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, 2016
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)
DELAWARE (State or other jurisdiction of incorporation or organization) | 04-2746201 (I.R.S. Employer Identification No.) | |
14 Oak Park
Bedford, Massachusetts 01730
(Address of Principal Executive Offices)
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, 2016 (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 $1,259,000,000.
As of January 23, 2017, there were 48,734,771 common shares outstanding.
Documents Incorporated By Reference
Portions of the definitive Proxy Statement in connection with the 2017 Annual Meeting of Shareholders are incorporated by reference into Part III.
PROGRESS SOFTWARE CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2016
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 leader in application development, empowering enterprises to build mission-critical business applications to succeed in an evolving business environment. With offerings spanning web, mobile and data for on-premise and cloud environments, we power businesses worldwide, promoting success one application at a time. Our solutions are used across a variety of industries.
Our products are generally sold as perpetual licenses, but certain products also use term licensing models and our cloud-based offerings use a subscription based model. More than half of our worldwide license revenue is realized through relationships with indirect channel partners, principally application partners and original equipment manufacturers (OEMs). Application partners are 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 2016 Highlights and Recent Developments
Leadership Changes
In October 2016, Yogesh Gupta became our President and Chief Executive Officer, replacing Philip Pead, who had been our President and Chief Executive Officer since December 2012. Mr. Pead remains a member of our Board of Directors. In September 2016, Kurt Abkemeier became our Chief Financial Officer, replacing Chris Perkins, who had been our Chief Financial Officer since February 2013.
New Strategic Plan
On January 16, 2017, we announced a new strategic plan highlighted by a new product strategy and a streamlined operating approach with a tighter focus on areas of strength to more efficiently drive revenue. The key tenets of the new strategic plan are as follows:
• | Streamlined Operating Approach. In fiscal year 2017, we have begun to adapt our organization and operating principles for our core products to focus primarily on customer and partner retention and success. For certain of our products, we are also strengthening our high volume, low touch e-commerce capabilities. |
• | New Product Strategy. As part of the new strategic plan, we are undertaking a new product strategy in which we will provide the platform and tools enterprises need to build next generation applications that drive their businesses known as “Cognitive Applications.” Our platform for Cognitive Applications will make it easy for developers to build these new applications and will include: |
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◦Our NativeScript offering, which allows developers to use JavaScript to build native applications across multiple platforms;
◦A mission-critical back-end-as-a-service platform that runs on any cloud, is secure, high-performing, and highly-scalable while supporting all modern user interfaces;
◦Automated and intuitive machine learning capabilities for accelerating the creation and delivery of Cognitive Applications;
◦Our data connectivity and integration capabilities; and
◦Our business logic and rules capabilities.
Our new product strategy replaces our prior strategy focused around our Digital Factory offering, which is a cloud-based solution combining primarily two of our products, Sitefinity and Telerik Platform. Although we are discontinuing our investment in our Digital Factory offering, Sitefinity remains a core product within our portfolio and Telerik Platform is a key part of our new product strategy.
• | Restructuring. With the adoption of our new product strategy, we are discontinuing our investment in our Digital Factory offering and re-aligning our resources consistent with our core operating approach. To that end, during the first quarter of fiscal year 2017, we began to implement restructuring efforts including the consolidation of facilities, implementation of a simplified organizational structure and a reduction of marketing and other external expenses. In addition, we began to reduce headcount by approximately 450 employees, totaling over 20% of our workforce. Initial headcount reductions commenced in the fiscal first quarter of 2017 and are expected to be substantially completed by the end of the fiscal second quarter of 2017, subject to local laws and consultation processes. After investments in our new product strategy, we expect to reduce net annual run-rate costs by approximately $20 million by the end of fiscal year 2017. |
Share Repurchase Authorization
In March 2016, our Board of Directors authorized a new $100.0 million share repurchase program, which increased the total authorization to $214.5 million. In fiscal year 2016, we repurchased and retired 3.1 million shares of common stock for $79.2 million under our Board of Directors authorized share repurchase program, leaving $135.3 million remaining under this program.
Dividend Declaration
On September 27, 2016, our Board of Directors approved the initiation of a quarterly cash dividend to our shareholders. The first quarterly dividend of $0.125 per share of common stock was paid on December 15, 2016 to shareholders of record as of the close of business on December 1, 2016. On January 11, 2017, our Board of Directors declared a quarterly dividend of $0.125 per share of common stock payable on March 15, 2017 to shareholders of record as of the close of business on March 1, 2017.
