PROS HOLDINGS, INC.
In 2020, we continued to grow through our subscription-based revenue model, by
enabling our customers to leverage our AI-driven solutions to help them compete
in the digital economy, while managing the impact of the coronavirus
("COVID-19") pandemic. Notable items for 2020 included:
•Subscription revenue increased by 17% in 2020 over 2019, and accounted for 68%,
58% and 50% of total revenue for the years ended December 31, 2020 , 2019 and
2018, respectively;
•Recurring revenue, which consists of subscription and maintenance and support
revenue, accounted for 85% of our total revenue and grew by 6% in 2020 over
2019;
•Annual recurring revenue ("ARR") was $209.7 million as of December 31, 2020 ,
down 5% year-over-year;
•Designated as a 2020-2021 Great Place to Work-Certified™ company;
•Delivered the record-breaking, virtual PROS 2020 Outperform Customer
Conference , with registration exceeding more than 600% as compared with our 2019
Outperform conference;
•Completed an offering of $150.0 million aggregate principal amount of 2027
Notes in a private placement in September 2020 .
While COVID-19 continued to spread throughout the world, our focus remained on
promoting employee health and safety, serving our customers and ensuring
business continuity. As a result, we directed our teams to work from home,
suspend travel and replaced historically in-person events such as our Outperform
conference with digital events. For further discussion of the possible impact of
COVID-19 to our business and our response, please see our Risk Factors under
Part I, Item 1A of this Annual Report on Form 10-K, and "Pandemic Response" under Part I, Item 1 of this Annual Report on Form 10-K.
ARR is one of our key performance metrics to assess the health and trajectory of our overall business. ARR, a non-GAAP financial measure, is defined, as of a specific date, as contracted recurring revenue, including contracts with a future start date, together with annualized overage fees incurred above contracted minimum transactions, and excluding perpetual and term license agreements recognized as license revenue in accordance with GAAP. ARR should be viewed independently of revenue, deferred revenue and other GAAP measures, and is not intended to be combined with any of these items. Total ARR as ofDecember 31, 2020 was$209.7 million , down from$219.8 million as ofDecember 31, 2019 , a decrease of 5%, due to the impact of COVID-19.
Cash used in operating activities was
Free cash flow is another key metric to assess the strength of our business. We define free cash flow, a non-GAAP financial measure, as net cash provided by (used in) operating activities minus capital expenditures (excluding expenditures for PROS new headquarters), purchases of other (non-acquisition-related) intangible assets and capitalized internal-use software development costs. We believe free cash flow may be useful to investors and other users of our financial information in evaluating the amount of cash generated by our business operations. Free cash flow used for the year endedDecember 31, 2020 was$53.3 million , compared to$0.9 million for the year endedDecember 31, 2019 . The following is a reconciliation of free cash flow to the most comparable GAAP measure, net cash provided by (used in) operating activities: Year Ended December 31, 2020 2019 Net cash provided by operating activities$ (49,389) $ 5,245 Purchase of property and equipment (excluding new headquarters) (2,248) (4,626) Purchase of intangible asset - (50) Capitalized internal-use software development costs (1,686) (1,436) Free cash flow$ (53,323) $ (867) 27
-------------------------------------------------------------------------------- Table of Contents Financial Performance Summary Recurring revenue, which is comprised of our subscription and maintenance and support revenue, accounted for 85% of our total revenue for the year endedDecember 31, 2020 . Total recurring revenue was$215.2 million for the year endedDecember 31, 2020 as compared to$203.5 million for the year endedDecember 31, 2019 , an increase of approximately$11.7 million , or 6%. This increase in recurring revenue was primarily attributable to a 17% increase in subscription revenue from new and existing customers. Revenue by Geography Geographic revenue is categorized based on the location of our customers' headquarters, and for the years endedDecember 31, 2020 , 2019 and 2018, is as follows: Year Ended December 31, 2020 2019 2018 Revenue Percent Revenue Percent Revenue Percent
34 %$ 68,482 35 % Europe 74,936 30 % 73,914 30 % 60,947 31 % The rest of the world 95,189 38 % 90,457 36 % 67,595 34 % Total revenue$ 252,424 100 %$ 250,334 100 %$ 197,024 100 % Convertible Debt InSeptember 2020 , we issued the 2027 Notes in an aggregate principal amount of$150.0 million . The interest rate for the 2027 Notes is fixed at 2.25% per year and interest is payable semiannually in arrears in cash onMarch 15 andSeptember 15 of each year, beginning onMarch 15, 2021 . The 2027 Notes mature onSeptember 15, 2027 unless redeemed or converted in accordance with their terms prior to such date. InMay 2019 , we issued the 2024 Notes in an aggregate principal amount of$143.8 million . We used a portion of the net proceeds of the offering of the 2024 Notes to exchange and retire approximately$122.1 million in aggregate principal of 2.0% convertible senior notes dueDecember 2019 (the "2019 Notes") for an aggregate cash consideration of$76.0 million and approximately 2.2 million shares of our common stock (the "Exchange Transactions"). We recorded a$2.3 million loss on debt extinguishment related to the Exchange Transactions. In the fourth quarter of 2019, at maturity, we settled the remaining principal of the 2019 Notes in cash and distributed approximately 0.3 million shares of our common stock to the notes holders, which represented the conversion value in excess of the principal amount. InAugust 2019 , we issued a notice of redemption to the holders of our outstanding 2.0% convertible senior notes dueJune 2047 (the "2047 Notes"), and during the third and fourth quarter of 2019, we converted the entire aggregate principal of$106.3 million of the 2047 Notes and delivered approximately 2.3 million shares of our common stock upon conversion. We recorded a$3.4 million loss on debt extinguishment related to the Redemption. The loss on extinguishment is included in the other (expense) income, net in the Consolidated Statements of Comprehensive Income (Loss).
