UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended November 30, 2014
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 0-19417
PROGRESS SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS (State or other jurisdiction of incorporation or organization) | 04-2746201 (I.R.S. Employer Identification No.) | |
14 Oak Park
Bedford, Massachusetts 01730
(Address of Principal Executive Offices)
Telephone Number: (781) 280-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock $.01 par value | The NASDAQ Global Select Market | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ý | Accelerated filer | ¨ | Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No ý
As of May 31, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $1,083,000,000.
As of January 21, 2015, there were 50,668,000 common shares outstanding.
Documents Incorporated By Reference
Portions of the definitive Proxy Statement in connection with the 2015 Annual Meeting of Shareholders are incorporated by reference into Part III.
PROGRESS SOFTWARE CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2014
INDEX
PART I | ||
Item 1. | ||
Item 1A. | ||
Item 1B. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II | ||
Item 5. | ||
Item 6. | ||
Item 7. | ||
Item 7A. | ||
Item 8. | ||
Item 9. | ||
Item 9A. | ||
Item 9B. | ||
PART III | ||
Item 10. | ||
Item 11. | ||
Item 12. | ||
Item 13. | ||
Item 14. | ||
PART IV | ||
Item 15. | ||
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CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions regarding forward-looking statements. This Form 10-K, and other information provided by us or statements made by our directors, officers or employees from time to time, may contain “forward-looking” statements and information, which involve risks and uncertainties. Actual future results may differ materially. Statements indicating that we “expect,” “estimate,” “believe,” “are planning” or “plan to” are forward-looking, as are other statements concerning future financial results, product offerings or other events that have not yet occurred. There are various factors that could cause actual results or events to differ materially from those anticipated by the forward-looking statements. Such factors are more fully described in Item 1A of this Form 10-K under the heading “Risk Factors.” Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized. We also cannot assure you that we have identified all possible issues which we might face. We undertake no obligation to update any forward-looking statements that we make.
PART I
Item 1. Business
Overview
We are a global software company that simplifies the development, deployment and management of business applications on-premise or in the cloud, on any platform or device, to any data source, with enhanced performance, minimal IT complexity and low total cost of ownership. Our comprehensive portfolio of products provides leading solutions for rapid application development, broad data integration and efficient data analysis. Our solutions are used across a variety of industries.
Our products are generally sold as perpetual licenses, but certain products and business activities also use term licensing models and our Progress Pacific platform offering uses a subscription based model. More than half of our worldwide license revenue is realized through relationships with indirect channel partners, principally application partners and original equipment manufacturers (OEMs). Application partners are independent software vendors (ISVs) that develop and market applications using our technology and resell our products in conjunction with sales of their own products that incorporate our technology. OEMs are companies that embed our products into their own software products or devices.
We operate in North America and Latin America (the Americas); Europe, the Middle East and Africa (EMEA); and the Asia Pacific region, through local subsidiaries as well as independent distributors.
Fiscal Year 2014 Highlights and Recent Developments
Acquisitions
In May 2014, we acquired Modulus LLC (Modulus), a platform-as-a-service provider offering a platform for easily hosting, deploying, scaling and monitoring data-intensive, real-time applications using powerful, rapidly growing Node.js and MongoDB technologies. The Modulus Node.js and MongoDB cloud platform is designed to simplify and speed development of the new generation of scalable, always connected business and consumer applications.
In October 2014, we acquired BravePoint, Inc. (BravePoint), a leading provider of consulting, training and application development services designed to increase customers' profitability and competitiveness through the use of technology. The acquisition significantly extends our services capabilities and enhances our ability to quickly enable our partners and customers to take greater advantage of new technologies.
In December 2014, following our fiscal year end, we acquired Telerik AD (Telerik), a leading provider of application development tools. Telerik enables its 1.4 million strong developer community to create compelling user experiences across cloud, web, mobile and desktop applications. Through this acquisition, we now provide comprehensive cloud and on-premise platform offerings that enable developers to rapidly create beautiful applications, driven by data for any web, desktop or mobile platform.
Business Unit Restructuring
Effective September 1, 2014, we began to operate as three distinct business units: OpenEdge, Data Connectivity and Integration, and Application Development and Deployment, each with dedicated sales, product management and product
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marketing functions. These changes were designed to enable the business to better deliver against the fast paced requirements in the on-premise and cloud application development and data connectivity and integration markets. As a result of these changes, we adopted segment reporting for our three business units beginning in the fourth fiscal quarter of 2014.
Share Repurchase Authorization
In January 2014, our Board of Directors authorized a new $100.0 million share repurchase program. Under this authorization, we repurchased 2.3 million shares for $52.6 million during 2014.
New Credit Facility
In December 2014, we entered into a new $300 million term and revolving credit facility with JPMorgan Chase Bank, N.A. and a syndicate of other lenders. This new credit facility replaced our prior $150 million revolving credit facility. We used the $150 million term loan to finance a portion of the Telerik acquisition.
Our Business Units
OpenEdge Business Unit
The OpenEdge business unit drives growth within OpenEdge’s large, diverse partner base by providing the product enhancements and marketing support these partners need to sell more of their existing solutions to their customers. The OpenEdge business unit is also focused on providing partners and direct end users with a clear path to develop and integrate cloud-based applications in the future. With an enhanced services organization bolstered by the acquisition of BravePoint, Progress helps partners and customers leverage their core assets and develop strategies that protect current investments, while addressing changing business requirements.
The solutions within the OpenEdge Business Unit include:
Progress OpenEdge
Progress OpenEdge is development software for building dynamic multi-language applications for secure deployment across any platform, any mobile device, and any cloud. OpenEdge provides a unified environment comprising 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 independently or with other components in the Pacific platform.
Progress Corticon
Progress Corticon is a Business Rules Management System (BRMS) that enables applications with decision automation, decision change process and decision-related insight capabilities. Corticon helps both business and IT users to quickly create or reuse business rules as well as create, improve, collaborate on, and maintain decision logic. Corticon is a market-leading platform for automating and executing business changes.
Data Connectivity and Integration Business Unit
The Data Connectivity and Integration Business Unit (DCI) is focused on the growth of our data assets, including the data integration components of the Pacific Platform. Data is at the core of every application, and with the exponential growth in the number and volume of data sources, this business unit addresses the increasingly complex challenges that organizations have in accessing and integrating that data.
The solutions within the DCI Business Unit include:
Progress DataDirect Connect
Progress DataDirect Connect software provides data connectivity using industry-standard interfaces to connect applications running on various platforms to any major database, for both corporate IT organizations and software vendors. With software components embedded in the products of over 350 software companies and in the applications of thousands of large enterprises, the DataDirect Connect product set is a global leader in the data connectivity market. The primary products, in addition to other drivers we have developed, are ODBC drivers, JDBC drivers and ADO.NET providers. They provide the
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capability to connect and integrate with other applications and data sources independently or with other components in the Pacific platform.
Progress DataDirect Cloud
Progress DataDirect Cloud is a SaaS-based connection management service that simplifies SQL access to a broad spectrum of cloud-based data sources through a single standards-based interface. The DataDirect Cloud service executes SQL queries against the appropriate cloud data source, managing all of the complexity, API’s, and versioning for the host application. In addition to integrating with other components in the Pacific platform, it provides the capability to connect and integrate with other applications and data sources independently.
Progress Easyl
Progress Easyl is a cloud-based data preparation tool that allows non-technical business professionals to access data from any source with easy-to-use templates and no coding required.
Application Development and Deployment Business Unit
The Application Development and Deployment (AppDev) business unit is focused on generating net new customers of the application development assets within our Pacific Platform and, starting December 2, 2014, from Telerik. This business unit has the focus and agility of a start-up, able to react quickly to changes in this rapidly-evolving market. Having a team solely focused on this market enables it to deliver PaaS innovation at a rapid pace, and meet the demands of developers who are seeking to increase their productivity and move toward the cloud.
The solutions within the AppDev Business Unit include:
Progress Pacific
Progress Pacific is a modern platform-as-a-service (PaaS) that enables the rapid creation and deployment of powerful, data-driven business applications with minimal coding by using point-and-click, drag-and-drop tools in a web browser. Standard interfaces enable fast, easy, real-time integration with numerous SaaS, relational database, NoSQL, Big Data, social, CRM and ERP data sources for automated applications. These can be deployed in a cloud, on-premise or in hybrid environments and also connect to existing applications to preserve investments. Progress Pacific provides users with the freedom to choose the development tools, data sources, deployment environments and devices that best fit business and user needs. It is comprised of Rollbase and DataDirect Cloud, together with assets from our OpenEdge, DataDirect, and Corticon products, which are discussed above.
Progress Rollbase
Progress Rollbase is application development software that allows rapid creation of software as a service (SaaS) business applications using point & click, drag & drop tools in a standard web browser with a minimal amount of code. Progress Rollbase applications can be deployed in any cloud or on-premise infrastructure.
Modulus
Modulus is a control platform for running Node.js applications, one of the most productive control platform languages available today. The Modulus Node.js and MongoDB cloud platform is designed to simplify and speed development of the new generation of scalable, always connected business and consumer applications that are constantly monitored and optimized for the best experience.
Telerik Dev Tools
Telerik Dev Tools is a cross-platform, user experience design, quality assurance, debugging and reporting suite for next generation web, mobile, desktop and HTML5 applications. Utilizing Telerik’s Dev Tools enables developers to focus on business logic and not infrastructure. Included in the Telerik Dev Tools are Telerik Fiddler and Kendo UI.
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Telerik Dev Cloud
Telerik Dev Cloud is a cloud-based application design, deployment, hosting and testing suite featuring hybrid application development environment, backend as a service, analytics and mobile testing.
Telerik Platform
The Telerik Platform is a complete end-to-end application lifecycle solution that combines Telerik’s Dev Tools, Dev Cloud and ALM products into an integrated platform for mobile application development using any approach (web, hybrid and native).
Telerik ALM
Telerik ALM is an application lifecycle management suite for testing web, mobile and desktop applications that covers the process from idea to deployment. The products that make up Telerik ALM are Telerik Team Pulse and Telerik Test Studio.
Telerik Sitefinity
Telerik Sifefinity is a next-generation web content management and customer analytics platform for managing and optimizing digital experiences. Telerik Sitefinity combines superior end-user experience with high level of customization capabilities for developers.
Product Development
Most of our products have been developed by our internal product development staff or the internal staffs of acquired companies. We believe that the features and performance of our products are competitive with those of other available development and deployment tools and that none of the current versions of our products are approaching obsolescence. However, we believe that significant investments in new product development and continuing enhancements of our current products will be required for us to maintain our competitive position.
As of November 30, 2014, we have four primary development offices in North America, one primary development office in EMEA and one primary development office in India. We spent $63.1 million, $58.2 million, and $44.4 million in fiscal years 2014, 2013 and 2012, respectively, on product development, including capitalized software development costs. As a result of the Telerik acquisition, we now have an additional primary development office in Sofia, Bulgaria.
Customers
We market our products globally through several channels: directly to end-users and indirectly to application partners (or ISVs), OEMs, and system integrators. Sales of our solutions and products through our direct sales force have historically been to business managers or IT managers in corporations and governmental agencies. For sales of the solutions within our AppDev business unit, we principally target developers who create business applications, from individuals to teams, within enterprises of all sizes.
We also market our products through indirect channels, primarily application partners and OEMs who embed our products as part of an integrated solution. We use international distributors in certain locations where we do not have a direct presence or where it is more economically feasible for us to do so.
More than half of our license revenues are derived from indirect channels. No single customer has accounted for more than 10% of our total revenue in any of our last three fiscal years.
Application Partners
Our application partners cover a broad range of markets, offer an extensive library of business applications and are a source of follow-on revenue. We have kept entry costs, consisting primarily of the initial purchase of development licenses, low to encourage a wide variety of application partners to build applications. If an application partner succeeds in marketing its applications, we obtain follow-on revenue as the application partner licenses our deployment products to allow its application to be installed and used by customers. We offer a subscription model alternative to the traditional perpetual license model for application partners who have chosen to enable their business applications under a SaaS platform.
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Original Equipment Manufacturers
We enter into arrangements with OEMs whereby the OEM embeds our products into its solutions, typically either software or technology devices. OEMs typically license the right to embed our products into their solutions and distribute such solutions for initial terms ranging from one to three years. Historically, a significant portion of our OEMs have renewed their agreements upon the expiration of the initial term. However, we are not assured that they will continue to renew in the future.
Sales and Marketing
We sell our products and solutions through our direct sales force and indirect channel partners. We have sold our products and solutions to enterprises in over 180 countries. Our sales and field marketing groups are organized by business unit and secondarily by region. We operate by region in North America, Latin America, EMEA and Asia Pacific. We believe this structure allows us to maintain direct contact with our customers and support their diverse market requirements. Our international operations provide focused local sales, support and marketing efforts and are able to respond directly to changes in local conditions.
In addition to our direct sales efforts, we distribute our products through systems integrators, resellers, distributors, and OEM partners in the United States and internationally. Systems integrators typically have expertise in vertical or functional markets. In some cases, they resell our products, bundling them with their broader service offerings. In other cases, they refer sales opportunities to our direct sales force for our products. Distributors sublicense our products and provide service and support within their territories. OEMs embed portions of our technology in their product offerings.
Sales personnel are responsible for developing new direct end-user accounts, recruiting new indirect channel partners and new independent distributors, managing existing channel partner relationships and servicing existing customers. We actively seek to avoid conflict between the sales efforts of our application partners and our own direct sales efforts. We use our inside sales team to enhance our direct sales efforts and to generate new business and follow-on business from existing customers.
