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Table of Contents

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, 2019
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 every Interactive Data File required to be submitted 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 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, 2019, there were 44,725,245 shares of the registrant’s common stock, $.01 par value per share, outstanding.


Table of Contents

PROGRESS SOFTWARE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2019
INDEX

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

2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets

 
May 31,
2019
 
November 30,
2018
(In thousands, except share data)
 
 
As Adjusted(1)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
103,249

 
$
105,126

Short-term investments
25,304

 
34,387

Total cash, cash equivalents and short-term investments
128,553

 
139,513

Accounts receivable (less allowances of $795 and $840, respectively)
52,040

 
59,715

Unbilled receivables
5,160

 
1,421

Other current assets
18,553

 
25,080

Assets held for sale

 
5,776

Total current assets
204,306

 
231,505

Long-term unbilled receivables
4,488

 
1,811

Property and equipment, net
32,971

 
30,714

Intangible assets, net
150,907

 
58,919

Goodwill
432,623

 
314,992

Deferred tax assets
1,877

 
966

Other assets
2,733

 
5,243

Total assets
$
829,905

 
$
644,150

Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt, net
$
7,002

 
$
5,819

Accounts payable
9,541

 
10,593

Accrued compensation and related taxes
20,762

 
25,500

Dividends payable to shareholders
6,944

 
6,998

Income taxes payable
3,416

 
1,228

Other accrued liabilities
20,605

 
12,686

Short-term deferred revenue
135,929

 
123,210

Total current liabilities
204,199

 
186,034

Long-term debt, net
291,194

 
110,270

Long-term deferred revenue
14,476

 
12,730

Deferred tax liabilities
70

 
5,799

Other noncurrent liabilities
4,619

 
5,315

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, 44,723,199 shares in 2019 and 45,114,935 shares in 2018
282,193

 
267,053

Retained earnings
61,744

 
85,125

Accumulated other comprehensive loss
(28,590
)
 
(28,176
)
Total shareholders’ equity
315,347

 
324,002

Total liabilities and shareholders’ equity
$
829,905

 
$
644,150

(1)The Company adopted the accounting standard related to revenue recognition ("ASC 606") effective December 1, 2018 using the full retrospective method. See Note 1. Nature of Business and Basis of Presentation for further information.
See notes to unaudited condensed consolidated financial statements.

3

Table of Contents

Condensed Consolidated Statements of Operations
 
 
Three Months Ended
 
Six Months Ended
 
May 31,
2019
 
May 31,
2018
 
May 31,
2019
 
May 31,
2018
(In thousands, except per share data)
 
 
As Adjusted(1)
 
 
 
As Adjusted(1)
Revenue:
 
 
 
 
 
 
 
Software licenses
$
29,728

 
$
22,526

 
$
52,530

 
$
48,580

Maintenance and services
70,267

 
70,338

 
137,014

 
139,694

Total revenue
99,995

 
92,864

 
189,544

 
188,274

Costs of revenue:
 
 
 
 
 
 
 
Cost of software licenses
925

 
1,233

 
2,092

 
2,494

Cost of maintenance and services
10,580

 
9,511

 
20,019

 
19,335

Amortization of acquired intangibles
6,106

 
5,899

 
11,539

 
11,717

Total costs of revenue
17,611

 
16,643

 
33,650

 
33,546

Gross profit
82,384

 
76,221

 
155,894

 
154,728

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
24,832

 
21,658

 
47,155

 
43,086

Product development
21,688

 
19,822

 
41,578

 
40,067

General and administrative
12,654

 
12,190

 
24,939

 
23,452

Amortization of acquired intangibles
4,585

 
3,318

 
7,773

 
6,637

Fees related to shareholder activist

 
214

 

 
1,472

Restructuring expenses
2,777

 
426

 
3,192

 
2,247

Acquisition-related expenses
1,107

 
43

 
1,107

 
86

Total operating expenses
67,643

 
57,671

 
125,744

 
117,047

Income from operations
14,741

 
18,550

 
30,150

 
37,681

Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(2,210
)
 
