10-Q 1 q2201810-q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to _____.
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  x    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  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨
(Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Emerging growth company
 
¨
 
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨ No  x
As of June 27, 2018, there were 45,015,249 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, 2018
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,
2018
 
November 30,
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
97,121

 
$
133,464

Short-term investments
47,079

 
50,145

Total cash, cash equivalents and short-term investments
144,200

 
183,609

Accounts receivable (less allowances of $720 and $676, respectively)
42,577

 
61,210

Other current assets
13,844

 
18,588

Total current assets
200,621

 
263,407

Property and equipment, net
42,208

 
42,261

Intangible assets, net
76,540

 
94,894

Goodwill
315,012

 
315,041

Deferred tax assets
846

 
1,123

Other assets
1,746

 
1,992

Total assets
$
636,973

 
$
718,718

Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt, net
$
5,819

 
$
5,819

Accounts payable
10,406

 
9,000

Accrued compensation and related taxes
17,605

 
32,373

Dividends payable to shareholders
6,377

 
6,619

Income taxes payable
3,428

 
1,173

Other accrued liabilities
16,026

 
20,496

Short-term deferred revenue
135,202

 
132,538

Total current liabilities
194,863

 
208,018

Long-term debt, net
113,180

 
116,090

Long-term deferred revenue
12,586

 
9,750

Deferred tax liabilities
1,228

 
2,809

Other noncurrent liabilities
5,979

 
5,967

Commitments and contingencies

 

Shareholders’ equity:
 
 
 
Preferred stock, $0.01 par value; authorized, 10,000,000 shares; issued, none

 

Common stock, $0.01 par value, and additional paid-in capital; authorized, 200,000,000 shares; issued and outstanding, 45,503,468 shares in 2018 and 47,281,035 shares in 2017
258,696

 
249,836

Retained earnings
74,655

 
145,247

Accumulated other comprehensive loss
(24,214
)
 
(18,999
)
Total shareholders’ equity
309,137

 
376,084

Total liabilities and shareholders’ equity
$
636,973

 
$
718,718

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,
2018
 
May 31,
2017
 
May 31,
2018
 
May 31,
2017
Revenue:
 
 
 
 
 
 
 
Software licenses
$
26,439

 
$
25,592

 
$
51,782

 
$
49,914

Maintenance and services
69,663

 
67,621

 
138,367

 
134,269

Total revenue
96,102

 
93,213

 
190,149

 
184,183

Costs of revenue:
 
 
 
 
 
 
 
Cost of software licenses
1,233

 
1,422

 
2,494

 
3,010

Cost of maintenance and services
9,511

 
11,262

 
19,335

 
21,754

Amortization of acquired intangibles
5,899

 
4,683

 
11,717

 
8,361

Total costs of revenue
16,643

 
17,367

 
33,546

 
33,125

Gross profit
79,459

 
75,846

 
156,603

 
151,058

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
21,658

 
21,236

 
43,086

 
46,957

Product development
19,822

 
18,791

 
40,067

 
36,125

General and administrative
12,190

 
11,606

 
23,452

 
22,174

Amortization of acquired intangibles
3,318

 
3,223

 
6,637

 
6,402

Fees related to shareholder activist
214

 

 
1,472

 

Restructuring expense
426

 
662

 
2,247

 
17,801

Acquisition-related expenses
43

 
44

 
86

 
93

Total operating expenses
57,671

 
55,562

 
117,047

 
129,552

Income from operations
21,788

 
20,284

 
39,556

 
21,506

Other (expense) income, net:
 
 
 
 
 
 
 
Interest expense
(1,272
)
 
(1,152
)
 
(2,437
)
 
(2,234
)
Interest income and other, net
231

 
257

 
639

 
478

Foreign currency (loss) gain, net
(243
)
 
(657
)
 
(1,071
)
 
(1,143
)
Total other (expense) income, net
(1,284
)
 
(1,552
)
 
(2,869
)
 
(2,899
)
Income before income taxes
20,504

 
18,732

 
36,687

 
18,607

Provision for income taxes
5,101

 
8,391

 
8,372

 
8,791

Net income
$
15,403

 
$
10,341

 
$
28,315

 
$
9,816

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.34

 
$
0.21

 
$
0.62

 
$
0.20

Diluted
$
0.33

 
$
0.21

 
$
0.61

 
$
0.20

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
45,531

 
48,221

 
46,030

 
48,477

Diluted
46,087

 
48,490

 
46,781

 
48,762

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.140

 
$
0.125

 
$
0.280

 
$
0.250

See notes to unaudited condensed consolidated financial statements.

4


Condensed Consolidated Statements of Comprehensive Income

 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2018
 
May 31, 2017
 
May 31, 2018
 
May 31, 2017
Net income
$
15,403

 
$
10,341

 
$
28,315

 
$
9,816

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(9,018
)
 
4,143

 
(5,187
)
 
5,371

Unrealized (losses) gains on investments, net of tax provision of $0 and $39 for the second quarter and first six months of 2018, respectively and $5 and $45 for the second quarter and first six months of 2017, respectively
(1
)
 
7

 
(28
)
 
78

Total other comprehensive (loss) income, net of tax
(9,019
)
 
4,150

 
(5,215
)
 
5,449

Comprehensive income
$
6,384

 
$
14,491

 
$
23,100

 
$
15,265


See notes to unaudited condensed consolidated financial statements.


5


Condensed Consolidated Statements of Cash Flows
 
 
Six Months Ended
(In thousands)
May 31,
2018
 
May 31,
2017
Cash flows from operating activities:
 
 
 
Net income
$
28,315

 
$
9,816

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property and equipment
3,343

 
3,962

Amortization of intangibles and other
19,290

 
15,886

Stock-based compensation
10,150

 
5,263

Loss on disposal of property
136

 
155

Deferred income taxes
(1,490
)
 
4,727

Excess tax benefit from stock plans

 
(353
)
Allowances for accounts receivable
103

 
42

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
18,500

 
22,651

Other assets
4,614

 
946

Accounts payable and accrued liabilities
(18,027
)
 
(6,475
)
Income taxes payable
2,267

 
401

Deferred revenue
6,523

 
2,708

Net cash flows from operating activities
73,724

 
59,729

Cash flows used in investing activities:
 
 
 
Purchases of investments
(8,258
)
 
(14,376
)
Sales and maturities of investments
10,723

 
9,440

Purchases of property and equipment
(3,196
)
 
(523
)
Payments for acquisitions, net of cash acquired

 
(28,270
)
Net cash flows used in investing activities
(731
)
 
(33,729
)
Cash flows used in financing activities:
 
 
 
Proceeds from stock-based compensation plans
4,671

 
5,031

Payments for taxes related to net share settlements of equity awards
(1,931
)
 
(2,367
)
Repurchases of common stock
(90,000
)
 
(24,954
)
Excess tax benefit from stock plans

 
353

Dividend payments to shareholders
(13,101
)
 