Our marketing personnel conduct a variety of marketing engagement programs designed to create demand for our products, enhance the market readiness of our products, raise the general awareness of our company and our products and solutions, generate leads for the sales organization and promote our various products. These programs include press relations, analyst relations, investor relations, digital/web marketing, marketing communications, participation in trade shows and industry conferences, and production of sales and marketing literature. We also hold global events, as well as regional user events in various locations throughout the world.
Our sales and marketing efforts with respect to the solutions within our Application Development and Deployment business unit differ from our traditional sales and marketing efforts because the target markets are different. For the products in our AppDev business unit, we are designing our marketing and sales model to be efficient for high volumes of lower-price transactions. Our marketing efforts will focus on driving traffic to our websites and on generating high quality sales leads, in many cases, consisting of developer end users who download a free evaluation of our software. Our sales efforts will then focus on converting these leads into paying customers through a high volume, short duration, sales process. Of particular importance to our target market, we enable our customers to buy our products in a manner convenient to them, whether by purchase order, online with a credit card or through our channel partners.
Customer Support
Our customer support staff provides telephone and Web-based support to end-users, application developers and OEMs. Customers may purchase maintenance services entitling them to software updates, technical support and technical bulletins. Maintenance is generally not required with our products and is purchased at the customer's option. We provide support to customers primarily through our main regional customer support centers in Bedford, Massachusetts; Morrisville, North Carolina; Rotterdam, The Netherlands; Hyderabad, India; Melbourne, Australia; and Sofia, Bulgaria. Local technical support for specific products is provided in certain other countries as well.
Professional Services
Our global professional services organization delivers business solutions for customers through a combination of products, consulting and education. Our consulting organization offers project management, implementation services, custom development, programming and other services. Our consulting organization also provides services to Web-enable existing applications or to take advantage of the capabilities of new product releases. Our education organization offers numerous training options, from traditional instructor-led courses to advanced learning modules available via the web or on CDs.
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In 2014, we significantly bolstered our professional services capabilities by acquiring BravePoint, a leading provider of consulting, training and application development services. This acquisition enhances our ability to quickly enable our partners and customers to take greater advantage of new technologies. With the acquisition of BravePoint, our services offerings include: application modernization; data management, managed database services; performance enhancements and tuning; and analytics/business intelligence. The purchase of BravePoint will principally benefit our OpenEdge business unit.
Competition
The computer software industry is intensely competitive. We experience significant competition from a variety of sources with respect to all of our products. Factors affecting competition in the markets we serve include product performance in complex applications, application solutions, vendor experience, ease of integration, price, training and support.
We compete in various markets with a number of entities, such as salesforce.com, Inc., Amazon.com, Inc., Software AG, RedHat, Inc., Pivotal Software, Inc., Microsoft Corporation, Oracle Corporation and other smaller firms. Many of these vendors offer PaaS, application development, data integration and other tools in conjunction with their CRM, web services, operating systems and relational database management systems. We believe that IBM Corporation, Microsoft Corporation and Oracle Corporation currently dominate the relational database market. We do not believe that there is a dominant vendor in the other infrastructure software markets, including PaaS and application development. Some of our competitors have greater financial, marketing or technical resources than we have and/or may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the promotion and sale of their products than we can. Increased competition could make it more difficult for us to maintain our revenue and market presence.
Copyrights, Trademarks, Patents and Licenses
We rely on a combination of contractual provisions and copyright, patent, trademark and trade secret laws to protect our proprietary rights in our products. We generally distribute our products under software license agreements that grant customers a perpetual nonexclusive license to use our products and contain terms and conditions prohibiting the unauthorized reproduction or transfer of our products. We also distribute our products through various channel partners, including application partners, OEMs and system integrators. We also license our products under term or subscription arrangements. In addition, we attempt to protect our trade secrets and other proprietary information through agreements with employees, consultants and channel partners. Although we intend to protect our rights vigorously, there is no assurance that these measures will be successful.
We seek to protect the source code of our products as trade secrets and as unpublished copyrighted works. We hold numerous patents covering portions of our products. We also have several patent applications for some of our other product technologies. Where possible, we seek to obtain protection of our product names and service offerings through trademark registration and other similar procedures throughout the world.
We believe that due to the rapid pace of innovation within our industry, factors such as the technological and creative skills of our personnel are as important in establishing and maintaining a leadership position within the industry as are the various legal protections of our technology. In addition, we believe that the nature of our customers, the importance of our products to them and their need for continuing product support may reduce the risk of unauthorized reproduction, although no assurances can be made in this regard.
Business Segment and Geographical Information
Effective September 1, 2014, we began operating as three distinct business units: OpenEdge, Data Connectivity and Integration, and Application Development and Deployment, each with dedicated sales, product management and product marketing functions. As a result of these changes, we began segment reporting for our three business units beginning in the fourth fiscal quarter of 2014. The segment information for the prior periods presented has been restated to reflect the change in our reportable segments. For additional information on business segments as well as geographical financial information, see Note 17 to our consolidated financial statements, which are incorporated herein by reference.
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Employees
As of November 30, 2014, we had 1,075 employees worldwide, including 307 in sales and marketing, 186 in customer support and services, 421 in product development and 161 in administration. As a result of the Telerik acquisition, we have approximately 1,800 employees worldwide. None of our U.S. employees are subject to a collective bargaining agreement. Employees in certain foreign jurisdictions are represented by local workers’ councils and/or collective bargaining agreements as may be customary or required in those jurisdictions. We have experienced no work stoppages and believe our relations with employees are good.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.progress.com as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission. The information posted on our website is not incorporated into this Annual Report.
Our Code of Conduct is also available on our website. Additional information about this code and amendments and waivers thereto can be found below in Part III, Item 10 of this Annual Report.
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Item 1A. Risk Factors
We operate in a rapidly changing environment that involves certain risks and uncertainties, some of which are beyond our control. The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and/or operating results.
Our revenue and quarterly results may fluctuate, which could adversely affect our stock price. We have experienced, and may in the future experience, significant fluctuations in our quarterly operating results that may be caused by many factors. These factors include:
• | changes in demand for our products; |
• | introduction, enhancement or announcement of products by us or our competitors; |
• | market acceptance of our new products; |
• | the growth rates of certain market segments in which we compete; |
• | size and timing of significant orders; |
• | budgeting cycles of customers; |
• | mix of distribution channels; |
• | mix of products and services sold; |
• | mix of international and North American revenues; |
• | fluctuations in currency exchange rates; |
• | changes in the level of operating expenses; |
• | the amount of our stock-based compensation; |
• | changes in management; |
• | restructuring programs; |
• | reorganizations of our sales force; |
• | completion or announcement of acquisitions by us or our competitors; |
• | customer order deferrals in anticipation of new products announced by us or our competitors; and |
• | general economic conditions in regions in which we conduct business. |
Revenue forecasting is uncertain, and the failure to meet our forecasts could result in a decline in our stock price. Our revenues, particularly new software license revenues, are difficult to forecast. We use a pipeline system to forecast revenues and trends in our business. Our pipeline estimates may prove to be unreliable either in a particular quarter or over a longer period of time, in part because the conversion rate of the pipeline into contracts can be difficult to estimate and requires management judgment. A variation in the conversion rate could cause us to plan or budget incorrectly and materially adversely impact our business or our planned results of operations. Furthermore, most of our expenses are relatively fixed, including costs of personnel and facilities, and are not easily reduced. Thus, an unexpected reduction in our revenue, or failure to achieve the anticipated rate of growth, would have a material adverse effect on our profitability. If our operating results do not meet our publicly stated guidance or the expectations of investors, our stock price may decline.
The addition of a subscription model to augment our traditional perpetual licensing model may negatively impact our license growth in the near term. Under a subscription model, downturns or upturns in sales may not be immediately reflected in our results of operations. Subscription pricing allows customers to use our products at a lower initial cost when compared to the sale of a perpetual license. Although the subscription model is designed to increase the number of customers who purchase our products and services and create a recurring revenue stream that is more predictable, it creates certain risks related to the timing of revenue recognition and reduced cash flows. A decline in new or renewed subscriptions in any period may not be immediately reflected in our results for that period, but may result in a decline in our revenue in future quarters. If we were to experience significant downturns in subscription sales and renewal rates, our results of operations might not reflect such downturns until future periods. Further, any increases in sales under our subscription sales model could result in decreased revenues over the short term if they are offset by a decline in sales from perpetual license customers.
We recognize a substantial portion of our revenue from sales made through third parties, including our application partners, distributors/resellers, and OEMs, and adverse developments in the businesses of these third parties or in our relationships with them could harm our revenues and results of operations. Our future results depend upon our continued successful distribution of our products through our application partner, distributor/reseller, and OEM channels. The activities of these third parties are not within our direct control. Our failure to manage our relationships with these third parties effectively could impair the success of our sales, marketing and support activities. A reduction in the sales efforts, technical capabilities or financial viability of these parties, a misalignment of interest between us and them, or a termination of our relationship with a major application partner, distributor/reseller, or OEM could have a negative effect on our sales and financial results. Any
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adverse effect on the application partners’, distributors'/resellers', or OEMs’ businesses related to competition, pricing and other factors could also have a material adverse effect on our business, financial condition and operating results.
Weakness in the U.S. and international economies may result in fewer sales of our products and may otherwise harm our business. We are subject to the risks arising from adverse changes in global economic conditions, especially those in the U.S., Europe and the Asia Pacific region. The past five years have been characterized by weak global economic conditions, tightening of credit markets and instability in the financial markets, particularly in Europe. If these conditions continue or worsen, customers may delay, reduce or forego technology purchases, both directly and through our application partners and OEMs. This could result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition. Further, deteriorating economic conditions could adversely affect our customers and their ability to pay amounts owed to us. Any of these events would likely harm our business, results of operations, financial condition or cash flows.
Our international operations expose us to additional risks, and changes in global economic and political conditions could adversely affect our international operations, our revenue and our net income. More than half of our total revenue is generated from sales outside North America. Political and/or financial instability, oil price shocks and armed conflict in various regions of the world can lead to economic uncertainty and may adversely impact our business. If customers’ buying patterns, decision-making processes, timing of expected deliveries and timing of new projects unfavorably change due to economic or political conditions, there would be a material adverse effect on our business, financial condition and operating results.
Other potential risks inherent in our international business include:
• | longer payment cycles; |
• | credit risk and higher levels of payment fraud; |
• | greater difficulties in accounts receivable collection; |
• | varying regulatory requirements; |
• | compliance with international and local trade, labor and export control laws; |
• | compliance with U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting bribery and corrupt payments to government officials; |
• | restrictions on the transfer of funds; |
• | difficulties in developing, staffing, and simultaneously managing a large number of varying foreign operations as a result of distance, language, and cultural differences; |
• | reduced or minimal protection of intellectual property rights in some countries; |
• | laws and business practices that favor local competitors or prohibit foreign ownership of certain businesses; |
• | seasonal reductions in business activity during the summer months in Europe and certain other parts of the world; |
• | economic instability in emerging markets; and |
• | potentially adverse tax consequences. |
Any one or more of these factors could have a material adverse effect on our international operations, and, consequently, on our business, financial condition and operating results.
Fluctuations in foreign currency exchange rates could have an adverse impact on our financial condition and results of operations. Changes in the value of foreign currencies relative to the U.S. dollar may adversely affect our results of operations and financial position. For example, during the second half of 2014 and early 2015, the value of the U.S. dollar strengthened in comparison to certain foreign currencies, including in Europe, Brazil and Australia. As more than 50% of our revenue comes from sales outside of the U.S., our revenue results have been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates.
We seek to reduce our exposure to fluctuations in exchange rates by entering into foreign exchange forward contracts to hedge certain actual and forecasted transactions of selected currencies (mainly in Europe, Brazil, Japan, Canada, Singapore and Australia). Our currency hedging transactions may not be effective in reducing any adverse impact of fluctuations in foreign currency exchange rates. Further, the imposition of exchange or price controls or other restrictions on the conversion of foreign currencies could have a material adverse effect on our business.
Technology and customer requirements evolve rapidly in our industry, and if we do not continue to develop new products and enhance our existing products in response to these changes, our business could be harmed. Ongoing enhancements to our product sets will be required to enable us to maintain our competitive position. We may not be successful in developing and marketing enhancements to our products on a timely basis, and any enhancements we develop may not adequately address the changing needs of the marketplace. Overlaying the risks associated with our existing products and enhancements are ongoing
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technological developments and rapid changes in customer requirements. Our future success will depend upon our ability to develop and introduce in a timely manner new products that take advantage of technological advances and respond to new customer requirements. We may not be successful in developing new products incorporating new technology on a timely basis, and any new products may not adequately address the changing needs of the marketplace. Failure to develop new products and product enhancements that meet market needs in a timely manner could have a material adverse effect on our business, financial condition and operating results.
We are substantially dependent on our Progress OpenEdge products. We derive a significant portion of our revenue from software license and maintenance revenue attributable to our Progress OpenEdge product set. Accordingly, our future results depend on continued market acceptance of OpenEdge. If new technologies emerge that are superior to, or more responsive to customer requirements, than OpenEdge such that we are unable to maintain OpenEdge’s competitive position within its marketplace, this will have a material adverse effect on our business, financial condition and operating results.
