10-Q 1 q3201810-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 August 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 September 27, 2018, there were 44,902,607 shares of the registrant’s common stock, $.01 par value per share, outstanding.



PROGRESS SOFTWARE CORPORATION
FORM 10-Q
FOR THE NINE MONTHS ENDED AUGUST 31, 2018
INDEX

 
 
 
PART I
 
 
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 5.
Item 6.
 
 
 
 

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets

(In thousands, except share data)
August 31,
2018
 
November 30,
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
98,697

 
$
133,464

Short-term investments
39,184

 
50,145

Total cash, cash equivalents and short-term investments
137,881

 
183,609

Accounts receivable (less allowances of $701 and $676, respectively)
45,817

 
61,210

Other current assets
13,696

 
18,588

Total current assets
197,394

 
263,407

Property and equipment, net
42,689

 
42,261

Intangible assets, net
67,712

 
94,894

Goodwill
314,951

 
315,041

Deferred tax assets
876

 
1,123

Other assets
1,810

 
1,992

Total assets
$
625,432

 
$
718,718

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

 
$
5,819

Accounts payable
8,299

 
9,000

Accrued compensation and related taxes
17,534

 
32,373

Dividends payable to shareholders
6,324

 
6,619

Income taxes payable
2,889

 
1,173

Other accrued liabilities
15,498

 
20,496

Short-term deferred revenue
131,854

 
132,538

Total current liabilities
188,217

 
208,018

Long-term debt, net
111,725

 
116,090

Long-term deferred revenue
12,975

 
9,750

Deferred tax liabilities
1,323

 
2,809

Other noncurrent liabilities
5,720

 
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, 45,133,361 shares in 2018 and 47,281,035 shares in 2017
263,255

 
249,836

Retained earnings
68,329

 
145,247

Accumulated other comprehensive loss
(26,112
)
 
(18,999
)
Total shareholders’ equity
305,472

 
376,084

Total liabilities and shareholders’ equity
$
625,432

 
$
718,718

See notes to unaudited condensed consolidated financial statements.

3


Condensed Consolidated Statements of Operations
 
 
Three Months Ended
 
Nine Months Ended
(In thousands, except per share data)
August 31,
2018
 
August 31,
2017
 
August 31,
2018
 
August 31,
2017
Revenue:
 
 
 
 
 
 
 
Software licenses
$
27,204

 
$
28,529

 
$
78,986

 
$
78,443

Maintenance and services
68,479

 
68,781

 
206,846

 
203,050

Total revenue
95,683

 
97,310

 
285,832

 
281,493

Costs of revenue:
 
 
 
 
 
 
 
Cost of software licenses
1,077

 
1,337

 
3,571

 
4,347

Cost of maintenance and services
10,110

 
10,970

 
29,445

 
32,724

Amortization of acquired intangibles
5,509

 
5,768

 
17,226

 
14,129

Total costs of revenue
16,696

 
18,075

 
50,242

 
51,200

Gross profit
78,987

 
79,235

 
235,590

 
230,293

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
21,752

 
23,159

 
64,838

 
70,116

Product development
19,338

 
19,620

 
59,405

 
55,745

General and administrative
12,218

 
11,164

 
35,670

 
33,338

Amortization of acquired intangibles
3,319

 
3,319

 
9,956

 
9,721

Fees related to shareholder activist

 

 
1,472

 

Restructuring expense
135

 
923

 
2,382

 
18,724

Acquisition-related expenses
42

 
751

 
128

 
844

Total operating expenses
56,804

 
58,936

 
173,851

 
188,488

Income from operations
22,183

 
20,299

 
61,739

 
41,805

Other (expense) income, net:
 
 
 
 
 
 
 
Interest expense
(1,337
)
 
(1,221
)
 
(3,774
)
 
(3,455
)
Interest income and other, net
322

 
239

 
961

 
717

Foreign currency (loss) gain, net
(946
)
 
(418
)
 
(2,017
)
 
(1,561
)
Total other (expense) income, net
(1,961
)
 
(1,400
)
 
(4,830
)
 
(4,299
)
Income before income taxes
20,222

 
18,899

 
56,909

 
37,506

Provision for income taxes
3,476

 
7,727

 
11,848

 
16,518

Net income
$
16,746

 
$
11,172

 
$
45,061

 
$
20,988

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.37

 
$
0.23

 
$
0.99

 
$
0.43

Diluted
$
0.37

 
$
0.23

 
$
0.97

 
$
0.43

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
45,130

 
48,071

 
45,730

 
48,342

Diluted
45,576

 
48,370

 
46,380

 
48,631

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.140

 
$
0.125

 
$
0.420

 
$
0.375

See notes to unaudited condensed consolidated financial statements.

