PROGRESS SOFTWARE CORPORATION Forward-Looking Statements
Certain statements below about anticipated results and our products and markets are forward-looking statements that are based on our current plans and assumptions. Important information about the bases for these plans and assumptions and factors that may cause our actual results to differ materially from these statements is contained below and in Item 1A. "Risk Factors" of this Annual Report on Form 10-K. 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 inU.S. dollars are positively impacted. As exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of revenue growth rates on a constant currency basis enhances the understanding of our revenue results and evaluation of our performance in comparison to prior periods. The constant currency information presented is calculated by translating current period results using prior period weighted average foreign currency exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. OverviewProgress 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, the flexibility of a cloud-native app dev platform to deliver modern apps, leading data connectivity technology, web content management, business rules, secure file transfer, and network monitoring. Over 1,700 independent software vendors, 100,000 enterprise customers, and two 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. 20
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The key tenets of our strategic plan and operating model are as follows:
Align Resources to Drive Profitability. Our organizational philosophy and operating principles focus primarily on customer and partner retention and success for our core products and a streamlined operating approach in order to more efficiently drive financial results.
Protect and Strengthen Our Core Business. A key element of our strategy is centered on providing the platform and tools enterprises need to build modern, strategic business applications. We offer these products and tools to both new customers and partners as well as our existing partner and customer ecosystems. This strategy builds on our inherent DNA and our vast experience in application development that we've acquired over the past 35+ years.
Our offerings enable developers to build the most modern applications quickly and easily, and include:
• our OpenEdge software, which provides a unified development environment
consisting of development tools, application servers, application
management tools, an embedded relational database management system and
the capability to connect and integrate with other applications and data
sources;
• our leading UI development tools, which enable organizations to easily
build engaging user interfaces for any device or front end;
• our data connectivity and integration capabilities;
• our business logic and rules capabilities;
• our secure file transfer solutions, which provide secure collaboration and
automated file transfers of sensitive data and advanced workflow
automation capabilities;
• our network management capabilities, which enable small and medium-sized
businesses to monitor and manage their IT infrastructure and applications;
and
• web content management for delivering personalized and engaging digital
experiences.
Acquire Accretive Businesses. We are pursuing acquisitions of businesses within
the software infrastructure space, with products that appeal to both IT
organizations and individual developers. These acquisitions must meet strict
financial criteria, which will enable us to drive significant stockholder
returns by providing scale and increased cash flows. As described below, in
April 2019 , we acquired Ipswitch in a transaction that met these strict
financial criteria.
Holistic Capital Allocation Approach. We have adopted a shareholder friendly
capital allocation policy that utilizes dividends and share repurchases to
return capital to shareholders. Pursuant to our capital allocation strategy that
we initially announced in September 2017 , we have targeted to return
approximately 25% of our annual cash flows from operations to stockholders in
the form of dividends. We also intend to repurchase our shares sufficient to
offset dilution from our equity plans.
In fiscal year 2019, we repurchased and retired 0.7 million shares of our common
stock for $25.0 million . In connection with the acquisition of Ipswitch in April
2019 , we suspended our stock repurchase program for the remainder of fiscal
2019.
We expect to resume share repurchases in fiscal 2020, at a level consistent with
our publicly stated capital allocation policy. The timing and amount of any
shares repurchased will be determined by management based on its evaluation of
market conditions and other factors, and the Board of Directors may choose to
suspend, expand or discontinue the repurchase program at any time. As of
November 30, 2019 , there was $75.0 million remaining under the share repurchase
authorization. In January 2020 , our Board of Directors increased the total share
repurchase authorization to $250.0 million .
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 . In September 2018 , the quarterly cash
dividend was increased to $0.155 per share of common stock. On September 24,
2019 , our Board of Directors approved an additional increase to our quarterly
cash dividend from $0.155 to $0.165 per share of common stock. On January 8,
2020 , our Board of Directors declared a quarterly dividend of $0.165 per share
of common stock that will be paid on March 16, 2020 to stockholders of record as
of the close of business on March 2, 2020 . We expect to continue paying
quarterly cash dividends in subsequent quarters consistent with our capital
allocation strategy.
In furtherance of our acquisition strategy, on April 30, 2019 , we acquired all
of the outstanding equity interests of Ipswitch, a provider of award-winning and
easy-to-use secure data file transfer and network management software, for an
aggregate purchase price of approximately $225.0 million .
We expect to continue to evaluate possible acquisitions and other strategic transactions designed to expand our business. As a result, our expected uses of cash could change, our cash position could be reduced and we may incur additional debt
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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, as applicable, through at least the next twelve months. We derive a significant portion of our revenue from international operations, which are primarily conducted in foreign currencies. The impact of foreign exchange rates had a material impact on revenue in fiscal year 2019. Since approximately one-third of our revenue is denominated in foreign currency, future fluctuations in foreign currency rates may also significantly impact our results. OnSeptember 26, 2019 , we announced that we are reducing our current and ongoing investment levels within our cognitive application product lines, which consist primarily of our DataRPM and Kinvey products. Accordingly, our fiscal fourth quarter results include a restructuring charge of$2.5 million . This restructuring charge relates to employee costs, including severance, health benefits and outplacement services (but excluding stock-based compensation) incurred as a part of the reduction in the investment. In connection with this restructuring action, during the fiscal fourth quarter, we evaluated the ongoing value of the intangible assets primarily associated with the technologies and trade names obtained in the acquisitions of DataRPM and Kinvey. As a result of this evaluation, we wrote down these assets to fair value, which resulted in a$22.7 million asset impairment charge.
Results of Operations
Adoption of New Accounting Standard
We adopted the new accounting standard related to revenue recognition ("ASC
606") effective December 1, 2018 , using the full retrospective method, which
required us to restate prior comparable periods. See Note 1. Nature of Business
and Summary of Significant Accounting Policies for further information.
Management's Discussion and Analysis of Financial Condition and Results of
Operations has also been adjusted to reflect the full retrospective adoption of
ASC 606.
Fiscal Year 2019 Compared to Fiscal Year 2018
Revenue
Fiscal Year Ended Percentage Change
Constant
(In thousands)
Currency
Revenue $ 413,298 $ 378,981 9 % 11 %
Total revenue increased in fiscal year 2019 as compared to fiscal year 2018
primarily due to the acquisition of Ipswitch during the second quarter of fiscal
year 2019, and an increase in license sales in our Data Connectivity and
Integration segment. Ipswitch contributed $28.2 million in revenue in fiscal
year 2019. The increase in total revenue was partially offset by an unfavorable
impact from currency exchange rates in fiscal year 2019 as compared to last
year. Changes in prices from fiscal year 2018 to 2019 did not have a significant
impact on our revenue.