(1,272
)
 
(3,599
)
 
(2,437
)
Interest income and other, net
344

 
231

 
573

 
639

Foreign currency loss, net
(451
)
 
(243
)
 
(1,294
)
 
(1,071
)
Total other expense, net
(2,317
)
 
(1,284
)
 
(4,320
)
 
(2,869
)
Income before income taxes
12,424

 
17,266

 
25,830

 
34,812

Provision for income taxes
4,243

 
4,362

 
8,247

 
8,175

Net income
$
8,181

 
$
12,904

 
$
17,583

 
$
26,637

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.18

 
$
0.28

 
$
0.39

 
$
0.58

Diluted
$
0.18

 
$
0.28

 
$
0.39

 
$
0.57

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
44,611

 
45,531

 
44,784

 
46,030

Diluted
45,287

 
46,087

 
45,287

 
46,781

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.155

 
$
0.140

 
$
0.310

 
$
0.280

(1)The Company adopted ASC 606 effective December 1, 2018 using the full retrospective method. See Note 1. Nature of Business and Basis of Presentation for further information.
See notes to unaudited condensed consolidated financial statements.

4

Table of Contents

Condensed Consolidated Statements of Comprehensive Income

 
Three Months Ended
 
Six Months Ended
 
May 31, 2019
 
May 31, 2018
 
May 31, 2019
 
May 31, 2018
(In thousands)
 
 
As Adjusted(1)
 
 
 
As Adjusted(1)
Net income
$
8,181

 
$
12,904

 
$
17,583

 
$
26,637

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(2,030
)
 
(9,018
)
 
(551
)
 
(5,187
)
Unrealized gain (loss) on investments, net of tax provision of $18 and $48 for the second quarter and first six months of 2019, respectively, and $0 and $39 for the second quarter and first six months of 2018, respectively
54

 
(1
)
 
137

 
(28
)
Total other comprehensive loss, net of tax
(1,976
)
 
(9,019
)
 
(414
)
 
(5,215
)
Comprehensive income
$
6,205

 
$
3,885

 
$
17,169

 
$
21,422

(1)The Company adopted ASC 606 effective December 1, 2018 using the full retrospective method. See Note 1. Nature of Business and Basis of Presentation for further information.

See notes to unaudited condensed consolidated financial statements.


5

Table of Contents

Condensed Consolidated Statements of Shareholders’ Equity
 
 
Six Months Ended May 31, 2019
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total Shareholders' Equity
(in thousands)
Number of Shares
 
Amount
 
 
 
 
Balance, December 1, 2018 as adjusted(1)
45,115

 
$
451

 
$
266,602

 
$
85,125

 
$
(28,176
)
 
$
324,002

Issuance of stock under employee stock purchase plan
99

 
1

 
2,802

 

 

 
2,803

Exercise of stock options
44

 

 
1,317

 

 

 
1,317

Vesting of restricted stock units and release of deferred stock units
146

 
1

 
(1
)
 

 

 

Withholding tax payments related to net issuance of restricted stock units
(37
)
 

 
(1,637
)
 

 

 
(1,637
)
Stock-based compensation

 

 
11,922

 

 

 
11,922

Issuance of shares related to non-compete agreement (Note 6)
44

 

 
2,000

 

 

 
2,000

Adjustment due to adoption of ASU 2016-16

 

 

 
(3,397
)
 

 
(3,397
)
Dividends declared

 

 

 
(13,832
)
 

 
(13,832
)
Treasury stock repurchases and retirements
(688
)
 
(5
)
 
(1,260
)
 
(23,735
)
 

 
(25,000
)
Net income

 

 

 
17,583

 

 
17,583

Other comprehensive loss

 

 

 

 
(414
)
 
(414
)
Balance, May 31, 2019
44,723

 
$
448

 
$
281,745

 
$
61,744

 
$
(28,590
)
 
$
315,347

(1)The Company adopted ASC 606 effective December 1, 2018 using the full retrospective method. See Note 1. Nature of Business and Basis of Presentation for further information.
 