The increased emphasis on a cloud strategy may give rise to risks that could harm our business. We are devoting significant resources to the development of technologies and service offerings in the cloud-based PaaS market where we have a limited operating history. Our cloud strategy requires continued investment in product development and cloud operations as well as a change in the way we price and deliver our products. Many of our competitors may have advantages over us due to their larger presence, larger developer network, deeper experience in the cloud-based computing market, and greater sales and marketing resources. It is uncertain whether these strategies will prove successful or whether we will be able to develop the infrastructure and business models more quickly than our competitors. Our cloud strategy may give rise to a number of risks, including the following:
• | if new or current customers desire only perpetual licenses, we may not be successful in selling subscriptions; |
• | although we intend to support our perpetual license business, the increased emphasis on a cloud strategy may raise concerns among our installed customer base; |
• | we may be unsuccessful in achieving our target pricing; |
• | our revenues might decline over the short or long term as a result of this strategy; |
• | our relationships with existing partners that resell perpetual licenses may be damaged; and |
• | we may incur costs at a higher than forecasted rate as we enhance and expand our cloud operations. |
We face various risks in connection with our acquisition of Telerik AD. On December 2, 2014, we completed the acquisition of Telerik. We face various risks in connection with our acquisition of Telerik, including the effects of disruption from the transaction making it more difficult to maintain relationships with employees, licensees, other business partners or governmental entities, other business effects, including the effects of industry, economic or political conditions outside of our or Telerik’s control, transaction costs, actual or contingent liabilities, diversion of management, uncertainties as to whether anticipated synergies will be realized and uncertainties as to whether Telerik’s business will be successfully integrated with our business. Any one or more of these factors could have a material adverse effect on the combined business, our results of operations and our financial condition.
We may make additional acquisitions or investments in new businesses, products or technologies that involve additional risks, which could disrupt our business or harm our financial condition, results of operations or cash flows. We may continue to make acquisitions of businesses or investments in companies that offer complementary products, services and technologies. Any acquisitions that we do complete involve a number of risks, including the risks of assimilating the operations and personnel of acquired companies, realizing the value of the acquired assets relative to the price paid, distraction of management from our ongoing businesses and potential product disruptions associated with the sale of the acquired company’s products. In addition, an acquisition may not further our business strategy as we expected, we may not integrate an acquired company or technology as successfully as we expected or we may overpay for, or otherwise not realize the expected return on, our investments, which could adversely affect our business or operating results and potentially cause impairment to assets that we recorded as a part of an acquisition including intangible assets and goodwill. These factors could have a material adverse effect on our business, financial condition, operating results and cash flows. The consideration we pay for any future acquisitions could include our stock. As a result, future acquisitions could cause dilution to existing shareholders and to earnings per share.
The segments of the software industry in which we participate are intensely competitive, and our inability to compete effectively could harm our business. We experience significant competition from a variety of sources with respect to the marketing and distribution of our products. Many of our competitors have greater financial, marketing or technical resources than we do and may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the promotion and sale of their products than we can. Increased competition could make it more difficult for us to maintain our market presence or lead to downward pricing pressure.
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In addition, the marketplace for new products is intensely competitive and characterized by low barriers to entry. For example, an increase in market acceptance of open source software may cause downward pricing pressures. As a result, new competitors possessing technological, marketing or other competitive advantages may emerge and rapidly acquire market share. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing their ability to deliver products that better address the needs of our prospective customers. Current and potential competitors may also be more successful than we are in having their products or technologies widely accepted. We may be unable to compete successfully against current and future competitors, and our failure to do so could have a material adverse effect on our business, prospects, financial condition and operating results.
We rely on the experience and expertise of our skilled employees, and must continue to attract and retain qualified technical, marketing and managerial personnel in order to succeed. Our future success will depend in a large part upon our ability to attract and retain highly skilled technical, managerial, sales and marketing personnel. There is significant competition for such personnel in the software industry. We may not continue to be successful in attracting and retaining the personnel we require to develop new and enhanced products and to continue to grow and operate profitably.
The loss of technology licensed from third parties could adversely affect our ability to deliver our products. We utilize certain technology that we license from third parties, including software that is integrated with internally developed software and used in our products to perform key functions. This technology, or functionally similar technology, may not continue to be available on commercially reasonable terms in the future, or at all. The loss of any significant third-party technology license could cause delays in our ability to deliver our products or services until equivalent technology is developed internally or equivalent third-party technology, if available, is identified, licensed and integrated.
If our products contain software defects or security flaws, it could harm our revenues and expose us to litigation. Our products, despite extensive testing and quality control, may contain defects or security flaws, especially when we first introduce them or when new versions are released. We may need to issue corrective releases of our software products to fix any defects or errors. The detection and correction of any security flaws can be time consuming and costly. Errors in our software products could affect the ability of our products to work with other hardware or software products, delay the development or release of new products or new versions of products, adversely affect market acceptance of our products and expose us to potential litigation. If we experience errors or delays in releasing new products or new versions of products, such errors or delays could have a material adverse effect on our revenue.
We could incur substantial cost in protecting our proprietary software technology or if we fail to protect our technology, which would harm our business. We rely principally on a combination of contract provisions and copyright, trademark, patent and trade secret laws to protect our proprietary technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This litigation could result in substantial costs and diversion of resources, whether or not we ultimately prevail on the merits. The steps we take to protect our proprietary rights may be inadequate to prevent misappropriation of our technology; moreover, others could independently develop similar technology.
We could be subject to claims that we infringe intellectual property rights of others, which could harm our business, financial condition, results of operations or cash flows. Third parties could assert infringement claims in the future with respect to our products and technology, and such claims might be successful. This litigation could result in substantial costs and diversion of resources, whether or not we ultimately prevail on the merits. This litigation could also lead to our being prohibited from selling one or more of our products, cause reluctance by potential customers to purchase our products, or result in liability to our customers and could have a material adverse effect on our business, financial condition, operating results and cash flows.
If our security measures are breached, our products and services may be perceived as not being secure, customers may curtail or stop using our products and services, and we may incur significant legal and financial exposure. Our products and services involve the storage and transmission of our customers’ proprietary information, and security breaches could expose us to a risk of loss of this information, litigation, and potential liability. Our security measures may be breached due to the actions of outside parties, employee error, malfeasance, or otherwise, and, as a result, an unauthorized party may obtain access to our data or our customers’ data. Any such breach or unauthorized access could result in significant legal and financial exposure, increased costs to defend litigation or damage to our reputation, and a loss of confidence in the security of our products and services that could potentially have an adverse effect on our business. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or
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perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose customers.
We may have exposure to additional tax liabilities. As a multinational corporation, we are subject to income taxes in the U.S. and various foreign jurisdictions. Significant judgment is required in determining our global provision for income taxes and other tax liabilities. In the ordinary course of a global business, there are many intercompany transactions and calculations where the ultimate tax determination is uncertain. Our income tax returns are routinely subject to audits by tax authorities. Although we regularly assess the likelihood of adverse outcomes resulting from these examinations to determine our tax estimates, a final determination of tax audits or tax disputes could have an adverse effect on our financial condition, results of operations and cash flows.
We are also subject to non-income taxes, such as payroll, sales, use, value-added, net worth, property and goods and services taxes in the U.S. and various foreign jurisdictions. We are regularly under audit by tax authorities with respect to these non-income taxes and may have exposure to additional non-income tax liabilities, which could have an adverse effect on our results of operations, financial condition and cash flows.
In addition, our future effective tax rates could be favorably or unfavorably affected by changes in tax rates, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws or their interpretation. Such changes could have a material adverse impact on our financial results.
We are required to comply with certain financial and operating covenants under our credit facility and to make scheduled debt payments as they become due; any failure to comply with those covenants or to make scheduled payments could cause amounts borrowed under the facility to become immediately due and payable or prevent us from borrowing under the facility. On December 2, 2014, we entered into a new credit facility, which consists of a $150 million term loan and a $150 million revolving loan (and may be increased by an additional $75 million in the form of revolving loans or term loans, or a combination thereof if the existing or additional lenders are willing to make such increased commitments). This new facility matures on December 2, 2019, at which time any amounts outstanding will be due and payable in full. As of December 2, 2014, we had $150 million outstanding under the credit facility. We may wish to borrow additional amounts under the facility in the future to support our operations, including for strategic acquisitions and share repurchases.
We are required to comply with specified financial and operating covenants and to make scheduled repayments of our term loan, which limits our ability to operate our business as we otherwise might operate it. Our failure to comply with any of these covenants or to meet any payment obligations under the facility could result in an event of default which, if not cured or waived, would result in any amounts outstanding, including any accrued interest and unpaid fees, becoming immediately due and payable. We might not have sufficient working capital or liquidity to satisfy any repayment obligations in the event of an acceleration of those obligations. In addition, if we are not in compliance with the financial and operating covenants at the time we wish to borrow funds, we will be unable to borrow funds.
Our common stock price may continue to be volatile, which could result in losses for investors. The market price of our common stock, like that of other technology companies, is volatile and is subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products by us or our competitors, changes in financial estimates by securities analysts or other events or factors. Our stock price may also be affected by broader market trends unrelated to our performance. As a result, purchasers of our common stock may be unable at any given time to sell their shares at or above the price they paid for them.
Item 1B. Unresolved Staff Comments
As of the date of this report, we do not have any open comments from the U.S. Securities and Exchange Commission (SEC) related to our financial statements or periodic filings with the SEC.
Item 2. Properties
We own our principal administrative, sales, support, marketing, product development and distribution facilities, which are located in three buildings totaling approximately 258,000 square feet in Bedford, Massachusetts. In addition, we maintain offices in leased facilities in various other locations in North America and outside North America, including Australia, Belgium, Brazil, Bulgaria, France, Germany, India, Netherlands, Singapore, and the United Kingdom. The terms of our leases generally range from one to six years. We believe that our facilities are adequate for our current needs and that suitable additional space will be available as needed.
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Item 3. Legal Proceedings
We are subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material effect on our consolidated financial position, results of operations or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The following table sets forth, for the periods indicated, the range of high and low sale prices for our common stock. Our common stock trades on the NASDAQ Global Select Market under the symbol "PRGS".
Fiscal Year Ended | |||||||||||||||
November 30, 2014 | November 30, 2013 | ||||||||||||||
High | Low | High | Low | ||||||||||||
First quarter | $ | 26.75 | $ | 22.81 | $ | 24.50 | $ | 19.89 | |||||||
Second quarter | $ | 25.47 | $ | 20.06 | $ | 24.40 | $ | 20.41 | |||||||
Third quarter | $ | 24.88 | $ | 20.92 | $ | 26.03 | $ | 21.00 | |||||||
Fourth quarter | $ | 27.43 | $ | 22.27 | $ | 26.95 | $ | 24.15 | |||||||
We have not declared or paid cash dividends on our common stock and we do not plan to pay cash dividends to our shareholders in the near future. As of December 31, 2014, our common stock was held by approximately 199 shareholders of record.
In January 2014, our Board of Directors authorized the repurchase of up to $100.0 million of our common stock. 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, 2014, we had repurchased approximately 2.3 million shares for $52.6 million under this authorization. We did not repurchase any shares of our common stock during the fourth quarter of fiscal year 2014.
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Stock Performance Graph and Cumulative Total Return
The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the NASDAQ Composite Index and the NASDAQ Computer Index for each of the last five fiscal years ended November 30, 2014, assuming an investment of $100 at the beginning of such period and the reinvestment of any dividends.
Comparison of 5 Year Cumulative Total Return(1)
Among Progress Software Corporation, the NASDAQ Composite Index and the
NASDAQ Computer Index
(1) $100 invested on November 30, 2009 in stock or index, including reinvestment of dividends.
November 30, | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | ||||||||||||||||||
Progress Software Corporation | $ | 100.00 | $ | 160.00 | $ | 126.92 | $ | 125.30 | $ | 164.11 | $ | 160.69 | ||||||||||||
NASDAQ Composite | 100.00 | 116.49 | 122.18 | 140.36 | 189.31 | 223.43 | ||||||||||||||||||
NASDAQ Computer | 100.00 | 118.31 | 127.84 | 143.32 | 181.11 | 231.36 | ||||||||||||||||||
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Item 6. Selected Financial Data
The following table sets forth selected financial data for the last five fiscal years (in thousands, except per share data):
Year Ended November 30, | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||
Revenue | $ | 332,533 | $ | 333,996 | $ | 317,612 | $ | 333,610 | $ | 329,786 | ||||||||||
Income from operations | 80,740 | 63,740 | 67,789 | 108,712 | 109,816 | |||||||||||||||
Income from continuing operations | 49,458 | 39,777 | 44,954 | 71,389 | 74,551 | |||||||||||||||
Net income | 49,458 | 74,907 | 47,444 | 59,629 | 48,098 | |||||||||||||||
Basic earnings per share from continuing operations | 0.97 | 0.73 | 0.71 | 1.09 | 1.17 | |||||||||||||||
Diluted earnings per share from continuing operations | 0.96 | 0.72 | 0.71 | 1.06 | 1.13 | |||||||||||||||
Cash, cash equivalents and short-term investments | 283,268 | 231,440 | 355,217 | 261,416 | 322,396 | |||||||||||||||
Total assets | 703,061 | 682,187 | 884,977 | 864,263 | 939,393 | |||||||||||||||
Long-term debt, including current portion | — | — | — | 357 | 664 | |||||||||||||||
Shareholders’ equity | 543,245 | 513,654 | 638,399 | 625,110 | 690,274 | |||||||||||||||
Prior period amounts have been revised for the impact of discontinued operations. Refer to Item 8 of this Form 10-K for an additional description of the impact of discontinued operations.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 more than half 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 weaken, our consolidated results stated in U.S. dollars are negatively 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 accounting principles generally accepted in the United States of America (GAAP).
Revised Prior Period Amounts
Our financial results for prior periods have been revised, in accordance with GAAP, to reflect certain changes to our business and other matters. The impact on prior periods of discontinued operations due to the sale of our divested product lines was previously included in the Annual Report on Form 10-K for the fiscal year ended November 30, 2013. Prior period amounts have been revised for the impact of changes to our reportable segments as a result of organizational structure changes. Refer to Item 8 of this Form 10-K for an additional description of these items.