License Revenue
Fiscal Year Ended Percentage Change
Constant
(In thousands) November 30, 2019 November 30, 2018 As Reported Currency
License $ 122,552 $ 99,800 23 % 25 %
As a percentage of total revenue 30 % 26 %
Software license revenue increased in fiscal year 2019 as compared to fiscal
year 2018 primarily due to the acquisition of Ipswitch and an increase in
license sales in our Data Connectivity and Integration segment. The increase in
license revenue was partially offset by an unfavorable impact from currency
exchange rates in fiscal year 2019 as compared to last year.
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Maintenance and Services Revenue
Fiscal Year Ended Percentage Change
Constant
(In thousands) November 30, 2019 November 30, 2018 As Reported Currency
Maintenance $ 259,006 $ 249,171 4 % 6 %
As a percentage of total revenue 63 % 66 %
Professional services $ 31,740 $ 30,010 6 % 7 %
As a percentage of total revenue 7 % 8 % Total maintenance and services revenue $ 290,746 $ 279,181
4 % 6 %
As a percentage of total revenue 70 % 74 %
Maintenance revenue increased in fiscal year 2019 as compared fiscal year 2018 due to the acquisition of Ipswitch and a slight increase in maintenance revenue in our Application Development and Deployment segment. This increase was offset by an unfavorable impact from currency exchange rates on our OpenEdge segment maintenance revenue in fiscal year 2019 compared to fiscal year 2018. Professional services revenue increased in fiscal year 2019 as compared to fiscal year 2018 primarily due to an increase in OpenEdge professional services revenue, partially offset by lower professional services revenue generated by our Application Development and Deployment segment.
Revenue by Region
Fiscal Year Ended Percentage Change
Constant
(In thousands) November 30, 2019 November 30, 2018 As Reported Currency
North America $ 233,911 $ 204,257 15 % 15 %
As a percentage of total revenue 57 % 54 %
EMEA $ 137,301 $ 135,055 2 % 6 %
As a percentage of total revenue 33 % 35 %
Latin America $ 19,665 $ 18,046 9 % 16 %
As a percentage of total revenue 5 % 5 %
Asia Pacific $ 22,421 $ 21,623 4 % 7 %
As a percentage of total revenue 5 % 6 %
Total revenue generated inNorth America increased$29.7 million , and total revenue generated outsideNorth America increased$4.7 million , in fiscal year 2019 as compared to fiscal year 2018. The increase inNorth America was primarily due to the acquisition of Ipswitch and higher license revenue generated by our Data Connectivity and Integration segment. The increase in revenue generated in EMEA in fiscal year 2019 as compared to fiscal year 2018 was also due to the acquisition of Ipswitch and higher license revenue generated by our Data Connectivity and Integration segment, partially offset by the unfavorable effect of foreign exchange rates. Revenue generated inLatin America increased in fiscal year 2019 as compared to fiscal year 2018 due to an increase in license sales in our OpenEdge segment. The revenue generated inAsia Pacific increased slightly in fiscal year 2019 as compared to fiscal year 2018 primarily due to the acquisition of Ipswitch. Total revenue generated in markets outsideNorth America represented 43% of total revenue in fiscal year 2019 compared to 46% of total revenue in the same period last year. If exchange rates had remained constant in fiscal year 2019 as compared to the exchange rates in effect in fiscal year 2018, total revenue generated in markets outsideNorth America would have been 44% of total revenue. 23
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Revenue by Segment
Fiscal Year Ended
(In thousands) November 30, 2019 November 30, 2018 Percentage Change
OpenEdge segment $ 296,929 $ 277,806 7 %
Data Connectivity and Integration segment 39,903 23,129 73 %
Application Development and Deployment segment 76,466 78,046 (2 )%
Total revenue $ 413,298 $ 378,981 9 %
Revenue in the OpenEdge segment increased in fiscal year 2019 as compared to
fiscal year 2018 primarily due to the acquisition of Ipswitch, partially offset
by an unfavorable impact from currency exchange rates in fiscal year 2019 as
compared to last year. Data Connectivity and Integration segment revenue
increased in fiscal year 2019 as compared to fiscal year 2018 primarily due to
the timing of certain renewals by OEMs. Application Development and Deployment
segment revenue decreased in fiscal year 2019 as compared to fiscal year 2018,
primarily due to lower license and professional services revenue, partially
offset by an increase in maintenance revenue.
Cost of Software Licenses
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Cost of software licenses $ 4,894 $ 4,769 3 %
As a percentage of software license revenue 4 % 5 %
As a percentage of total revenue 1 % 1 %
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. During the periods presented above, cost of
software licenses remained relatively flat as a percentage of revenue.
Cost of Maintenance and Services
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Cost of maintenance and services $ 44,463 $ 39,470 13 %
As a percentage of maintenance and services revenue 15 % 14 %
As a percentage of total revenue 11 % 10 %
Cost of maintenance and services consists primarily of costs of providing
customer support, consulting, and education. Cost of maintenance and services
increased in fiscal year 2019 as compared to fiscal year 2018 primarily due to
higher compensation-related costs resulting from an increase in headcount as a
result of the acquisition of Ipswitch.
Amortization of Acquired Intangibles
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Amortization of acquired intangibles $ 25,884 $ 22,734 14 %
As a percentage of total revenue 6 % 6 %
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Amortization of acquired intangibles included in costs of revenue primarily represents the amortization of the value assigned to technology-related intangible assets obtained in business combinations. Amortization of acquired intangibles increased in fiscal year 2019 as compared to fiscal year 2018, primarily due to the addition of intangible assets associated with the technologies obtained in connection with the acquisition of Ipswitch.
Gross Profit
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Gross profit $ 338,057 $ 312,008 8 %
As a percentage of total revenue 82 % 82 %
Our gross profit increased in fiscal year 2019 as compared to fiscal year 2018 primarily due to the increases of license and maintenance revenue, offset slightly by the increase of cost of maintenance and services and the amortization of acquired intangibles, each as described above.
Sales and Marketing
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Sales and marketing $ 101,701 $ 93,036 9 %
As a percentage of total revenue 25 % 25 %
Sales and marketing expenses increased in fiscal year 2019 as compared to fiscal
year 2018 primarily due to increased compensation-related expenses as a result
of increased headcount from the acquisition of Ipswitch.
Product Development
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Product development $ 88,572 $ 79,739 11 %
As a percentage of total revenue 21 % 21 %
Product development expenses increased in fiscal year 2019 as compared to fiscal
year 2018 primarily due to increased compensation-related expenses as a result
of increased headcount from the acquisition of Ipswitch.