4


Condensed Consolidated Statements of Comprehensive Income

 
Three Months Ended
 
Nine Months Ended
(In thousands)
August 31, 2018
 
August 31, 2017
 
August 31, 2018
 
August 31, 2017
Net income
$
16,746

 
$
11,172

 
$
45,061

 
$
20,988

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(1,950
)
 
5,920

 
(7,137
)
 
11,291

Unrealized gains on investments, net of tax provision of $18 and $57 for the third quarter and first nine months of 2018, respectively and $17 and $62 for the third quarter and first nine months of 2017, respectively
52

 
27

 
24

 
105

Total other comprehensive (loss) income, net of tax
(1,898
)
 
5,947

 
(7,113
)
 
11,396

Comprehensive income
$
14,848

 
$
17,119

 
$
37,948

 
$
32,384


See notes to unaudited condensed consolidated financial statements.


5


Condensed Consolidated Statements of Cash Flows
 
 
Nine Months Ended
(In thousands)
August 31,
2018
 
August 31,
2017
Cash flows from operating activities:
 
 
 
Net income
$
45,061

 
$
20,988

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property and equipment
5,158

 
5,794

Amortization of intangibles and other
28,489

 
25,530

Stock-based compensation
14,716

 
9,559

Loss on disposal of property
201

 
186

Deferred income taxes
(1,487
)
 
3,518

Excess tax benefit from stock plans

 
(403
)
Allowances for accounts receivable
140

 
53

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
15,017

 
15,769

Other assets
4,465

 
3,783

Accounts payable and accrued liabilities
(20,290
)
 
(10,971
)
Income taxes payable
1,575

 
759

Deferred revenue
3,980

 
(1,394
)
Net cash flows from operating activities
97,025

 
73,171

Cash flows from (used in) investing activities:
 
 
 
Purchases of investments
(8,258
)
 
(30,482
)
Sales and maturities of investments
18,495

 
25,904

Purchases of property and equipment
(5,968
)
 
(865
)
Payments for acquisitions, net of cash acquired

 
(77,149
)
Proceeds from sale of property, plant and equipment, net

 
1,557

Net cash flows from (used in) investing activities
4,269

 
(81,035
)
Cash flows used in financing activities:
 
 
 
Proceeds from stock-based compensation plans
7,943

 
7,245

Payments for taxes related to net share settlements of equity awards
(1,942
)
 
(2,369
)
Repurchases of common stock
(110,000
)
 
(43,936
)
Excess tax benefit from stock plans

 
403

Dividend payments to shareholders
(19,472
)
 
(18,151
)
Payment of long-term debt
(4,641
)
 
(11,250
)
Net cash flows used in financing activities
(128,112
)
 
(68,058
)
Effect of exchange rate changes on cash
(7,949
)
 
13,643

Net decrease in cash and cash equivalents
(34,767
)
 
(62,279
)
Cash and cash equivalents, beginning of period
133,464

 
207,036

Cash and cash equivalents, end of period
$
98,697

 
$
144,757


6


Condensed Consolidated Statements of Cash Flows, continued
 
Nine Months Ended
 
August 31,
2018
 
August 31,
2017
Supplemental disclosure:
 
 
 
Cash paid for income taxes, net of refunds of $889 in 2018 and $3,584 in 2017
$
7,515

 
$
10,469

Cash paid for interest
$
3,096

 
$
2,703

Non-cash investing and financing activities:
 
 
 
Total fair value of restricted stock awards, restricted stock units and deferred stock units on date vested
$
9,546

 
$
13,833

Dividends declared
$
6,324

 
$
5,975

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").

We made no material changes in the application of our significant accounting policies that were disclosed in our Annual Report. We have prepared the accompanying unaudited condensed consolidated financial statements on the same basis as the audited financial statements included in our Annual Report, 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 August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). ASU 2018-15 amends current guidance to align the accounting for costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing costs associated with developing or obtaining internal-use software. Capitalized implementation costs must be expensed over the term of the hosting arrangement and presented in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement. The guidance in ASU 2018-15 is effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted. We are currently accounting for costs incurred in a cloud computing arrangement in accordance with the guidance provided in ASU 2018-15.