Overview
We are a global software company that simplifies the development, deployment and management of business applications on-premise or in the cloud, on any platform or device, to any data source, with enhanced performance, minimal IT complexity and low total cost of ownership. We intend to become a leading provider of next-generation application development and deployment capabilities in the cloud for the PaaS market. In furtherance of this strategy, we began to unify the product
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capabilities of our core product lines with the goal of refining and enhancing our next generation, feature-rich application development and deployment solution targeting the new market category of PaaS.
To that end, during fiscal year 2013, we added new functionalities to our existing products. We also completed the acquisition of Rollbase, Inc. (Rollbase), a provider of application development software technology that allows the rapid design, development and deployment of on-demand business applications. In addition, in July 2013, we announced the release of Progress Pacific, which provides users with the freedom to choose the development environment tools, data sources, deployment environments and devices that best fit business and user needs. It is comprised of Rollbase and DataDirect Cloud, together with assets from our OpenEdge, DataDirect and Corticon products.
As a result of our renewed focus on our core products, the enhancements to our existing products and improvement in our cost structure, we experienced improved financial performance during fiscal year 2013. Our cloud strategy will require continued investment in product development and cloud operations as well as a change in the way we price and deliver our products.
During fiscal years 2012 and 2013, we completed divestitures of eleven product lines which were not considered core product lines of our business. The aggregate purchase price for these product lines was approximately $175 million. Our operating performance was adversely impacted in fiscal years 2012 and 2013 by temporarily higher expense levels and restructuring costs as we transitioned away from the product lines we divested.
In fiscal year 2014, we continued to invest in our existing product lines and also announced the release of Easyl, our latest product offering included in our Pacific platform, which is a data analysis tool that dramatically simplifies the process of accessing, blending, and reporting on organizational data.
We also made acquisitions in fiscal year 2014 in furtherance of our PaaS strategy and designed to accelerate our growth. In May 2014, we acquired Modulus LLC (Modulus), a PaaS provider offering a platform for easily hosting, deploying, scaling and monitoring data-intensive, real-time applications using powerful, rapidly growing Node.js and MongoDB technologies. In October, we acquired BravePoint, Inc. (BravePoint), a leading provider of consulting, training and application development services designed to increase customers' profitability and competitiveness through the use of technology. The acquisition of BravePoint significantly extends our services capabilities and enhances our ability to quickly enable our partners and customers to take greater advantage of new technologies.
Following the end of fiscal year 2014, we acquired Telerik AD, a leading provider of application development tools. Telerik enables its 1.4 million strong developer community to create compelling user experiences across cloud, web, mobile and desktop applications. Through this acquisition, we now provide comprehensive cloud and on-premise platform offerings that enable developers to rapidly create beautiful applications, driven by data for any web, desktop or mobile platform. Our operating performance in fiscal year 2015 may be impacted by the disruption caused by the acquisition of Telerik as we finalize our integration efforts.
Effective September 1, 2014, we began operating as three distinct business units: OpenEdge, Data Connectivity and Integration, and Application Development and Deployment, each with dedicated sales, product management and product marketing functions. As a result of these changes, we began segment reporting for our three business units beginning in the fourth fiscal quarter of 2014. The segment information for the prior periods presented has been restated to reflect the change in our reportable segments.
In January 2014, our Board of Directors authorized a new $100.0 million share repurchase program. Under this authorization, we have repurchased 2.3 million shares for $52.6 million during fiscal year 2014.
We derive a significant portion of our revenue from international operations, which are primarily conducted in foreign currencies. As a result, changes in the value of these foreign currencies relative to the U.S. dollar have significantly impacted our results of operations and may impact our future results of operations. During the fourth quarter of 2014 and early 2015, the value of the U.S. dollar strengthened in comparison to certain foreign currencies, including in Europe, Brazil and Australia. As more than 50% of our revenue comes from sales outside of the U.S., our revenue results have been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates
We have evaluated, and expect to continue to evaluate, possible acquisitions and other strategic transactions designed to expand our business and/or add complementary products and technologies to our existing product sets. As a result, our expected uses of cash could change, our cash position could be reduced and we may incur additional debt obligations to the extent we complete additional acquisitions.
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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.
Results of Operations
The following table sets forth certain income and expense items as a percentage of total revenue, and the percentage change in dollar amounts of such items compared with the corresponding period in the previous fiscal year.
Percentage Change | ||||||||||||||
Percentage of Total Revenue | 2014 Compared to 2013 | 2013 Compared to 2012 | ||||||||||||
2014 | 2013 | 2012 | ||||||||||||
Revenue: | ||||||||||||||
Software licenses | 35 | % | 37 | % | 34 | % | (4 | )% | 15 | % | ||||
Maintenance and services | 65 | 63 | 66 | 1 | — | |||||||||
Total revenue | 100 | 100 | 100 | — | 5 | |||||||||
Costs of revenue: | ||||||||||||||
Cost of software licenses | 2 | 2 | 2 | (7 | ) | 19 | ||||||||
Cost of maintenance and services | 7 | 8 | 9 | (7 | ) | (10 | ) | |||||||
Amortization of acquired intangibles | 1 | — | — | 124 | 103 | |||||||||
Total costs of revenue | 10 | 10 | 11 | (2 | ) | (4 | ) | |||||||
Gross profit | 90 | 90 | 89 | — | 6 | |||||||||
Operating expenses: | ||||||||||||||
Sales and marketing | 31 | 32 | 31 | (4 | ) | 7 | ||||||||
Product development | 18 | 17 | 14 | 3 | 29 | |||||||||
General and administrative | 15 | 17 | 20 | (14 | ) | (10 | ) | |||||||
Amortization of acquired intangibles | — | — | — | (14 | ) | (7 | ) | |||||||
Restructuring expenses | 1 | 4 | 2 | (81 | ) | 66 | ||||||||
Acquisition-related expenses | 2 | 1 | — | 83 | * | |||||||||
Total operating expenses | 67 | 71 | 67 | (8 | ) | 10 | ||||||||
Income from operations | 24 | 19 | 21 | 27 | (6 | ) | ||||||||
Other income (expense) | (1 | ) | — | — | (207 | ) | * | |||||||
Income from continuing operations before income taxes | 23 | 19 | 21 | 24 | (8 | ) | ||||||||
Provision for income taxes | 9 | 7 | 7 | 23 | — | |||||||||
Income from continuing operations | 15 | 12 | 14 | 24 | (12 | ) | ||||||||
Income (loss) from discontinued operations, net | — | 11 | 1 | (100 | ) | * | ||||||||
Net income | 15 | % | 23 | % | 15 | % | (34 | )% | 58 | % | ||||
* Not meaningful
Fiscal Year 2014 Compared to Fiscal Year 2013
Revenue
Fiscal Year Ended | Percentage Change | ||||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | As Reported | Constant Currency | |||||||||
Revenue | $ | 332,533 | $ | 333,996 | — | % | — | % | |||||
Total revenue decreased $1.5 million in fiscal year 2014 as compared to fiscal year 2013. The decrease in revenue in fiscal year 2014 was primarily a result of a decrease in license revenue as further described below.
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Changes in prices from fiscal year 2013 to fiscal year 2014 did not have a significant impact on our revenue. Changes in foreign currency exchange rates did not significantly impact our reported revenues on a consolidated basis for fiscal year 2014.
License Revenue
Fiscal Year Ended | Percentage Change | ||||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | As Reported | Constant Currency | |||||||||
License | $ | 117,801 | $ | 122,312 | (4 | )% | (3 | )% | |||||
As a percentage of total revenue | 35 | % | 37 | % | |||||||||
Software license revenue decreased $4.5 million, or 4%, in fiscal year 2014 as compared to fiscal year 2013. Software license revenue would have decreased by 3% if exchange rates had been constant in fiscal year 2014 as compared to exchange rates in effect in fiscal year 2013. License revenue in fiscal year 2014 decreased in the North America, EMEA, and Latin America regions, mainly as a result of lower revenues related to our DataDirect product, primarily to direct end users. The decrease in DataDirect sales was primarily due to the upfront revenue recognition in fiscal year 2013 on several large multi-year OEM renewals, as well as the weakness in our pipeline from earlier in the year, which impacted our revenue growth in the first three quarters of fiscal year 2014.
Maintenance and Services Revenue
Fiscal Year Ended | Percentage Change | ||||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | As Reported | Constant Currency | |||||||||
Maintenance | $ | 202,496 | $ | 202,857 | — | % | — | % | |||||
As a percentage of total revenue | 61 | % | 61 | % | |||||||||
Professional services | $ | 12,236 | $ | 8,827 | 39 | % | 38 | % | |||||
As a percentage of total revenue | 4 | % | 3 | % | |||||||||
Total maintenance and services revenue | $ | 214,732 | $ | 211,684 | 1 | % | (1 | )% | |||||
As a percentage of total revenue | 65 | % | 63 | % | |||||||||
Maintenance and services revenue increased $3.0 million in fiscal year 2014 as compared to fiscal year 2013. Maintenance revenue remained essentially flat and professional services revenue increased 39% compared to the prior year. The increase in professional services revenue in fiscal year 2014 was primarily due to the impact of the BravePoint acquisition during the fourth quarter of fiscal year 2014.
Revenue by Region
Fiscal Year Ended | Percentage Change | ||||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | As Reported | Constant Currency | |||||||||
North America | $ | 150,716 | $ | 154,279 | (2 | )% | (2 | )% | |||||
As a percentage of total revenue | 45 | % | 46 | % | |||||||||
EMEA | $ | 131,335 | $ | 133,600 | (2 | )% | (4 | )% | |||||
As a percentage of total revenue | 40 | % | 40 | % | |||||||||
Latin America | $ | 24,917 | $ | 25,370 | (2 | )% | 6 | % | |||||
As a percentage of total revenue | 7 | % | 8 | % | |||||||||
Asia Pacific | $ | 25,565 | $ | 20,747 | 23 | % | 29 | % | |||||
As a percentage of total revenue | 8 | % | 6 | % | |||||||||
Total revenue generated in North America decreased $3.6 million, and total revenue generated outside North America increased $2.1 million, in fiscal year 2014 as compared to fiscal year 2013. Total revenue generated in markets outside North America
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represented 55% of total revenue in fiscal year 2014 compared to 54% of total revenue in fiscal year 2013. Total revenue generated in markets outside North America would have represented 55% of total revenue if exchange rates had been constant in fiscal year 2014 as compared to the exchange rates in effect in fiscal year 2013. The increase in the Asia Pacific region was due to a large multi-year deal with two OpenEdge end users.
Revenue by Segment
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | Percentage Change | |||||||
OpenEdge segment | $ | 296,721 | $ | 293,508 | 1 | % | ||||
Data Connectivity and Integration segment | 34,772 | 40,089 | (13 | )% | ||||||
Application Development and Deployment segment | 1,040 | 399 | 161 | % | ||||||
Total revenue | $ | 332,533 | $ | 333,996 | — | % | ||||
Revenue in the OpenEdge segment increased $3.2 million, or 1%, due to growth in the Asia Pacific and Latin America regions, as well as incremental services revenues as a result of the BravePoint acquisition during the fourth quarter of fiscal year 2014. Data Connectivity and Integration revenue decreased $5.3 million, or 13%, year over year, primarily in North America. The decrease in Data Connectivity and Integration revenue was primarily due to the upfront revenue recognition in fiscal year 2013 on several large multi-year OEM renewals, as well as the weakness in our pipeline from earlier in the year, which impacted our revenue growth in the first three quarters of fiscal year 2014. Application Development and Deployment revenue was $1.0 million in fiscal year 2014 compared to $0.4 million in fiscal year 2013.
Cost of Software Licenses
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | Percentage Change | |||||||
Cost of software licenses | $ | 6,396 | $ | 6,889 | (7 | )% | ||||
As a percentage of software license revenue | 5 | % | 6 | % | ||||||
As a percentage of total revenue | 2 | % | 2 | % | ||||||
Cost of software licenses consists primarily of costs of royalties, electronic software distribution costs, duplication and packaging. Cost of software licenses decreased $0.5 million in fiscal year 2014 as compared to fiscal year 2013, and decreased as a percentage of software license revenue from 6% to 5%, due to lower royalties. Cost of software licenses as a percentage of software license revenue varies from period to period depending upon the relative product mix.
Cost of Maintenance and Services
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | Percentage Change | |||||||
Cost of maintenance and services | $ | 24,864 | $ | 26,753 | (7 | )% | ||||
As a percentage of maintenance and services revenue | 12 | % | 13 | % | ||||||
As a percentage of total revenue | 7 | % | 8 | % | ||||||
Cost of maintenance and services consists primarily of costs of providing customer support, education and consulting. Cost of maintenance and services decreased $1.9 million in fiscal year 2014 as compared to fiscal year 2013, and decreased as a percentage of maintenance and services revenue from 13% to 12%. The decrease in cost of maintenance and services in fiscal year 2014 is primarily due to lower compensation-related costs as a result of the significant decrease in headcount within our customer support organization compared to fiscal year 2013, which more than offset the increase in costs of services due to the acquisition of BravePoint during the fourth quarter of fiscal year 2014.
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Amortization of Acquired Intangibles
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | Percentage Change | |||||||
Amortization of acquired intangibles | $ | 2,999 | $ | 1,340 | 124 | % | ||||
As a percentage of total revenue | 1 | % | — | % | ||||||
Amortization of acquired intangibles included in costs of revenue primarily represents the amortization of the value assigned to intangible assets for technology obtained in business combinations. Amortization of acquired intangibles increased $1.7 million in fiscal year 2014 as compared to fiscal year 2013. The increase was due to amortization of intangible assets acquired as a result of the Rollbase and Modulus acquisitions, which were completed at the end of the second quarter of fiscal year 2013 and 2014, respectively, and the BravePoint acquisition completed during the fourth quarter of fiscal year 2014, partially offset by decreases due to the completion of amortization of certain intangible assets acquired in prior years.