General and Administrative
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
General and administrative $ 53,360 $ 49,050 9 %
As a percentage of total revenue 13 % 13 %
General and administrative expenses include the costs of our finance, human
resources, legal, information systems and administrative departments. General
and administrative expenses increased in fiscal year 2019 as compared to fiscal
year 2018 primarily due to increased stock-based compensation expense.
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Amortization of Acquired Intangibles
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Amortization of acquired intangibles $ 22,255 $ 13,241 68 %
As a percentage of total revenue 5 % 3 %
Amortization of acquired intangibles included in operating expenses primarily
represents the amortization of value assigned to intangible assets obtained in
business combinations other than assets identified as purchased technology.
Amortization of acquired intangibles increased in fiscal year 2019 as compared
to fiscal year 2018 due to the addition of intangible assets obtained in
connection with the acquisition of Ipswitch.
Impairment of Intangible and Long-Lived Assets
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Impairment of intangible and long-lived assets $ 24,096 $ - *
As a percentage of total revenue 6 % - %
*Not meaningful
In the fourth quarter of fiscal year 2019 we determined that the intangible
assets associated with the technology obtained in connection with the
acquisitions of DataRPM and Kinvey were fully impaired, resulting from our
decision to reduce our current and ongoing investment levels within our
cognitive application product lines. As a result, we incurred an impairment
charge of $22.7 million in the fourth quarter of fiscal year 2019. See Note 6 to
our Consolidated Financial Statements in Item 8 of this Form 10-K for additional
details. In addition, during the fourth quarter of fiscal year 2019, we incurred
an additional asset impairment charge of $1.4 million related to the abandonment
of certain long-lived assets associated with a sale of corporate land and
buildings. See Note 5 to our Consolidated Financial Statements in Item 8 of this
Form 10-K for additional details.
Restructuring Expenses
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Restructuring expenses $ 6,331 $ 2,251 181 %
As a percentage of total revenue 2 % 1 %
Restructuring expenses recorded in fiscal year 2019 relate to the restructuring
activities that occurred in fiscal years 2019 and 2017. See Note 13 to our
Consolidated Financial Statements in Item 8 of this Form 10-K for additional
details, including types of expenses incurred and the timing of future expenses
and cash payments. See also the Liquidity and Capital Resources section of this
Item 2, Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Acquisition-Related Expenses
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Acquisition-related expenses $ 1,658 $ 258 *
As a percentage of total revenue - % - %
*Not meaningful
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Acquisition-related costs are expensed as incurred and include those costs
incurred as a result of a business combination. These costs consist of
professional services fees, including third-party legal and valuation-related
fees, as well as retention fees, and earn-out payments treated as compensation
expense. Acquisition-related expenses in fiscal year 2019 were related to the
acquisition of Ipswitch. Acquisition-related expenses in fiscal year 2018 were
minimal.
Loss on Assets Held for Sale
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Loss on assets held for sale $ - $ 5,147 *
As a percentage of total revenue - % 1 %
*Not meaningful
In the fourth quarter of fiscal year 2018, we reclassified certain corporate land and building assets previously reported as property and equipment to assets held for sale on our consolidated balance sheets as we were actively marketing them and expected to sell them within one year. As a result, we recognized an impairment charge of$5.1 million , which represented the difference between the fair value less cost to sell and the carrying value of the assets. The impairment charge was recorded to loss on assets held for sale within operating expenses on our fiscal year 2018 consolidated statement of operations. See Note 5 to our Consolidated Financial Statements in Item 8 of this Form 10-K for additional details.
Fees Related to Shareholder Activist
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Fees related to shareholder activist $ - $ 1,472 (100 )%
As a percentage of total revenue - % - %
In September 2017 , Praesidium Investment Management , then one of our largest
stockholders, publicly announced its disagreement with our strategy in a
Schedule 13D filed with the SEC and stated that it was seeking changes in the
composition of our Board of Directors. In fiscal year 2018, we incurred
professional and other fees relating to Praesidium's actions.
Income from Operations
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Income from operations $ 40,084 $ 67,814 (41 )%
As a percentage of total revenue 10 % 18 %
Income from operations decreased in fiscal year 2019 as compared to fiscal year
2018. As described above, the decrease was primarily driven by the impairment of
intangible and long-lived assets in the fourth quarter of fiscal year 2019, as
well as increases in operating expenses, amortization of acquired intangible
assets, restructuring expenses and acquisition expenses recorded in fiscal year
2019 as a result of the acquisition of Ipswitch. This decrease was partially
offset by increased revenue in fiscal year 2019 and the loss on assets held for
sale recorded in fiscal year 2018, as described above.
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Income from Operations by Segment
Fiscal Year Ended
(In thousands) November 30, 2019 November 30, 2018 Percentage Change
OpenEdge segment $ 211,720 $ 209,986 1 %
Data Connectivity and Integration segment 31,930 15,495 106 %
Application Development and Deployment segment 52,473 50,959 3 %
Other unallocated expenses (256,039 ) (208,626 ) (23 )%
Total income from operations $ 40,084 $ 67,814 (41 )%
Note that 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, loss on assets
held for sale, stock-based compensation, fees related to shareholder activist,
restructuring, and acquisition-related expenses.
Other (Expense) Income
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Interest expense $ (9,913 ) $ (5,149 ) 93 %
Interest income and other, net 1,143 1,220 (6 )%
Foreign currency loss, net (2,819 ) (3,089 ) (9 )%
Total other expense, net $ (11,589 ) $ (7,018 ) (65 )%
As a percentage of total revenue (3 )% (2 )%
Other expense, net, increased in fiscal year 2019 as compared to fiscal year
2018 primarily due to an increase in interest expense. The change in interest
expense is a result of an increase in the principal balance of our debt, which
was used to fund the Ipswitch acquisition.
Provision for Income Taxes
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Provision for income taxes $ 2,095 $ 11,126 (81 )%
As a percentage of total revenue <1% 3 %
Our effective income tax rate was 7% in fiscal year 2019 and 18% in fiscal year
2018. The primary reason for the decrease in the effective rate was due to the
loss incurred by our US operations in fiscal year 2019 resulting from the
amortization and impairment of intangibles. In addition, the majority of our
international profits were earned in a jurisdiction with a statutory tax rate of
10%.
Net Income
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Net income $ 26,400 $ 49,670 (47 )%
As a percentage of total revenue 6 % 13 %
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Fiscal 2018 Compared to Fiscal 2017
Revenue
Fiscal Year Ended Percentage Change
Constant
(In thousands)
Currency
Revenue $ 378,981 $ 389,154 (3 )% (3 )%
Total revenue decreased in fiscal year 2018 as compared to fiscal year 2017
primarily due to a decline in license and professional services revenue,
partially offset by an increase in maintenance revenue and a favorable impact
from foreign currency exchange rates as further described below. Changes in
prices from fiscal year 2017 to 2018 did not have a significant impact on our
revenue.