In February 2018, the 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.


8


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.

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 October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16"), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Under current GAAP, the recognition of current and deferred income taxes for an intra-entity transfer are prohibited until the asset has been sold to an outside party. The amendments in ASU 2016-16 are effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the impact of the adoption of this update on our consolidated financial position, results of operations, and disclosure requirements.

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. Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The standard also requires new disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. 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 an unbilled receivable on the balance sheet. Accordingly, the recognition of 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 August 31, 2018 is as follows (in thousands):
 
 
Amortized Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
92,827

 
$

 
$

 
$
92,827

Money market funds
5,870

 

 

 
5,870

State and municipal bond obligations
24,349

 

 
(125
)
 
24,224

U.S. treasury bonds
6,715

 

 
(25
)
 
6,690

Corporate bonds
8,332

 

 
(62
)
 
8,270

Total
$
138,093

 
$

 
$
(212
)
 
$
137,881



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):
 
 
August 31, 2018
 
November 30, 2017
 
Cash and
Equivalents
 
Short-Term
Investments
 
Cash and
Equivalents
 
Short-Term
Investments
Cash
$
92,827

 
$

 
$
130,547

 
$

Money market funds
5,870

 

 
2,917

 

State and municipal bond obligations

 
24,224

 

 
40,227

U.S. treasury bonds

 
6,690

 

 
3,491

Corporate bonds

 
8,270

 

 
6,427

Total
$
98,697

 
$
39,184

 
$
133,464

 
$
50,145


The fair value of debt securities by contractual maturity is as follows (in thousands):
 
 
August 31,
2018
 
November 30,
2017
Due in one year or less
$
26,209

 
$
22,333

Due after one year (1)
12,975

 
27,812

Total
$
39,184

 
$
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 on the condensed consolidated balance sheets.

We did not hold any investments with continuous unrealized losses as of August 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 August 31, 2018, $1.8 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 nine months ended August 31, 2018, realized and unrealized losses of $1.0 million and $4.1 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 nine months ended August 31, 2017, realized and unrealized gains of $5.2 million and $9.6 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):
 
 
August 31, 2018
 
November 30, 2017
 
Notional Value
 
Fair Value
 
Notional Value
 
Fair Value
Forward contracts to sell U.S. dollars
$
149,204

 
$
(1,806
)
 
$
119,192

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

 

 
462

 

Total
$
149,204

 
$
(1,806
)
 
$
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 August 31, 2018 (in thousands):
 
 
 
 
Fair Value Measurements Using
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Money market funds
$
5,870

 
$
5,870

 
$

 
$

State and municipal bond obligations
24,224

 

 
24,224

 

U.S. treasury bonds
6,690

 

 
6,690

 

Corporate bonds
8,270

 

 
8,270

 

Liabilities
 
 
 
 
 
 
 
Foreign exchange derivatives
$
(1,806
)
 
$

 
$
(1,806
)
 
$


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 nine months ended August 31, 2018.


12


Note 5: Intangible Assets and Goodwill

Intangible Assets

Intangible assets are comprised of the following significant classes (in thousands):
 
 
August 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

 
$
(105,451
)
 
$
48,850

 
$
154,301

 
$
(88,224
)
 
$
66,077

Customer-related
67,802

 
(54,024
)
 
13,778

 
67,802

 
(46,230
)
 
21,572

Trademarks and trade names
17,740

 
(12,656
)
 
5,084

 
17,740

 
(10,495
)
 
7,245

Total
$
239,843

 
$
(172,131
)
 
$
67,712

 
$
239,843

 
$
(144,949
)
 
$
94,894


In the three and nine months ended August 31, 2018, amortization expense related to intangible assets was $8.8 million and $27.2 million, respectively. In the three and nine months ended August 31, 2017, amortization expense related to intangible assets was $9.1 million and $23.9 million, respectively.