(12,116
)
Payment of long-term debt
(3,094
)
 
(7,500
)
Net cash flows used in financing activities
(103,455
)
 
(41,553
)
Effect of exchange rate changes on cash
(5,881
)
 
6,403

Net decrease in cash and cash equivalents
(36,343
)
 
(9,150
)
Cash and cash equivalents, beginning of period
133,464

 
207,036

Cash and cash equivalents, end of period
$
97,121

 
$
197,886


6


Condensed Consolidated Statements of Cash Flows, continued
 
Six Months Ended
 
May 31,
2018
 
May 31,
2017
Supplemental disclosure:
 
 
 
Cash paid for income taxes, net of refunds of $533 in 2018 and $2,928 in 2017
$
3,545

 
$
4,962

Cash paid for interest
$
1,991

 
$
1,745

Non-cash investing and financing activities:
 
 
 
Total fair value of restricted stock awards, restricted stock units and deferred stock units on date vested
$
9,404

 
$
13,754

Dividends declared
$
6,377

 
$
6,035

Unsettled sale of property, plant and equipment, net
$

 
$
1,488

See notes to unaudited condensed consolidated financial statements.

7


Notes to Condensed Consolidated Financial Statements

Note 1: Basis of Presentation

Company Overview - Progress Software Corporation ("Progress," the "Company," "we," "us," or "our") offers the leading platform for developing and deploying strategic business applications. We enable customers and partners to deliver modern, high-impact digital experiences with a fraction of the effort, time and cost. Progress offers powerful tools for easily building adaptive user experiences across any type of device or touchpoint, award-winning machine learning that enables cognitive capabilities to be a part of any application, the flexibility of a serverless cloud to deploy modern apps, business rules, web content management, plus leading data connectivity technology. Over 1,700 independent software vendors, 100,000 enterprise customers, and 2 million developers rely on Progress to power their applications.

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 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 (the "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, 2017, as amended ("Annual Report on Form 10-K for the fiscal year ended November 30, 2017").

We made no material 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, 2017. 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, 2017, 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 February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"). ASU 2018-02 gives entities the option to reclassify the disproportionate income tax effects ("stranded tax effects") caused by the newly-enacted US Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. The update also requires new disclosures, some of which are applicable for all entities. The guidance in ASU 2018-02 is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently considering whether to adopt the optional reclassification of the stranded tax effects and evaluating the effect that implementation of this update will have upon adoption on our consolidated financial position and results of operations.

In August 2017, the FASB issued Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"). ASU 2017-12 intends to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The guidance in ASU 2017-12 is required for annual reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the effect that implementation of this update will have upon adoption on our consolidated financial position and results of operations.


8


In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting ("ASU 2017-09"), which amends the scope of modification accounting for share-based payment awards. The guidance in ASU 2017-09 provides that modification accounting is required only if a change in the terms or conditions of an award results in a change to the fair value, the vesting conditions, or the classification of the award as equity or liability. The guidance in ASU 2017-09 is required for annual reporting periods beginning after December 15, 2017, with early adoption permitted. We are currently assessing the impact of the adoption of this update on our consolidated financial position and results of operations.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 amends Topic 350 to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. This update requires the performance of an annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The guidance in ASU 2017-04 is required for annual reporting periods beginning after December 15, 2019, with early adoption permitted. We are currently considering whether to adopt this update prior to the required adoption date.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718), 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. The standard requires, on a prospective basis, the recognition of all excess tax benefits and tax deficiencies as income tax benefit or expense in the statement of operations and the tax effect of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. The excess tax benefits and tax deficiencies should not be considered in an entity's calculation of its annual estimated effective tax rate and, as excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method to calculate diluted earnings per share should exclude such excess tax benefits. Further, on either a prospective or retrospective basis, excess tax benefits should be classified as operating activities in the statement of cash flows. The standard also provides entities the option to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur, which is to be applied in accordance with a modified retrospective transition. Additionally, the standard updates the threshold to qualify for equity classification for minimum statutory tax withholding requirements by permitting an entity to withhold up to the maximum statutory rates in the applicable jurisdictions, applied on a modified retrospective basis. Finally, the standard requires that cash paid by an employer to a taxing authority when directly withholding shares for tax withholding purposes be classified as a financing activity in the statement of cash flows, applied retrospectively.

We adopted this standard at the beginning of the first quarter of fiscal year 2018 and elected to classify excess tax benefits as operating activities on a prospective basis in the condensed consolidated statement of cash flows. As such, the prior period condensed consolidated statement of cash flows was not adjusted. We also elected to account for forfeitures as they occur and recorded a cumulative-effect adjustment of $0.6 million to retained earnings during the period of adoption. The adoption of ASU 2016-09 did not have a material impact on our consolidated financial position, results of operations, and cash flows.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) ("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 upon adoption on our consolidated financial position and results of operations.


9


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 from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance provided in Topic 606 requires entities to use a five-step model to recognize revenue by allocating the consideration from contracts to performance obligations on a relative standalone selling price basis. The standard also requires new disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This new guidance was initially effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016 and early adoption was not permitted. However, 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 effective date for the Company will be December 1, 2018.

Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. The Company currently plans to adopt this ASU in accordance with the full retrospective approach, effective December 1, 2018. Fiscal year 2019 quarterly results, and comparative prior periods, will be prepared in accordance with ASC Topic 606. The first Annual Report on Form 10-K issued in accordance with ASC Topic 606 will be for the period ended November 30, 2019.

Management is currently assessing the impact the adoption of this standard will have on the Company’s consolidated financial statements, but anticipates that the revenue recognition related to accounting for the following transactions will be most impacted:

Revenue from term licenses with extended payment terms over the term of the agreement within our Data Connectivity and Integration segment - These transactions are typically recognized when the amounts are billed to the customer under current revenue recognition guidance. In accordance with ASU 2014-09, revenue from term license performance obligations is expected to be recognized upon delivery and revenue from maintenance performance obligations is expected to be recognized over the contract term. To the extent the Company enters into future term licenses with extended payment terms after the adoption of ASU 2014-09, revenue from term licenses with extended payment terms will be recognized prior to the customer being billed and the Company will recognize a net contract asset on the balance sheet. Accordingly, license revenue will be accelerated under ASU 2014-09 as the Company currently does not recognize revenue until the amounts have been billed to the customer.

Revenue from transactions with multiple elements within our Application Development and Deployment segment (i.e., sales of perpetual licenses with maintenance and/or support) - These transactions are currently recognized ratably over the associated maintenance period as the Company does not have vendor specific objective evidence ("VSOE") for maintenance or support. Under ASU 2014-09, the requirement to have VSOE for undelivered elements that exists under current guidance is eliminated. Accordingly, the Company will recognize a portion of the sales price as revenue upon delivery of the license instead of recognizing the entire sales price ratably over the maintenance period.