License Revenue
Fiscal Year Ended Percentage Change
Constant
(In thousands) November 30, 2018 November 30, 2017 As Reported Currency
License $ 99,800 $ 113,643 (12 )% (13 )%
As a percentage of total revenue 26 % 29 %
Software license revenue decreased in fiscal year 2018 as compared to fiscal year 2017 due to a decrease in software license revenue in our Data Connectivity and Integration and OpenEdge segments.
Maintenance and Services Revenue
Fiscal Year Ended Percentage Change
Constant
(In thousands) November 30, 2018 November 30, 2017 As Reported Currency
Maintenance $ 249,171 $ 243,508 2 % 1 %
As a percentage of total revenue 66 % 63 %
Professional services $ 30,010 $ 32,003 (6 )% (7 )%
As a percentage of total revenue 8 % 8 % Total maintenance and services revenue $ 279,181 $ 275,511
1 % - %
As a percentage of total revenue 74 % 71 %
Maintenance revenue increased in fiscal year 2018 as compared to fiscal year
2017 due to an increase in maintenance revenue in our OpenEdge and Application
Development and Deployment segments and a favorable impact from currency
exchange rates, partially offset by a decline in our Data Connectivity and
Integration segment. Professional services revenue decreased in fiscal year 2018
as compared to fiscal year 2017 primarily due to lower professional services
revenue from our OpenEdge and Application Development and Deployment segments.
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Revenue by Region
Fiscal Year Ended Percentage Change
Constant
(In thousands) November 30, 2018 November 30, 2017 As Reported Currency
North America $ 204,257 $ 235,815 (13 )% (13 )%
As a percentage of total revenue 54 % 61 %
EMEA $ 135,055 $ 117,509 15 % 11 %
As a percentage of total revenue 35 % 30 %
Latin America $ 18,046 $ 16,002 13 % 22 %
As a percentage of total revenue 5 % 4 %
Asia Pacific $ 21,623 $ 19,828 9 % 10 %
As a percentage of total revenue 6 % 5 %
Total revenue generated inNorth America decreased$31.6 million , and total revenue generated outsideNorth America increased$21.4 million , in fiscal year 2018 as compared to fiscal year 2017. The decrease inNorth America was primarily due to a decrease in license revenue in our Data Connectivity and Integration and OpenEdge segments as well as a decrease in maintenance revenue in our OpenEdge and Application Development and Deployment segments. The increase in revenue generated in EMEA in fiscal year 2018 as compared to fiscal year 2017 was primarily due to an increase in maintenance revenue in our OpenEdge and Application Development and Deployment segments, as well as a favorable impact from currency exchange rates. Revenue generated inLatin America andAsia Pacific increased in fiscal year 2018 as compared to fiscal year 2017 due to an increase in maintenance revenue. Total revenue generated in markets outsideNorth America represented 46% of total revenue in fiscal year 2018 compared to 39% of total revenue in the same period last year. If exchange rates had remained constant in fiscal year 2018 as compared to the exchange rates in effect in fiscal year 2017, total revenue generated in markets outsideNorth America would have been 46% of total revenue. Revenue by Segment Fiscal Year Ended (In thousands) November 30, 2018 November 30, 2017 Percentage Change OpenEdge segment $ 277,806 $ 279,823 (1 )% Data Connectivity and Integration segment 23,129 29,434 (21 )% Application Development and Deployment segment 78,046 79,897 (2 )% Total revenue $ 378,981 $ 389,154 (3 )% Revenue in the OpenEdge segment decreased in fiscal year 2018 as compared to fiscal year 2017, largely due to the decrease in license and professional services revenue. Data Connectivity and Integration segment revenue decreased in fiscal year 2018 as compared to fiscal year 2017 primarily due to the timing of certain renewals by OEMs. Application Development and Deployment segment revenue decreased in fiscal year 2018 as compared to fiscal year 2017, primarily due to lower license and professional services revenue, partially offset by an increase in maintenance revenue. Cost of Software Licenses Fiscal Year Ended Percentage (In thousands) November 30, 2018 November 30, 2017 Change Cost of software licenses $ 4,769 $ 5,752 (17 )% As a percentage of software license revenue 5 % 5 % As a percentage of total revenue 1 % 1 % 30
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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 cost of software licenses in fiscal year 2018 was a result of lower payments of royalties to third parties as compared to fiscal year 2017.
Cost of Maintenance and Services
Fiscal Year Ended
Percentage
(In thousands) November 30, 2018 November 30, 2017 Change
Cost of maintenance and services $ 39,470 $ 43,299 (9 )%
As a percentage of maintenance and services revenue 14 % 16 %
As a percentage of total revenue 10 % 11 %
Cost of maintenance and services consists primarily of costs of providing
customer support, consulting, and education. Cost of maintenance and services
decreased in fiscal year 2018 as compared to fiscal year 2017 primarily due to
lower compensation-related costs resulting from a decrease in headcount,
partially offset by higher third-party professional services expense.
Amortization of Acquired Intangibles
Fiscal Year Ended
Percentage
(In thousands) November 30, 2018 November 30, 2017 Change
Amortization of acquired intangibles $ 22,734 $ 20,108 13 %
As a percentage of total revenue 6 % 5 %
Amortization of acquired intangibles included in costs of revenue primarily
represents the amortization of the value assigned to technology-related
intangible assets obtained in business combinations. Amortization of acquired
intangibles increased in fiscal year 2018 as compared to fiscal year 2017. The
increase was 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, partially offset by the completion of amortization of certain
intangible assets acquired in prior years.
Gross Profit
Fiscal Year Ended
Percentage
(In thousands) November 30, 2018 November 30, 2017 Change
Gross profit $ 312,008 $ 319,995 (2 )%
As a percentage of total revenue 82 % 82 %
Our gross profit decreased in fiscal year 2018 as compared to fiscal year 2017
primarily due to the decrease in license and professional services revenue as
well as the increase of amortization of acquired intangibles, offset slightly by
the decrease in cost of maintenance and services and cost of software licenses
as described above.
Sales and Marketing
Fiscal Year Ended
Percentage
(In thousands) November 30, 2018 November 30, 2017 Change
Sales and marketing $ 93,036 $ 101,051 (8 )%
As a percentage of total revenue 25 % 26 %
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Sales and marketing expenses decreased in fiscal year 2018 as compared to fiscal
year 2017 primarily due to lower compensation-related and professional service
expenses 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
Fiscal Year Ended
Percentage
(In thousands) November 30, 2018 November 30, 2017 Change
Product development $ 79,739 $ 76,988 4 %
As a percentage of total revenue 21 % 20 %
Product development expenses increased in fiscal year 2018 as compared to fiscal
year 2017 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 fiscal year 2017
as compared to fiscal year 2018.