Future amortization expense for intangible assets as of August 31, 2018, is as follows (in thousands):
 
Remainder of 2018
$
8,873

2019
34,932

2020
10,152

2021
10,033

2022
3,722

Total
$
67,712


Goodwill

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

Balance, November 30, 2017
$
315,041

Translation adjustments
(90
)
Balance, August 31, 2018
$
314,951


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

 
$
(90
)
 
$
248,946

Data Connectivity and Integration
19,040

 

 
19,040

Application Development and Deployment
46,965

 

 
46,965

Total goodwill
$
315,041

 
$
(90
)
 
$
314,951


During the quarter ending August 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 serverless 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 nine months ended August 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 August 31, 2018, we incurred minimal stock-based compensation expense related to these restricted stock units. During the nine months ended August 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 nine months ended August 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 August 31, 2018 was $119.1 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 August 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 August 31, 2018 was 3.63%.

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 August 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 August 31, 2018 and August 31, 2017 and $0.3 million for the nine months ended August 31, 2018 and August 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 August 31, 2018, there were no amounts outstanding under the revolving line and $1.3 million of letters of credit.

As of August 31, 2018, aggregate principal payments of long-term debt for the next five years are (in thousands):
Remainder of 2018
$
1,546

2019
6,188

2020
9,281

2021
12,375

2022
89,719

Total
$
119,109


Note 8: Common Stock Repurchases

In the three and nine months ended August 31, 2018, we repurchased and retired 0.5 million shares of our common stock for $20.0 million and 2.6 million shares for $110.0 million, respectively. In the three and nine months ended August 31, 2017, we repurchased and retired 0.6 million shares for $19.0 million and 1.5 million shares for $43.9 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 August 31, 2018, there was $110.0 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 the 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
 
Nine Months Ended
 
August 31,
2018
 
August 31,
2017
 
August 31,
2018
 
August 31,
2017
Cost of maintenance and services
$
(96
)
 
$
239

 
$
419

 
$
790

Sales and marketing
762

 
808

 
2,127

 
1,371

Product development
1,744

 
1,645

 
5,774

 
2,699

General and administrative
2,156

 
1,604

 
6,396

 
4,699

Total stock-based compensation
$
4,566

 
$
4,296

 
$
14,716

 
$
9,559


Note 10: Accumulated Other Comprehensive Loss

The following table summarizes the changes in accumulated balances of other comprehensive loss during the nine months ended August 31, 2018 (in thousands):

 
Foreign Currency Translation Adjustment
 
Unrealized (Losses) Gains on Investments
 
Accumulated Other Comprehensive Loss
Balance, December 1, 2017
$
(18,770
)
 
$
(229
)
 
$
(18,999
)
Other comprehensive loss before reclassifications, net of tax
(7,137
)
 
24

 
(7,113
)
Balance, August 31, 2018
$
(25,907
)
 
$
(205
)
 
$
(26,112
)

The tax effect on accumulated unrealized (losses) gains on investments was minimal as of August 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
1,132

 
1,250

 
2,382

Cash disbursements
(1,172
)
 
(4,752
)
 
(5,924
)
Translation adjustments and other
45

 
10

 
55

Balance, August 31, 2018
$
575

 
$
64

 
$
639


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 fiscal year 2018. We expect to incur additional expenses related to facility closures as part of this restructuring action through fiscal year 2019, 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 nine months ended August 31, 2018, we incurred expenses of $0.1 million and $2.4 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 fiscal year 2019. The short-term portion of the restructuring reserve of $0.5 million is included in other accrued liabilities and the long-term portion of $0.1 million is included in other noncurrent liabilities on the condensed consolidated balance sheets at August 31, 2018.

Note 12: Income Taxes

Our income tax provision for the third 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 17% in the third quarter of fiscal year 2018 compared to 41% in the third quarter of fiscal year 2017, and 21% in the first nine months of fiscal year 2018 compared to 44% 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 (the "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 August 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 tax amounts. During the first quarter of fiscal year 2018, we recognized a provisional tax benefit of $1.4 million related to the

18


re-measurement of our U.S. deferred tax balances. During the third quarter of fiscal year 2018, we recognized an additional provisional tax benefit of $0.6 million related to the re-measurement of our U.S. deferred tax balances for the true-up of deferred tax assets and liabilities that we expect upon the filing of our fiscal year 2017 U.S. income tax return in the fourth quarter of fiscal year 2018.