Our Business Segments
OpenEdge Business Segment
The OpenEdge business segment 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 segment is also focused on providing partners and direct end users with a clear path to develop and integrate cloud-based applications in the future. Our services organization 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 Segment include:
Progress OpenEdge
Progress OpenEdge is development software for building dynamic multi-language applications for secure deployment across any platform, any 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 Progress products.
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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 rules.
Data Connectivity and Integration Business Segment
The Data Connectivity and Integration Business Segment (DCI) is focused on the growth of our data assets, including the data integration components of our cloud offerings. Data is at the core of every application, and with the exponential growth in the number and volume of data sources, this business segment addresses the increasingly complex challenges that organizations have in accessing and integrating that data.
The solutions within the DCI Business Segment 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 capability to connect and integrate with other applications and data sources independently or with our cloud-based offerings.
Progress DataDirect Cloud
Progress DataDirect Cloud is a software-as-a-service (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 our other cloud-based offerings, it provides the capability to connect and integrate with other applications and data sources independently.
Application Development and Deployment Business Segment
The Application Development and Deployment (AppDev) business segment is focused on generating net new customers for our application development assets. Substantially all of the products within the AppDev segment were acquired in connection with our acquisition of Telerik, Inc. in December 2014. This business segment 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 us to rapidly meet the demands of developers who are seeking to increase their productivity and move toward the cloud.
The solutions within the AppDev Business Segment include:
Dev Tools
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 Dev Tools enables developers to focus on business logic and not infrastructure. Included in Dev Tools are Fiddler and Kendo UI.
NativeScript
NativeScript is an open-source application development platform that enables developers to use JavaScript to build cross-platform, native iOS and Android applications.
Dev Cloud
Dev Cloud is a cloud-based application design, deployment, hosting and testing suite featuring a hybrid application development environment, backend as a service, analytics and mobile testing.
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Telerik Platform
The Telerik Platform is a complete end-to-end application lifecycle solution that combines Dev Tools, Dev Cloud and ALM products into an integrated platform for mobile application development using any approach (web, hybrid and native).
Test Studio
Test Studio is an application lifecycle management suite for testing web, mobile and desktop applications that covers the process from idea to deployment.
Sitefinity
Sitefinity is a next-generation web content management and customer analytics platform for managing and optimizing digital experiences. Sitefinity combines superior end user experience with a high level of customization capabilities for developers.
Progress Rollbase
Progress Rollbase is application development software that allows rapid creation of 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.
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, 2016, we have four primary development offices in North America, two primary development offices in EMEA and one primary development office in India. We spent $88.6 million, $88.3 million, and $63.1 million in fiscal years 2016, 2015 and 2014, respectively, on product development, including capitalized software development costs.
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. We also 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 segment 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 certain of our products, including Dev Tools and the Telerik Platform, differ from our traditional sales and marketing efforts because the target markets are different. For these products, we have designed our marketing and sales model to be efficient for high volumes of lower-price transactions. Our marketing efforts 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 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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Our services offerings include: application modernization; data management, managed database services; performance enhancements and tuning; and analytics/business intelligence.
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 platform-as-a-service (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 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 segments: OpenEdge, Data Connectivity and Integration, and Application Development and Deployment and began segment reporting for these business segments beginning in the fourth fiscal quarter of 2014. For additional information on business segments as well as geographical financial information, see Note 16 to our Consolidated Financial Statements in Item 8 of this Form 10-K.
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Employees
As of November 30, 2016, we had 1,912 employees worldwide, including 578 in sales and marketing, 269 in customer support and services, 812 in product development and 253 in administration. On January 16, 2017, we announced that we will reduce headcount by approximately 450 employees, totaling over 20% of our workforce. Initial headcount reductions began in the fiscal first quarter of 2017 and are expected to be substantially completed by the end of the fiscal second quarter of 2017, subject to local laws and consultation processes.
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 Form 10-K.
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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; |
• | a high percentage of our revenue is generated in the third month of each fiscal quarter and any failure to receive, complete or process orders at the end of any quarter could cause us to fall short of our revenue targets; |
• | 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; |
• | changes in 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
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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 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 Latin America. The past five years have been characterized by weak global economic conditions, tightening of credit markets and instability in the financial markets. 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. Approximately 43% 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.