General and Administrative
Fiscal Year Ended
Percentage
(In thousands) November 30, 2018 November 30, 2017 Change
General and administrative $ 49,050 $ 45,739 7 %
As a percentage of total revenue 13 % 12 %
General and administrative expenses include the costs of our finance, human
resources, legal, information systems and administrative departments. General
and administrative expenses increased in fiscal year 2018 as compared to fiscal
year 2017 primarily due to increased stock-based compensation expense, as well
as higher professional services expense, partially offset by lower
compensation-related expenses. During the first quarter of fiscal year 2017,
there were significant forfeitures due to our restructuring action, which
significantly reduced stock-based compensation expense in fiscal year 2017 as
compared to fiscal year 2018.
Amortization of Acquired Intangibles
Fiscal Year Ended
Percentage
(In thousands) November 30, 2018 November 30, 2017 Change
Amortization of acquired intangibles $ 13,241 $ 13,039 2 %
As a percentage of total revenue 3 % 3 %
Amortization of acquired intangibles included in operating expenses primarily
represents the amortization of value assigned to intangible assets obtained in
business combinations other than assets identified as purchased technology.
Amortization of acquired intangibles increased in fiscal year 2018 as compared
to fiscal year 2017 due to the addition of intangible assets obtained in
connection with the acquisitions of DataRPM and Kinvey, which occurred in the
second and third quarters of fiscal year 2017, respectively.
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Restructuring Expenses
Fiscal Year Ended
Percentage
(In thousands) November 30, 2018 November 30, 2017 Change
Restructuring expenses $ 2,251 $ 22,210 (90 )%
As a percentage of total revenue 1 % 6 %
Restructuring expenses recorded in fiscal year 2018 relate to the restructuring
activities that occurred in fiscal year 2017. See Note 13 to our Consolidated
Financial Statements in Item 8 of this Form 10-K for additional details,
including types of expenses incurred and the timing of future expenses and cash
payments. See also the Liquidity and Capital Resources section of this Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Acquisition-Related Expenses
Fiscal Year Ended
Percentage
(In thousands) November 30, 2018 November 30, 2017 Change
Acquisition-related expenses $ 258 $ 1,458 (82 )%
As a percentage of total revenue - % - %
Acquisition-related costs are expensed as incurred and include those costs
incurred as a result of a business combination. These costs consist of
professional services fees, including third-party legal and valuation-related
fees, as well as retention fees, and earn-out payments treated as compensation
expense. Acquisition-related expenses in fiscal year 2018 were minimal.
Acquisition-related expenses in fiscal year 2017 resulted primarily from expense
related to the acquisitions of DataRPM and Kinvey, which occurred in the second
and third quarters of fiscal year 2017, respectively.
Loss on Assets Held for Sale
Fiscal Year Ended
Percentage
(In thousands) November 30, 2018 November 30, 2017 Change
Loss on assets held for sale $ 5,147 $ - *
As a percentage of total revenue 1 % - %
In the fourth quarter of fiscal year 2018, we reclassified certain corporate
land and building assets previously reported as property and equipment to assets
held for sale on our consolidated balance sheets as we are actively marketing
them and expect to sell them within one year. As a result, we recognized an
impairment charge of $5.1 million , which represents the difference between the
fair value less cost to sell and the carrying value of the assets. The
impairment charge was recorded to loss on assets held for sale within operating
expenses on our fiscal year 2018 consolidated statement of operations. See Note
5 to our Consolidated Financial Statements in Item 8 of this Form 10-K for
additional details.
Fees Related to Shareholder Activist
Fiscal Year Ended
Percentage
(In thousands) November 30, 2018 November 30, 2017 Change
Fees related to shareholder activist $ 1,472 $ 2,020 (27 )%
As a percentage of total revenue - % 1 %
In September 2017 , Praesidium Investment Management , then one of our largest
stockholders, publicly announced its disagreement with our strategy in a
Schedule 13D filed with the SEC and stated that it was seeking changes in the
composition of our Board of Directors. In fiscal years 2017 and 2018, we
incurred professional and other fees relating to Praesidium's actions.
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Income from Operations
Fiscal Year Ended
Percentage
(In thousands) November 30, 2018 November 30, 2017 Change
Income from operations $ 67,814 $ 57,490 18 %
As a percentage of total revenue 18 % 15 %
Income from operations increased in fiscal year 2018 as compared to fiscal year
2017. As described above, the increase was primarily driven by lower
restructuring expenses, sales and marketing expenses, and acquisition expenses.
This increase was partially offset by the loss on assets held for sale recorded
in fiscal year 2018, higher general and administrative expenses, higher product
development expenses, and lower gross margin, as described above.
Income from Operations by Segment
Fiscal Year Ended
(In thousands) November 30, 2018 November 30, 2017 Percentage Change
OpenEdge segment $ 209,986 $ 204,032 3 %
Data Connectivity and Integration segment 15,495 19,164 (19 )%
Application Development and Deployment segment 50,959 52,781 (3 )%
Other unallocated expenses (208,626 ) (218,487 ) 5 %
Total income from operations $ 67,814 $ 57,490 18 %
Note that 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, loss on assets
held for sale, stock-based compensation, fees related to shareholder activist,
restructuring, and acquisition-related expenses.
Other (Expense) Income
Fiscal Year Ended
Percentage
(In thousands) November 30, 2018 November 30, 2017 Change
Interest expense $ (5,149 ) $ (4,631 ) 11 %
Interest income and other, net 1,220 921 32 %
Foreign currency loss (3,089 ) (1,317 ) 135 %
Total other expense, net $ (7,018 ) $ (5,027 ) (40 )%
As a percentage of total revenue (2 )% (1 )%
Other (expense) income, net decreased in fiscal year 2018 as compared to fiscal
year 2017 primarily due to an increase in foreign currency losses and higher
interest expense. The increase in foreign currency losses is a result of an
increase in the cost of forward points relating to our hedging activities, as
well as movements in exchange rates and changes in our intercompany receivables
and payables denominated in currencies other than local currencies during fiscal
year 2018.
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Provision for Income Taxes
Fiscal Year Ended
Percentage
(In thousands) November 30, 2018 November 30, 2017 Change
Provision for income taxes $ 11,126 $ 23,442 (53 )%
As a percentage of total revenue 3 % 6 %
Our effective income tax rate was 18% in fiscal year 2018 and 45% in fiscal year
2017. The primary reason for the decrease in the effective rate was due to
enactment of tax reform in the United States that lowered our federal tax rate
in fiscal year 2018 to a blended rate of 22.2% as compared to 35.0% in fiscal
year 2017. In addition, during fiscal year 2018 we recorded a $1.7 million
income tax benefit for the re-measurement of our U.S. deferred tax balances.
