscal years 2013 and 2014. Our Federal income tax returns have been examined or are closed by statute for all years prior to fiscal year 2012, 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 2011, and we are no longer subject to audit for those periods.

Tax authorities for certain non-U.S. jurisdictions are also examining returns, none of which are material to our consolidated balance sheets, cash flows or statements of income. With some exceptions, we are generally no longer subject to tax examinations in non-U.S. jurisdictions for years prior to fiscal year 2010.

17



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,
2016
 
May 31,
2015
 
May 31,
2016
 
May 31,
2015
Net income
$
7,275

 
$
5,769

 
$
10,491

 
$
4,798

Weighted average shares outstanding
49,873

 
50,342

 
50,341

 
50,505

Dilutive impact from common stock equivalents
481

 
743

 
556

 
719

Diluted weighted average shares outstanding
50,354

 
51,085

 
50,897

 
51,224

Basic earnings per share
$
0.15

 
$
0.11

 
$
0.21

 
$
0.10

Diluted earnings per share
$
0.14

 
$
0.11

 
$
0.21

 
$
0.09


We excluded stock awards representing approximately 450,000 shares and 491,000 shares of common stock from the calculation of diluted earnings per share in the three and six months ended May 31, 2016, respectively, because these awards were anti-dilutive. In the three and six months ended May 31, 2015, we excluded stock awards representing 247,000 shares and 250,000 shares of common stock, respectively, from the calculation of diluted earnings per share as they were anti-dilutive.


18


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 the combination of our Chief Executive Officer and Chief Operating Officer.

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 income (loss) before income taxes:

 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2016
 
May 31, 2015
 
May 31, 2016
 
May 31, 2015
Segment revenue:
 
 
 
 
 
 
 
OpenEdge
$
66,928

 
$
71,906

 
$
131,061

 
$
141,377

Data Connectivity and Integration
10,005

 
7,275

 
16,601

 
14,388

Application Development and Deployment
19,185

 
9,636

 
37,937

 
14,433

Total revenue
96,118

 
88,817

 
185,599

 
170,198

Segment costs of revenue and operating expenses:
 
 
 
 
 
 
 
OpenEdge
17,296

 
18,446

 
35,360

 
37,980

Data Connectivity and Integration
3,134

 
3,133

 
6,035

 
6,383

Application Development and Deployment
9,724

 
10,851

 
18,535

 
20,235

Total costs of revenue and operating expenses
30,154

 
32,430

 
59,930

 
64,598

Segment contribution:
 
 
 
 
 
 
 
OpenEdge
49,632

 
53,460

 
95,701

 
103,397

Data Connectivity and Integration
6,871

 
4,142

 
10,566

 
8,005

Application Development and Deployment
9,461

 
(1,215
)
 
19,402

 
(5,802
)
Total contribution
65,964

 
56,387

 
125,669

 
105,600

Other unallocated expenses (1)
53,620

 
59,122

 
106,620

 
119,521

Income (loss) from operations
12,344

 
(2,735
)
 
19,049

 
(13,921
)
Other (expense) income, net
(1,361
)
 
(1,025
)
 
(3,186
)
 
(93
)
Income (loss) before income taxes
$
10,983

 
$
(3,760
)
 
$
15,863

 
$
(14,014
)
 
 
 
 
 
 
 
 
(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.
                                