Note 2: Cash, Cash Equivalents and Investments

A summary of our cash, cash equivalents and available-for-sale investments at May 31, 2018 is as follows (in thousands):
 
 
Amortized Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
96,523

 
$

 
$

 
$
96,523

Money market funds
598

 

 

 
598

State and municipal bond obligations
32,323

 

 
(184
)
 
32,139

U.S. treasury bonds
6,704

 

 
(28
)
 
6,676

Corporate bonds
8,334

 

 
(70
)
 
8,264

Total
$
144,482

 
$

 
$
(282
)
 
$
144,200



10


A summary of our cash, cash equivalents and available-for-sale investments at November 30, 2017 is as follows (in thousands):
 
 
Amortized Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
130,547

 
$

 
$

 
$
130,547

Money market funds
2,917

 

 

 
2,917

State and municipal bond obligations
40,458

 

 
(231
)
 
40,227

U.S. treasury bonds
3,517

 

 
(26
)
 
3,491

Corporate bonds
6,463

 

 
(36
)
 
6,427

Total
$
183,902

 
$

 
$
(293
)
 
$
183,609


Such amounts are classified on our condensed consolidated balance sheets as follows (in thousands):
 
 
May 31, 2018
 
November 30, 2017
 
Cash and
Equivalents
 
Short-Term
Investments
 
Cash and
Equivalents
 
Short-Term
Investments
Cash
$
96,523

 
$

 
$
130,547

 
$

Money market funds
598

 

 
2,917

 

State and municipal bond obligations

 
32,139

 

 
40,227

U.S. treasury bonds

 
6,676

 

 
3,491

Corporate bonds

 
8,264

 

 
6,427

Total
$
97,121

 
$
47,079

 
$
133,464

 
$
50,145


The fair value of debt securities by contractual maturity is as follows (in thousands):
 
 
May 31,
2018
 
November 30,
2017
Due in one year or less
$
27,247

 
$
22,333

Due after one year (1)
19,832

 
27,812

Total
$
47,079

 
$
50,145


(1)
Includes state and municipal bond obligations, U.S. treasury bonds, and corporate bonds, which are securities representing investments available for current operations and are classified as current in the condensed consolidated balance sheets.

We did not hold any investments with continuous unrealized losses as of May 31, 2018 or November 30, 2017.

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 on the consolidated balance sheets at the end of each reporting period and expire from 30 days to one year. At May 31, 2018, $1.5 million was recorded in other accrued liabilities on the condensed consolidated balance sheet. At November 30, 2017, $0.2 million and $0.2 million was recorded in other accrued liabilities and other assets, respectively, on the consolidated balance sheet. In the three and six months ended May 31, 2018, realized and unrealized losses of $6.7 million and $3.1 million, respectively, from our forward contracts were recognized in foreign currency (loss) gain, net, on the condensed consolidated statements of operations. In the three and six months ended May 31, 2017, realized and unrealized gains of $3.6 million and $4.4 million, respectively, from our forward contracts were recognized in foreign currency (loss) gain, net on the condensed consolidated statements of operations. The losses and gains were substantially offset by realized and unrealized gains and losses on the offsetting positions.


11


The table below details outstanding foreign currency forward contracts where the notional amount is determined using contract exchange rates (in thousands):
 
 
May 31, 2018
 
November 30, 2017
 
Notional Value
 
Fair Value
 
Notional Value
 
Fair Value
Forward contracts to sell U.S. dollars
$
127,560

 
$
(1,473
)
 
$
119,192

 
$
(27
)
Forward contracts to purchase U.S. dollars
703

 
2

 
462

 

Total
$
128,263

 
$
(1,471
)
 
$
119,654

 
$
(27
)

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, 2018 (in thousands):
 
 
 
 
Fair Value Measurements Using
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Money market funds
$
598

 
$
598

 
$

 
$

State and municipal bond obligations
32,139

 

 
32,139

 

U.S. treasury bonds
6,676

 

 
6,676

 

Corporate bonds
8,264

 

 
8,264

 

Liabilities
 
 
 
 
 
 
 
Foreign exchange derivatives
$
(1,471
)
 
$

 
$
(1,471
)
 
$


The following table details the fair value measurements within the fair value hierarchy of our financial assets and liabilities at November 30, 2017 (in thousands):
 
 
 
 
Fair Value Measurements Using
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Money market funds
$
2,917

 
$
2,917

 
$

 
$

State and municipal bond obligations
40,227

 

 
40,227

 

U.S. treasury bonds
3,491

 

 
3,491

 

Corporate bonds
6,427

 

 
6,427

 

Liabilities
 
 
 
 
 
 
 
Foreign exchange derivatives
$
(27
)
 
$

 
$
(27
)
 
$


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 did not have any nonrecurring fair value measurements during the six months ended May 31, 2018.


12


Note 5: Intangible Assets and Goodwill

Intangible Assets

Intangible assets are comprised of the following significant classes (in thousands):
 
 
May 31, 2018
 
November 30, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
Purchased technology
$
154,301

 
$
(99,942
)
 
$
54,359

 
$
154,301

 
$
(88,224
)
 
$
66,077

Customer-related
67,802

 
(51,426
)
 
16,376

 
67,802

 
(46,230
)
 
21,572

Trademarks and trade names
17,740

 
(11,935
)
 
5,805

 
17,740

 
(10,495
)
 
7,245

Total
$
239,843

 
$
(163,303
)
 
$
76,540

 
$
239,843

 
$
(144,949
)
 
$
94,894


In the three and six months ended May 31, 2018, amortization expense related to intangible assets was $9.2 million and $18.4 million, respectively. In the three and six months ended May 31, 2017, amortization expense related to intangible assets was $7.9 million and $14.8 million, respectively.

Future amortization expense for intangible assets as of May 31, 2018, is as follows (in thousands):
 
Remainder of 2018
$
17,701

2019
34,932

2020
10,152

2021
10,033

2022
3,722

Total
$
76,540


Goodwill

Changes in the carrying amount of goodwill in the six months ended May 31, 2018 are as follows (in thousands):

Balance, November 30, 2017
$
315,041

Translation adjustments
(29
)
Balance, May 31, 2018
$
315,012


Changes in the goodwill balances by reportable segment in the six months ended May 31, 2018 are as follows (in thousands):
 
November 30, 2017
 
Translation adjustments
 
May 31, 2018
OpenEdge
$
249,036

 
$
(29
)
 
$
249,007

Data Connectivity and Integration
19,040

 

 
19,040

Application Development and Deployment
46,965

 

 
46,965

Total goodwill
$
315,041

 
$
(29
)
 
$
315,012


During the quarter ending May 31, 2018, no triggering events 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.


13


Note 6: Business Combinations

Kinvey Acquisition

On June 1, 2017, we acquired by merger 100% of the outstanding securities of Kinvey for an aggregate sum of $49.2 million, which includes approximately $0.3 million held-back from the founder of Kinvey as an incentive to remain with the Company for at least two years following the acquisition. The $0.3 million held-back is being recorded to expense over the service period. Kinvey allows developers to set up, use, and operate a cloud backend for any native, hybrid, web, or IoT app built using any development tools. The acquisition was accounted for as a business combination, and accordingly, the results of operations of Kinvey are included in our operating results as part of the OpenEdge business segment from the date of acquisition. We paid the purchase price in cash from available funds.