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
 
Nine Months Ended
 
August 31,
2018
 
August 31,
2017
 
August 31,
2018
 
August 31,
2017
Net income
$
16,746

 
$
11,172

 
$
45,061

 
$
20,988

Weighted average shares outstanding
45,130

 
48,071

 
45,730

 
48,342

Dilutive impact from common stock equivalents
446

 
299

 
650

 
289

Diluted weighted average shares outstanding
45,576

 
48,370

 
46,380

 
48,631

Basic earnings per share
$
0.37

 
$
0.23

 
$
0.99

 
$
0.43

Diluted earnings per share
$
0.37

 
$
0.23

 
$
0.97

 
$
0.43


We excluded stock awards representing approximately 690,000 shares and 577,000 shares of common stock from the calculation of diluted earnings per share in the three and nine months ended August 31, 2018, respectively, because these awards were anti-dilutive. In the three and nine months ended August 31, 2017, we excluded stock awards representing 905,000 shares and 648,000 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
 
Nine Months Ended
(In thousands)
August 31, 2018
 
August 31, 2017
 
August 31, 2018
 
August 31, 2017
Segment revenue:
 
 
 
 
 
 
 
OpenEdge
$
68,029

 
$
68,135

 
$
204,404

 
$
198,533

Data Connectivity and Integration
7,597

 
8,987

 
20,989

 
22,911

Application Development and Deployment
20,057

 
20,188

 
60,439

 
60,049

Total revenue
95,683

 
97,310

 
285,832

 
281,493

Segment costs of revenue and operating expenses:
 
 
 
 
 
 
 
OpenEdge
16,419

 
18,374

 
47,194

 
52,538

Data Connectivity and Integration
1,520

 
2,200

 
4,823

 
6,531

Application Development and Deployment
7,071

 
6,369

 
20,068

 
19,896

Total costs of revenue and operating expenses
25,010

 
26,943

 
72,085

 
78,965

Segment contribution margin:
 
 
 
 
 
 
 
OpenEdge
51,610

 
49,761

 
157,210

 
145,995

Data Connectivity and Integration
6,077

 
6,787

 
16,166

 
16,380

Application Development and Deployment
12,986

 
13,819

 
40,371

 
40,153

Total contribution margin
70,673

 
70,367

 
213,747

 
202,528

Other unallocated expenses (1)
48,490

 
50,068

 
152,008

 
160,723

Income from operations
22,183

 
20,299

 
61,739

 
41,805

Other (expense) income, net
(1,961
)
 
(1,400
)
 
(4,830
)
 
(4,299
)
Income before income taxes
$
20,222

 
$
18,899

 
$
56,909

 
$
37,506

 
 
 
 
 
 
 
 
(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 of acquired intangibles, 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
 
Nine Months Ended
(In thousands)
August 31,
2018
 
August 31,
2017
 
August 31,
2018
 
August 31,
2017
Software licenses
$
27,204

 
$
28,529

 
$
78,986

 
$
78,443

Maintenance
60,566

 
60,536

 
184,368

 
179,572

Services
7,913

 
8,245

 
22,478

 
23,478

Total revenue
$
95,683

 
$
97,310

 
$
285,832

 
$
281,493



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
 
Nine Months Ended
(In thousands)
August 31,
2018
 
August 31,
2017
 
August 31,
2018
 
August 31,
2017
North America
$
52,212

 
$
55,703

 
$
154,676

 
$
157,438

EMEA
33,422

 
31,830

 
101,769

 
92,320

Latin America
4,341

 
5,009

 
13,058

 
15,669

Asia Pacific
5,708

 
4,768

 
16,329

 
16,066

Total revenue
$
95,683

 
$
97,310

 
$
285,832

 
$
281,493


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"). 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 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.

Product Strategy. As part of the strategic plan implemented in early 2017, 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 enables developers to build the most modern applications quickly and easily, 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 high productivity 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 in fiscal year 2017, 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 six months 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. However, during our third fiscal quarter, the U.S. dollar strengthened in comparison to those currencies, negatively impacting our revenue during the period. We expect that future fluctuations in foreign currency exchange rates will continue to impact our results.

22



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 August 31, 2018, there is $110.0 million remaining under this current authorization. We expect to repurchase an additional $10 million of shares of our common stock in the remainder of fiscal year 2018 and the remaining $100 million in fiscal year 2019. 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 21, 2018, our Board of Directors approved an 11% increase to our quarterly cash dividend from $0.14 to $0.155 per share of common stock, which will be paid on December 17, 2018 to shareholders of record as of the close of business on December 3, 2018. We began paying quarterly cash dividends of $0.125 per share of common stock to Progress stockholders in December 2016 and increased the quarterly cash dividend to $0.14 per share in September 2017. 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.

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 August 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.