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,
2016
 
May 31,
2015
 
May 31,
2016
 
May 31,
2015
Software licenses
$
28,787

 
$
28,722

 
$
52,742

 
$
53,953

Maintenance
59,485

 
52,656

 
117,821

 
101,894

Professional services
7,846

 
7,439

 
15,036

 
14,351

Total
$
96,118

 
$
88,817

 
$
185,599

 
$
170,198



19


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,
2016
 
May 31,
2015
 
May 31,
2016
 
May 31,
2015
North America
$
53,392

 
$
47,520

 
$
102,457

 
$
89,644

EMEA
31,577

 
31,146

 
62,798

 
59,010

Latin America
4,389

 
4,388

 
8,082

 
9,356

Asia Pacific
6,760

 
5,763

 
12,262

 
12,188

Total
$
96,118

 
$
88,817

 
$
185,599

 
$
170,198



20


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) Economic, geopolitical and market conditions, including the continued difficult economic environment in Brazil, and the continued slow economic recovery in Europe, parts of the U.S. and other parts of the world, can adversely affect our business, results of operations and financial condition, including our revenue growth and profitability, which in turn could adversely affect our stock price. (2) We may fail to achieve our financial forecasts due to such factors as delays or size reductions in transactions, fewer large transactions in a particular quarter, fluctuations in currency exchange rates, or a decline in our renewal rates for contracts. (3) Our ability to successfully manage transitions to new business models and markets, including an increased emphasis on a cloud and subscription strategy, may not be successful. (4) If we are unable to develop new or sufficiently differentiated products and services, or to enhance and improve our existing products and services in a timely manner to meet market demand, partners and customers may not purchase new software licenses or subscriptions or purchase or renew support contracts. (5) We depend upon our extensive partner channel and we may not be successful in retaining or expanding our relationships with channel partners. (6) Our international sales and operations subject us to additional risks that can adversely affect our operating results, including risks relating to foreign currency gains and losses. (7) If the security measures for our software, services or other offerings are compromised or subject to a successful cyber-attack, or if such offerings contain significant coding or configuration errors, we may experience reputational harm, legal claims and financial exposure. (8) We may make acquisitions in the future and those acquisitions may not be successful, may involve unanticipated costs or other integration issues or may disrupt our existing operations 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, 2015. 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 a substantial portion 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 leader in application development, empowering the digital transformation organizations need to create and sustain engaging user experiences in today's evolving marketplace. With offerings spanning web, mobile and data for on-premise and cloud environments, we power startups and industry titans worldwide. Our solutions are used across a variety of industries. We operate as three distinct segments: OpenEdge, Data Connectivity and Integration, and Application Development and Deployment, each with dedicated product management and product marketing functions.

At the beginning of fiscal year 2015, we acquired Telerik AD, a leading provider of application development tools. Telerik enables its 1.9 million strong developer community to create compelling user experiences across cloud, web, mobile and desktop applications. Through this acquisition, we 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.


21


The revenue of Telerik is 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, during fiscal year 2015, our expenses as a percentage of total revenue were higher than we expect they will be in future periods once this acquired deferred revenue balance is recognized. The impact of this on fiscal year 2016 has been, and is expected to continue to be, minimal.

In the first six months of fiscal year 2016, our results were adversely impacted by decreases in sales to OpenEdge direct enterprise customers. During the past three fiscal years, our results have benefited from several large license sales to OpenEdge direct enterprise customers. These large transactions are difficult to predict as they are subject to longer sales cycles and the timing of completion is often uncertain. If we fail to complete these large transactions or if completion is delayed, our results will be adversely impacted.

In March 2016, our Board of Directors authorized a new $100.0 million share repurchase program, which increased the total authorization to $202.8 million. During the three months ended May 31, 2016, we repurchased and retired 1.9 million shares of our common stock for $48.3 million. As of May 31, 2016, there is $154.5 million remaining under the current authorization. Our intent is to utilize the full amount of this authorization by the end of the fiscal year ended November 30, 2016.

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 continued to strengthen during the first half of 2015. The U.S. dollar has remained strong in comparison to foreign currencies in 2016. Since approximately 35% 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.

In addition, the announcement of the Referendum of the United Kingdom’s (or the U.K.) Membership of the European Union (E.U.) (referred to as Brexit), advising for the exit of the United Kingdom from the European Union, has resulted in significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the further strengthening of the U.S. dollar against foreign currencies. The announcement of Brexit may create further global economic uncertainty, which may cause our customers to closely monitor their costs and reduce their spending budget on our products and services. If the Referendum is passed into law, there could be further uncertainty as the U.K. determines the future terms of its relationship with the E.U. Any of these effects of Brexit, among others, could materially adversely affect our business, results of operations and financial condition.

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.


22


Results of Operations

Revenue

 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2016
 
May 31, 2015
 
As Reported
 
Constant
Currency
Revenue
$
96,118

 
$
88,817

 
8
%
 
9
%
 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2016
 
May 31, 2015
 
As Reported
 
Constant
Currency
Revenue
$
185,599

 
$
170,198

 
9
%
 
11
%

Total revenue increased $7.3 million, or 8%, in the second quarter of fiscal year 2016 as compared to the same quarter last year. Revenue would have increased by 9% 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 $15.4 million, or 11% on a constant currency basis and 9% using actual exchange rates, in the first six months of fiscal year 2016 as compared to the same period last year. The increase in all periods was primarily a result of an increase in maintenance and services revenue as further described below. Changes in prices from fiscal year 2015 to 2016 did not have a significant impact on our revenue.