The total consideration, less the $0.3 million held-back discussed above, which is considered to be a compensation arrangement, was allocated to Kinvey's tangible assets, identifiable intangible assets and assumed liabilities based on their estimated fair values. The excess of the total consideration, less the amount held-back from the founder, over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The allocation of the purchase price was completed in the fourth quarter of fiscal year 2017 upon the finalization of our valuation of identifiable intangible assets and deferred taxes.

The allocation of the purchase price is as follows (in thousands):
 
Total
 
Life
Net working capital
$
(963
)
 
 
Property, plant and equipment
26

 
 
Purchased technology
22,100

 
5 Years
Trade name
1,800

 
5 Years
Customer relationships
100

 
5 Years
Net deferred tax assets
1,465

 
 
Goodwill
24,351

 
 
Net assets acquired
$
48,879

 
 

The fair value of the intangible assets was estimated using the income approach in which the after-tax cash flows are discounted to present value. The cash flows are based on estimates used to price the acquisition, 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.

Deferred taxes include deferred tax liabilities resulting from the tax effects of fair value adjustments related to identifiable intangible assets, which are more than offset by the value of deferred tax assets acquired from Kinvey. Tangible assets acquired and assumed liabilities were recorded at fair value.

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 $24.4 million of goodwill, which is not deductible for tax purposes.

Acquisition-related transaction costs (e.g., legal, due diligence, valuation, and other professional fees) are not included as a component of consideration paid, but are required to be expensed as incurred. We incurred minimal acquisition-related costs during the three and six months ended May 31, 2018, which are included in acquisition-related expenses on our condensed consolidated statements of operations.

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


14


DataRPM Acquisition

On March 1, 2017, we acquired by merger 100% of the outstanding securities of DataRPM for an aggregate sum of $30.0 million. Approximately $1.7 million of the purchase price was paid to DataRPM’s founders in the form of restricted stock units, subject to a two-year vesting schedule and continued employment. DataRPM is a leader in cognitive predictive maintenance for the industrial IoT ("IIoT") market. The acquisition was accounted for as a business combination, and accordingly, the results of operations of DataRPM are included in our operating results as part of the OpenEdge business segment from the date of acquisition. We paid the purchase price in cash from available funds.

The total consideration, less the fair value of the granted restricted stock units discussed above, which are considered compensation arrangements, was allocated to DataRPM’s tangible assets, identifiable intangible assets and assumed liabilities based on their estimated fair values. 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. The allocation of the purchase price was completed in the fourth quarter of fiscal year 2017 upon the finalization of our valuation of identifiable intangible assets and deferred taxes.

The allocation of the purchase price is as follows (in thousands):
 
Total
 
Life
Net working capital
$
(174
)
 
 
Property, plant and equipment
68

 
 
Purchased technology
19,900

 
5 Years
Trade name
800

 
5 Years
Customer relationships
100

 
5 Years
Deferred taxes
(5,006
)
 
 
Goodwill
12,583

 
 
Net assets acquired
$
28,271

 
 

The fair value of the intangible assets was estimated using the income approach in which the after-tax cash flows are discounted to present value. The cash flows are based on estimates used to price the acquisition, 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.

Deferred taxes include deferred tax liabilities resulting from the tax effects of fair value adjustments related to identifiable intangible assets, partially offset by the fair value of deferred tax assets acquired from DataRPM. Tangible assets acquired and assumed liabilities were recorded at fair value.

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 $12.6 million of goodwill, which is not deductible for tax purposes.

As discussed above, approximately $1.7 million of the total consideration was paid to DataRPM’s founders in restricted stock units, subject to a vesting schedule and continued employment. We concluded that the restricted stock units are compensation arrangements and we are recognizing stock-based compensation expense in accordance with the vesting schedule over the service period of the awards, which is two-years. During the three months ended May 31, 2018, we incurred minimal stock-based compensation expense related to these restricted stock units. During the six months ended May 31, 2018, as a result of the termination of employment of one of the founders, we recorded a minimal credit to stock-based compensation expense related to forfeitures. These amounts are included in operating expenses on our condensed consolidated statements of operations.

Acquisition-related transaction costs (e.g., legal, due diligence, valuation, and other professional fees) are not included as a component of consideration transferred, but are required to be expensed as incurred. We did not incur any acquisition-related costs during the three and six months ended May 31, 2018 and do not expect to incur additional material costs with respect to this acquisition.


15


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

Note 7: Term Loan and Line of Credit

Our credit agreement provides for a $123.8 million secured term loan and a $150.0 million secured revolving credit facility. The revolving credit facility may be made available in U.S. Dollars and certain other currencies and may be increased by up to an additional $125.0 million if the existing or additional lenders are willing to make such increased commitments. 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 November 20, 2022, 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 term loan as of May 31, 2018 was $120.7 million, with $6.2 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, 2018. The principal repayment amounts are in accordance with the following schedule: (i) eight payments of $1.5 million each, (ii) four payments of $2.3 million each, (iii) four payments of $3.1 million each, (iv) three payments of $3.9 million each, and (v) 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, 2018, 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, 2018 was 3.44%.

Costs incurred to obtain our long-term debt of $1.8 million are recorded as debt issuance costs as a direct deduction from the carrying value of the debt liability on our condensed consolidated balance sheets as of May 31, 2018. These costs are being amortized over the term of the debt agreement using the effective interest rate method. Amortization expense related to the debt issuance costs of $0.1 million for the three months ended May 31, 2018 and May 31, 2017 and $0.2 million for the six months ended May 31, 2018 and May 31, 2017, respectively, is recorded in interest expense on our condensed consolidated statements of operations.

Revolving loans may be borrowed, repaid, and reborrowed until November 20, 2022, at which time all amounts outstanding must be repaid. As of May 31, 2018, there were no amounts outstanding under the revolving line and $1.3 million of letters of credit.

As of May 31, 2018, aggregate principal payments of long-term debt for the next five years are (in thousands):
Remainder of 2018
$
3,093

2019
6,188

2020
9,281

2021
12,375

2022
89,719

Total
$
120,656


Note 8: Common Stock Repurchases

In the three and six months ended May 31, 2018, we repurchased and retired 1.1 million shares of our common stock for $45.0 million and 2.1 million shares for $90.0 million, respectively. In the three and six months ended May 31, 2017, we repurchased and retired 0.2 million shares for $6.9 million and 0.9 million shares for $25.0 million, respectively. The shares were repurchased in all periods as part of our Board of Directors authorized share repurchase program.

In September 2017, our Board of Directors increased our total share repurchase authorization to $250.0 million. As of May 31, 2018, there was $130.0 million remaining under this current authorization.