Factors Affecting Our Performance
Key factors and trends that have affected and we believe will continue to affect our operating results include:
•COVID-19Global Impact . The global economy has been significantly and negatively impacted by COVID-19, and the scope and duration of the outbreak and timeframe for economic recovery is uncertain. The travel industry, a sector served by our solutions, has been particularly adversely impacted. For example, unprecedented declines in travel demand have forced airlines, including some of our customers, to respond by significantly reducing capacity, grounding flights, reducing personnel, adjusting corporate liquidity and, in certain cases, filing for bankruptcy protection. The global workplace environment has also substantially changed in the wake of COVID-19. To support the health and well-being of our employees, customers, partners and communities, our global workforce has been primarily working remotely sinceMarch 16, 2020 . Many of our customers are also working remotely, which in some cases has delayed, and may continue to impact the timing of new business and implementations of our solutions. The duration and extent of the impact of COVID-19 continues to be unknown and could continue to impact the pace and timing of adoption and implementation of our solutions, cash flow from operations and customer retention. 28 -------------------------------------------------------------------------------- Table of Contents •COVID-19 Financial Impact. As compared to our expectations prior to COVID-19, the global economic impact of COVID-19 adversely impacted our revenue, bad debt expense and operating cash flow during the year endedDecember 31, 2020 . We expect customer bookings and the related revenue and cash flows will continue to be lower than anticipated prior to the pandemic as a result of decreased demand for new subscriptions and services, delays to projects during the COVID-19 pandemic, and increased scrutiny on new large software purchases. In addition, certain customers have requested, and we expect will continue to request, relief to existing contracts and the impact of those is uncertain. •Buying Preferences Driving Technology Adoption. Corporate buyers are increasingly demanding the same type of digital buying experience that they enjoy as consumers. Buyers often prefer not to interact with sales representatives as their primary source of research, and increasingly prefer to buy online when they have already decided what to buy. This trend has accelerated during the current pandemic environment. In response, we believe that businesses are increasingly modernizing their sales process to compete in digital commerce by adopting technologies which provide fast, frictionless, and personalized buying experiences across sales channels. We believe we are uniquely positioned to help power these buying experiences with our AI-powered solutions that enable buyers to move fluidly and with personalized experiences across our customers' direct sales, online, mobile and partner channels. •Continued Investments. As a result of the economic impact of COVID-19, we are continuing to be measured in our investments and focused on cost control efforts across our organization, while continuing to create awareness for our solutions, expand our customer base and grow our subscription revenues. For example, we are slowing our overall rate of employee hiring, emphasizing hiring for strategic positions and cross training our travel implementation personnel to serve prospects and customers in other existing industry verticals. While we incurred losses in 2020, we believe our market is large and underpenetrated and intend to continue investing in sales, marketing, customer success, cloud support, security, privacy, infrastructure and other long-term initiatives to expand our ability to sell and renew our subscription offerings globally. We also plan to continue investing in product development to enhance our existing technologies, including initiatives to accelerate customer time-to-value and provide out-of-the-box integration with third-party commerce solutions, and develop new applications and technologies. •Cloud Migrations. Sales of our cloud-based solutions have, and we expect future sales of our cloud-based solutions will continue to reduce our future maintenance and support revenue, as long-term customers continue to migrate from our legacy licensed solutions to our current cloud solutions. Description of Key Components of our Operating Results
Revenue
We derive our revenues primarily from recurring revenue, which includes subscription and maintenance and support services. Recurring revenues accounted for 85% of our total revenue in 2020.
Subscription. Subscription revenue primarily consists of fees that give
customers access to one or more of our cloud applications with related customer
support. We primarily recognize subscription revenue ratably over the
contractual term of the arrangement beginning with commencement of service.
Subscription revenue related to certain offerings, where fees are based on a
number of transactions, are recognized on a usage basis.
Maintenance and support. Maintenance and support revenue includes customer
support for our on-premises software and the right to unspecified software
updates and enhancements. We recognize revenue from maintenance arrangements
ratably over the period in which the services are provided. Our maintenance and
support contracts are generally one year in length, billed annually in advance,
and non-cancelable.
Services. Services revenue primarily consists of fees for configuration
services, consulting and training. We typically sell our services on either a
fixed-fee or time-and-materials basis. Services revenue is generally recognized
as the services are performed for time and material contracts, or on a
proportional performance basis for fixed-price contracts. The majority of our
services contracts are on a fixed-fee basis. Training revenues are recognized as
the services are performed.
Services revenue varies from period to period depending on different factors,
including the level of services required to implement our solutions, the timing
of services revenue recognition on certain subscription contracts and any
additional services requested by our customers during a particular period.
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Significant judgments are required in determining whether services that are contained in our customer subscription contracts are considered distinct, including whether the services are capable of being distinct and whether they are separately identifiable. Services deemed to be distinct are accounted for as a separate performance obligation and revenue is recognized as the services are performed. If determined services are not considered distinct, the services and the subscription are determined to be a single performance obligation and revenue is recognized over the contractual term of the subscription beginning on the date that subscription services are made available to the customer. Cost of Revenue Cost of subscription. Cost of subscription consists of infrastructure costs to support our current subscription customer base including third-party hosting services and expenses related to operating our network infrastructure, including depreciation expense and operating lease payments, salaries and related expenses, amortization of capitalized software and an allocation of depreciation, amortization of certain intangible assets and allocated overhead.
Cost of maintenance and support. Cost of maintenance and support consists largely of employee-related costs and an allocation of depreciation, amortization of intangibles, and allocated overhead.