Three Months Ended May 31, 2019
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total Shareholders' Equity
(in thousands)
Number of Shares
 
Amount
 
 
 
 
Balance, March 1, 2019
44,474

 
$
446

 
$
272,408

 
$
60,462

 
$
(26,614
)
 
$
306,702

Issuance of stock under employee stock purchase plan
61

 
1

 
1,805

 

 

 
1,806

Exercise of stock options
35

 

 
1,049

 

 

 
1,049

Vesting of restricted stock units and release of deferred stock units
146

 
1

 
(1
)
 

 

 

Withholding tax payments related to net issuance of restricted stock units
(37
)
 

 
(1,632
)
 

 

 
(1,632
)
Stock-based compensation

 

 
6,116

 

 

 
6,116

Issuance of shares related to non-compete agreement (Note 6)
44

 

 
2,000

 

 

 
2,000

Dividends declared

 

 

 
(6,899
)
 

 
(6,899
)
Net income

 

 

 
8,181

 

 
8,181

Other comprehensive loss

 

 

 

 
(1,976
)
 
(1,976
)
Balance, May 31, 2019
44,723

 
$
448

 
$
281,745

 
$
61,744

 
$
(28,590
)
 
$
315,347


6

Table of Contents

Condensed Consolidated Statements of Shareholders’ Equity (cont.)
 
 
Six Months Ended May 31, 2018
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total Shareholders' Equity
(in thousands)
Number of Shares
 
Amount
 
 
 
 
Balance, December 1, 2017 as adjusted(1)
47,281

 
$
473

 
$
249,363

 
$
179,919

 
$
(18,406
)
 
$
411,349

Issuance of stock under employee stock purchase plan
293

 
3

 
3,066

 

 

 
3,069

Exercise of stock options
53

 
1

 
1,524

 

 

 
1,525

Withholding tax payments related to net issuance of restricted stock units

 

 
(1,931
)
 

 

 
(1,931
)
Stock-based compensation

 

 
10,150

 

 

 
10,150

Adjustment due to adoption of ASU 2016-09

 

 
641

 
(641
)
 

 

Dividends declared

 

 

 
(12,858
)
 

 
(12,858
)
Treasury stock repurchases and retirements
(2,124
)
 
(21
)
 
(4,569
)
 
(85,410
)
 

 
(90,000
)
Net income

 

 

 
26,637

 

 
26,637

Other comprehensive income

 

 

 

 
(5,215
)
 
(5,215
)
Balance, May 31, 2018 as adjusted(1)
45,503

 
$
456

 
$
258,244

 
$
107,647

 
$
(23,621
)
 
$
342,726

(1)The Company adopted ASC 606 effective December 1, 2018 using the full retrospective method. See Note 1. Nature of Business and Basis of Presentation for further information.

 
Three Months Ended May 31, 2018
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total Shareholders' Equity
(in thousands)
Number of Shares
 
Amount
 
 
 
 
Balance, March 1, 2018 as adjusted(1)
46,298

 
$
463

 
$
254,584

 
$
143,292

 
$
(14,602
)
 
$
383,737

Issuance of stock under employee stock purchase plan
245

 
3

 
1,971

 

 

 
1,974

Exercise of stock options
30

 
1

 
855

 

 

 
856

Withholding tax payments related to net issuance of restricted stock units

 

 
(1,931
)
 

 

 
(1,931
)
Stock-based compensation

 

 
5,580

 

 

 
5,580

Dividends declared

 

 

 
(6,375
)
 

 
(6,375
)
Treasury stock repurchases and retirements
(1,070
)
 
(11
)
 
(2,815
)
 
(42,174
)
 

 
(45,000
)
Net income

 

 

 
12,904

 

 
12,904

Other comprehensive income

 

 

 

 
(9,019
)
 
(9,019
)
Balance, May 31, 2018 as adjusted(1)
45,503

 
$
456

 
$
258,244

 
$
107,647

 
$
(23,621
)
 
$
342,726

(1)The Company adopted ASC 606 effective December 1, 2018 using the full retrospective method. See Note 1. Nature of Business and Basis of Presentation for further information.