16


Note 9: Stock-Based Compensation

Stock-based compensation expense reflects the fair value of stock-based awards, less the present value of expected dividends, 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, the Black-Scholes option valuation model, or the Monte Carlo Simulation valuation model.

During fiscal years 2016 and 2017, we granted performance-based restricted stock units that include a three-year market condition under a Long-Term Incentive Plan (“LTIP”) where the performance measurement period is three years. Vesting of the LTIP awards is based on our level of attainment of specified total shareholder return ("TSR") targets relative to the percentage appreciation of a specified index of companies for the respective three-year periods and is also subject to the continued employment of the grantees. In order to estimate the fair value of such awards, we used a Monte Carlo Simulation valuation model.

During the first quarter of fiscal year 2018, we granted performance-based restricted stock units that include two performance metrics under a LTIP where the performance measurement period is three years. Vesting of the 2018 LTIP awards is as follows: (i) 50% is based on the three-year market condition as described above (TSR), and (ii) 50% is based on achievement of a three-year cumulative performance condition (operating income). In order to estimate the fair value of such awards, we used a Monte Carlo Simulation valuation model for the market condition portion of the award, and used the closing price of our common stock on the date of grant, less the present value of expected dividends, for the portion related to the performance condition.

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 years for options and 3 years for restricted stock units. We recognize stock-based compensation expense related to our employee stock purchase plan using an accelerated attribution method.

The following table provides the classification of stock-based compensation as reflected on our condensed consolidated statements of operations (in thousands): 
 
Three Months Ended
 
Six Months Ended
 
May 31,
2018
 
May 31,
2017
 
May 31,
2018
 
May 31,
2017
Cost of maintenance and services
$
269

 
$
294

 
$
515

 
$
551

Sales and marketing
995

 
200

 
1,365

 
563

Product development
1,984

 
1,158

 
4,030

 
1,054

General and administrative
2,332

 
1,981

 
4,240

 
3,095

Total stock-based compensation
$
5,580

 
$
3,633

 
$
10,150

 
$
5,263


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, 2018 (in thousands):

 
Foreign Currency Translation Adjustment
 
Unrealized Losses on Investments
 
Accumulated Other Comprehensive Loss
Balance, December 1, 2017
$
(18,770
)
 
$
(229
)
 
$
(18,999
)
Other comprehensive loss before reclassifications, net of tax
(5,187
)
 
(28
)
 
(5,215
)
Balance, May 31, 2018
$
(23,957
)
 
$
(257
)
 
$
(24,214
)

The tax effect on accumulated unrealized losses on investments was minimal as of May 31, 2018 and November 30, 2017.


17


Note 11: Restructuring Charges

The following table provides a summary of activity for our restructuring actions, which are detailed further below (in thousands):
 
Excess
Facilities and
Other Costs
 
Employee Severance and Related Benefits
 
Total
Balance, December 1, 2017
$
570

 
$
3,556

 
$
4,126

Costs incurred
997

 
1,250

 
2,247

Cash disbursements
(900
)
 
(4,281
)
 
(5,181
)
Translation adjustments and other
46

 
11

 
57

Balance, May 31, 2018
$
713

 
$
536

 
$
1,249


During fiscal year 2017, we undertook certain operational restructuring initiatives intended to significantly reduce annual costs. As part of this action, management committed to a new strategic plan highlighted by a new product strategy and a streamlined operating approach. To execute these operational restructuring initiatives, we reduced our global workforce by over 20%. These workforce reductions occurred in substantially all functional units and across all geographies in which we operate. We also consolidated offices in various locations during fiscal year 2017 and the first half of fiscal year 2018. We expect to incur additional expenses related to facility closures during fiscal year 2018, but we do not expect these additional costs to be material.

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.

As part of this fiscal year 2017 restructuring, for the three and six months ended May 31, 2018, we incurred expenses of $0.4 million and $2.2 million, respectively, which are recorded in restructuring expenses on the condensed consolidated statements of operations.

Cash disbursements for expenses incurred to date under this restructuring are expected to be made through the fourth quarter of fiscal year 2018. The short-term portion of the restructuring reserve of $1.0 million is included in other accrued liabilities and the long-term portion of $0.2 million is included in other noncurrent liabilities on the condensed consolidated balance sheets at May 31, 2018.

Note 12: Income Taxes

Our income tax provision for the second quarter of fiscal years 2018 and 2017 reflects our estimate 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 in which they occur. The estimates are reevaluated each quarter based on our estimated tax expense for the full fiscal year.

Our effective income tax rate was 25% in the second quarter of fiscal year 2018 compared to 45% in the second quarter of fiscal year 2017, and 23% in the first six months of fiscal year 2018 compared to 47% in the same period last year. The primary reason for the decrease in the effective rate is due to the enactment of tax reform in the United States in December 2017.

During the first quarter of fiscal year 2018, the Tax Cuts and Jobs Act was enacted in the United States. The Act reduces the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and, effective fiscal year 2019, creates new taxes on certain foreign sourced earnings. In December 2017, the SEC issued SAB 118, which directs taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. As of May 31, 2018, we have not completed our accounting for the tax effects of enactment of the Act, however, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax.

As a result of the Act, we re-measured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to changes in deferred

18


tax amounts. During the first quarter of fiscal year 2018, we recognized a provisional tax benefit of $1.4 million related to the re-measurement of our U.S. deferred tax balances.

The one-time transition tax associated with the Act is based on our total post-1986 earnings and profits ("E&P") that we previously deferred from U.S. federal taxation. During the first quarter of fiscal year 2018, we made a provisional determination that we have an accumulated deficit in our foreign subsidiaries' E&P and thus do not have a transition tax associated with deferred foreign earnings related to the Act. We have not yet completed our calculation of the total post-1986 E&P for our foreign subsidiaries or the tax pools of our foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets.

Our Federal income tax returns have been examined or are closed by statute for all years prior to fiscal year 2015. Our state income tax returns have been examined or are closed by statute for all years prior to fiscal year 2013.

Tax authorities for certain non-U.S. jurisdictions are also examining returns. With some exceptions, we are generally not subject to tax examinations in non-U.S. jurisdictions for years prior to fiscal year 2012.

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,
2018
 
May 31,
2017
 
May 31,
2018
 
May 31,
2017
Net income
$
15,403

 
$
10,341

 
$
28,315

 
$
9,816

Weighted average shares outstanding
45,531

 
48,221

 
46,030

 
48,477

Dilutive impact from common stock equivalents
556

 
269

 
751

 
285

Diluted weighted average shares outstanding
46,087

 
48,490

 
46,781

 
48,762

Basic earnings per share
$
0.34

 
$
0.21

 
$
0.62

 
$
0.20

Diluted earnings per share
$
0.33

 
$
0.21

 
$
0.61

 
$
0.20


We excluded stock awards representing approximately 698,000 shares and 521,000 shares of common stock from the calculation of diluted earnings per share in the three and six months ended May 31, 2018, respectively, because these awards were anti-dilutive. In the three and six months ended May 31, 2017, we excluded stock awards representing 941,000 shares and 519,000 shares of common stock, respectively, from the calculation of diluted earnings per share as they were anti-dilutive.