Cost of services. Cost of services includes those costs related to services and implementation of our solutions, primarily employee-related costs and third-party contractors, billable and non-billable travel and an allocation of depreciation and allocated overhead. Cost of providing services may vary from quarter to quarter depending on a number of factors, including the amount of services required to implement and configure our solutions. Services gross profit varies period to period depending on different factors, including the level of services required to implement our solutions, our mix of employees and third-party contractors, our effective billable man-day rates, our use of third-party system integrators and the billable utilization of our services personnel. Operating Expenses Selling and marketing. Selling and marketing expenses primarily consist of employee-related costs, third-party contractors, sales commissions, sales and marketing programs such as lead generation programs, company awareness programs, our annual Outperform conference, participation in industry trade shows, and other sales and marketing programs, travel, amortization expenses associated with acquired intangible assets and allocated overhead. Sales commissions are deferred and amortized on a straight-line basis over the period of benefit, which we have determined to be five to eight years. General and administrative. General and administrative expenses primarily consist of employee-related costs for executive, accounting, finance, legal, human resources and internal IT support functions and an allocation of depreciation and allocated overhead. General and administrative expenses also include outside legal and accounting fees and provision for bad debts. Research and development. Research and development expenses primarily consist of employee-related costs and third-party contractors who work on enhancements of existing solutions, the development of new solutions, scientific research, quality assurance and testing, and an allocation of depreciation, facilities and allocated overhead. Results of Operations Comparison of year endedDecember 31, 2020 with year endedDecember 31, 2019 Revenue: For the Year Ended December 31, 2020 2019 Percentage of Percentage of (Dollars in thousands) Amount total revenue Amount total revenue Variance $ Variance % Subscription$ 170,473 67 %$ 145,327 58 %$ 25,146 17 % Maintenance and support 44,692 18 % 58,184 23 % (13,492) (23) % Total subscription, maintenance and support 215,165 85 % 203,511 81 % 11,654 6 % Services 37,259 15 % 46,823 19 % (9,564) (20) % Total revenue$ 252,424 100 %$ 250,334 100 %$ 2,090 1 % 30
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Subscription revenue. Subscription revenue increased primarily due to an increased number of customer subscription contracts as compared to the prior year. For the year endedDecember 31, 2020 , our subscription revenue was negatively impacted by a decrease in customer revenue retention attributed to the impact of COVID-19, and primarily driven by the impact of COVID-19 on our travel customers. Our ability to maintain consistently high customer retention rates will directly impact our ability to continue to grow our subscription revenue. Due to the ongoing uncertain economic conditions caused by COVID-19, we expect subscription revenue to grow at a slower pace in the near term. Maintenance and support revenue. Maintenance and support revenue decreased primarily as a result of existing maintenance customers migrating to our cloud solutions and a decrease in customer retention due to the impact of COVID-19. We expect maintenance revenue to continue to decline as we continue to migrate maintenance customers to our cloud solutions.
Services revenue. Services revenue decreased primarily as a result of lower sales of services related to subscription contracts than in 2019 due to the impact of COVID-19.
Cost of revenue and gross profit.
For the Year Ended December 31,
2020 2019
Percentage Percentage
of total of total
(Dollars in thousands) Amount revenue Amount revenue Variance $ Variance %
Cost of subscription $ 51,673 20 % $ 42,339 17 % $ 9,334 22 %
Cost of maintenance and support 9,880 4 % 11,052 4 % (1,172) (11) %
Total cost of subscription,
maintenance and support 61,553 24 % 53,391 21 % 8,162 15 %
Cost of services 43,080 17 % 45,726 18 % (2,646) (6) %
Total cost of revenue $ 104,633 41 % $ 99,117 40 % $ 5,516 6 %
Gross profit $ 147,791 59 % $ 151,217 60 % $ (3,426) (2) %
Cost of subscription. Cost of subscription increased primarily due to increased
infrastructure costs to support our current subscription customer base and
increased employee-related costs driven by higher headcount. Our subscription
gross profit percentage was 70% and 71%, respectively, for the years ended
December 31, 2020 and 2019.
Cost of maintenance and support. Cost of maintenance and support declined
primarily due to a decrease in personnel costs as a result of the need to
support a smaller maintenance customer base as we migrate customers to our
subscription solutions. Maintenance and support gross profit percentages for the
years ended
Cost of services. Cost of services decreased primarily due to the lower utilization of third-party contractors and reduced travel expenses due to the COVID-19 pandemic, partially offset by increased employee-related costs driven by higher headcount. Services gross profit percentages for the years endedDecember 31, 2020 and 2019, were (16)% and 2%, respectively. The decrease in services gross profit percentages was primarily due to the decrease in services revenues and the increase in headcount. Gross profit. Overall gross profit decreased for the year endedDecember 31, 2020 principally attributable to the slower growth in revenue due to the impact of COVID-19. 31 --------------------------------------------------------------------------------
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Operating expenses:
For the Year Ended December 31,
2020 2019
Percentage of total Percentage of
(Dollars in thousands) Amount revenue Amount total revenue Variance $ Variance %
Selling and marketing $ 87,182 35 % $ 89,553 36 % $ (2,371) (3) %
General and administrative 51,075 20 % 47,254 19 % 3,821 8 %
Research and development 75,614 30 % 67,246 27 % 8,368 12 %
Acquisition-related - - % 502 - % (502) (100) %
Total operating expenses $ 213,871 85 % $ 204,555 82 % $ 9,316 5 %
Selling and marketing expenses. Sales and marketing expenses decreased primarily
due to a decrease of travel expense of $7.0 million due to the COVID-19
pandemic, partially offset by an increase of $4.2 million in employee-related
costs driven by higher sales and marketing headcount, as we continue to focus on
adding new customers and increasing penetration within our existing customer
base, an increase of $0.3 million in expenses for sales and marketing events,
and a $0.1 million increase in allocated overhead.