7

Table of Contents

Condensed Consolidated Statements of Cash Flows
 
 
Six Months Ended
 
May 31,
2019
 
May 31,
2018
(In thousands)
 
 
As Adjusted(1)
Cash flows from operating activities:
 
 
 
Net income
$
17,583

 
$
26,637

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property and equipment
3,438

 
3,343

Amortization of intangibles and other
19,900

 
19,290

Stock-based compensation
11,922

 
10,150

Loss on disposal of property and equipment
(18
)
 
136

Deferred income taxes
(6,707
)
 
(1,687
)
Allowances for bad debt and sales credits
287

 
103

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
10,859

 
19,772

Other assets
7,722

 
4,614

Accounts payable and accrued liabilities
(4,627
)
 
(18,027
)
Income taxes payable
1,937

 
2,267

Deferred revenue
2,822

 
7,127

Net cash flows from operating activities
65,118

 
73,725

Cash flows (used in) from investing activities:
 
 
 
Purchases of investments
(5,750
)
 
(8,258
)
Sales and maturities of investments
14,709

 
10,723

Purchases of property and equipment
(1,080
)
 
(3,196
)
Payments for acquisitions, net of cash acquired
(225,298
)
 

Proceeds from sale of property, plant and equipment, net
6,146

 

Net cash flows used in investing activities
(211,273
)
 
(731
)
Cash flows from (used in) financing activities:
 
 
 
Proceeds from stock-based compensation plans
4,303

 
4,671

Payments for taxes related to net share settlements of equity awards
(1,637
)
 
(1,931
)
Repurchases of common stock
(25,000
)
 
(90,000
)
Dividend payments to shareholders
(13,886
)
 
(13,101
)
Proceeds from the issuance of debt
184,984

 

Payment of principle on long-term debt
(1,547
)
 
(3,094
)
Payment of issuance costs for long-term debt
(1,611
)
 

Net cash flows from (used in) financing activities
145,606

 
(103,455
)
Effect of exchange rate changes on cash
(1,328
)
 
(5,881
)
Net decrease in cash and cash equivalents
(1,877
)
 
(36,342
)
Cash and cash equivalents, beginning of period
105,126

 
133,464

Cash and cash equivalents, end of period
$
103,249

 
$
97,122

(1)The Company adopted ASC 606 effective December 1, 2018 using the full retrospective method. See Note 1. Nature of Business and Basis of Presentation for further information.

8

Table of Contents

Condensed Consolidated Statements of Cash Flows, continued
 
Six Months Ended
 
May 31,
2019
 
May 31,
2018
Supplemental disclosure:
 
 
 
Cash paid for income taxes, net of refunds of $176 in 2019 and $533 in 2018
$
4,242

 
$
3,545

Cash paid for interest
$
2,990

 
$
1,991

Non-cash investing and financing activities:
 
 
 
Total fair value of restricted stock awards, restricted stock units and deferred stock units on date vested
$
8,063

 
$
9,404

Dividends declared
$
6,944

 
$
6,377

See notes to unaudited condensed consolidated financial statements.

9

Table of Contents

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 ("ISVs"), 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 ("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, 2018, ("Annual Report on Form 10-K for the fiscal year ended November 30, 2018").

We adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASC 606") effective December 1, 2018 using the full retrospective method, which required us to retroactively adjust comparative prior periods to conform to current presentation. See "Recently Adopted Accounting Pronouncements" below for further information.

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, 2018, except as discussed below with respect to our adoption of ASC 606. 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, 2018, 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.