Gross Profit
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | Percentage Change | |||||||
Gross profit | $ | 298,274 | $ | 299,014 | — | % | ||||
As a percentage of total revenue | 90 | % | 90 | % | ||||||
Our gross profit decreased $0.7 million in fiscal year 2014 as compared to fiscal year 2013, and our gross profit as a percentage of total revenue was 90% for both periods. The dollar decrease in our gross profit was primarily due to lower license revenue offset by lower cost of maintenance and services.
Sales and Marketing
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | Percentage Change | |||||||
Sales and marketing | $ | 101,496 | $ | 105,997 | (4 | )% | ||||
As a percentage of total revenue | 31 | % | 32 | % | ||||||
Sales and marketing expenses decreased $4.5 million in fiscal year 2014 as compared to fiscal year 2013, and decreased as a percentage of total revenue from 32% to 31%. The decrease was primarily due to lower compensation-related and travel costs in the sales function, as well as lower commission expense due to the lower level of license bookings as compared to fiscal year 2013. The decrease in costs in these areas was slightly offset by an increase in stock based compensation expense during the third quarter of fiscal year 2014 due to accelerated vesting of restricted stock units in connection with the termination of employment of our Senior Vice President of Global Field Operations. Marketing expenses were relatively consistent between the periods.
Product Development
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | Percentage Change | |||||||
Product development costs | $ | 63,099 | $ | 58,172 | 8 | % | ||||
Capitalized product development costs | (4,134 | ) | (836 | ) | 394 | % | ||||
Total product development expense | $ | 58,965 | $ | 57,336 | 3 | % | ||||
As a percentage of total revenue | 18 | % | 17 | % | ||||||
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Product development expenses increased $1.6 million in fiscal year 2014 as compared to fiscal year 2013, and increased as a percentage of revenue from 17% to 18%. The increase was primarily due to higher costs related to building our Progress Pacific platform. The increase was partially offset by the deferral of capitalized product development costs related to certain development activities with respect to our cloud and mobile platforms beginning in the fourth quarter of fiscal year 2013, as well as lower incentive compensation costs.
General and Administrative
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | Percentage Change | |||||||
General and administrative | $ | 48,292 | $ | 55,994 | (14 | )% | ||||
As a percentage of total revenue | 15 | % | 17 | % | ||||||
General and administrative expenses include the costs of our finance, human resources, legal, information systems and administrative departments. General and administrative expenses decreased $7.7 million in fiscal year 2014 as compared to fiscal year 2013, and decreased as a percentage of revenue from 17% to 15%. The decrease is primarily related to lower compensation-related costs as a result of headcount reduction actions occurring subsequent to the third quarter of fiscal year 2013, as well as lower incentive compensation and professional services costs. The decrease in costs in these areas was slightly offset by an increase in stock based compensation expense during the third quarter of fiscal year 2014 due in part to accelerated vesting of restricted stock units in connection with the termination of employment of our Senior Vice President of Human Resources.
Amortization of Acquired Intangibles
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | Percentage Change | |||||||
Amortization of acquired intangibles | $ | 653 | $ | 760 | (14 | )% | ||||
As a percentage of total revenue | — | % | — | % | ||||||
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 these acquired intangibles decreased 14% in fiscal year 2014 as compared to fiscal year 2013 due to the completion of amortization of certain intangible assets acquired in prior years, offset by the amortization of intangible assets associated with the Rollbase and Modulus acquisitions, which were completed during the second quarter of fiscal years 2013 and 2014, respectively, and the BravePoint acquisition, which was completed in the fourth quarter of fiscal year 2014.
Restructuring Expenses
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | Percentage Change | |||||||
Restructuring expenses | $ | 2,266 | $ | 11,983 | (81 | )% | ||||
As a percentage of total revenue | 1 | % | 4 | % | ||||||
We incurred restructuring expenses of $2.3 million in fiscal year 2014 as compared to $12.0 million in fiscal year 2013. Restructuring expenses in fiscal year 2014 relate to the restructuring actions occurring in fiscal years 2014, 2013 and 2012. See Note 14 to the 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 "Liquidity and Capital Resources".
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Acquisition-Related Expenses
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | Percentage Change | |||||||
Acquisition-related expenses | $ | 5,862 | $ | 3,204 | 83 | % | ||||
As a percentage of total revenue | 2 | % | 1 | % | ||||||
Acquisition-related expenses increased in fiscal year 2014 compared to fiscal year 2013 due to expenses related to earn-out provisions that were part of the Rollbase acquisition completed in the second quarter of fiscal year 2013, as well as transaction-related costs, primarily professional services fees, associated with the acquisition of Modulus, which was acquired in the second quarter of fiscal year 2014, BravePoint, which was acquired in the fourth quarter of fiscal year 2014, and Telerik, which was acquired in the first quarter of fiscal year 2015.
Income from Operations
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | Percentage Change | |||||||
Income from operations | $ | 80,740 | $ | 63,740 | 27 | % | ||||
As a percentage of total revenue | 24 | % | 19 | % | ||||||
Income from operations increased $17.0 million in fiscal year 2014 as compared to fiscal year 2013, and increased as a percentage of total revenue from 19% to 24%. As discussed above, the increase was primarily the result of lower operating expenses in fiscal year 2014.
Income from Operations by Segment
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | Percentage Change | |||||||
OpenEdge segment | $ | 225,910 | $ | 209,833 | 8 | % | ||||
Data Connectivity and Integration segment | 22,464 | 27,692 | (19 | )% | ||||||
Application Development and Deployment segment | (8,314 | ) | (1,213 | ) | (585 | )% | ||||
Other unallocated expenses | (159,320 | ) | (172,572 | ) | 8 | % | ||||
Total income from operations | $ | 80,740 | $ | 63,740 | 27 | % | ||||
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: product development, corporate marketing, general and administration, amortization of acquired intangibles, stock-based compensation, restructuring, and acquisition-related expenses.
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Other (Expense) Income
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | Percentage Change | |||||||
Interest income and other | $ | (489 | ) | $ | 1,201 | (141 | )% | |||
Foreign currency loss | (2,447 | ) | (2,158 | ) | (13 | ) | ||||
Total other (expense) income, net | $ | (2,936 | ) | $ | (957 | ) | (207 | )% | ||
As a percentage of total revenue | (1 | )% | — | % | ||||||
Other (expense) income decreased $2.0 million in fiscal year 2014 as compared to fiscal year 2013. The decrease is primarily related to the realized loss incurred of $2.6 million resulting from the sale of our remaining auction rate securities, which is included in interest income and other for fiscal year 2014. The change in foreign currency losses is a result of movements in exchange rates and the impact on our intercompany receivables and payables denominated in currencies other than local currencies.
Provision for Income Taxes
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | Percentage Change | |||||||
Provision for income taxes | $ | 28,346 | $ | 23,006 | 23 | % | ||||
As a percentage of total revenue | 9 | % | 7 | % | ||||||
Our effective tax rate was 36% in fiscal year 2014 and 37% in fiscal year 2013. The lower rate in fiscal year 2014 is primarily due to the recognition of $2.1 million of tax benefits associated with the expected distribution from a foreign subsidiary that will occur in the foreseeable future. This benefit was partially offset by a lower research and development credit in fiscal year 2014 compared to fiscal year 2013. In fiscal year 2014, there was only a one month benefit from the research and development credit because it expired on December 31, 2013 and was not reinstated as of November 30, 2014. Fiscal year 2013 benefited from a reinstatement of the research and development credit in January 2013 with a retroactive effective date to January 1, 2012 that allowed us to benefit from the credit in fiscal year 2013 for the period of January 1 to November 30, 2012.
Net Income
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | Percentage Change | |||||||
Income from continuing operations | $ | 49,458 | $ | 39,777 | 24 | % | ||||
Income (loss) from discontinued operations | — | 35,130 | (100 | )% | ||||||
Net income | $ | 49,458 | $ | 74,907 | (34 | )% | ||||
Income (loss) from discontinued operations includes the revenues and direct expenses of the product lines we divested in fiscal year 2012 and the first quarter of fiscal year 2013 and the Apama product line, which was sold in July 2013. In fiscal year 2013, the income from discontinued operations includes the pre-tax gain on the sales of our Actional, Artix, DataXtend, ObjectStore, Orbacus, Orbix, Savvion and Sonic product lines of $35.7 million and the pre-tax gain on sale of the Apama product line of $35.9 million. See Note 7 of the Consolidated Financial Statements appearing in Item 8 of this Annual Report for additional information related to our discontinued product lines.
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Fiscal 2013 Compared to Fiscal 2012
Revenue
Fiscal Year Ended | Percentage Change | ||||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | As Reported | Constant Currency | |||||||||
Revenue | $ | 333,996 | $ | 317,612 | 5 | % | 6 | % | |||||
Total revenue increased $16.4 million in fiscal year 2013 as compared to fiscal year 2012. Revenue would have increased by 6% if exchange rates had been constant in fiscal year 2013 as compared to exchange rates in effect in fiscal year 2012. The increase in revenue in fiscal year 2013 was primarily a result of an increase in license revenue as further described below.
Changes in prices from fiscal year 2012 to fiscal year 2013 did not have a significant impact on our revenue. Changes in foreign currency exchange rates did not significantly impact our reported revenues on a consolidated basis.
License Revenue
Fiscal Year Ended | Percentage Change | ||||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | As Reported | Constant Currency | |||||||||
License | $ | 122,312 | $ | 106,626 | 15 | % | 15 | % | |||||
As a percentage of total revenue | 37 | % | 34 | % | |||||||||
Software license revenue increased $15.7 million, or 15% on an actual and constant currency basis, in fiscal year 2013 as compared to fiscal year 2012. The increase in license revenue in fiscal year 2013 was primarily driven by higher revenue for our OpenEdge products in the North America, EMEA and Asia Pacific regions and our Corticon products in the North America region, offset by lower revenue for DataDirect products due to timing of deal closures on multi-year OEM agreements in prior years.
Maintenance and Services Revenue
Fiscal Year Ended | Percentage Change | ||||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | As Reported | Constant Currency | |||||||||
Maintenance | $ | 202,857 | $ | 202,691 | — | % | 1 | % | |||||
As a percentage of total revenue | 61 | % | 64 | % | |||||||||
Professional services | $ | 8,827 | $ | 8,295 | 6 | % | 3 | % | |||||
As a percentage of total revenue | 3 | % | 2 | % | |||||||||
Total maintenance and services revenue | $ | 211,684 | $ | 210,986 | — | % | — | % | |||||
As a percentage of total revenue | 63 | % | 66 | % | |||||||||
Maintenance and services revenue increased $0.7 million in fiscal year 2013 as compared to fiscal year 2012. Maintenance and services revenue remained essentially flat in fiscal year 2013 as the loss of revenue from non-renewing customers offset the growth in maintenance revenue associated with new license sales on an as reported and constant currency basis. Professional services revenue increased in fiscal year 2013 due to the timing of professional service engagements.
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Revenue by Region
Fiscal Year Ended | Percentage Change | ||||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | As Reported | Constant Currency | |||||||||
North America | $ | 154,279 | $ | 142,659 | 8 | % | 8 | % | |||||
As a percentage of total revenue | 46 | % | 45 | % | |||||||||
EMEA | $ | 133,600 | $ | 125,566 | 6 | % | 5 | % | |||||
As a percentage of total revenue | 40 | % | 39 | % | |||||||||
Latin America | $ | 25,370 | $ | 28,335 | (10 | )% | (3 | )% | |||||
As a percentage of total revenue | 8 | % | 9 | % | |||||||||
Asia Pacific | $ | 20,747 | $ | 21,052 | (1 | )% | 4 | % | |||||
As a percentage of total revenue | 6 | % | 7 | % | |||||||||
Total revenue generated in North America increased $11.6 million, and total revenue generated outside North America increased $4.8 million, in fiscal year 2013 as compared to fiscal year 2012. Total revenue generated in markets outside North America represented 54% of total revenue in fiscal year 2013 compared to 55% of total revenue in fiscal year 2012. Total revenue generated in markets outside North America would have represented 54% of total revenue if exchange rates had been constant in fiscal year 2013 as compared to the exchange rates in effect in fiscal year 2012.
Revenue by Segment
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | Percentage Change | |||||||
OpenEdge segment | $ | 293,508 | $ | 275,258 | 7 | % | ||||
Data Connectivity and Integration segment | 40,089 | 42,354 | (5 | )% | ||||||
Application Development and Deployment segment | 399 | — | — | % | ||||||
Total revenue | $ | 333,996 | $ | 317,612 | 5 | % | ||||
OpenEdge revenue increased by $18.3 million, or 7%, in fiscal year 2013 as compared to fiscal year 2012, and Data Connectivity and Integration revenue decreased $2.3 million, or 5%, year over year. As noted above, the increase in OpenEdge revenue was primarily driven by higher license revenue in the North America, EMEA and Asia Pacific regions and the decrease in the Data Connectivity and Integration revenue was due to timing of deal closures on multi-year OEM agreements in prior years. We did not begin to sell the products included in the Application Development and Deployment segment until fiscal year 2013.
Cost of Software Licenses
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | Percentage Change | |||||||
Cost of software licenses | $ | 6,889 | $ | 5,776 | 19 | % | ||||
As a percentage of software license revenue | 6 | % | 5 | % | ||||||
As a percentage of total revenue | 2 | % | 2 | % | ||||||
Cost of software licenses consists primarily of costs of royalties, electronic software distribution costs, duplication and packaging. Cost of software licenses increased $1.1 million in fiscal year 2013 as compared to fiscal year 2012, and increased as a percentage of software license revenue 5% to 6%. The dollar increase was primarily due to higher royalty expense for products and technologies licensed or resold from third parties due to higher license revenues. Cost of software licenses as a percentage of software license revenue varies from period to period depending upon the relative product mix.