Risk Relating to the Referendum of the United Kingdom’s Membership of the European Union. The announcement of the Referendum of the United Kingdom’s (or the U.K.) Membership of the European Union (E.U.) (referred to as Brexit), advising for the exit of the United Kingdom from the European Union, resulted in significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business. As described elsewhere in this 10-K, we translate revenue denominated in foreign currency into U.S. dollars for our financial statements. During periods of a strengthening dollar, our reported international revenue is reduced because
foreign currencies translate into fewer U.S. dollars. The announcement of Brexit has created global economic uncertainty, which may cause our customers to closely monitor their costs and reduce their spending budget on our products and services.
The effects of Brexit will depend on any agreements the U.K. makes to retain access to E.U. markets either during a transitional period or more permanently. The measures could potentially disrupt the markets we serve and may cause us to lose customers, and employees. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate.
Any of these effects of Brexit, among others, could materially adversely affect our business, results of operations and financial condition.
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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 have adversely affected our results of operations and financial position. During recent years, the value of the U.S. dollar strengthened in comparison to certain foreign currencies, including in Europe, Brazil and Australia. As approximately one-third of our revenue is denominated in foreign currency, 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, India 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 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.
We announced a new strategic plan for the company that may be difficult to implement, may not be successful and could adversely impact our business and results of operations. On January 16, 2017, we announced a new strategic plan. Under the plan, we intend to provide the platform and tools enterprises need to build next generation applications that drive their businesses known as “Cognitive Applications.” Our Board of Directors has approved certain operational restructuring initiatives to reduce annual costs. Some or all of these actions may adversely affect our financial condition and operating results, and we may not be able to execute on the plan nor enhance shareholder value. The new strategic plan may also subject our business to additional risks, such as the following:
• | disruption of our business or distraction of our employees and management; |
• | difficulty recruiting, hiring, motivating and retaining talented and skilled personnel; |
• | increased stock price volatility and changes to our stock price which may be unrelated to our current results of operations; and |
• | uncertainty among our customers and prospective customers, and increased difficulty in closing sales with existing and prospective customers and delays in purchasing decisions. |
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 cloud-based technologies and service offerings 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; |
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• | 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 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 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.
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.
Privacy concerns and laws, evolving regulation of cloud computing, cross-border data transfer restrictions and other domestic or foreign regulations may limit the use and adoption of our products and solutions and adversely affect our business. Regulation related to the provision of services on the Internet is increasing, as federal, state and foreign governments continue to adopt new laws and regulations addressing data privacy and the collection, processing, storage and use of personal information. In some cases, foreign data privacy laws and regulations, such as the European Union’s Data Protection Directive, and the country-specific laws and regulations that implement that directive, also govern the processing of personal information. Further, laws are increasingly aimed at the use of personal information for marketing purposes, such as the European Union’s e-Privacy Directive, and the country-specific regulations that implement that directive. Such laws and regulations are subject to new and differing interpretations and may be inconsistent among jurisdictions. These and other requirements could reduce demand for our products and solutions or restrict our ability to store and process data or, in some cases, impact our ability to offer our products and solutions in certain locations or our customers' ability to deploy our solutions globally.
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For example, the European Court of Justice recently invalidated the U.S.-EU Safe Harbor framework that had been in place since 2000, which allowed companies to meet certain European legal requirements for the transfer of personal data from the European Economic Area to the United States. While other adequate legal mechanisms to lawfully transfer such data remain, the invalidation of the U.S.-EU Safe Harbor framework may result in different European data protection regulators applying differing standards for the transfer of personal data, which could result in increased regulation, cost of compliance and limitations on data transfer for us and our customers. The costs of compliance with and other burdens imposed by laws, regulations and standards may limit the use and adoption of our services, reduce overall demand for our services, lead to significant fines, penalties or liabilities for noncompliance, or slow the pace at which we close sales transactions, any of which could harm our business.
Furthermore, concerns regarding data privacy may cause our customers’ customers to resist providing the data necessary to allow our customers to use our products and solutions effectively. Even the perception that the privacy of personal information is not satisfactorily protected or does not meet regulatory requirements could inhibit sales of our products or solutions, and could limit adoption of our cloud-based solutions.
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 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
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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. In December 2014, we entered into a 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 facility matures in December 2019, at which time any amounts outstanding will be due and payable in full. 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 may limit 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. On January 16, 2017, we announced that we are undertaking a restructuring of our operations, which will include a consolidation of certain facilities. We are in the process of identifying those facilities to consolidate.
We believe that our facilities are adequate for our current needs and that suitable additional space will be available as needed.
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.