Results of Operations

Revenue

 
Three Months Ended
 
Percentage Change
(In thousands)
August 31, 2018
 
August 31, 2017
 
As Reported
 
Constant
Currency
Revenue
$
95,683

 
$
97,310

 
(2
)%
 
(1
)%
 
Nine Months Ended
 
Percentage Change
(In thousands)
August 31, 2018
 
August 31, 2017
 
As Reported
 
Constant
Currency
Revenue
$
285,832

 
$
281,493

 
2
%
 
%

Total revenue decreased in the third quarter of fiscal year 2018 as compared to the same quarter last year due to the strengthening of the U.S. dollar during the quarter, which resulted in an unfavorable impact from foreign currency exchange rates, and a decrease in license revenue as further described below. In addition, total revenue increased in the first nine months of fiscal year 2018 as compared to the same period last year. The increase was primarily due to a favorable impact of currency exchange rates during the first nine months of fiscal year 2018 and an increase in maintenance revenue. 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)
August 31, 2018
 
August 31, 2017
 
As Reported
 
Constant
Currency
Software Licenses
$
27,204

 
$
28,529

 
(5
)%
 
(4
)%
As a percentage of total revenue
28
%
 
29
%
 
 
 
 
 
Nine Months Ended
 
Percentage Change
(In thousands)
August 31, 2018
 
August 31, 2017
 
As Reported
 
Constant
Currency
Software Licenses
$
78,986

 
$
78,443

 
1
%
 
(1
)%
As a percentage of total revenue
28
%
 
28
%
 
 
 
 

Software license revenue decreased in the third quarter of fiscal year 2018 as compared to the same period last year due to a decrease in software license revenue in our Data Connectivity and Integration and Application Development and Deployment segments, partially offset by an increase in license sales in our OpenEdge segment. Software license revenue increased in the first nine months of fiscal year 2018 as compared to the same period 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 offset by a decline in software license revenue in our Data Connectivity and Integration and Application Development and Deployment segments.

Maintenance and Services Revenue
 
 
Three Months Ended
 
Percentage Change
(In thousands)
August 31, 2018
 
August 31, 2017
 
As Reported
 
Constant
Currency
Maintenance
$
60,566

 
$
60,536

 
 %
 
1
 %
As a percentage of total revenue
63
%
 
62
%
 
 
 
 
Services
7,913

 
8,245

 
(4
)%
 
(4
)%
As a percentage of total revenue
8
%
 
8
%
 
 
 
 
Total maintenance and services revenue
$
68,479

 
$
68,781

 
 %
 
 %
As a percentage of total revenue
72
%
 
71
%
 
 
 
 
 
Nine Months Ended
 
Percentage Change
(In thousands)
August 31, 2018
 
August 31, 2017
 
As Reported
 
Constant
Currency
Maintenance
$
184,368

 
$
179,572

 
3
 %
 
1
 %
As a percentage of total revenue
65
%
 
64
%
 
 
 
 
Services
22,478

 
23,478

 
(4
)%
 
(5
)%
As a percentage of total revenue
8
%
 
8
%
 
 
 
 
Total maintenance and services revenue
$
206,846

 
$
203,050

 
2
 %
 
 %
As a percentage of total revenue
72
%
 
72
%
 
 
 
 

Maintenance and services revenue remained flat in the third quarter of fiscal year 2018 as compared to the same period last year. Maintenance revenue increased in the first nine months of fiscal year 2018 due to a favorable impact from currency exchange rates and an increase in maintenance revenue in our Application Development and Deployment and OpenEdge segments, partially offset by a decline in our Data Connectivity and Integration segment. Services revenue decreased in all periods primarily due to lower professional services revenue from our OpenEdge segment.


24


Revenue by Region

 
Three Months Ended
 
Percentage Change
(In thousands)
August 31, 2018
 
August 31, 2017
 
As Reported
 
Constant
Currency
North America
$
52,212

 
$
55,703

 
(6
)%
 
(6
)%
As a percentage of total revenue
55
%
 
57
%
 
 
 
 
Europe, the Middle East and Africa ("EMEA")
$
33,422

 
$
31,830

 
5
 %
 
5
 %
As a percentage of total revenue
35
%
 
33
%
 
 
 
 
Latin America
$
4,341

 
$
5,009

 
(13
)%
 
(1
)%
As a percentage of total revenue
4
%
 
5
%
 
 
 