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an on-going basis, management evaluates its estimates and records changes in estimates in the period in which they become known. These estimates are based on historical data and experience, as well as various other assumptions that management believes to be reasonable under the circumstances. The most significant estimates relate to: the timing and amount of revenue recognition, including the determination of the nature and timing of the satisfaction of performance obligations, the standalone selling price of performance obligations, and the transaction price allocated to performance obligations; the realization of tax assets and estimates of tax liabilities; fair values of investments in marketable securities; assets held for sale; intangible assets and goodwill valuations; the recognition and disclosure of contingent liabilities; the collectability of accounts receivable; and assumptions used to determine the fair value of stock-based compensation. Actual results could differ from those estimates.


10

Table of Contents

Revenue Recognition

Revenue Policy

We derive our revenue primarily from software licenses and maintenance and services. Our license arrangements generally contain multiple performance obligations, including software maintenance services. Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. When an arrangement contains multiple performance obligations, we account for individual performance obligations separately if they are distinct. We recognize revenue through the application of the following steps: (i) identification of the contract(s) with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to performance obligations in the contract; and (v) recognition of revenue when or as we satisfy the performance obligations. Sales taxes collected from customers and remitted to government authorities are excluded from revenue and we do not license our software with a right of return.

Software Licenses

Software licenses are on-premise and fully functional when made available to the customer. As the customer can use and benefit from the license on its own, on-premise software licenses represent distinct performance obligations. Revenue is recognized upfront at the point in time when control is transferred, which is defined as the point in time when the client can use and benefit from the license. Our licenses are sold as perpetual or term licenses, and the arrangements typically contain various combinations of maintenance and services, which are generally accounted for as separate performance obligations. We use the residual approach to allocate the transaction price to our software license performance obligations because, due to the pricing of our licenses being highly variable, they do not have an observable stand-alone selling price ("SSP"). As required, we evaluate the residual approach estimate compared to all available observable data in order to conclude the estimate is representative of its SSP.

Perpetual licenses are generally invoiced upon execution of the contract and payable within 30 days. Term licenses are generally invoiced in advance on an annual basis over the term of the arrangement, which is typically one to three years. Any difference between the revenue recognized and the amount invoiced to the customer is recognized on our consolidated balance sheets as unbilled receivables until the customer is invoiced, at which point the amount is reclassed to accounts receivable.

Maintenance

Maintenance revenue is made up of technical support, bug fixes, and when-and-if available unspecified software upgrades. As these maintenance services are considered to be a series of distinct services that are substantially the same and have the same duration and measure of progress, we have concluded that they represent one combined performance obligation. Revenue is recognized ratably over the contract period. The SSP of maintenance services is a percentage of the net selling price of the related software license, which has remained within a tight range and is consistent with the stand-alone pricing of subsequent maintenance renewals.

Maintenance services are generally invoiced in advance on an annual basis over the term of the arrangement, which is typically one to three years.

Services

Services revenue primarily includes consulting and customer education services. In general, services are distinct performance obligations. Services revenue is generally recognized as the services are delivered to the customer. We apply the practical expedient of recognizing revenue upon invoicing for time and materials-based arrangements as the invoiced amount corresponds to the value of the services provided. The SSP of services is based upon observable prices in similar transactions using the hourly rates sold in stand-alone services transactions. Services are either sold on a time and materials basis or prepaid upfront.

We also offer products via a software-as-a-service ("SaaS") model, which is a subscription-based model. Our customers can use hosted software over the contract period without taking possession of it and the cloud services are available to them throughout the entire term, even if they do not use the service. Revenue related to SaaS offerings is recognized ratably over the contract period. The SSP of SaaS performance obligations is determined based upon observable prices in stand-alone SaaS transactions. SaaS arrangements are generally invoiced in advance on a monthly, quarterly, or annual basis over the term of the arrangement, which is typically one to three years.