Net Income
Fiscal Year Ended
Percentage
(In thousands) November 30, 2018 November 30, 2017 Change
Net income $ 49,670 $ 29,021 71 %
As a percentage of total revenue 13 % 7 %
Liquidity and Capital Resources
Cash, Cash Equivalents and Short-Term Investments
November 30, November 30,
(In thousands) 2019 2018
Cash and cash equivalents $ 154,259 $ 105,126
Short-term investments 19,426 34,387
Total cash, cash equivalents and short-term investments
The increase in cash, cash equivalents and short-term investments of$34.2 million from the end of fiscal year 2018 was primarily due to proceeds from the issuance of long term debt of$185.0 million , cash inflows from operations of$128.5 million , proceeds from sale of property and equipment of$6.1 million , and$5.0 million in cash received from the issuance of common stock. These cash inflows were offset by payments for acquisitions, net of cash acquired, of$225.3 million , dividend payments of$27.8 million , repurchases of common stock of$25.0 million , payments of debt obligations in the amount of$6.9 million , the effect of exchange rates on cash of$1.3 million and purchases of property and equipment of$4.0 million . Except as described below, there are no limitations on our ability to access our cash, cash equivalents and short-term investments. Cash, cash equivalents and short-term investments held by our foreign subsidiaries was$23.1 million and$35.6 million atNovember 30, 2019 and 2018, respectively. Foreign cash includes unremitted foreign earnings, which are invested indefinitely outside of theU.S. As such, they are not available to fund our domestic operations. If we were to repatriate these earnings, we may be subject to income tax withholding in certain tax jurisdictions and a portion of the repatriated earnings may be subject toU.S. income tax. However, we do not anticipate that the repatriation of earnings would have a material adverse impact on our liquidity.
Share Repurchases
In fiscal years 2019 and 2018, we repurchased and retired 0.7 million shares of our common stock for$25.0 million and 2.9 million shares of our common stock for$120.0 million , respectively, under this current authorization. In fiscal year 2017, we repurchased and retired 2.2 million shares of our common stock for$73.9 million . As ofNovember 30, 2019 , there was$75.0 million remaining under the share repurchase authorization. InJanuary 2020 , our Board of Directors increased the total share repurchase authorization to$250.0 million . 35
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Dividends
We began paying quarterly cash dividends of$0.125 per share of common stock to Progress stockholders inDecember 2016 and increased the quarterly cash dividend to$0.14 per share inSeptember 2017 . InSeptember 2018 , the quarterly cash dividend was increased to$0.155 per share of common stock. OnSeptember 24, 2019 , our Board of Directors approved an additional increase to our quarterly cash dividend from$0.155 to$0.165 per share of common stock. We have paid aggregate cash dividends totaling$27.8 million ,$25.8 million and$24.1 million for the years endedNovember 30, 2019 ,November 30, 2018 andNovember 30, 2017 , respectively. We expect to continue paying quarterly cash dividends in subsequent quarters consistent with our capital allocation strategy.
Restructuring Activities
During the first quarter of fiscal year 2017, we announced 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 then operated. During the fourth quarter of fiscal year 2017, we incurred additional costs with respect to this restructuring, including the reduction in redundant positions primarily within the product development and sales functions. We also consolidated offices in various locations. As part of this fiscal year 2017 restructuring, for the fiscal years endedNovember 30, 2019 and 2018, we incurred expenses of$0.7 million and$2.3 million , respectively, which are recorded as restructuring expenses on the consolidated statements of operations. We do not expect to incur additional material costs with respect to this restructuring. During the second quarter of fiscal year 2019, we restructured our operations in connection with the acquisition of Ipswitch. This restructuring resulted in a reduction in redundant positions, primarily within administrative functions of Ipswitch. We expect to incur additional expenses as part of this action related to employee costs and facility closures as we consolidate offices in various locations during fiscal year 2020, but we do not expect theses costs to be material. For the fiscal year endedNovember 30, 2019 , we incurred expenses of$3.1 million in connection with the restructuring, which are recorded as restructuring expenses in the consolidated statements of operations. Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2020. During the fourth quarter of fiscal year 2019, we announced the reduction of our current and ongoing investment level within our cognitive application product lines, which consist primarily of our DataRPM and Kinvey products. This restructuring resulted in a reduction in positions primarily within the sales and product development functions. For the fiscal year endedNovember 30, 2019 , we incurred expenses of$2.5 million , in connection with the restructuring, which are recorded as restructuring expenses in the consolidated statements of operations. Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2020. We do not expect to incur additional material costs with respect to this restructuring.
In connection with this restructuring action, during the fourth quarter of
fiscal year 2019, we evaluated the ongoing value of the intangible assets
primarily associated with the technologies and trade names obtained in the
acquisitions of DataRPM and Kinvey. As a result, we wrote down these assets to
fair value, which resulted in a
Credit Facility
Our credit agreement provides for a$301.0 million secured term loan and a$100.0 million secured revolving credit facility. The revolving credit facility may be made available inU.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 onApril 30, 2024 , 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 ofNovember 30, 2019 was$297.2 million , with$11.3 million due in the next 12 months. The term loan requires repayment of principal at the end of each fiscal quarter, beginning with the fiscal quarter endedAugust 31, 2019 . The principal repayment amounts are in accordance with the following schedule: (i) four payments of$1.9 million each, (ii) four payments of$3.8 million each, (iii) four payments of$5.6 million each, (iv) four payments of$7.5 million each, (v) three payments of$9.4 million each, and (vi) 36
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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. The average interest rate of the credit facility during the fiscal year endedNovember 30, 2019 was 3.90% and the interest rate as ofNovember 30, 2019 was 3.38%. Revolving loans may be borrowed, repaid, and reborrowed untilApril 30, 2024 , at which time all amounts outstanding must be repaid. As ofNovember 30, 2019 , there were no amounts outstanding under the revolving line and$1.8 million of letters of credit. The credit facility contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, grant liens, make investments, make acquisitions, incur indebtedness, merge or consolidate, dispose of assets, pay dividends or make distributions, repurchase stock, change the nature of the business, enter into certain transactions with affiliates and enter into burdensome agreements, in each case subject to customary exceptions for a credit facility of this size and type. We are also required to maintain compliance with a consolidated fixed charge coverage ratio, a consolidated total leverage ratio and a consolidated senior secured leverage ratio. We are in compliance with these financial covenants as ofNovember 30, 2019 .