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Cost of Maintenance and Services
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | Percentage Change | |||||||
Cost of maintenance and services | $ | 26,753 | $ | 29,878 | (10 | )% | ||||
As a percentage of maintenance and services revenue | 13 | % | 14 | % | ||||||
As a percentage of total revenue | 8 | % | 9 | % | ||||||
Cost of maintenance and services consists primarily of costs of providing customer support, education and consulting. Cost of maintenance and services decreased $3.1 million in fiscal year 2013 as compared to fiscal year 2012 and decreased as a percentage of maintenance and services revenue from 14% to 13%. The decrease in fiscal year 2013 was the result of cost savings due to our restructuring actions which were initiated in the second half of fiscal year 2012.
Amortization of Acquired Intangibles
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | Percentage Change | |||||||
Amortization of acquired intangibles | $ | 1,340 | $ | 660 | 103 | % | ||||
As a percentage of total revenue | — | % | — | % | ||||||
Amortization of acquired intangibles included in costs of revenue primarily represents the amortization of the value assigned to intangible assets for technology obtained in business combinations. Amortization of acquired intangibles increased $0.7 million in fiscal year 2013 as compared to fiscal year 2012. The increase was due to amortization of intangible assets acquired with the Rollbase acquisition, which was completed in the second quarter of fiscal year 2013, offset by decreases due to the completion of amortization of certain intangible assets acquired in prior years.
Gross Profit
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | Percentage Change | |||||||
Gross profit | $ | 299,014 | $ | 281,298 | 6 | % | ||||
As a percentage of total revenue | 90 | % | 89 | % | ||||||
Our gross profit increased $17.7 million in fiscal year 2013 as compared to fiscal year 2012, and our gross profit as a percentage of total revenue increased from 89% to 90%. The dollar increase in our gross profit was primarily due to higher license revenue and lower cost of maintenance and services.
Sales and Marketing
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | Percentage Change | |||||||
Sales and marketing | $ | 105,997 | $ | 98,838 | 7 | % | ||||
As a percentage of total revenue | 32 | % | 31 | % | ||||||
Sales and marketing expenses increased $7.2 million in fiscal year 2013 as compared to fiscal year 2012, and increased as a percentage of total revenue from 31% to 32%. The increase in sales and marketing expense in fiscal year 2013 was primarily due to the increase in marketing programs related to our core products, which was lower in 2012 as a result of our divestiture of several product lines and implementation of our new strategic plan announced in April 2012. The increase was partially offset by lower-compensation related costs in fiscal year 2013 as a result of headcount reduction actions, which occurred in the
29
second half of fiscal year 2012. The increase was also offset by incremental compensation-related expenses of $1.4 million recognized in fiscal year 2012 due to the separation of one of our sales and marketing executives.
Product Development
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | Percentage Change | |||||||
Product development costs | $ | 58,172 | $ | 44,443 | 31 | % | ||||
Capitalized product development costs | (836 | ) | — | 100 | % | |||||
Total product development expense | $ | 57,336 | $ | 44,443 | 29 | % | ||||
As a percentage of total revenue | 17 | % | 14 | % | ||||||
Product development expenses increased $12.9 million in fiscal year 2013 as compared to fiscal year 2012, and increased as a percentage of revenue from 14% to 17%. The increase was primarily due to higher costs related to our new product development strategy, including higher expenses related to building our Progress Pacific platform. The increase was offset by lower compensation-related costs in fiscal year 2013 as a result of headcount reduction actions, which occurred in the second half of fiscal year 2012, and the deferral of capitalized product development costs related to our Progress Pacific platform in fiscal year 2013.
General and Administrative
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | Percentage Change | |||||||
General and administrative | $ | 55,994 | $ | 61,989 | (10 | )% | ||||
As a percentage of total revenue | 17 | % | 20 | % | ||||||
General and administrative expenses include the costs of our finance, human resources, legal, information systems and administrative departments. General and administrative expenses decreased $6.0 million in fiscal year 2013 as compared to fiscal year 2012, and decreased as a percentage of revenue from 20% to 17%. The decrease in fiscal year 2013 was primarily due to incremental costs incurred in fiscal year 2012 for stock-based compensation associated with the hiring of a new Chief Executive Officer in December 2011, $0.9 million for a litigation settlement and $3.2 million of proxy-related costs. The decrease was also the result of cost savings in fiscal year 2013 from our restructuring actions and other cost control measures, which were initiated in the second half of fiscal year 2012.
Amortization of Acquired Intangibles
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | Percentage Change | |||||||
Amortization of acquired intangibles | $ | 760 | $ | 820 | (7 | )% | ||||
As a percentage of total revenue | — | % | — | % | ||||||
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 these acquired intangibles decreased $0.1 million in fiscal year 2013 as compared to fiscal year 2012 due to the completion of amortization of certain intangible assets acquired in prior years, offset by the amortization of intangible assets associated with the Rollbase acquisition, which was completed during the second quarter of fiscal year 2013.
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Restructuring Expenses
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | Percentage Change | |||||||
Restructuring expenses | $ | 11,983 | $ | 7,204 | 66 | % | ||||
As a percentage of total revenue | 4 | % | 2 | % | ||||||
We incurred restructuring expenses of $12.0 million in fiscal year 2013 as compared to $7.2 million in fiscal year 2012. Restructuring expenses in fiscal year 2013 relate to the restructuring actions occurring in fiscal years 2013 and 2012. See Note 14 to the 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 "Liquidity and Capital Resources".
Acquisition-Related Expenses
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | Percentage Change | |||||||
Acquisition-related expenses | $ | 3,204 | $ | 215 | 1,390 | % | ||||
As a percentage of total revenue | 1 | % | — | % | ||||||
Acquisition-related expenses increased in fiscal year 2013 compared to fiscal year 2012 due to expenses related to earn-out provisions which were part of the Rollbase acquisition, plus a $1.0 million termination fee for a pre-existing licensing arrangement between Rollbase and another third-party. The fiscal year 2012 expenses related to the acquisition of Corticon, which occurred in the fourth quarter of fiscal year 2011.
Income from Operations
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | Percentage Change | |||||||
Income from operations | $ | 63,740 | $ | 67,789 | (6 | )% | ||||
As a percentage of total revenue | 19 | % | 21 | % | ||||||
Income from operations decreased $4.0 million in fiscal year 2013 as compared to fiscal year 2012, and decreased as a percentage of total revenue from 21% to 19%. As discussed above, the decrease was primarily the result of higher operating expenses, most notably product development, restructuring and acquisition-related expenses. The decrease was also due to the absorption into our continuing operations of costs previously required to support our divested product lines.
Income from Operations by Segment
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | Percentage Change | |||||||
OpenEdge segment | $ | 209,833 | $ | 188,346 | 11 | % | ||||
Data Connectivity and Integration segment | 27,692 | 29,097 | (5 | )% | ||||||
Application Development and Deployment segment | (1,213 | ) | — | (100 | )% | |||||
Other unallocated expenses | (172,572 | ) | (149,654 | ) | (15 | )% | ||||
Total income from operations | $ | 63,740 | $ | 67,789 | (6 | )% | ||||
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: product development, corporate marketing, general and administration, amortization of acquired intangibles, stock-based compensation, restructuring, and acquisition-related expenses.
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Other Income (Expense)
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | Percentage Change | |||||||
Interest income and other | $ | 1,201 | $ | 2,574 | (53 | )% | ||||
Foreign currency gain (loss) | (2,158 | ) | (2,378 | ) | 9 | % | ||||
Total other income (expense), net | $ | (957 | ) | $ | 196 | 588 | % | |||
As a percentage of total revenue | — | % | — | % | ||||||
Other income (expense) decreased $1.2 million in fiscal year 2013 as compared to fiscal year 2012. The decrease in interest income was due to lower cash balances and lower interest rates in certain countries during fiscal year 2013 and additional interest income on tax credits during fiscal year 2012 that did not recur in fiscal year 2013. The decrease was also due to the $0.4 million realized loss related to the settlement of an auction rate security during fiscal year 2013. The change in foreign currency losses was a result of movements in exchange rates and the impact on our intercompany receivables and payables denominated in currencies other than local currencies.
Provision for Income Taxes
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | Percentage Change | |||||||
Provision for income taxes | $ | 23,006 | $ | 23,031 | — | % | ||||
As a percentage of total revenue | 7 | % | 7 | % | ||||||
Our effective tax rate was 37% in fiscal year 2013 and 34% in fiscal year 2012. The lower rate in fiscal year 2012 was primarily due a larger percentage of profit before tax earned overseas in fiscal year 2012 versus fiscal year 2013 at an effective rate lower than the US effective tax rate. In addition, fiscal year 2012 benefited from the recognition of a previously unrecognized tax benefit due to the expiration of the statute of limitations. Fiscal year 2013 benefited from a reinstatement of the research and development credit in the tax code in January 2013 with a retroactive effective date to January 1, 2012 that allowed us to benefit from the credit in fiscal year 2013 for the period of January 1 to November 30, 2012.
Net Income
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2013 | November 30, 2012 | Percentage Change | |||||||
Income from continuing operations | $ | 39,777 | $ | 44,954 | (12 | )% | ||||
Income (loss) from discontinued operations | 35,130 | 2,490 | 1,311 | % | ||||||
Net income | $ | 74,907 | $ | 47,444 | 58 | % | ||||
Income (loss) from discontinued operations includes the revenues and direct expenses of the product lines we divested in fiscal year 2012 and the first quarter of fiscal year 2013 and the Apama product line, which was sold in July 2013. In fiscal year 2013, the income from discontinued operations includes the pre-tax gain on the sales of our Actional, Artix, DataXtend, ObjectStore, Orbacus, Orbix, Savvion and Sonic product lines of $35.7 million and the pre-tax gain on sale of the Apama product line of $35.9 million. In fiscal year 2012, it includes the gains on sales of our FuseSource and Shadow product lines of $19.8 million and $25.3 million, respectively, and an impairment loss of $8.6 million related to our Artix, Orbacus and Orbix assets, which were classified as held for sale in our consolidated balance sheet at November 30, 2012. The impairment loss represented the write down of the assets to fair value. See Note 7 of the Consolidated Financial Statements appearing in Item 8 of this Annual Report for additional information related to our discontinued product lines.
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Liquidity and Capital Resources
Cash, Cash Equivalents and Short-Term Investments
(In thousands) | November 30, 2014 | November 30, 2013 | |||||
Cash and cash equivalents | $ | 263,082 | $ | 198,818 | |||
Short-term investments | 20,186 | 32,622 | |||||
Total cash, cash equivalents and short-term investments | $ | 283,268 | $ | 231,440 | |||
The increase in cash, cash equivalents and short-term investments of $51.8 million since the end of fiscal year 2013 is primarily due to cash inflows from operations of $107.7 million as well as the sale of auction rate securities during the third quarter of fiscal year 2014 of $26.2 million, partially offset by repurchases of our common stock of $52.6 million, the purchase of Modulus for cash consideration of $12.5 million and the purchase of BravePoint for cash consideration of $12.0 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 $86.0 million and $113.8 million at November 30, 2014 and 2013, respectively. At November 30, 2014 and 2013, the net undistributed earnings of our foreign subsidiaries was $18.6 million and $32.9 million, respectively, and are considered to be permanently reinvested; as such, they are not available to fund our domestic operations. If we were to repatriate the earnings, they would be subject to taxation in the U.S., but would primarily be offset by foreign tax credits. We do not believe this has a material impact on our liquidity.
Following the end of fiscal year 2014, we acquired Telerik AD for an aggregate purchase price of $262.5 million. Approximately $11 million of the purchased price was paid to Telerik’s founders and certain other key employees in restricted stock units, subject to a vesting schedule and continued employment. We funded the purchase price through a combination of existing cash resources and the term loan under the new credit facility described below. We do not believe that the Telerik acquisition has a material impact on our liquidity.
Share Repurchase Program
In April 2012, our Board of Directors authorized us to repurchase $350.0 million of our common stock through fiscal year 2013, and in July 2013, our Board of Directors increased the authorization to $360.0 million. We began to repurchase shares pursuant to this authorization in October 2012 and we completed repurchasing shares under this authorization during the fiscal year ended November 30, 2013. Under this authorization, we repurchased a total of 16.1 million shares for $357.9 million.
In January 2014, our Board of Directors authorized a new $100.0 million share repurchase program. 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. During fiscal year 2014, we repurchased 2.3 million shares of our common stock for $52.6 million.
Divestiture of Non-Core Product Lines
In fiscal year 2012 and the first quarter of fiscal year 2013, we divested the ten product lines which were not considered core to our business. The aggregate purchase price was approximately $130.0 million. In July 2013, we divested our Apama product line to Software AG for a purchase price of $44.3 million.
The cash flows of our continuing and discontinued operations have not been segregated in our statements of cash flows. The divestitures of these product lines will reduce our cash flows in future periods, including our operating cash flows, due to the loss of revenue offset by the elimination of direct expenses associated with the divested product lines and other cost savings actions.
Restructuring Activities
During the third quarter of fiscal year 2014, our management approved, committed to and initiated plans to make strategic changes to our organization to provide greater focus and agility in the delivery of next generation application development, deployment and integration solutions. Effective September 1, 2014, we began to operate as three distinct business units:
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OpenEdge, Data Connectivity and Integration, and Application Development and Deployment, each with dedicated sales, product management and product marketing functions. In connection with the new organizational structure, we no longer have a global head of sales, as well as certain other positions within the sales and administrative organizations. The organizational changes did not result in the closing of any of our facilities.