 
Asia Pacific
$
5,708

 
$
4,768

 
20
 %
 
23
 %
As a percentage of total revenue
6
%
 
5
%
 
 
 
 
 
Nine Months Ended
 
Percentage Change
(In thousands)
August 31, 2018
 
August 31, 2017
 
As Reported
 
Constant
Currency
North America
$
154,676

 
$
157,438

 
(2
)%
 
(2
)%
As a percentage of total revenue
54
%
 
56
%
 
 
 
 
EMEA
$
101,769

 
$
92,320

 
10
 %
 
4
 %
As a percentage of total revenue
36
%
 
33
%
 
 
 
 
Latin America
$
13,058

 
$
15,669

 
(17
)%
 
(11
)%
As a percentage of total revenue
4
%
 
5
%
 
 
 
 
Asia Pacific
$
16,329

 
$
16,066

 
2
 %
 
2
 %
As a percentage of total revenue
6
%
 
6
%
 
 
 
 

Total revenue generated in North America decreased $3.5 million, and total revenue generated outside North America increased $1.9 million, in the third quarter of fiscal year 2018 as compared to the same quarter last year. Total revenue generated in North America decreased $2.8 million, and total revenue generated outside North America increased $7.1 million, in the first nine months of fiscal year 2018 as compared to the same period last year. The decrease in North America in the third quarter of fiscal year 2018 was primarily due to license and professional services revenue decreases in our OpenEdge segment and a decline in license revenue in our Data Connectivity and Integration segment. The decrease in North America in the first nine months of fiscal year 2018 was primarily due to a decrease in license revenue in our Data Connectivity and Integration and Application Development and Deployment segments and professional services revenue in our OpenEdge segment. This decrease was partially offset by an increase in maintenance revenue in our OpenEdge segment. The increase in revenue generated in EMEA in all periods was primarily due to an increase in OpenEdge maintenance and license revenue which was further impacted by favorable exchange rates as described above. Revenue generated in Latin America decreased in the third quarter and first nine months of fiscal year 2018. The decrease in the third quarter was primarily due to a negative impact of exchange rate fluctuations, while the decrease in the first nine months of fiscal year 2018 was a result of decreases in license and maintenance revenue in our OpenEdge segment and the negative impact of exchange rate fluctuations. The revenue generated in Asia Pacific increased in all periods primarily due to higher license revenue in our OpenEdge segment.

Total revenue generated in markets outside North America represented 46% of total revenue in the first nine months of fiscal year 2018 and 44% of total revenue in the same period last year. If exchange rates had remained constant in the first nine 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)
August 31, 2018
 
August 31, 2017
 
As Reported
 
Constant Currency
OpenEdge segment
$
68,029

 
$
68,135

 
 %
 
1
 %
Data Connectivity and Integration segment
7,597

 
8,987

 
(15
)%
 
(16
)%
Application Development and Deployment segment
20,057

 
20,188

 
(1
)%
 
(1
)%
Total revenue
$
95,683

 
$
97,310

 
(2
)%
 
(1
)%
 
Nine Months Ended
 
Percentage Change
(In thousands)
August 31, 2018
 
August 31, 2017
 
As Reported
 
Constant Currency
OpenEdge segment
$
204,404

 
$
198,533

 
3
 %
 
1
 %
Data Connectivity and Integration segment
20,989

 
22,911

 
(8
)%
 
(9
)%
Application Development and Deployment segment
60,439

 
60,049

 
1
 %
 
1
 %
Total revenue
$
285,832

 
$
281,493

 
2
 %
 
 %

Revenue in the OpenEdge segment decreased in the third quarter of fiscal year 2018, largely due to the negative impact of exchange rate fluctuations, offset by an increase in license revenue. Revenue in the OpenEdge segment increased in the first nine months of fiscal year 2018 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 manufacturers ("OEMs"). Application Development and Deployment stayed approximately flat in all periods, primarily due to lower license revenue offset by an increase in maintenance revenue.

Cost of Software Licenses

 
Three Months Ended
 
Nine Months Ended
(In thousands)
August 31, 2018
 
August 31, 2017
 
Percentage
Change
 
August 31, 2018
 
August 31, 2017
 
Percentage
Change
Cost of software licenses
$
1,077

 
$
1,337

 
(19
)%
 
$
3,571

 
$
4,347

 
(18
)%
As a percentage of software license revenue
4
%
 
5
%
 
 
 
5
%
 
6
%
 
 
As a percentage of total revenue
1
%
 
1
%
 
 
 
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. The decrease in all periods was a result of lower payments of royalties to third parties as compared to the same period in the prior year.