License Revenue

 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2016
 
May 31, 2015
 
As Reported
 
Constant
Currency
License
$
28,787

 
$
28,722

 
%
 
1
%
As a percentage of total revenue
30
%
 
32
%
 
 
 
 
 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2016
 
May 31, 2015
 
As Reported
 
Constant
Currency
License
$
52,742

 
$
53,953

 
(2
)%
 
%
As a percentage of total revenue
28
%
 
32
%
 
 
 
 

License revenue remained flat in the second quarter of fiscal year 2016 as compared to the same quarter last year and decreased $1.2 million, or 2%, in the first six months of fiscal year 2016 as compared to the same period last year. The decrease in license revenue over the first six months of fiscal year 2016 as compared to the same periods last year was primarily due to decreases in sales to OpenEdge direct enterprise customers and in Corticon license sales.

Maintenance and Services Revenue
 
 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2016
 
May 31, 2015
 
As Reported
 
Constant
Currency
Maintenance
$
59,485

 
$
52,656

 
13
%
 
14
%
As a percentage of total revenue
62
%
 
59
%
 
 
 
 
Services
7,846

 
7,439

 
5
%
 
6
%
As a percentage of total revenue
8
%
 
8
%
 
 
 
 
Total maintenance and services revenue
$
67,331

 
$
60,095

 
12
%
 
13
%
As a percentage of total revenue
70
%
 
68
%
 
 
 
 

23


 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2016
 
May 31, 2015
 
As Reported
 
Constant
Currency
Maintenance
$
117,821

 
$
101,894

 
16
%
 
18
%
As a percentage of total revenue
63
%
 
60
%
 
 
 
 
Services
15,036

 
14,351

 
5
%
 
5
%
As a percentage of total revenue
8
%
 
8
%
 
 
 
 
Total maintenance and services revenue
$
132,857

 
$
116,245

 
14
%
 
17
%
As a percentage of total revenue
72
%
 
68
%
 
 
 
 

Maintenance and services revenue increased $7.2 million in the second quarter of fiscal year 2016 as compared to the same quarter last year. Maintenance revenue increased 13% and professional services revenue increased 5% in the second quarter of fiscal year 2016 as compared to the second quarter of fiscal year 2015. Maintenance and services revenue increased $16.6 million in the first six months of fiscal year 2016 as compared to the same period last year. Maintenance revenue increased 16% and professional services revenue increased 5% in the first six months of fiscal year 2016 as compared to the same period of fiscal year 2015.

The increase in maintenance revenue is primarily due to the impact of the Telerik acquisition during the first quarter of fiscal year 2015. As a result of acquisition accounting, the acquired deferred revenue balance was significantly reduced to reflect its fair value as of the acquisition date. Therefore, the reduction of the acquisition date deferred revenue had a negative impact on revenue in the first six months of fiscal year 2015. However, in the first six months of fiscal year 2016 we recognized revenue related to the full value of Telerik deferred revenue that was generated during fiscal year 2015. The increase in services revenue in the second quarter and first six months of fiscal year 2016 was primarily due to higher software-as-a-service (SaaS) revenue generated by our Application Development and Deployment segment compared to the same period last year, partially offset by lower professional services revenue.

Revenue by Region

 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2016
 
May 31, 2015
 
As Reported
 
Constant
Currency
North America
$
53,392

 
$
47,520

 
12
%
 
12
%
As a percentage of total revenue
56
%
 
54
%
 
 
 
 
EMEA
$
31,577

 
$
31,146

 
1
%
 
2
%
As a percentage of total revenue
33
%
 
35
%
 
 
 
 
Latin America
$
4,389

 
$
4,388

 
%
 
11
%
As a percentage of total revenue
4
%
 
5
%
 
 
 
 
Asia Pacific
$
6,760

 
$
5,763

 
17
%
 
19
%
As a percentage of total revenue
7
%
 
6
%
 
 
 
 
 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2016
 
May 31, 2015
 
As Reported
 
Constant
Currency
North America
$
102,457

 
$
89,644

 
14
 %
 
14
%
As a percentage of total revenue
55
%
 
53
%
 
 
 
 
EMEA
$
62,798

 
$
59,010

 
6
 %
 
9
%
As a percentage of total revenue
34
%
 
35
%
 
 
 
 
Latin America
$
8,082

 
$
9,356

 
(14
)%
 
4
%
As a percentage of total revenue
4
%
 
5
%
 
 
 
 
Asia Pacific
$
12,262

 
$
12,188

 
1
 %
 
4
%
As a percentage of total revenue
7
%
 
7
%
 
 
 
 

Total revenue generated in North America increased $5.9 million, and total revenue generated outside North America increased $1.4 million, in the second quarter of fiscal year 2016 as compared to the same quarter last year. Total revenue generated in