General and administrative expenses. General and administrative expenses
increased primarily due to an increase of $5.3 million in bad debt expense
recognized as a result of increased credit risk from uncertain economic
conditions caused by COVID-19 and the bankruptcy of several customers in the
travel industry, partially offset by a decrease in professional fees in 2020 as
compared to 2019 related to our acquisition of Travelaer in 2019.
Research and development expenses. Research and development expenses increased
primarily due to an increase of $8.3 million in employee-related costs driven by
higher headcount and a slight increase in allocated overhead.
Acquisition-related expenses. Acquisition-related expenses were $0.5 million
for the year ended December 31, 2019 , and consisted primarily of integration
costs, professional fees and retention bonuses for our acquisition of Travelaer
in 2019.
Other income (expense), net:
For the Year Ended December 31,
2020 2019
Percentage of Percentage of
(Dollars in thousands) Amount total revenue Amount total revenue Variance $ Variance %
Convertible debt interest and
amortization $ (11,125) (4) % $ (14,765) (6) % $ 3,640 (25) %
Other income (expense), net $ 897 - % $ (354) - % $ 1,251 (353) %
Convertible debt interest and amortization. Convertible debt interest and
amortization expense for each of the years ended December 31, 2020 and 2019
related to coupon interest and amortization of debt discount and issuance costs
attributable to our Notes. Convertible debt interest and amortization decreased
primarily as a result of our settlement of the 2019 Notes and 2047 Notes during
2019, partially offset by an increase due to the issuance of our 2027 Notes in
September 2020 .
Other income (expense), net. The change in other income (expense), net for the
year ended December 31, 2020 , primarily related to a $5.7 million loss on debt
extinguishment related to our 2019 Notes and 2047 Notes recognized in 2019 which
was partially offset by a decrease in interest income during the period.
Income tax provision:
For the Year Ended
December 31,
(Dollars in thousands) 2020 2019 Variance $ Variance %
Effective tax rate (0.9) % (0.9) % n/a - %
Income tax provision $ 676 $ 624 $ 52 8 %
32-------------------------------------------------------------------------------- Table of Contents Our tax provision for the year endedDecember 31, 2020 included both foreign income and withholding taxes. No tax benefit was recognized on jurisdictions with a projected loss for the year due to the valuation allowances on our deferred tax assets. Our 2020 and 2019 effective tax rates had an unusual relationship to pretax loss from operations due to a valuation allowance on our net deferred tax assets. Our income tax provisions in 2020 and 2019 only included foreign income and withholding taxes, resulting in an effective tax rate of (0.9)% and (0.9)%, respectively. The difference between the effective tax rates and the federal statutory rate of 21% for the years endedDecember 31, 2020 and 2019 was primarily due to the increase in our valuation allowance of$24.3 million and$12.4 million , respectively.
As of
Comparison of year ended
Additional information on fiscal 2018 items, including discussion of the year-over-year comparisons between 2019 and 2018 that are not included in this Form 10-K, can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , filed with theSEC onFebruary 19, 2020 . Revenue: For the Year Ended December 31, 2019 2018 Percentage of Percentage of total (Dollars in thousands) Amount total revenue Amount revenue Variance $ Variance % Subscription$ 145,327 58 %$ 98,708 50 %$ 46,619 47 % Maintenance and support 58,184 23 % 64,760 33 % (6,576) (10) % Total subscription, maintenance and support 203,511 81 % 163,468 83 % 40,043 24 % Services 46,823 19 % 33,556 17 % 13,267 40 % Total revenue$ 250,334 100 %$ 197,024 100 %$ 53,310 27 % Cost of revenue and gross profit: For the Year Ended December 31, 2019 2018 Percentage Percentage of total of total (Dollars in thousands) Amount revenue Amount revenue Variance $ Variance % Cost of subscription$ 42,339 17 %$ 35,619 18 %$ 6,720 19 % Cost of maintenance and support 11,052 4 % 11,602 6 % (550) (5) % Total cost of subscription, maintenance and support 53,391 21 % 47,221 24 % 6,170 13 % Cost of services 45,726 18 % 29,958 15 % 15,768 53 % Total cost of revenue$ 99,117 40 %$ 77,179 39 %$ 21,938 28 % Gross profit$ 151,217 60 %$ 119,845 61 %$ 31,372 26 % 33
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Operating expenses:
For the Year Ended December 31,
2019 2018
Percentage of total Percentage of total
(Dollars in thousands) Amount revenue Amount revenue Variance $ Variance %
Selling and marketing $ 89,553 36 % $ 72,006 37 % $ 17,547 24 %
General and administrative 47,254 19 % 41,302 21 % 5,952 14 %
Research and development 67,246 27 % 55,657 28 % 11,589 21 %
Acquisition-related 502 - % 95 - % 407 428 %
Total operating expenses $ 204,555 82 % $ 169,060 86 % $ 35,495 21 %
Other (expense) income, net:
For the Year Ended December 31,
2019 2018
Percentage of Percentage of
(Dollars in thousands) Amount total revenue Amount total revenue Variance $ Variance %
Convertible debt interest and
amortization $ (14,765) (6) % $ (16,986) (9) % $ 2,221 (13) %
Other (expense) income, net $ (354) - % $ 2,155 1 % $ (2,509) (116) %
Income tax provision:
For the Year Ended December 31,
(Dollars in thousands) 2019 2018 Variance $ Variance %
Effective tax rate (1) % - % n/a (1) %
Income tax provision $ 624 $ 200 $ 424 212 %
Liquidity and Capital Resources