Cost of Maintenance and Services

 
Three Months Ended
 
Nine Months Ended
(In thousands)
August 31, 2018
 
August 31, 2017
 
Percentage
Change
 
August 31, 2018
 
August 31, 2017
 
Percentage
Change
Cost of maintenance and services
$
10,110

 
$
10,970

 
(8
)%
 
$
29,445

 
$
32,724

 
(10
)%
As a percentage of maintenance and services revenue
15
%
 
16
%
 
 
 
14
%
 
16
%
 
 
As a percentage of total revenue
11
%
 
11
%
 
 
 
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 and

26


lower stock-based compensation expense as a result of forfeitures during the quarter, partially offset by higher professional services expense.

Amortization of Acquired Intangibles
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
August 31, 2018
 
August 31, 2017
 
Percentage
Change
 
August 31, 2018
 
August 31, 2017
 
Percentage
Change
Amortization of acquired intangibles
$
5,509

 
$
5,768

 
(4
)%
 
$
17,226

 
$
14,129

 
22
%
As a percentage of total revenue
6
%
 
6
%
 
 
 
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 decreased in the third quarter of fiscal year 2018 as compared to the same quarter last year. The decrease was due to the completion of amortization of certain intangible assets acquired in prior years. Amortization of acquired intangibles increased in the first nine months of fiscal year 2018 compared to the same period last year, 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
 
Nine Months Ended
(In thousands)
August 31, 2018
 
August 31, 2017
 
Percentage
Change
 
August 31, 2018
 
August 31, 2017
 
Percentage
Change
Gross profit
$
78,987

 
$
79,235

 
 %
 
$
235,590

 
$
230,293

 
2
%
As a percentage of total revenue
83
%
 
81
%
 
 
 
82
%
 
82
%
 
 

Our gross profit decreased in the third quarter as compared to the same quarter last year due to the decrease in license and services revenue, offset by lower cost of revenue as described above. In addition, gross profit increased in the first nine months of fiscal year 2018 compared to the same period in the prior year, primarily due to the increases of license and maintenance revenue and the decrease in cost of maintenance and services and cost of software licenses as described above, offset slightly by the increase of amortization of acquired intangibles.

Sales and Marketing

 
Three Months Ended
 
Nine Months Ended
(In thousands)
August 31, 2018
 
August 31, 2017
 
Percentage
Change
 
August 31, 2018
 
August 31, 2017
 
Percentage
Change
Sales and marketing
$
21,752

 
$
23,159

 
(6
)%
 
$
64,838

 
$
70,116

 
(8
)%
As a percentage of total revenue
23
%
 
24
%
 
 
 
23
%
 
25
%
 
 

Sales and marketing expenses decreased in all periods as compared to the same periods last year primarily due to lower compensation-related expense as a result of the headcount reduction actions which occurred in the first quarter of fiscal year 2017. The decrease was partially offset by higher marketing programs costs related to the go-to-market efforts for Kinvey and DataRPM.

Product Development

 
Three Months Ended
 
Nine Months Ended
(In thousands)
August 31, 2018
 
August 31, 2017
 
Percentage
Change
 
August 31, 2018
 
August 31, 2017
 
Percentage
Change
Product development costs
$
19,338

 
$
19,620

 
(1
)%
 
$
59,405

 
$
55,745

 
7
%
As a percentage of total revenue
20
%
 
20
%
 
 
 
21
%
 
20
%
 
 


27


Product development expenses decreased in the third quarter of fiscal year 2018 primarily due to lower compensation-related costs as a result of the headcount reductions actions which occurred in the first quarter of fiscal year 2017. The increase in the first nine months of fiscal year 2018 as compared to the same period last year is primarily due to higher stock-based compensation expenses, partially offset by lower compensation-related costs. 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 first nine months of fiscal year 2017 as compared to the same periods in the current fiscal year.

General and Administrative

 
Three Months Ended
 
Nine Months Ended
(In thousands)
August 31, 2018
 
August 31, 2017
 
Percentage
Change
 
August 31, 2018
 
August 31, 2017
 
Percentage
Change
General and administrative
$
12,218

 
$
11,164

 
9
%
 
$
35,670