As part of the 2014 restructuring, for fiscal year 2014, we incurred expenses of $1.7 million, which are related to employee costs, including severance, health benefits, and outplacement services, but excluding stock-based compensation. The expenses are recorded as restructuring expenses in the consolidated statements of income. We do not expect to incur additional material costs with respect to the 2014 restructuring. Cash disbursements for expenses incurred to date under the 2014 restructuring are expected to be completed during fiscal year 2015.
During the third quarter of fiscal year 2013, our management approved, committed to and initiated plans to restructure and improve efficiencies in our operations as a result of the sale of the Apama product line and the divestitures completed during fiscal years 2012 and 2013. We reduced our global workforce primarily within the administrative and sales organizations. This workforce reduction was conducted across all geographies and also resulted in the closing of certain facilities.
As part of the 2013 restructuring, we incurred $0.4 million of expenses in fiscal year 2014. The expenses are recorded as restructuring expenses in the consolidated statements of income. We do not expect to incur additional material costs with respect to the 2013 restructuring. As of November 30, 2014, $0.2 million of the cumulative expenses recognized under the 2013 restructuring remains unpaid. The balance relates to excess facilities costs, which we expect to pay through fiscal year 2017.
During the second quarter of fiscal year 2012, as part of our new strategic plan, our management approved, committed to and initiated certain operational restructuring initiatives to reduce annual costs, including the simplification of our organizational structure and the consolidation of facilities.
As part of the 2012 restructuring, we incurred $0.2 million of expenses in the fiscal year 2014. The expenses are recorded as restructuring expenses in the consolidated statements of income. We do not expect to incur additional material costs for the 2012 restructuring. As of November 30, 2014, $0.2 million of the cumulative expenses recognized under the 2012 restructuring remains unpaid. The balance relates to excess facilities costs, which we expect to pay through fiscal year 2015.
Credit Facility
On December 2, 2014, in connection with entering into the new credit facility described below, we terminated our prior revolving credit facility with JPMorgan Chase Bank, N.A. and the other lenders party to the credit facility. Our prior credit facility was to mature on August 15, 2016. Loans under the prior credit facility could be paid before maturity in whole or in part at our option without penalty or premium. As of November 30, 2014 and at the time of termination, there were no revolving loans and $0.7 million of letters of credit outstanding. The outstanding letters of credit were incorporated into the new credit facility.
On December 2, 2014, we entered into a new credit agreement with JPMorgan Chase Bank, N.A. and the other lenders party to the credit agreement providing for a $150 million secured term loan and a $150 million secured revolving credit facility. The revolving credit facility may be increased by up to an additional $75 million if the existing or additional lenders are willing to make increased commitments. The term loan was used to partially fund our acquisition of Telerik. 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.
Interest rates for the term loan and revolving credit facility are determined at our option and would range from 1.50% to 2.25% above the Eurodollar rate for Eurodollar-based borrowings or would range from 0.50% to 1.25% above the defined base rate for base rate borrowings, in each case based upon our leverage ratio. Additionally, we may borrow certain foreign currencies at rates set in the same range above the respective London interbank offered interest rates for those currencies, based on our leverage ratio. A quarterly commitment fee on the undrawn portion of the revolving credit facility is required, ranging from 0.25% to 0.40% per annum, based upon our leverage ratio.
The credit facility matures on December 2, 2019, when all amounts outstanding will be due and payable in full. The revolving credit facility does not require amortization of principal. The term loan requires repayment of principal at the end of each fiscal quarter, beginning with the fiscal quarter ending February 28, 2015. The first eight payments are in the principal amount of $1.875 million each, the following eight payments are in the principal amount of $3.75 million each, the following three payments are in the principal amount of $5.625 million each, and the last payment is of the remaining principal amount. Any
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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.
Revolving loans may be borrowed, repaid and reborrowed until December 2, 2019, at which time all amounts outstanding must be repaid. Accrued interest on the loans is payable quarterly in arrears with respect to base rate loans and at the end of each interest rate period (or at each three month interval in the case of loans with interest periods greater than three months) with respect to LIBOR rate loans. We may prepay the loans or terminate or reduce the commitments in whole or in part at any time, without premium or penalty, subject to certain conditions and reimbursement of certain costs in the case of LIBOR rate loans.
We are the sole borrower under the credit facility. Our obligations are guaranteed by each of our material domestic subsidiaries and are secured by substantially all of our assets and those of our material domestic subsidiaries, as well as 100% of the capital stock of our domestic subsidiaries and 65% of the capital stock of our first-tier foreign subsidiaries, in each case, subject to certain exceptions. Future material domestic subsidiaries will be required to guaranty our obligations under the credit facility, and to grant security interests in substantially all of their assets to secure such obligations.
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 leverage ratio and a consolidated senior secured leverage ratio.
The credit facility includes customary events of default that include, among other things, non-payment defaults, covenant defaults, inaccuracy of representations and warranties, cross default to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults, ERISA defaults and a change of control default. The occurrence of an event of default could result in the acceleration of the obligations under the credit facility. Under certain circumstances, a default interest rate will apply on all unpaid and overdue amounts (including principal, interest and fees) under the credit facility at a per annum rate equal to 2.00% above the applicable interest rate or 2.00% above the defined base rate.
Auction Rate Securities
During the third quarter of fiscal year 2014, we sold all of our remaining auction rate securities (ARS) for $26.2 million and received the proceeds during the quarter. The previously recorded unrealized losses associated with our ARS have been adjusted based on the sale prices and recorded as a realized loss of $2.6 million during fiscal year 2014 within interest income and other in the consolidated statement of operations.
Cash Flows from Operating Activities
Fiscal Year Ended | |||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | November 30, 2012 | ||||||||
Net income | $ | 49,458 | $ | 74,907 | $ | 47,444 | |||||
Non-cash reconciling items included in net income | 57,532 | (26,335 | ) | 23,561 | |||||||
Changes in operating assets and liabilities | 704 | (43,992 | ) | 33,110 | |||||||
Net cash flows from operating activities | $ | 107,694 | $ | 4,580 | $ | 104,115 | |||||
The increase in cash generated from operations in fiscal year 2014 as compared to fiscal year 2013 was primarily due to $56.3 million in payments made in fiscal year 2013 for income taxes related to the divestitures of the product lines discussed in Note 7, as well as an additional $14.5 million in payments related to the restructuring activities discussed in Note 14 in fiscal year 2013 as compared to fiscal year 2014 and higher income from operations. Total net tax payments made in fiscal year 2014 were $7.3 million, compared to $69.9 million in fiscal year 2013.
The decrease in cash generated from operations in fiscal year 2013 as compared to fiscal year 2012 was primarily due to $56.3 million in payments made in fiscal year 2013 for income taxes related to the divestitures. Total net tax payments made in fiscal year 2013 were $69.9 million, compared to $15.3 million in fiscal year 2012. The decrease is also attributable to an increase in annual bonus payments made in fiscal year 2013 as compared to fiscal year 2012.
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Our gross accounts receivable as of November 30, 2014 increased by $1.0 million from the end of fiscal year 2013. DSO in accounts receivable from continuing operations was 63 days at the end of fiscal year 2014, compared to 66 days at the end of fiscal year 2013 and 67 days at the end of fiscal year 2012. We target a DSO range of 60 to 75 days.
Cash Flows from Investing Activities
Fiscal Year Ended | |||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | November 30, 2012 | ||||||||
Net investment activity | $ | 37,784 | $ | 21,033 | $ | 55,096 | |||||
Purchases of property and equipment | (7,985 | ) | (4,226 | ) | (7,735 | ) | |||||
Capitalized software costs | (3,816 | ) | (836 | ) | — | ||||||
Payments for acquisitions, net of cash acquired | (24,493 | ) | (9,450 | ) | — | ||||||
Proceeds from divestitures | 3,300 | 111,120 | 46,590 | ||||||||
Other investing activities | 346 | 1,121 | 189 | ||||||||
Net cash flows from investing activities | $ | 5,136 | $ | 118,762 | $ | 94,140 | |||||
Net cash inflows and outflows of our net investment activity is primarily a result of the timing of our purchases and maturities of securities, which are classified as short-term investments, including the sale of all of our remaining ARS during the third quarter of fiscal year 2014, as well as the timing of acquisitions and divestitures.
We purchased $8.0 million of property and equipment in fiscal year 2014 as compared to $4.2 million in the fiscal year 2013 and $7.7 million in fiscal year 2012. Fiscal year 2014 includes a $4.5 million investment in licensed software for use in our Pacific mobility platform.
We also received $3.3 million in the first quarter of fiscal year 2014 from an escrow release related to the divestitures discussed in Note 7, as compared to $111.1 million of proceeds related to the sale of divested product lines in fiscal year 2013, which was the primary reason for the decrease in net cash inflows from investing activities period over period.
We acquired 100% of the membership interests in Modulus LLC (Modulus), a privately held platform-as-a-service (PaaS) provider based in Cincinnati, Ohio, for $15.0 million, including $12.5 million in cash paid, during the second quarter of fiscal year 2014. We acquired 100% of the capital stock of BravePoint, Inc. (BravePoint), a leading provider of consulting, training and application development services, from Chesapeake Utilities Corporation in exchange for $12.0 million in cash in the fourth quarter of fiscal year 2014. We acquired 100% of the equity interests in Rollbase, a privately held software vendor for $9.9 million, which included $9.5 million in cash paid, in the second quarter of fiscal year 2013.
We received $111.1 million and $46.6 million in fiscal years 2013 and 2012, respectively, from the sales of our non-Core and Apama product lines. In the first quarter of fiscal year 2013, we completed the divestitures of our Actional, Artix, DataXtend, ObjectStore, Orbacus, Orbix, Savvion and Sonic product lines, and received proceeds of $75.5 million, which were offset by direct transactions costs. During the third quarter of fiscal year 2013, we completed the divestiture of the Apama product line for a purchase price of $44.3 million, of which $4.5 million was held in escrow to secure indemnification claims, if any, for up to 18 months. The proceeds from the Apama divestiture were also offset by direct transaction costs. The escrow was released to us in January 2015. In fiscal year 2012, we divested two product lines. The FuseSource product line was sold to Red Hat, Inc. for $21.3 million in September 2012, of which $2.1 million is held in escrow, and the Shadow product line was sold to Rocket Software, Inc. for $31.9 million in October 2012, of which $3.3 million was held in escrow for 15 months and received during the first quarter of fiscal year 2014. The proceeds from the Shadow divestiture were also offset by direct transaction costs.
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Cash Flows from Financing Activities
Fiscal Year Ended | |||||||||||
(In thousands) | November 30, 2014 | November 30, 2013 | November 30, 2012 | ||||||||
Proceeds from stock-based compensation plans | $ | 16,488 | $ | 54,430 | $ | 29,208 | |||||
Repurchases of common stock | (52,604 | ) | (276,537 | ) | (81,316 | ) | |||||
Other financing activities | (6,116 | ) | (3,294 | ) | (2,920 | ) | |||||
Net cash flows from financing activities | $ | (42,232 | ) | $ | (225,401 | ) | $ | (55,028 | ) | ||
We received $16.5 million in fiscal year 2014 from the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to $54.4 million in fiscal year 2013 and $29.2 million is fiscal year 2012. In fiscal year 2014, we repurchased $52.6 million our common stock under our $100.0 million stock purchase plan, which was approved by the Board of Directors in January 2014. In fiscal years 2013 and 2012, we repurchased $276.5 million and $81.3 million, net of unsettled trades, respectively, of our common stock under our $350.0 million stock repurchase plan, which was approved by the Board of Directors in April 2012, and increased by $10.0 million to $360.0 million in June 2013.
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.
Liquidity Outlook
We believe that existing cash balances, together with funds generated from operations and amounts available under our new 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 we have deemed permanently reinvested. Our foreseeable cash needs include our planned capital expenditures and share repurchases, lease commitments, restructuring obligations and other long-term obligations.
Revenue Backlog
(In thousands) | November 30, 2014 | November 30, 2013 | |||||
Deferred revenue, primarily related to unexpired maintenance and support contracts | $ | 96,240 | $ | 97,537 | |||
Multi-year licensing arrangements (1) | 20,244 | 12,577 | |||||
Total revenue backlog | $ | 116,484 | $ | 110,114 | |||
(1) | Our backlog of orders not included on the balance sheet is not subject to our normal accounting controls for information that is either reported in or derived from our basic financial statements. Note that approximately $15.5 million of the multi-year licensing arrangements as of November 30, 2014 relate to DataDirect OEM arrangements, while the remaining amount relates to arrangements in our OpenEdge business unit. |
We typically fulfill most of our software license orders within 30 days of acceptance of a purchase order. Assuming all other revenue recognition criteria have been met, we recognize software license revenue upon shipment of the product, or if delivered electronically, when the customer has the right to access the software. Because there are many elements governing when revenue is recognized, including when orders are shipped, credit approval obtained, completion of internal control processes over revenue recognition and other factors, management has some control in determining the period in which certain revenue is recognized. We had in the past and may have in the future open software license orders which have not shipped or have otherwise not met all the required criteria for revenue recognition. Beginning in the second quarter of 2013, we changed our processes such that the amount of open software license orders received but not shipped at the end of the quarter was reduced to $0 at the end of the second, third, and fourth quarters of fiscal year 2013 and the first, second, third and fourth
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quarters of fiscal year 2014. We expect this will continue in future periods and we generally do not believe that the amount, if any, of such software license orders at the end of a particular reporting period is a reliable indicator of future performance. In addition, there is no industry standard for the definition of backlog and there may be an element of estimation in determining the amount. As such, direct comparisons with other companies may be difficult or potentially misleading.