AtDecember 31, 2020 , we had$329.1 million of cash and cash equivalents and$246.4 million of working capital as compared to$306.1 million of cash and cash equivalents and$189.8 million of working capital atDecember 31, 2019 . Our principal sources of liquidity are our cash and cash equivalents, cash flows generated from operations and potential borrowings under our$50 million secured Credit Agreement ("Revolver") with the lenders party thereto andWells Fargo Bank, National Association as agent for the lenders party thereto. The facility expires inJuly 2022 . We issued the 2027 Notes inSeptember 2020 , the 2024 Notes inMay 2019 and completed our Secondary Offering inAugust 2018 to supplement our overall liquidity position. Our material drivers or variants of operating cash flow are net income (loss), noncash expenses (principally share-based compensation, intangible amortization and amortization of debt discount and issuance costs) and the timing of periodic invoicing and cash collections related to licenses, subscriptions and support for our software and related services. Our operating cash flows are also impacted by the timing of payments to our vendors and the payments of our other liabilities and customer concessions. We generally pay our vendors and service providers in accordance with the invoice terms and conditions. We believe our existing cash, cash equivalents, including funds available under our Revolver, and our current estimates of future operating cash flows, will provide adequate liquidity and capital resources to meet our operational requirements, anticipated capital expenditures and coupon interest payments for our Notes for the next twelve months. Our future working capital requirements will depend on many factors, including the operations of our existing business, potential growth of our subscription services, future acquisitions we might undertake, expansion into complementary businesses and the impact of COVID-19, including the pace and timing of adoption and implementation of our solutions, relief to existing contracts and customer retention. If such need arises, we may raise additional funds through equity or debt financings. However, the recent COVID-19 pandemic caused some disruption in the capital markets and further disruption could make financing more difficult and/or expensive and we may not be able to obtain such financing on terms acceptable to us or at all. During the period of uncertainty and volatility related to COVID-19, we will continue to monitor our liquidity. 34
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The following table presents key components of our Consolidated Statements of
Cash Flows for the years ended
For the Year Ended December 31,
(Dollars in thousands) 2020 2019 2018
Net cash (used in) provided by operating activities
$ 5,245 $ 5,703 Net cash used in investing activities (30,460) (17,560) (6,258) Net cash provided by financing activities 102,914 22,991 135,352 Cash and cash equivalents (beginning of period) 306,077 295,476 160,505 Cash and cash equivalents (end of period)$ 329,134 $ 306,077 $ 295,476 Operating Activities Cash used in operating activities in 2020 was$49.4 million and increased as compared to cash provided by operating activities in 2019 of$5.2 million . The increase was primarily attributable to higher cash operating expenses driven mainly by an increase in headcount year-over-year, higher annual incentive payment as compared to 2019, customer requests during the pandemic to defer payments into 2021, and a decrease in customer revenue retention attributed to the impact of COVID-19.
Cash provided by operating activities in 2019 was
Investing Activities
Net cash used in investing activities for 2020 of$30.5 million was primarily due to$28.5 million of capital expenditures mainly attributable to the build out of our new headquarters which was committed prior to the pandemic. In addition, we incurred capitalized internal-use software development costs on our subscription solutions of$1.7 million , and investment in equity securities of$0.3 million . Net cash used in investing activities for 2019 was$17.6 million , which was primarily related to our acquisition of Travelaer. In addition, we incurred capitalized internal-use software development costs on our subscription service solutions of$1.4 million , capital expenditures of$5.3 million , investment in equity securities of$0.3 million and intangible (non-acquisition) asset of$0.1 million . Financing Activities Net cash provided by financing activities for 2020 was$102.9 million , which was attributable to the proceeds of$146.9 million from the issuance of our 2027 Notes and proceeds from the exercise of employee stock plans of$2.8 million , partially offset by the purchase of Capped Call of$25.3 million , a payment of$20.5 million for tax withholdings on vesting of employee share-based awards and a$1.0 million payment for debt issuance costs related to the 2027 Notes. Net cash provided by financing activities for 2019 was$23.0 million , which was attributable to the proceeds of$140.2 million from the issuance of our 2024 Notes, proceeds from the bond hedge termination of$64.8 million and proceeds from the exercise of employee stock plans of$2.0 million , which was partially offset by the settlement of our 2019 and 2047 Notes of$97.7 million , termination of warrant of$45.2 million , a payment of$23.8 million for tax withholdings on vesting of employee share-based awards, the purchase of Capped Call of$16.4 million and a$0.9 million payment for debt issuance costs related to the 2024 Notes. Stock Repurchases InAugust 2008 , our Board of Directors authorized a stock repurchase program for the purchase of up to$15.0 million of our common stock. No shares were repurchased under the program during the years endedDecember 31, 2020 , 2019 and 2018, respectively. As ofDecember 31, 2020 ,$10.0 million remained available in the stock repurchase program. The repurchase of stock, if continued, will be funded primarily with existing cash balances. The timing of any repurchases will depend upon various factors including, but not limited to, market conditions, the market price of our common stock and management's assessment of our liquidity and cash flow needs. For additional information on the stock repurchase program see Item 5 , "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities ." 35 -------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements and Contractual Obligations We do not have any relationships with unconsolidated entities or financial partnerships, such as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Our principal commitments as ofDecember 31, 2020 consist of obligations under operating leases and various service agreements. See Note 18 of our Notes to Consolidated Financial Statements for additional information regarding our contractual commitments.