11

Table of Contents

Arrangements with Multiple Performance Obligations

When an arrangement contains multiple performance obligations, we account for individual performance obligations separately if they are distinct. We allocate the transaction price to each performance obligation in a contract based on its relative SSP. Although we do not have a history of offering these elements, prior to allocating the transaction price to each performance obligation, we consider whether the arrangement has any discounts, material rights, or specified future upgrades that may represent additional performance obligations. Determining whether products and services are distinct performance obligations and the determination of the SSP may require significant judgment.

Contract Balances

Unbilled Receivables and Contract Assets

The timing of revenue recognition may differ from the timing of customer invoicing. When revenue is recognized prior to invoicing and the right to the amount due from customers is conditioned only on the passage of time, we record an unbilled receivable on our condensed consolidated balance sheets. Our multi-year term license arrangements, which are typically billed annually, result in revenue recognition in advance of invoicing and the recognition of unbilled receivables.

As of May 31, 2019, invoicing of our long-term unbilled receivables is expected to occur as follows (in thousands):
2020
$
525

2021
3,398

2022
565

Total
$
4,488



Contract assets, which arise when revenue is recognized prior to invoicing and the right to the amount due from customers is conditioned on something other than the passage of time, such as the completion of a related performance obligation, were $0.7 million as of May 31, 2019 and minimal as of November 30, 2018. These amounts are included in unbilled receivables or long-term unbilled receivables on our condensed consolidated balance sheets.

Deferred Revenue

Deferred revenue is recorded when revenue is recognized subsequent to customer invoicing. Our deferred revenue balance is primarily made up of deferred maintenance from our OpenEdge and Application Development and Deployment segments.

As of May 31, 2019, the changes in deferred revenue were as follows (in thousands):
Balance, December 1, 2018 As Adjusted(1)
$
135,940

Billings and other
204,009

Revenue recognized
(189,544
)
Balance, May 31, 2019
$
150,405

(1)The Company adopted ASC 606 effective December 1, 2018 using the full retrospective method.


Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. As of May 31, 2019, transaction price allocated to remaining performance obligations was $154 million. We expect to recognize approximately 90% of the revenue within the next year and the remainder thereafter.



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Deferred Contract Costs

Deferred contract costs, which include certain sales incentive programs, are incremental and recoverable costs of obtaining a contract with a customer. Incremental costs of obtaining a contract with a customer are recognized as an asset if the expected benefit of those costs is longer than one year. We have applied the practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include a large majority of our sales incentive programs as we have determined that annual compensation is commensurate with annual sales activities.

Certain of our sales incentive programs do meet the requirements to be capitalized. Depending upon the sales incentive program and the related revenue arrangement, such capitalized costs are amortized over the longer of (i) the product life, which is generally three to five years; or (ii) the term of the related revenue contract. We determined that a three to five year product life represents the period of benefit that we receive from these incremental costs based on both qualitative and quantitative factors, which include customer contracts, industry norms, and product upgrades. Total deferred contract costs were minimal as of May 31, 2019 and November 30, 2018 and are included in other current assets and other assets on our condensed consolidated balance sheets. Amortization of deferred contract costs is included in sales and marketing expense on our condensed consolidated statement of operations and was minimal in all periods presented.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements
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 prior accounting standards, the recognition of current and deferred income taxes for an intra-entity transfer was prohibited until the asset has been sold to an outside party. We adopted this standard at the beginning of the first quarter of fiscal year 2019. Upon adoption, we reclassified approximately $3.4 million from non-current prepaid taxes, which is included in other assets on our consolidated balance sheet, to retained earnings as of December 1, 2018.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606"). Under this standard, 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 and provides guidance on the recognition of costs related to obtaining customer contracts. We adopted this ASU effective December 1, 2018 in accordance with the full retrospective approach, which required us to retrospectively adjust certain previously reported results in the comparative prior periods presented. Upon adoption, we recorded a cumulative $31 million increase to our 2017 beginning retained earnings balance, a $15 million decrease to deferred revenue, a $28 million increase to unbilled receivables, and a $12 million increase to deferred tax liabilities.