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 of November 30, 2014 (in thousands):
Payments Due by Period | |||||||||||||||||||
Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | |||||||||||||||
Operating leases | $ | 15,251 | $ | 5,733 | $ | 5,731 | $ | 2,161 | $ | 1,626 | |||||||||
Purchase obligations (1) | 1,400 | 700 | 700 | — | — | ||||||||||||||
Unrecognized tax benefits (2) | 1,711 | — | — | — | — | ||||||||||||||
Total | $ | 18,362 | $ | 6,433 | $ | 6,431 | $ | 2,161 | $ | 1,626 | |||||||||
(1) | Represents the fixed or minimum amounts due under purchase obligations for support service agreements. |
(2) | The liability is not subject to fixed payment terms and the amount and timing of payments, if any, which we will make related to this liability are not known. See Note 15 of the Consolidated Financial Statements appearing in Item 8 of this Annual Report 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 of the Consolidated Financial Statements appearing 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 elements, including software maintenance services, consulting services, and customer education services. We do not recognize revenue until the following four basic criteria are met: (i) persuasive evidence of an arrangement exists, (ii) our product has been shipped or, if delivered electronically, the customer has the right to access the software, (iii) the fee is fixed or determinable, and (iv) collection of the fee is probable.
Evidence of an arrangement generally consists of a contract or purchase order signed by the customer. In regard to delivery, we generally ship our software electronically and do not license our software with conditions of acceptance. If an arrangement does contain conditions of acceptance, we defer recognition of the revenue until the acceptance criteria are met or the period of acceptance has passed. Services are considered delivered as the work is performed or, in the case of maintenance, over the contractual service period. We assess whether a fee is fixed or determinable at the outset of the arrangement and consider the payment terms of the transaction, including transactions that extend beyond our customary payment terms. We do not license our software with a right of return. In assessing whether the collection of the fee is probable, we consider customer credit-worthiness, a customer’s historical payment experience, economic conditions in the customer’s industry and geographic location and general economic conditions. If we do not consider collection of a fee to be probable, we defer the revenue until the fees are collected, provided all other conditions for revenue recognition have been met.
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In determining when to recognize revenue from a customer arrangement, we are often required to exercise judgment regarding the application of our accounting policies to a particular arrangement. The primary judgments used in evaluating revenue recognized in each period involve: determining whether collection is probable, assessing whether the fee is fixed or determinable, and determining the fair value of the maintenance and services elements included in multiple-element software arrangements. Such judgments can materially impact the amount of revenue that we record in a given period. While we follow specific and detailed rules and guidelines related to revenue recognition, we make and use significant management judgments and estimates in connection with the revenue recognized in any reporting period, particularly in the areas described above. If management made different estimates or judgments, material differences in the timing of the recognition of revenue could occur.
In regard to software license revenues, perpetual and term license fees are recognized as revenue when the software is delivered, no significant obligations or contingencies related to the software exist, other than maintenance, and all other revenue recognition criteria are met. We generally recognize revenue for products distributed through application partners and distributors on a sell-in basis.
Revenue from maintenance is recognized ratably over the service period. Maintenance revenue is deferred until the associated license is delivered to the customer and all other criteria for revenue recognition have been met. Revenue from other services, which are primarily consulting and customer education services, is generally recognized as the services are delivered to the customer, provided all other criteria for revenue recognition have been met.
We generally sell our software licenses with maintenance services and, in some cases, also with consulting services. For these multiple element arrangements, we allocate revenue to the delivered elements of the arrangement using the residual method, whereby revenue is allocated to the undelivered elements based on vendor specific objective evidence (or VSOE) of fair value of the undelivered elements with the remaining arrangement fee allocated to the delivered elements and recognized as revenue assuming all other revenue recognition criteria are met. For the undelivered elements, we determine VSOE of fair value to be the price charged when the undelivered element is sold separately. We determine VSOE for maintenance sold in connection with a software license based on the amount that will be separately charged for the maintenance renewal period. Substantially all license arrangements indicate the renewal rate for which customers may, at their option, renew their maintenance agreement. We determine VSOE for consulting services by reference to the amount charged for similar engagements when a software license sale is not involved. We review services sold separately on a periodic basis and update, when appropriate, our VSOE of fair value for such maintenance and services to ensure that it reflects our recent pricing experience. If VSOE of fair value for the undelivered elements cannot be established, we defer all revenue from the arrangement until the earlier of the point at which such sufficient VSOE does exist or all elements of the arrangement have been delivered, or if the only undelivered element is maintenance, then we recognize the entire fee ratably over the maintenance period. If payment of the software license fees is dependent upon the performance of consulting services or the consulting services are essential to the functionality of the licensed software, then we recognize both the software license and consulting fees using the completed contract method.
Sales taxes collected from customers and remitted to government authorities are excluded from revenue.
With the introduction of Progress Pacific in fiscal year 2013, we have also begun offering products via a platform-as-a-service (PaaS) model, which is a subscription model. Subscription revenue derived from these agreements is generally recognized on a straight-line basis over the subscription term, provided persuasive evidence of an arrangement exists, access to our software has been granted to the customer, the fee for the subscription is fixed or determinable, and collection of the subscription fee is probable.
Deferred revenue generally results from contractual billings for which revenue has not been recognized and consists of the unearned portion of license, maintenance, and services fees. Deferred revenue expected to be recognized as revenue more than one year subsequent to the balance sheet date is included in long-term liabilities in the consolidated balance sheets.
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Allowances for Doubtful Accounts and Sales Credit Memos
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. We establish this allowance using estimates that we make based on factors such as the composition of the accounts receivable aging, historical bad debts, changes in payment patterns, changes to customer creditworthiness and current economic trends. Historically, our actual losses have been consistent with the allowances recorded. However, if we used different estimates, or if the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, we would require additional provisions for doubtful accounts that would increase bad debt expense.
We also record an allowance for estimates of potential sales credit memos. This allowance is determined based on an analysis of historical credit memos issued and current economic trends, and is recorded as a reduction of revenue.
Goodwill and Intangible Asset Impairment
We had goodwill and net intangible assets of $253.4 million at November 30, 2014. 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. During the fourth quarter of fiscal year 2014, we changed the date of our annual impairment testing for goodwill from December 15 to October 31. This change did not result in the delay, acceleration or avoidance of an impairment charge. We believe this change in accounting principle is preferable because it better 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. The change to the goodwill testing date was applied prospectively, as retrospective application is impractical because we were unable to objectively select assumptions that would have been used in previous periods without the benefit of hindsight. We completed the required annual testing of goodwill for impairment as of both December 15, 2013 and October 31, 2014 and have determined that goodwill was not impaired at either date.
In performing our annual assessment, we may first perform a qualitative test 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.
We adopted Accounting Standards Update (ASU) No. 2011-08, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (ASU 2011-08) for our fiscal 2013 annual impairment test. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not (“MLTN”) that the fair value of a reporting unit is less than its carrying value. If it is concluded that it is MLTN that the fair value is less than carrying value, then it is necessary to perform the currently prescribed two-step goodwill impairment test. Alternatively, if it is concluded that is it MLTN that the fair value exceeds carrying value, the currently prescribed two-step goodwill impairment test is not required. At the time of our fiscal year 2013 annual test, all of the goodwill was attributable to our single operating segment. We performed our qualitative assessment and concluded that it was not MLTN that the fair value of our reporting unit was less than its carrying value.
During fiscal year 2014, we tested goodwill for impairment as of December 15, 2013, our previous annual testing date, and on October 31, 2014, our new annual testing date.
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At the time of our December 15, 2013 annual test, we operated as a single operating segment with one reporting unit and consequently we evaluated goodwill for impairment based on an evaluation of the fair value of the Company as a whole. We performed our qualitative assessment and concluded that it was not MLTN that the fair value of our operating segment was less than its carrying value.
During the fourth quarter of 2014, we began operating as three distinct business units: OpenEdge, Data Connectivity and Integration, and Application Development and Deployment, each with dedicated sales, product management and product marketing functions. As a result of these changes, we began segment reporting for our three business units beginning in the fourth fiscal quarter of 2014. During the fourth quarter of fiscal year 2014, we reassigned goodwill to the new reporting units based on the relative fair values of the reporting units. This resulted in goodwill of $212.2 million being assigned to our OpenEdge reporting unit, $19.0 million being assigned to our Data Connectivity and Integration reporting unit, and $1.5 million being assigned to our Application Development and Deployment reporting unit.
In connection with the reassignment of our goodwill to our new reporting units during the fourth quarter of fiscal year 2014, we performed goodwill impairment tests on both our old and new reporting units to ensure that no impairment existed prior to the reassignment of goodwill or resulted after the reassignment of goodwill. Prior to the reassignment of goodwill from our single operating segment with one reporting unit, we performed a qualitative assessment and concluded that it was not MLTN that the fair value of the reporting unit was less than its carrying value. After the reassignment of goodwill to our three reporting units, we compared the fair value of those reporting units to their carrying values under a Step 1 approach. The OpenEdge and Data Connectivity and Integration reporting units had fair values that significantly exceeded their carrying values, and as such, Step 2 of the impairment test was not required.
For the Application Development and Deployment reporting unit, the Step 1 test indicated that the fair value of this reporting unit was below its carrying value. We performed Step 2 of the impairment test which compared the implied fair value of the Application Development and Deployments reporting unit's goodwill to its carrying value. The implied fair value of goodwill is derived by performing a hypothetical purchase price allocation for the reporting unit as of the measurement date and allocating the reporting unit’s estimated fair value to its assets and liabilities. The residual amount from performing this allocation represents the implied fair value of goodwill. To the extent this amount is below the carrying value of goodwill, an impairment charge is recorded. As a result of completing Step 2, the Application Development and Deployment reporting unit's implied fair value of goodwill exceeded the carrying value of goodwill of $1.5 million, resulting in no impairment charge.
Income Tax Accounting
We have a net deferred tax asset of $12.0 million at November 30, 2014. 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, ongoing 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 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 anticipated 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-coupon U.S. Treasury securities for the period that is commensurate with the
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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
In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15). ASU 2014-15 provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The adoption of ASU 2014-15 is not expected to have a material impact on our financial position, results of operations or cash flows.
In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASU 2014-12). ASU 2014-12 brings consistency to the accounting for share-based payment awards that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards. This guidance is effective for all entities for reporting periods (including interim periods) beginning after December 15, 2015. Early adoption is permitted. In addition, all entities will have the option of applying the guidance either prospectively (i.e., only to awards granted or modified on or after the effective date of the ASU) or retrospectively. We are currently evaluating the effect that implementation of this update will have on our consolidated financial position and results of operations upon adoption.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new guidance is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016; early adoption is not permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. This update could impact the timing and amounts of revenue recognized. We are currently evaluating the effect that implementation of this update will have on our consolidated financial position and results of operations upon adoption.
In July 2013, the FASB issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11). ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating
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loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance is effective on a prospective basis for fiscal years and interim reporting periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on our financial position, results of operations or cash flows.
In March 2013, the FASB issued Accounting Standards Update No. 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (ASU 2013-05). ASU 2013-05 provides guidance on releasing cumulative translation adjustments when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or a business within a foreign entity. ASU 2013-05 is effective on a prospective basis for fiscal years and interim reporting periods within those years, beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU 2013-05 is not expected to have a material impact on our financial position, results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of risks, including changes in interest rates affecting the return on our investments and foreign currency fluctuations. We have established policies and procedures to manage our exposure to fluctuations in interest rates and foreign currency exchange rates.
Exposure to market rate risk for changes in interest rates relates to our investment portfolio. We have not used derivative financial instruments in our investment portfolio. We place our investments with high-quality issuers and have policies limiting, among other things, the amount of credit exposure to any one issuer. We seek to limit default risk by purchasing only investment-grade securities. Our investments have an average remaining maturity of less than two years or interest-rate resets of less than 60 days and are primarily fixed-rate instruments. In addition, we have classified the majority of our debt securities as available-for-sale. The available-for-sale classification reduces the consolidated statements of income exposure to interest rate risk if such investments are held until their maturity date because changes in fair value due to market changes in interest rates are recorded on the consolidated balance sheet in accumulated other comprehensive income. Based on a hypothetical 10% adverse movement in interest rates, the potential losses in future earnings, fair value of risk-sensitive instruments and cash flows are immaterial.
We use forward contracts that are not designated as hedging instruments to hedge economically the impact of the variability in exchange rates on accounts receivable denominated in certain foreign currencies. We do not enter into derivative instruments for speculative purposes. We generally do not hedge the net assets of our international subsidiaries. All forward contracts are recorded at fair value in other current assets on the consolidated balance sheets at the end of each reporting period and expire within 90 days. In fiscal year 2014, realized and unrealized losses of $1.5 million from our forward contracts were recognized in other income in the consolidated statement of income. These losses were substantially offset by realized and unrealized gains on the offsetting positions.
Foreign currency translation exposure from a 10% movement of currency exchange rates would have a material impact on our reported revenue and net income. Based on a hypothetical 10% adverse movement in all foreign currency exchange rates, our revenue would be adversely affected by approximately 5% and our net income would be adversely affected by approximately 13% (excluding any offsetting positive impact from our ongoing hedging programs), although the actual effects may differ materially from the hypothetical analysis.
The table below details outstanding foreign currency forward contracts at November 30, 2014 and 2013 where the notional amount is determined using contract exchange rates (in thousands):
November 30, 2014 | November 30, 2013 | ||||||||||||||
Notional Value | Fair Value | Notional Value | Fair Value | ||||||||||||
Forward contracts to sell U.S. dollars | $ | 21,738 | $ | (13 | ) | $ | 26,016 | $ | 79 | ||||||
Forward contracts to purchase U.S. dollars | 15,534 | (89 | ) | 22,483 | 92 | ||||||||||
Total | $ | 37,272 | |||||||||||||