Contractual Obligations
The following table sets forth our contractual obligations as ofDecember 31, 2020 : Payment due by period Less than 1 More than 5 (Dollars in thousands) Total year 1-3 years 3-5 years years Notes, including interest$ 322,350 $ 4,813 $ 9,625 $ 151,162 $ 156,750 Operating leases 72,882 9,580 21,752 9,683 31,867 Purchase and contractual commitments 39,259 30,148 9,111 - -
Total contractual obligations
Notes As ofDecember 31, 2020 , our outstanding Notes consist of the 2024 and 2027 Notes. Interest on the 2024 Notes is payable semi-annually, in arrears onMay 15 andNovember 15 of each year. Interest on the 2027 Notes is payable semiannually in arrears in cash onMarch 15 andSeptember 15 of each year, beginning onMarch 15, 2021 . AtDecember 31, 2020 , our maximum commitment for interest payments under the 2024 and 2027 Notes was$28.6 million for their remaining duration. Covenants Our Revolver contains affirmative and negative covenants, including covenants which restrict our ability to, among other things, create liens, incur additional indebtedness and engage in certain other transactions, in each case subject to certain exclusions. In addition, our Revolver contains certain financial covenants which become effective in the event our liquidity falls below$50 million or upon the occurrence of an event of default. As ofDecember 31, 2020 , we were in compliance with all financial covenants in the Revolver. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Actual results could differ from those estimates.
We believe the critical accounting policies listed below affect significant judgment and estimates used in the preparation of our Consolidated Financial Statements.
Revenue Recognition
We derive our revenues primarily from subscription services, services and associated software maintenance and support services.
We determine revenue recognition through the following steps:
•Identification of the contract, or contracts, with a customer;
•Identification of the performance obligations in the customer contract(s);
•Determination of the transaction price;
•Allocation of the transaction price to each performance obligation in the
customer contract(s); and
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•Recognition of revenue when, or as, we satisfy a performance obligation.
Subscription revenue
Subscription revenue primarily consists of fees that give customers access to one or more of our cloud applications with related customer support. We primarily recognize subscription revenue ratably over the contractual term of the arrangement beginning with commencement of service. Subscription revenue related to certain offerings, where fees are based on a number of transactions, are recognized on a usage basis.
Maintenance and support revenue
Maintenance and support revenue includes customer support for our on-premises software and the right to unspecified software updates and enhancements. We recognize revenue from maintenance arrangements ratably over the period in which the services are provided. Our maintenance and support contracts are generally one year in length, billed annually in advance, and non-cancelable.
Services revenue
Services revenue primarily consists of fees for configuration services, consulting and training. We typically sell our services on either a fixed-fee or time-and-materials basis. Services revenue is generally recognized as the services are performed for time and material contracts, or on a proportional performance basis for fixed-price contracts. The majority of our services contracts are on a fixed-fee basis. Training revenues are recognized as the services are performed. Significant judgments are required in determining whether services that are contained in our customer subscription contracts are considered distinct, including whether the services are capable of being distinct and whether they are separately identifiable. Services deemed to be distinct are accounted for as a separate performance obligation and revenue is recognized as the services are performed. If determined services are not considered distinct, the services and the subscription are determined to be a single performance obligation and revenue is recognized over the contractual term of the subscription beginning on the date that subscription services are made available to the customer.
Customer contracts with multiple performance obligations
A portion of our customer contracts contain multiple performance obligations. Significant judgment is required in determining whether multiple performance obligations contained in a single customer contract are capable of being distinct and are separately identifiable. An obligation determined to be distinct is accounted for as a separate performance obligation and revenue for that separate performance obligation is recognized when, or as, we satisfy the performance obligation. If obligations are not determined to be distinct, those obligations are accounted for as a single, combined performance obligation. The transaction price is allocated to each performance obligation on a relative standalone selling price basis.
Allowance for Doubtful Accounts
In addition to our initial credit evaluations upon entering into a new customer contract, we regularly assess our ability to collect outstanding customer invoices. The allowance is based on both specific and general reserves. To do so, we make estimates of the collectability of accounts receivable. We provide an allowance for doubtful accounts when we determine that the collection of an outstanding customer receivable is not probable. We regularly review our trade receivables allowance by considering factors such as historical experience, the age of the trade receivable balances and current economic conditions that may affect a customer's ability to pay.
Deferred Costs
Sales commissions earned by our sales representatives are considered incremental
and recoverable costs of obtaining a customer contract. Sales commissions are
deferred and amortized on a straight-line basis over the period of benefit,
which we have determined to be five to eight years. We determined the period of
benefit by taking into consideration our customer contracts, expected renewals
of those customer contracts (as we currently do not pay an incremental sales
commission for renewals), our technology and other factors. We also defer
amounts earned by employees other than sales representatives who earn incentive
payments under compensation plans tied to the value of customer contracts
acquired.
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Deferred Implementation Costs
We capitalize certain contract fulfillment costs, including personnel and other
costs (such as hosting, employee salaries, benefits and payroll taxes), that are
associated with arrangements where services are not distinct from other
undelivered obligations in our customer contracts. We analyze implementation
costs and capitalize those costs that are directly related to customer contracts
that are expected to be recoverable and enhance the resources which will be used
to satisfy the undelivered performance obligations in those contracts. Deferred
implementation costs are amortized ratably over the remaining contract term once
the revenue recognition criteria for the respective performance obligation has
been met and revenue recognition commences.
Deferred Revenue
Deferred revenue primarily consists of customer invoicing in advance of revenues being recognized. We generally invoice our customers annually in advance for subscription services and maintenance and support services. Deferred revenue that is anticipated to be recognized during the next twelve-month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent.
Noncash Share-Based Compensation
We have two noncash share-based compensation plans, the 2007 equity incentive plan and the 2017 equity incentive plan which authorize the discretionary granting of various types of stock awards to key employees, officers, directors and consultants. Our 2007 equity incentive plan expired inMarch 2017 , and inMay 2017 , we adopted our 2017 equity incentive plan which serves as the successor to our 2007 equity incentive plan. Under the 2017 equity incentive plan, we may provide noncash share-based compensation through the grant of: (i) restricted stock awards; (ii) restricted stock unit awards - time, performance and market-based ("RSUs"); (iii) stock options; (iv) stock appreciation rights ("SARs"); (v) phantom stock; and (vi) performance awards, such as market stock units ("MSUs"). To date, we have granted stock options, SARs, RSUs and MSUs.