24


North America increased $12.8 million, and total revenue generated outside North America increased $2.6 million, in the first six months of fiscal year 2016 as compared to the same period last year. The increase in North America and EMEA was primarily due to the impact of the Telerik acquisition during the first quarter of fiscal year 2015. As a result of acquisition accounting, the acquired deferred revenue balance was significantly reduced to reflect its fair value as of the acquisition date. Therefore, the reduction of the acquisition date deferred revenue had a negative impact on revenue in the first six months of fiscal year 2015. However, in the first six months of fiscal year 2016 we recognized revenue related to the full value of Telerik deferred revenue that was generated during fiscal year 2015. The decrease in Latin America in the first six months of 2016 compared to the same period of 2015 was due to the continuing difficult economic situation in Brazil.

Total revenue generated in markets outside North America represented 45% of total revenue in the first six months of fiscal year 2016 and 47% of total revenue in the same period last year. If exchange rates had remained constant in the first six months of fiscal year 2016 as compared to the exchange rates in effect in the same period of fiscal year 2015, total revenue generated in markets outside North America would have been 46% of total revenue.

Revenue by Segment

 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2016
 
May 31, 2015
 
As Reported
 
Constant Currency
OpenEdge segment
$
66,928

 
$
71,906

 
(7
)%
 
(6
)%
Data Connectivity and Integration segment
10,005

 
7,275

 
38
 %
 
38
 %
Application Development and Deployment segment
19,185

 
9,636

 
99
 %
 
99
 %
Total revenue
$
96,118

 
$
88,817

 
8
 %
 
9
 %
 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2016
 
May 31, 2015
 
As Reported
 
Constant Currency
OpenEdge segment
$
131,061

 
$
141,377

 
(7
)%
 
(5
)%
Data Connectivity and Integration segment
16,601

 
14,388

 
15
 %
 
16
 %
Application Development and Deployment segment
37,937

 
14,433

 
163
 %
 
163
 %
Total revenue
$
185,599

 
$
170,198

 
9
 %
 
11
 %

Revenue in the OpenEdge segment decreased $5.0 million, or 7%, during the second quarter of fiscal year 2016 as compared to the same quarter last year, primarily due to lower license revenue from direct enterprise customers and Corticon. Revenue in the OpenEdge segment would have decreased by 6% if exchange rates had been constant in fiscal year 2016 as compared to exchange rates in fiscal year 2015. Data Connectivity and Integration revenue increased $2.7 million, or 38%, quarter over quarter primarily in North America due to higher license revenue. Application Development and Deployment revenue increased $9.5 million, or 99%, quarter over quarter as a result of the impact of the Telerik acquisition during the first quarter of fiscal year 2015 as described above.

Revenue in the OpenEdge segment decreased $10.3 million, or 7%, in the first six months of fiscal year 2016 as compared to the same period last year. The decrease is primarily due to lower license revenue from direct enterprise customers and Corticon. Revenue in the OpenEdge segment would have decreased by 5% if exchange rates had been constant in fiscal year 2016 as compared to exchange rates in fiscal year 2015. Data Connectivity and Integration revenue increased $2.2 million, or 15%, period over period primarily in North America due to higher license revenue. Application Development and Deployment revenue increased $23.5 million, or 163%, period over period as a result of the impact of the Telerik acquisition during the first quarter of fiscal year 2015 as described above.

25



Cost of Software Licenses

 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2016
 
May 31, 2015
 
Percentage
Change
 
May 31, 2016
 
May 31, 2015
 
Percentage
Change
Cost of software licenses
$
1,233

 
$
1,365

 
(10
)%
 
$
2,715

 
$
3,085

 
(12
)%
As a percentage of software license revenue
4
%
 
5
%
 
 
 
5
%
 
6
%
 
 
As a percentage of total revenue
1
%
 
2
%
 
 
 
1
%
 
2
%
 
 

Cost of software licenses consists primarily of costs of royalties, electronic software distribution, duplication and packaging. Cost of software licenses decreased $0.1 million, or 10%, in the second quarter of fiscal year 2016 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 $0.4 million, or 12%, in the first six months of fiscal year 2016 as compared to the same period last year, and decreased as a percentage of software license revenue from 6% to 5%. 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, 2016
 
May 31, 2015
 
Percentage
Change
 
May 31, 2016
 
May 31, 2015
 
Percentage
Change
Cost of maintenance and services
$
11,063

 
$
10,288

 
8
%
 
$
21,392

 
$
21,563

 
(1
)%
As a percentage of maintenance and services revenue
16
%
 
17
%
 
 
 