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.

We operate as three distinct business segments: OpenEdge, Data Connectivity and Integration, and Application Development and Deployment.

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.


19


The following table provides revenue and contribution margin from our reportable segments and reconciles to our consolidated income before income taxes:

 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2018
 
May 31, 2017
 
May 31, 2018
 
May 31, 2017
Segment revenue:
 
 
 
 
 
 
 
OpenEdge
$
69,967

 
$
65,890

 
$
136,375

 
$
130,398

Data Connectivity and Integration
5,788

 
7,096

 
13,392

 
13,924

Application Development and Deployment
20,347

 
20,227

 
40,382

 
39,861

Total revenue
96,102

 
93,213

 
190,149

 
184,183

Segment costs of revenue and operating expenses:
 
 
 
 
 
 
 
OpenEdge
15,013

 
16,287

 
30,775

 
34,164

Data Connectivity and Integration
1,674

 
2,069

 
3,303

 
4,331

Application Development and Deployment
6,199

 
5,991

 
12,997

 
13,527

Total costs of revenue and operating expenses
22,886

 
24,347

 
47,075

 
52,022

Segment contribution margin:
 
 
 
 
 
 
 
OpenEdge
54,954

 
49,603

 
105,600

 
96,234

Data Connectivity and Integration
4,114

 
5,027

 
10,089

 
9,593

Application Development and Deployment
14,148

 
14,236

 
27,385

 
26,334

Total contribution margin
73,216

 
68,866

 
143,074

 
132,161

Other unallocated expenses (1)
51,428

 
48,582

 
103,518

 
110,655

Income from operations
21,788

 
20,284

 
39,556

 
21,506

Other (expense) income, net
(1,284
)
 
(1,552
)
 
(2,869
)
 
(2,899
)
Income before income taxes
$
20,504

 
$
18,732

 
$
36,687

 
$
18,607

 
 
 
 
 
 
 
 
(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: certain product development and corporate sales and marketing expenses, customer support, administration, amortization and impairment of acquired intangibles, impairment of goodwill, stock-based compensation, fees related to shareholder activist, restructuring, and acquisition-related expenses.
                                
Our revenues are derived from licensing our products, and from related services, which consist of maintenance, hosting services, 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,
2018
 
May 31,
2017
 
May 31,
2018
 
May 31,
2017
Software licenses
$
26,439

 
$
25,592

 
$
51,782

 
$
49,914

Maintenance
62,323

 
59,898

 
123,802

 
119,036

Services
7,340

 
7,723

 
14,565

 
15,233

Total revenue
$
96,102

 
$
93,213

 
$
190,149

 
$
184,183



20


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 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,
2018
 
May 31,
2017
 
May 31,
2018
 
May 31,
2017
North America
$
50,823

 
$
51,430

 
$
102,464

 
$
101,735

EMEA
35,333

 
30,646

 
68,347

 
60,490

Latin America
4,256

 
5,637

 
8,717

 
10,660

Asia Pacific
5,690

 
5,500

 
10,621

 
11,298

Total revenue
$
96,102

 
$
93,213

 
$
190,149

 
$
184,183


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 “believe,” “may,” “could,” “would,” “might,” “should,” “expect,” “intend,” “plan,” “target,” “anticipate” and “continue,” 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 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 have made acquisitions, and 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. (9) 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, 2017, as amended ("Annual Report on Form 10-K for the fiscal year ended November 30, 2017"). 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 strengthen, our consolidated results stated in U.S. dollars are positively impacted.

As exchange rates are an important factor in understanding period to period comparisons, we present revenue growth rates on a constant currency basis, which helps improve the understanding of our revenue results and our performance in comparison to prior periods. The constant currency information presented is calculated by translating current period results using prior

21


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

Progress Software Corporation ("Progress," the "Company," "we," "us," or "our") offers the leading platform for developing and deploying strategic business applications. We enable customers and partners to deliver modern, high-impact digital experiences with a fraction of the effort, time and cost. Progress offers powerful tools for easily building adaptive user experiences across any type of device or touchpoint, award-winning machine learning that enables cognitive capabilities to be a part of any application, the flexibility of a serverless cloud to deploy modern apps, business rules, web content management, plus leading data connectivity technology. Over 1,700 independent software vendors, 100,000 enterprise customers, and 2 million developers rely on Progress to power their applications. We operate as three distinct segments: OpenEdge, Data Connectivity and Integration, and Application Development and Deployment.

Beginning in late October 2016, with the appointment of Yogesh Gupta as our new Chief Executive Officer, our Board of Directors and executive management team undertook a comprehensive review of our strategy and operations.

On January 16, 2017, we announced a new strategic plan highlighted by a new product strategy and a streamlined operating approach with a tighter focus on areas of strength to more efficiently drive revenue. The key tenets of the new strategic plan are as follows:

Streamlined Operating Approach. In fiscal year 2017, we adapted our organization and operating principles to focus primarily on customer and partner retention and success for many of our core products. For selected products that have new customer acquisition potential, we also strengthened our demand generation and high volume, low touch e-commerce capabilities.

New Product Strategy. As part of the new strategic plan, we undertook a new product strategy to provide the platform and tools enterprises need to build next generation applications that drive their businesses, known as “Cognitive Applications.” We offer this platform to both new customers and partners as well as our existing OpenEdge partner and customer ecosystems. Our platform for Cognitive Applications makes it easy for developers to build machine learning into their applications, and includes:

Our leading UI development tools, which enable organizations to easily build engaging user interfaces for any device or front end;
Our NativeScript offering, which allows developers to use JavaScript to build native applications across multiple mobile platforms;
A modern serverless cloud backend application platform that runs on any cloud, is secure, high-performing, and highly-scalable while supporting all modern user interfaces;
Automated and intuitive machine learning capabilities for accelerating the creation and delivery of Cognitive Applications;
Our data connectivity and integration capabilities;
Our business logic and rules capabilities; and
Web Content Management for delivering personalized and engaging digital experiences.

Restructuring. With the adoption of our new product strategy, we discontinued our investment in our Digital Factory strategy and re-aligned our resources consistent with our core operating approach. To that end, during fiscal year 2017, we implemented restructuring efforts including the consolidation of facilities, implementation of a simplified organizational structure and a reduction of marketing and other external expenses. In addition, we reduced headcount by over 400 employees, totaling over 20% of our workforce. We reduced our full year expenses by over $30 million by the end of fiscal year 2017.

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. For example, in late fiscal 2017 and the first half of fiscal 2018, the value of the U.S. dollar weakened in comparison to certain foreign currencies, including in Europe. Since approximately one-third of our revenue is denominated in foreign currency, our revenue results during those periods were positively impacted. We expect that future fluctuations in foreign currency exchange rates will continue to impact our results.