Cash Flows from Operating Activities
Fiscal Year Ended
November 30, November 30, November 30,
(In thousands) 2019 2018 2017
Net income $ 26,400 $ 49,670 $ 29,021
Non-cash reconciling items included in net income 90,139 68,542 52,353
Changes in operating assets and liabilities 11,945 3,140 24,312
Net cash flows from operating activities
The increase in cash generated from operations in fiscal year 2019 as compared to fiscal year 2018 was primarily due to lower tax payments in fiscal year 2019 compared to fiscal year 2018. The most significant non-cash reconciling item included in net income in fiscal year 2019 was a$22.7 million intangible asset impairment charge (see Note 4 to the Consolidated Financial Statements in Item 8 of this Form 10-K for further information on the impairment charge). Cash flows in fiscal year 2019 were particularly strong due to increased collections resulting from the acquisition of Ipswitch, partially offset by increased personnel related expenditures. Our gross accounts receivable as ofNovember 30, 2019 increased by$13.1 million from the end of fiscal year 2018, which is primarily due to the acquisition of Ipswitch. Days sales outstanding ("DSO") in accounts receivable increased to 56 days at the end of fiscal year 2019 compared to 47 days at the end of fiscal year 2018, with the increase due to the timing of billings. In addition, our total deferred revenue as ofNovember 30, 2019 increased by$41.3 million from the end of fiscal year 2018. The significant changes in operating assets and liabilities in fiscal year 2018 as compared to fiscal year 2017 were primarily due to a decrease in personnel related expenditures. The most significant non-cash reconciling item included in net income in fiscal year 2018 was a$5.1 million loss on assets held for sale (see Note 5 to the Consolidated Financial Statements in Item 8 of this Form 10-K for further information on the impairment charge). In addition, our gross accounts receivable as ofNovember 30, 2018 decreased by$1.5 million from the end of fiscal year 2017. DSO in accounts receivable was 47 days at the end of fiscal year 2018 and at the end of fiscal year 2017. 37
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Cash Flows (used in) from Investing Activities
Fiscal Year Ended
November 30, November 30, November 30,
(In thousands) 2019 2018 2017
Net investment activity $ 14,770 $ 14,843 $ (8,821 )
Purchases of property and equipment (3,998 ) (7,250 ) (3,377 )
Proceeds from sale of property, plant and
equipment, net 6,146 - 1,557
Payments for acquisitions, net of cash acquired (225,298 ) - (77,150 )
Net cash flows (used in) from investing
activities $ (208,380 ) $ 7,593 $ (87,791 )
Net cash outflows and inflows of our net investment activity are generally a
result of the timing of our purchases and maturities of securities, which are
classified as cash equivalents or short-term securities, as well as the timing
of acquisitions and divestitures. Cash used in investing activities increased in
fiscal year 2019 as compared to fiscal year 2018. Most significantly, we
acquired Ipswitch for a net cash amount of $225.3 million . We did not complete
any acquisitions during fiscal year 2018, and we acquired DataRPM and Kinvey for
a net cash amount of $77.2 million in fiscal year 2017. In addition, we
purchased $4.0 million of property and equipment in fiscal year 2019, as
compared to $7.3 million in fiscal year 2018 and $3.4 million in fiscal year
2017. We also sold $6.1 million of certain corporate land and building assets in
the second quarter of fiscal year 2019.
Cash Flows from (used in) Financing Activities
Fiscal Year Ended
November 30, November 30, November 30,
(In thousands) 2019 2018 2017
Proceeds from stock-based compensation plans
(25,000 ) (120,000 ) (73,936 )
Dividend payment to shareholders (27,760 ) (25,789 ) (24,127 )
Proceeds from the issuance of debt, net of
payments of principal and debt issuance costs 178,065 (6,188 ) (12,424 )
Other financing activities (4,278 ) (3,999 ) (2,852 )
Net cash flows from (used in) financing
activities $ 130,292 $ (146,771 ) $ (103,314 )
During fiscal year 2019, we received $9.3 million from the exercise of stock
options and the issuance of shares under our employee stock purchase plan as
compared to $9.2 million in fiscal year 2018 and $10.0 million in fiscal year
2017. In addition, we made dividend payments of $27.8 million to our
stockholders in fiscal year 2019, as compared to dividend payments of $25.8
million and $24.1 million in fiscal years 2018 and 2017, respectively. Most
significantly, we received proceeds from the issuance of debt of $185.0 million
in fiscal year 2019 in connection with the acquisition of Ipswitch. In addition,
we repurchased $25.0 million of our common stock under our share repurchase plan
in fiscal year 2019, compared to $120.0 million in fiscal year 2018 and $73.9
million in fiscal year 2017. We also made principal payments on our debt of $5.3
million during fiscal year 2019, as compared to $6.2 million in fiscal year 2018
and $11.3 million in fiscal year 2017.
Indemnification Obligations
We include standard intellectual property indemnification provisions in our
licensing agreements in the ordinary course of business. Pursuant to our product
license agreements, we will indemnify, hold harmless, and agree to reimburse the
indemnified party for losses suffered or incurred by the indemnified party,
generally business partners or customers, in connection with certain patent,
copyright or other intellectual property infringement claims by third parties
with respect to our products. Other agreements with our customers provide
indemnification for claims relating to property damage or personal injury
resulting from the performance of services by us or our subcontractors.
Historically, our costs to defend lawsuits or settle claims relating to such
indemnity agreements have been insignificant. Accordingly, the estimated fair
value of these indemnification provisions is immaterial.
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Liquidity Outlook
We believe that existing cash balances, together with funds generated from operations and amounts available under our credit facility, will be sufficient to finance our operations and meet our foreseeable cash requirements through at least the next twelve months. We do not contemplate a need for any foreign repatriation of the earnings which are deemed invested indefinitely outside of theU.S. Our foreseeable cash needs include our planned capital expenditures, debt repayments, quarterly cash dividends, share repurchases, acquisitions, lease commitments, restructuring obligations and other long-term obligations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
Contractual Obligations
The following table details our contractual obligations as ofNovember 30, 2019 (in thousands): Payments Due by Period Less than 1 1-3 3-5 More than 5 Total Year Years Years Years Long-term debt: Principal payments$ 297,238 $ 11,288 $ 45,150 $ 240,800 $ - Interest payments(1) 39,223 9,921 18,159 11,143 - Operating leases 31,164 7,453 10,688 10,119 2,904 Purchase obligations(2) 2,888 963 1,773 152 - Unrecognized tax benefits(3) - - - - - Total$ 370,513 $ 29,625 $ 75,770 $ 262,214 $ 2,904
(1) Interest on the long-term debt is due and payable monthly and is estimated
using the effective interest rate as of
rate is variable. See Note 8 to our Consolidated Financial Statements in Item
8 of this Form 10-K for additional information.