Noncash share-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.
The fair value of the RSUs (time and performance-based) is based on the closing
price of our stock on the date of grant. The fair value and the derived service
period of the market-based RSUs is estimated on the date of grant using a Monte
Carlo simulation model. The model requires the use of a number of assumptions
including the expected volatility of our stock, our risk-free interest rate and
expected dividends. Our expected volatility at the date of grant is based on our
historical volatility over the performance period.
We estimate the fair value of the stock options and SARs using the Black-Scholes
option pricing model, which requires us to use significant judgment to make
estimates regarding the expected life of the award, volatility of our stock
price, the risk-free interest rate and the dividend yield of our stock over the
life of the award. The expected life of the award is a historical weighted
average of the expected lives of similar securities of comparable public
companies. We estimate volatility using our historical volatility. The risk-free
interest rate assumption is based on observed interest rates appropriate for the
terms of our awards. The dividend yield assumption is based on our expectation
of paying no dividends.
As we issue stock options and SARs, we evaluate the assumptions used to value
our stock option awards and SARs. If factors change and we employ different
assumptions, noncash share-based compensation expense may differ significantly
from what we have recorded in the past. If there are any modifications or
cancellations of the underlying unvested securities, we may be required to
accelerate, increase or cancel any remaining unearned noncash share-based
compensation expense. Future noncash share-based compensation expense and
unearned noncash share-based compensation will increase to the extent that we
grant additional equity awards to employees.
We estimate the number of awards that will be forfeited and recognize expense
only for those awards that ultimately are expected to vest. Significant judgment
is required in determining the adjustment to noncash share-based compensation
expense for estimated forfeitures. Noncash share-based compensation expense in a
period could be impacted, favorably or unfavorably, by differences between
forfeiture estimates and actual forfeitures.
MSUs are performance-based awards that cliff vest based on our shareholder
return relative to the total shareholder return of the Russell 2000 Index
("Index") over the three-year periods ending February 28, 2020 , October 9, 2020
and December 31, 2020 ("Performance Period"), respectively. The MSUs vested on
March 1, 2020 and October 9, 2020 and are
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scheduled to vest on January 10, 2021 , respectively. The maximum number of
shares issuable upon vesting is 200% of the MSUs initially granted based on the
average price of our common stock relative to the Index during the Performance
Period. We estimate the fair value of MSUs on the date of grant using a Monte
Carlo simulation model. The determination of the fair value of the MSUs is
affected by our stock price and a number of assumptions including the expected
volatilities of our stock and the Index, the risk-free interest rate and
expected dividends. Our expected volatility at the date of grant was based on
the historical volatilities of our stock and the Index over the Performance
Period.
We record deferred tax assets for share-based compensation awards that will
result in future deductions on our income tax returns, based on the amount of
share-based compensation recognized at the statutory tax rate in the
jurisdiction in which we will receive a tax deduction. Because the deferred tax
assets we record are based upon the share-based compensation expenses in a
particular jurisdiction, the aforementioned inputs that affect the fair values
of our stock awards may also indirectly affect our income tax expense. In
addition, differences between the deferred tax assets recognized for financial
reporting purposes and the actual tax deduction reported on our income tax
returns are recorded in our income tax (expense) income.
At December 31, 2020 , we had $55.9 million of total unrecognized compensation
costs related to noncash share-based compensation arrangements for stock awards
granted. These costs will be recognized over a weighted-average period of 2.5
years.
Accounting for Income Taxes
We estimate our income taxes based on the various jurisdictions where we
conduct business and we use estimates in determining our provision for income
taxes. We estimate separately our deferred tax assets, related valuation
allowances, current tax liabilities and deferred tax liabilities. The
calculation of our tax liabilities involves dealing with uncertainties in the
application of complex tax rules and the potential for future adjustment of our
uncertain tax positions by the U.S. Internal Revenue Service or other taxing
jurisdictions. We estimate our current tax liability and assess temporary
differences that result from differing treatments of certain items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which we show on our balance sheet. At December 31, 2020 , our
deferred tax assets consisted primarily of temporary differences related to
noncash share-based compensation, interest expense limited under Section 163(j),
Research and Experimentation ("R&E") tax credit carryforwards and net operating
losses.
We review the realizability of our deferred tax asset on a quarterly basis, or
whenever events or changes in circumstances indicate that a review is required.
In determining the requirement for a valuation allowance, the historical and
projected financial results of the legal entity or consolidated group recording
the net deferred tax asset are considered, along with any other positive or
negative evidence. Since future financial results may differ from previous
estimates, periodic adjustments to our valuation allowances may be necessary. We
continually perform an analysis related to the realizability of our deferred tax
assets. As a result, and after considering tax planning initiatives and other
positive and negative evidence, we determine that it is more likely than not
that our net deferred tax assets will not be realized. During 2020, there was
not sufficient positive evidence to outweigh the current and historic negative
evidence to determine that it was more likely than not that our net deferred tax
assets would not be realized. Therefore, we continue to have a valuation
allowance against net deferred tax assets as of December 31, 2020 .
We account for uncertain income tax positions recognized in our financial
statements in accordance with the Income Tax Topic of the Accounting Standards
Codification ("ASC"), issued by the FASB. This interpretation requires companies
to use a prescribed model for assessing the financial recognition and
measurement of all tax positions taken or expected to be taken in their tax
returns. This guidance provides clarification on recognition, classification,
interest and penalties, accounting in interim periods, disclosures and
transition. Please see Note 15 to the Consolidated Financial Statements for
more information.