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In September 2017, we announced a new capital allocation strategy pursuant to which we are targeting to return approximately 50% of our annual cash flows from operations to stockholders in the form of share repurchases and 25-30% through dividends. To that end, our Board of Directors increased our total share repurchase authorization to $250.0 million. As of May 31, 2018, there is $130.0 million remaining under this current authorization. We expect to repurchase an additional $30 million of shares of our common stock in the remainder of fiscal year 2018. However, the timing and amount of any shares repurchased will be determined by management based on its evaluation of market conditions and other factors, and we may choose to suspend, expand or discontinue the repurchase program at any time.

On September 6, 2017, our Board of Directors approved a 12% increase in our quarterly cash dividend to $0.14 per share of common stock. We began paying quarterly cash dividends of $0.125 per share of common stock to Progress stockholders in December 2016. We expect to continue paying quarterly cash dividends in subsequent quarters consistent with our capital allocation strategy. However, we may terminate or modify this program at any time without notice. On June 20, 2018, our Board of Directors declared a quarterly dividend of $0.14 per share of common stock that will be paid on September 17, 2018 to shareholders of record as of the close of business on September 3, 2018.

We 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. However, 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, including quarterly cash dividends and stock repurchases to Progress stockholders, through at least the next twelve months.

During the first quarter of fiscal year 2018, the Tax Cuts and Jobs Act was enacted in the United States. The Act reduces the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings. In December 2017, the Securities and Exchange Commission (the "SEC") issued SAB 118, which directs taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. As of May 31, 2018, we have not completed our accounting for the tax effects of enactment of the Act, however, as described elsewhere in this Form 10-Q, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax.

In September 2017, Praesidium Investment Management publicly announced in a Schedule 13D filed with the SEC its disagreement with our strategy and stated that it was seeking changes in the composition of our Board of Directors. In March 2018, Praesidium Investment Management publicly announced in an amended Schedule 13D filed with the SEC that it had sold all but 1,000 shares of Company common stock that it previously held. We incurred professional and other fees relating to Praesidium’s actions as noted below. We do not expect to incur additional professional and other fees related to this matter.

Results of Operations

Revenue

 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2018
 
May 31, 2017
 
As Reported
 
Constant
Currency
Revenue
$
96,102

 
$
93,213

 
3
%
 
1
%
 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2018
 
May 31, 2017
 
As Reported
 
Constant
Currency
Revenue
$
190,149

 
$
184,183

 
3
%
 
1
%

Total revenue increased in the second quarter and first six months of fiscal year 2018 as compared to the same periods last year primarily due to a favorable impact from currency exchange rates. Changes in prices from fiscal year 2017 to 2018 did not have a significant impact on our revenue.


23


Software License Revenue

 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2018
 
May 31, 2017
 
As Reported
 
Constant
Currency
Software Licenses
$
26,439

 
$
25,592

 
3
%
 
1
%
As a percentage of total revenue
28
%
 
27
%
 
 
 
 
 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2018
 
May 31, 2017
 
As Reported
 
Constant
Currency
Software Licenses
$
51,782

 
$
49,914

 
4
%
 
1
%
As a percentage of total revenue
27
%
 
27
%
 
 
 
 

Software license revenue increased in the second quarter and first six months of fiscal year 2018 as compared to the same periods last year primarily due to a favorable impact from currency exchange rates and an increase in license sales in our OpenEdge segment. The increase was partially offset by a decline in software license revenue in our Data Connectivity and Integration and Application Development and Deployment segments during the second quarter of fiscal year 2018 and a decline in our Application Development and Deployment segment during the first six months of fiscal year 2018 as compared to the same periods in the prior year.

Maintenance and Services Revenue
 
 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2018
 
May 31, 2017
 
As Reported
 
Constant
Currency
Maintenance
$
62,323

 
$
59,898

 
4
 %
 
1
 %
As a percentage of total revenue
65
%
 
64
%
 
 
 
 
Services
7,340

 
7,723

 
(5
)%
 
(6
)%
As a percentage of total revenue
8
%
 
8
%
 
 
 
 
Total maintenance and services revenue
$
69,663

 
$
67,621

 
3
 %
 
1
 %
As a percentage of total revenue
72
%
 
73
%
 
 
 
 
 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2018
 
May 31, 2017
 
As Reported
 
Constant
Currency
Maintenance
$
123,802

 
$
119,036

 
4
 %
 
1
 %
As a percentage of total revenue
65
%
 
65
%
 
 
 
 
Services
14,565

 
15,233

 
(4
)%
 
(6
)%
As a percentage of total revenue
8
%
 
8
%
 
 
 
 
Total maintenance and services revenue
$
138,367

 
$
134,269

 
3
 %
 
 %
As a percentage of total revenue
73
%
 
73
%
 
 
 
 

Maintenance revenue increased in all periods presented primarily due to a favorable impact from currency exchange rates and an increase in maintenance revenue in our OpenEdge and Application Development and Deployment segments, offset by a decline in our Data Connectivity and Integration segment. The decrease in services revenue in all periods presented was due to lower professional services revenue generated by our OpenEdge segment, partially offset by an increase in Sitefinity professional services revenue in our Application Development and Deployment segment.


24


Revenue by Region

 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2018
 
May 31, 2017
 
As Reported
 
Constant
Currency
North America
$
50,823

 
$
51,430

 
(1
)%
 
(1
)%
As a percentage of total revenue
53
%
 
55
%
 
 
 
 
Europe, the Middle East and Africa ("EMEA")
$
35,333

 
$
30,646

 
15
 %
 
7
 %
As a percentage of total revenue
37
%
 
33
%
 
 
 
 
Latin America
$
4,256

 
$
5,637

 
(24
)%
 
(20
)%
As a percentage of total revenue
4
%
 
6
%
 
 
 
 
Asia Pacific
$
5,690

 
$
5,500

 
3
 %
 
3
 %
As a percentage of total revenue
6
%
 
6
%
 
 
 
 
 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2018
 
May 31, 2017
 
As Reported
 
Constant
Currency
North America
$
102,464

 
$
101,735

 
1
 %
 
1
 %
As a percentage of total revenue
54
%
 
55
%
 
 
 
 
EMEA
$
68,347

 
$
60,490

 
13
 %
 
4
 %
As a percentage of total revenue
36
%
 
33
%
 
 
 
 
Latin America
$
8,717

 
$
10,660

 
(18
)%
 
(16
)%
As a percentage of total revenue
4
%
 
6
%
 
 
 
 
Asia Pacific
$
10,621

 
$
11,298

 
(6
)%
 
(8
)%
As a percentage of total revenue
6
%
 
6
%
 
 
 
 