(2) Represents the fixed or minimum amounts due under purchase obligations for
support service agreements.
(3) Our other noncurrent liabilities on the consolidated balance sheet include
unrecognized tax benefits and related interest and penalties. As of
additional
liabilities. At this time, we are unable to make a reasonably reliable
estimate of the timing of payments in individual years in connection with
these tax liabilities; therefore, such amounts are not included in the above
contractual obligation table. See Note 14 to our Consolidated Financial
Statements in Item 8 of this Form 10-K for additional information.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with GAAP. We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. However, actual results may differ from these estimates. We have identified the following critical accounting policies that require the use of significant judgments and estimates in the preparation of our consolidated financial statements. This listing is not a comprehensive list of all of our accounting policies. For further information regarding the application of these and other accounting policies, see Note 1 to our Consolidated Financial Statements in Item 8 of this Form 10-K.
Revenue Recognition
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)
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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
reclassified 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.
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.
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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 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. Contract assets 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. These amounts are included in unbilled receivables or long-term unbilled receivables on our consolidated balance sheets.
Deferred Revenue
Deferred revenue is recorded when revenue is recognized subsequent to customer invoicing. Deferred revenue expected to be recognized as revenue more than one year subsequent to the balance sheet date is included in long-term liabilities on the consolidated balance sheets.
We had goodwill and net intangible assets of$532.2 million atNovember 30, 2019 . We evaluate goodwill and other intangible assets with indefinite useful lives, if any, for impairment annually or on an interim basis when events and circumstances arise that indicate impairment may have occurred. We perform our annual goodwill impairment as ofOctober 31st of each fiscal year. We believe this date aligns the timing of the annual goodwill impairment testing with our planning and budgeting process, which is a key component of the tests, and alleviates administrative burden during our year-end reporting period. In performing our annual assessment, we first perform a qualitative test to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value and if necessary, perform a quantitative test. To conduct the quantitative impairment test of goodwill, we compare the fair value of a reporting unit to its carrying value. If the reporting unit's carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value. We estimate the fair values of our reporting units using discounted cash flow models or other valuation models, such as comparative transactions and market multiples. We must make assumptions about future cash flows, future operating plans, discount rates, comparable companies, market multiples, purchase price premiums and other factors in those models. Different assumptions and judgment determinations could yield different conclusions that would result in an impairment charge to income in the period that such change or determination was made. When we evaluate potential impairments outside of our annual measurement date, judgment is required in determining whether an event has occurred that may impair the value of goodwill or intangible assets. Factors that could indicate that an impairment may exist include significant underperformance relative to plan or long-term projections, significant changes in business strategy, significant negative industry or economic trends or a significant decline in our stock price for a sustained period of time. The determination of reporting units also requires management judgment. We consider whether a reporting unit exists within a reportable segment based on the availability of discrete financial information that is regularly reviewed by segment management. Our three reporting units were OpenEdge, Data Connectivity and Integration, and Application Development and Deployment as ofNovember 30, 2019 . During fiscal year 2019, we tested goodwill for impairment for each of our reporting units as ofOctober 31, 2019 . Our reporting units each had fair values which significantly exceeded their carrying values as of the annual impairment date. We did not recognize any goodwill impairment charges during fiscal years 2019, 2018 or 2017. During fiscal year 2019, we evaluated the ongoing value of the intangible assets associated with the technology obtained in connection with the acquisitions of DataRPM and Kinvey. As a result of our decision to reduce our current and ongoing spending levels within our cognitive application product lines, which consist primarily of our DataRPM and Kinvey products, we determined that the intangible assets were fully impaired. Therefore, we incurred an impairment charge of$22.7 million in the fourth quarter of fiscal year 2019 (Note 4). We did not recognize any intangible asset impairment charges during fiscal years 2018 and 2017. 41
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Income Tax Accounting
We have a net deferred tax asset of$18.6 million atNovember 30, 2019 . We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. We consider scheduled reversals of temporary differences, projected future taxable income, tax planning strategies and other matters in assessing the need for and the amount of a valuation allowance. If we were to change our assumptions or otherwise determine that we were unable to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period that such change or determination was made. Management judgment is also required in evaluating whether a tax position taken or expected to be taken in a tax return, based on the weight of available evidence, indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. Management judgment is also required in measuring the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. If management made different estimates or judgments, material differences in the amount accrued for uncertain tax positions would occur.
Stock-Based Compensation
We recognize stock-based compensation based on the fair value of stock-based awards, less the present value of expected dividends, measured at the date of grant. Stock-based compensation is recognized over the requisite service period, which is generally the vesting period of the award, and is adjusted each period for actual forfeitures. We estimate the fair value of each stock-based award on the measurement date using either the current market price, the Black-Scholes option valuation model, or the Monte Carlo Simulation valuation model. The Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to the expected stock price volatility, the expected term of the option, a risk-free interest rate and a dividend yield. The expected volatility is based on the historical volatility of our stock price. The expected term is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free interest rate is based on the yield of zero-couponU.S. Treasury securities for the period that is commensurate with the expected option term at the time of grant. The expected dividend yield is based on our historical behavior and future expectations of dividend declarations.
Restructuring Charges
We periodically record restructuring charges resulting from restructuring our operations (including consolidations and/or relocations of operations), changes to our strategic plan, or managerial responses to declines in demand, increasing costs, or other market factors. The determination of restructuring charges requires management judgment and may include costs related to employee benefits, such as costs of severance and termination benefits, and estimates of costs for future lease commitments on excess facilities, net of estimated future sublease income. In determining the amount of the facilities charge, we are required to estimate such factors as future vacancy rates, the time required to sublet properties and sublease rates. These estimates are reviewed quarterly based on known real estate market conditions and the credit-worthiness of subtenants, and may result in revisions to established facility reserves.
Business Combinations
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The estimates used to value the net assets acquired are based in part on historical experience and information obtained from the management of the acquired company. We generally value the identifiable intangible assets acquired using a discounted cash flow model. The significant estimates used in valuing certain of the intangible assets include, but are not limited to: future expected cash flows of the asset, discount rates to determine the present value of the future cash flows, attrition rates of customers, and expected technology life cycles. We also estimate the useful lives of the intangible assets based on the expected period over which we anticipate generating economic benefit from the asset.
Our estimates of fair value are based on assumptions believed to be reasonable at that time. If management made different estimates or judgments, material differences in the fair values of the net assets acquired may result.
Recent Accounting Pronouncements
Refer to Note 1 to our Consolidated Financial Statements in Item 8 of this Form 10-K.
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