The revenue recognition related to accounting for the following transactions is most impacted by our adoption of this standard:

Revenue from term licenses with extended payment terms over the term of the agreement within our Data Connectivity and Integration segment - Under the applicable revenue recognition guidance for fiscal years 2018 and prior, these transactions were recognized when the amounts were billed to the customer. In accordance with ASC 606, revenue from term license performance obligations is recognized upon delivery and revenue from maintenance performance obligations is expected to be recognized over the contract term. To the extent that we enter into these transactions, revenue from term licenses with extended payment terms will be recognized prior to the customer being billed and we will recognize an unbilled receivable on the balance sheet. Accordingly, the recognition of license revenue is accelerated under ASC 606 as we historically did not recognize revenue until the amounts had 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) - Under the applicable revenue recognition guidance for fiscal years 2018 and prior, these transactions were recognized ratably over the associated maintenance period as the Company did not have vendor specific objective evidence ("VSOE") for maintenance or support. Under ASC 606, the requirement to have VSOE for undelivered elements that existed under prior 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.

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The impact of the adoption of this standard on our previously reported consolidated balance sheet and consolidated statements of operations is as follows:

Consolidated Balance Sheet
 
November 30, 2018
(in thousands)
As Reported
 
Adjustments
 
As Adjusted
Assets
 
 
 
 
 
Accounts receivable, net
$
58,450

 
$
1,265

 
$
59,715

Short-term unbilled receivables

 
1,421

 
1,421

Long-term unbilled receivables

 
1,811

 
1,811

Deferred tax assets
1,922

 
(956
)
 
966

Other assets(1)
580,237

 

 
580,237

Total assets
$
640,609

 
$
3,541

 
$
644,150

Liabilities and shareholders’ equity
 
 
 
 
 
Short-term deferred revenue
133,194

 
(9,984
)
 
123,210

Long-term deferred revenue
15,127

 
(2,397
)
 
12,730

Deferred tax liabilities
3,797

 
2,002

 
5,799

Other liabilities(2)
178,409

 

 
178,409

Retained earnings
71,242

 
13,883

 
85,125

Accumulated other comprehensive loss
(28,213
)
 
37

 
(28,176
)
Other equity(3)
267,053

 

 
267,053

Total liabilities and shareholders’ equity
$
640,609

 
$
3,541

 
$
644,150

(1)Includes cash and cash equivalents, short-term investments, other current assets, assets held for sale, property and equipment, net, intangible assets, net, goodwill, and other assets.
(2)Includes current portion of long-term debt, net, accounts payable, accrued compensation and related taxes, dividends payable, income taxes payable, other accrued liabilities, long-term debt, net, and other noncurrent liabilities.
(3)Includes common stock and additional paid-in capital.


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Consolidated Statements of Income

 
May 31, 2018
 
Three Months Ended
 
Six Months Ended
(In thousands, except per share data)
As Reported
 
Adjustments
 
As Adjusted
 
As Reported
 
Adjustments
 
As Adjusted
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Software licenses
$
26,439

 
$
(3,913
)
 
$
22,526

 
$
51,782

 
$
(3,202
)
 
$
48,580

Maintenance and services
69,663

 
675

 
70,338

 
138,367

 
1,327

 
139,694

Total revenue
96,102

 
(3,238
)
 
92,864

 
190,149

 
(1,875
)
 
188,274

Costs of revenue
16,643

 

 
16,643

 
33,546

 

 
33,546

Gross Profit
79,459

 
(3,238
)
 
76,221

 
156,603

 
(1,875
)
 
154,728

Operating expenses
57,671

 

 
57,671

 
117,047

 

 
117,047

Income from operations
21,788

 
(3,238
)
 
18,550

 
39,556

 
(1,875
)
 
37,681

Other expense, net
(1,284
)
 

 
(1,284
)
 
(2,869
)