Total revenue generated in North America decreased $0.6 million, and total revenue generated outside North America increased $3.5 million, in the second quarter of fiscal year 2018 as compared to the same quarter last year. Total revenue generated in North America increased $0.7 million, and total revenue generated outside North America increased $5.2 million, in the first six months of fiscal year 2018 as compared to the same period last year. The decrease in North America in the second quarter of fiscal year 2018 was primarily due to lower license revenue generated by our Data Connectivity and Integration segment, partially offset by increased license and maintenance revenue in our OpenEdge segment. The increase in North America in the first six months of fiscal year 2018 was primarily due to an increase in license and maintenance revenue in our OpenEdge segment. The increase in revenue generated in EMEA in all periods was primarily due to an increase in OpenEdge license and maintenance revenue, which was further impacted by favorable exchange rates as described above. The decrease in revenue generated in Latin America in all periods was primarily due to license and maintenance revenue decreases in our OpenEdge segment. The revenue generated in Asia Pacific in the second quarter increased as compared to the same quarter last year as a result of higher license revenue in our OpenEdge segement. The decrease in revenue generated in Asia Pacific in the first six months of fiscal year 2018 as compared to the same period last year was primarily due to lower license and maintenance revenue in our OpenEdge segment.

Total revenue generated in markets outside North America represented 46% of total revenue in the first six months of fiscal year 2018 and 45% of total revenue in the same period last year. If exchange rates had remained constant in the first six months of fiscal year 2018 as compared to the exchange rates in effect in the same period of fiscal year 2017, total revenue generated in markets outside North America would have been 45% of total revenue.


25


Revenue by Segment

 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2018
 
May 31, 2017
 
As Reported
 
Constant Currency
OpenEdge segment
$
69,967

 
$
65,890

 
6
 %
 
3
 %
Data Connectivity and Integration segment
5,788

 
7,096

 
(18
)%
 
(19
)%
Application Development and Deployment segment
20,347

 
20,227

 
1
 %
 
1
 %
Total revenue
$
96,102

 
$
93,213

 
3
 %
 
1
 %
 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2018
 
May 31, 2017
 
As Reported
 
Constant Currency
OpenEdge segment
$
136,375

 
$
130,398

 
5
 %
 
1
 %
Data Connectivity and Integration segment
13,392

 
13,924

 
(4
)%
 
(4
)%
Application Development and Deployment segment
40,382

 
39,861

 
1
 %
 
1
 %
Total revenue
$
190,149

 
$
184,183

 
3
 %
 
1
 %

Revenue in the OpenEdge segment increased in all periods primarily due to the favorable impact from exchange rate fluctuations and an increase in license and maintenance revenue, partially offset by a decrease in professional services revenue. Data Connectivity and Integration revenue decreased in all periods primarily due to the timing of certain renewals by original equipment manufactures ("OEMs"). Application Development and Deployment revenue increased in all periods primarily as a result of higher maintenance and services revenue from Sitefinity.

Cost of Software Licenses

 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2018
 
May 31, 2017
 
Percentage
Change
 
May 31, 2018
 
May 31, 2017
 
Percentage
Change
Cost of software licenses
$
1,233

 
$
1,422

 
(13
)%
 
$
2,494

 
$
3,010

 
(17
)%
As a percentage of software license revenue
5
%
 
6
%
 
 
 
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 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, 2018
 
May 31, 2017
 
Percentage
Change
 
May 31, 2018
 
May 31, 2017
 
Percentage
Change
Cost of maintenance and services
$
9,511

 
$
11,262

 
(16
)%
 
$
19,335

 
$
21,754

 
(11
)%
As a percentage of maintenance and services revenue
14
%
 
17
%
 
 
 
14
%
 
16
%
 
 
As a percentage of total revenue
10
%
 
12
%
 
 
 
10
%
 
12
%
 
 

Cost of maintenance and services consists primarily of costs of providing customer support, consulting, and education. The decrease in both periods was primarily due to lowered compensation-related costs resulting from a decrease in headcount.


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Amortization of Acquired Intangibles
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2018
 
May 31, 2017
 
Percentage
Change
 
May 31, 2018
 
May 31, 2017
 
Percentage
Change
Amortization of acquired intangibles
$
5,899

 
$
4,683

 
26
%
 
$
11,717

 
$
8,361

 
40
%
As a percentage of total revenue
6
%
 
5
%
 
 
 
6
%
 
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 increased primarily due to the addition of intangible assets associated with the technologies obtained in connection with the acquisitions of DataRPM in the second quarter of fiscal year 2017 and Kinvey in the third quarter of fiscal year 2017.

Gross Profit
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2018
 
May 31, 2017
 
Percentage
Change
 
May 31, 2018
 
May 31, 2017
 
Percentage
Change
Gross profit
$
79,459

 
$
75,846

 
5
%
 
$
156,603

 
$
151,058

 
4
%
As a percentage of total revenue
83
%
 
81
%
 
 
 
82
%
 
82
%
 
 

Our gross profit increased in the second quarter and first six months of fiscal year 2018 primarily due to the increases of license and maintenance revenue and the decrease in cost of maintenance and services as described above, offset slightly by the increase of amortization of acquired intangibles.

Sales and Marketing

 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2018
 
May 31, 2017
 
Percentage
Change
 
May 31, 2018
 
May 31, 2017
 
Percentage
Change
Sales and marketing
$
21,658

 
$
21,236

 
2
%
 
$
43,086

 
$
46,957

 
(8
)%
As a percentage of total revenue
23
%
 
23
%
 
 
 
23
%
 
25
%
 
 

Sales and marketing expenses increased in the second quarter of fiscal year 2018 as compared to the same period last year primarily due to higher marketing programs costs related to our annual customer and partner conference, which took place during the quarter. The increase was partially offset by lower compensation-related expenses. The decrease in the first six months of fiscal year 2018 as compared to the same period last year was primarily due to lower compensation-related and travel costs as a result of the headcount reduction actions which occurred in the first quarter of fiscal year 2017.

Product Development

 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2018
 
May 31, 2017
 
Percentage
Change
 
May 31, 2018
 
May 31, 2017
 
Percentage
Change
Product development costs
$
19,822

 
$
18,791

 
5
%
 
$
40,067

 
$
36,125

 
11
%
As a percentage of total revenue
21
%
 
20
%
 
 
 
21
%
 
20
%
 
 

Product development expenses increased in the second quarter and first six months of fiscal year 2018 as compared to the same period last year primarily due to higher stock-based compensation expenses. During the first quarter of fiscal year 2017, there were significant forfeitures due to our restructuring action, which significantly reduced stock-based compensation expense in the second quarter and first six months of fiscal year 2017 as compared to the same periods in the current fiscal year.


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General and Administrative

 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2018
 
May 31, 2017
 
Percentage
Change
 
May 31, 2018
 
May 31, 2017
 
Percentage
Change
General and administrative
$
12,190

 
$
11,606

 
5
%
 
$
23,452

 
$
22,174

 
6
%
As a percentage of total revenue
13
%
 
12
%
 
 
 
12
%