16
%
 
19
%
 
 
As a percentage of total revenue
12
%
 
12
%
 
 
 
12
%
 
13
%
 
 

Cost of maintenance and services consists primarily of costs of providing customer support, consulting and education. Cost of maintenance and services increased $0.8 million, or 8%, in the second quarter of fiscal year 2016 as compared to the same quarter last year, and decreased as a percentage of maintenance and services revenue from 17% to 16%. Cost of maintenance and services remained relatively flat in the first six months of fiscal year 2016 as compared to the same period last year, and decreased as a percentage of maintenance and services revenue from 19% to 16%. The increase in cost of maintenance and services is primarily due to as higher compensation-related costs as a result of an increase in headcount as compared to the second quarter of fiscal year 2015, offset by lower depreciation expense resulting from the impairment of prior mobile technology long-lived assets in the second quarter of fiscal year 2015.

Amortization of Acquired Intangibles
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2016
 
May 31, 2015
 
Percentage
Change
 
May 31, 2016
 
May 31, 2015
 
Percentage
Change
Amortization of acquired intangibles
$
3,939

 
$
4,093

 
(4
)%
 
$
7,878

 
$
8,726

 
(10
)%
As a percentage of total revenue
4
%
 
5
%
 
 
 
4
%
 
5
%
 
 

Amortization of acquired intangibles included in costs of revenue primarily represents the amortization of the value assigned to technology-related intangible assets obtained in business combinations. Amortization of acquired intangibles decreased $0.2 million, or 4%, in the second quarter of fiscal year 2016 as compared to the same quarter last year and decreased $0.9 million, or 10%, in the first six months of fiscal year 2016 as compared to the same period last year. The decrease was due to the completion of amortization of certain intangible assets acquired in prior years.


26


Gross Profit
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2016
 
May 31, 2015
 
Percentage
Change
 
May 31, 2016
 
May 31, 2015
 
Percentage
Change
Gross profit
$
79,883

 
$
73,071

 
9
%
 
$153,614
 
$136,824
 
12
%
As a percentage of total revenue
83
%
 
82
%
 
 
 
83
%
 
80
%
 
 

Our gross profit increased $6.8 million, or 9%, in the second quarter of fiscal year 2016 as compared to the same quarter last year and increased $16.8 million, or 12%, in the first six months of fiscal year 2016 as compared to the same period last year. Our gross profit as a percentage of total revenue increased from 82% to 83% and 80% to 83% in the second quarter and first six months of fiscal year 2016, respectively, compared to the same periods of fiscal year 2015. The dollar increase is primarily related to the increase of maintenance revenue. As a result of acquisition accounting, the deferred revenue balance acquired from Telerik in the first quarter of fiscal year 2015 was significantly reduced to reflect its fair value as of the acquisition date, which impacted the amount of revenue recognized in the quarter and first six months of 2015. However, we were still incurring the associated costs to fulfill the acquired deferred revenue, which were reflected in our consolidated statement of operations in the second quarter and first six months of fiscal year 2015. As a result, our expenses as a percentage of total revenue were higher in the second quarter and first six months of fiscal year 2015.

Sales and Marketing

 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2016
 
May 31, 2015
 
Percentage
Change
 
May 31, 2016
 
May 31, 2015
 
Percentage
Change
Sales and marketing
$
29,138

 
$
31,852

 
(9
)%
 
$
58,796

 
$
62,602

 
(6
)%
As a percentage of total revenue
30
%
 
36
%
 
 
 
32
%
 
37
%
 
 

Sales and marketing expenses decreased $2.7 million, or 9%, in the second quarter of fiscal year 2016 as compared to the same quarter last year, and decreased as a percentage of total revenue from 36% to 30%. Sales and marketing expenses decreased $3.8 million, or 6%, in the first six months of fiscal year 2016 as compared to the same period last year, and decreased as a percentage of total revenue from 37% to 32%. The decrease in both periods was primarily due to lower outside services and marketing program costs as compared to the prior year.

Product Development

 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2016
 
May 31, 2015
 
Percentage
Change
 
May 31, 2016
 
May 31, 2015
 
Percentage
Change
Product development costs
$
22,297

 
$
22,869

 
(3
)%
 
$
44,094

 
$
46,157

 
(4
)%
Capitalized product development costs

 
(579
)
 
(100
)%
 

 
(1,046
)
 
(100
)%
Total product development expense
$
22,297

 
$
22,290

 
 %
 
$
44,094

 
$