Business Combinations
We record tangible and intangible assets acquired and liabilities assumed in
business combinations under the purchase method of accounting. Amounts paid for
each acquisition are allocated to the assets acquired and liabilities assumed
based on their fair values at the date of acquisition. We then allocate the
purchase price in excess of net tangible assets acquired to identifiable
intangible assets based on detailed valuations that use information and
assumptions provided by management. We allocate any excess purchase price over
the fair value of the net tangible and intangible assets acquired and
liabilities assumed to goodwill. If the fair value of the assets acquired
exceeds our purchase price, the excess is recognized as a gain.
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Significant management judgments and assumptions are required in determining the fair value of acquired assets and liabilities, particularly acquired intangible assets. The valuation of purchased intangible assets is based upon estimates of the future performance and cash flows from the acquired business. Each asset is measured at fair value from the perspective of a market participant. If different assumptions are used, it could materially impact the purchase price allocation and adversely affect our results of operations, financial condition and cash flows. Intangible Assets,Goodwill and Long-Lived Assets When we acquire a business, a portion of the purchase consideration is typically allocated to acquired technology and other identifiable intangible assets, such as customer relationships. The excess of the purchase consideration over the net of the acquisition-date fair value of identifiable assets acquired and liabilities assumed is recorded as goodwill. We estimate fair value primarily utilizing the market approach, which calculates fair value based on the market values of comparable companies or comparable transactions. The amounts allocated to acquired technology and other intangible assets represent our estimates of their fair values at the acquisition date. We amortize our intangible assets that have finite lives using either the straight-line method or, if reliably determinable, the pattern in which the economic benefit of the asset is expected to be consumed utilizing expected undiscounted future cash flows. Amortization is recorded over the estimated useful lives ranging from two to eight years. We review our intangible assets subject to amortization to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. If the carrying value of an asset exceeds its undiscounted cash flows, we will write down the carrying value of the intangible asset to its fair value in the period identified. In assessing recoverability, we must make assumptions regarding estimated future cash flows and discount rates. If these estimates or related assumptions change in the future, we may be required to record impairment charges. If the estimate of an intangible asset's remaining useful life is changed, we will amortize the remaining carrying value of the intangible asset prospectively over the revised remaining useful life. We assess goodwill for impairment as ofNovember 30 of each fiscal year, or more frequently if events or changes in circumstances indicate that the fair value of our reporting unit has been reduced below its carrying value. When conducting our annual goodwill impairment assessment, we use a two-step process. The first step is to perform an optional qualitative evaluation as to whether it is more likely than not that the fair value of our reporting unit is less than its carrying value, using an assessment of relevant events and circumstances. In performing this assessment, we are required to make assumptions and judgments including, but not limited to, an evaluation of macroeconomic conditions as they relate to our business, industry and market trends, as well as the overall future financial performance of our reporting unit and future opportunities in the markets in which it operates. If we determine that it is not more likely than not that the fair value of our reporting unit is less than its carrying value, we are not required to perform any additional tests in assessing goodwill for impairment. However, if we conclude otherwise or elect not to perform the qualitative assessment, we perform a second step for our reporting unit, consisting of a quantitative assessment of goodwill impairment. This quantitative assessment requires us to compare the fair value of our reporting unit with its carrying value. If the carrying amount exceeds the fair value, an impairment charge will be recognized, however, loss cannot exceed the total amount of goodwill allocated to the reporting unit. Recent Accounting Pronouncements See Note 2 - Summary of Significant Accounting Policies to the Consolidated Financial Statements included in this report, regarding the impact of certain recent accounting pronouncements on our Consolidated Financial Statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
Our contracts are predominately denominated inU.S. dollars; however, we have contracts denominated in foreign currencies and therefore a portion of our revenue is subject to foreign currency risks. The primary market risk we face is from foreign currency exchange rate fluctuations. Our cash flows are subject to fluctuations due to changes in foreign currency exchange rates. The effect of an immediate 10% adverse change in exchange rates on foreign denominated receivables as ofDecember 31, 2020 , would have resulted in a$0.4 million loss. We are also exposed to foreign currency risk due to our operating subsidiaries inFrance ,United Kingdom ,Canada ,Germany ,Ireland ,Australia ,Bulgaria andUnited Arab Emirates . A hypothetical 10% adverse change in the value of theU.S. dollar in relation to the Euro, which is our single most significant 40 -------------------------------------------------------------------------------- Table of Contents foreign currency exposure, would have changed revenue for the year endedDecember 31, 2020 by approximately$1.6 million . However, due to the relatively low volume of payments made and received through our foreign subsidiaries, we do not believe that we have significant exposure to foreign currency exchange risks. Fluctuations in foreign currency exchange rates could harm our financial results in the future. We currently do not use derivative financial instruments to mitigate foreign currency exchange risks. We continue to review this issue and may consider hedging certain foreign exchange risks through the use of currency futures or options in future years. Exposure to Interest Rates
Our exposure to market risk for changes in interest rates relates to the
variable interest rate on borrowings under our Revolver. As of
As ofDecember 31, 2020 , we had outstanding principal amounts of$150.0 million and$143.8 million of the 2027 and the 2024 Notes, respectively, which are fixed rate instruments. Therefore, our results of operations are not subject to fluctuations in interest rates. The fair value of the Notes may change when the market price of our stock fluctuates. We believe that we do not have any material exposure to changes in the fair value as a result of changes in interest rates due to the short term nature of our cash equivalents. Item 8. Financial Statements and Supplementary Data
The consolidated financial statements required to be filed are indexed on page F-1 and are incorporated herein by reference. See Item 15(a)(1) and (2). Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
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