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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, 2016 | November 30, 2015 | ||||||||||||||
High | Low | High | Low | ||||||||||||
First quarter | $ | 27.11 | $ | 22.01 | $ | 27.79 | $ | 23.58 | |||||||
Second quarter | $ | 26.55 | $ | 22.57 | $ | 27.80 | $ | 25.32 | |||||||
Third quarter | $ | 29.80 | $ | 24.20 | $ | 30.57 | $ | 25.69 | |||||||
Fourth quarter | $ | 30.24 | $ | 25.55 | $ | 27.44 | $ | 21.94 | |||||||
On September 27, 2016, our Board of Directors approved the initiation of a quarterly cash dividend to Progress shareholders. The first quarterly dividend of $0.125 per share of common stock was paid on December 15, 2016 to shareholders of record as of the close of business on December 1, 2016. On January 11, 2017, our Board of Directors declared a quarterly dividend of $0.125 per share of common stock payable on March 15, 2017 to shareholders of record as of the close of business on March 1, 2017.
As of December 31, 2016, our common stock was held by approximately 182 shareholders of record.
In January 2014, our Board of Directors authorized a $100.0 million share repurchase program. In fiscal year 2014, we repurchased and retired 2.3 million shares of our common stock for $52.6 million. In fiscal year 2015, under the same authorization, we repurchased and retired 1.3 million shares for $32.9 million. In September 2015, our Board of Directors authorized a new $100.0 million share repurchase program, which increased the total authorization to $114.5 million.
In March 2016, our Board of Directors authorized a new $100.0 million share repurchase program, which increased the total authorization to $214.5 million. In fiscal year 2016, we repurchased and retired 3.1 million shares of our common stock for $79.2 million. As of November 30, 2016, there is $135.3 million remaining under this current authorization. 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.
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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, 2016, 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, 2011 in stock or index, including reinvestment of dividends.
November 30, | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||||
Progress Software Corporation | $ | 100.00 | $ | 98.72 | $ | 128.57 | $ | 127.93 | $ | 117.77 | $ | 145.16 | ||||||||||||
NASDAQ Composite | 100.00 | 114.88 | 154.38 | 180.41 | 194.96 | 203.17 | ||||||||||||||||||
NASDAQ Computer | 100.00 | 112.11 | 141.32 | 178.34 | 192.86 | 206.86 | ||||||||||||||||||
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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, | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Revenue | $ | 405,341 | $ | 377,554 | $ | 332,533 | $ | 333,996 | $ | 317,612 | ||||||||||
(Loss) income from operations | (29,709 | ) | 14,754 | 80,740 | 63,740 | 67,789 | ||||||||||||||
(Loss) income from continuing operations | (55,726 | ) | (8,801 | ) | 49,458 | 39,777 | 44,954 | |||||||||||||
Net (loss) income | (55,726 | ) | (8,801 | ) | 49,458 | 74,907 | 47,444 | |||||||||||||
Basic (loss) earnings per share from continuing operations | (1.13 | ) | (0.17 | ) | 0.97 | 0.73 | 0.71 | |||||||||||||
Diluted (loss) earnings per share from continuing operations | (1.13 | ) | (0.17 | ) | 0.96 | 0.72 | 0.71 | |||||||||||||
Cash dividends declared per common share | 0.125 | — | — | — | — | |||||||||||||||
Cash, cash equivalents and short-term investments | 249,754 | 241,279 | 283,268 | 231,440 | 355,217 | |||||||||||||||
Total assets | 754,827 | 877,123 | 702,756 | 682,187 | 884,977 | |||||||||||||||
Long-term debt, including current portion | 135,000 | 144,375 | — | — | — | |||||||||||||||
Shareholders’ equity | 406,629 | 522,464 | 543,245 | 513,654 | 638,399 | |||||||||||||||
Fiscal year 2016 amounts have been impacted by a $92 million impairment charge related to the goodwill of the Application Development and Deployment reporting unit. Refer to Note 6 to the Consolidated Financial Statements in Item 8 of this Form 10-K for additional details. Fiscal years 2016 and 2015 amounts have been impacted by the acquisition of Telerik AD. Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 7 to the Consolidated Financial Statements for additional details. We also entered into a credit agreement during fiscal year 2015 to partially fund our acquisition of Telerik AD. Refer to Note 8 to the Consolidated Financial Statements for additional details.
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).
Overview
We are a global leader in application development, empowering enterprises to build mission-critical business applications to succeed in an evolving business environment. With offerings spanning web, mobile and data for on-premise and cloud environments, we power businesses worldwide, promoting success one application at a time. Our solutions are used across a variety of industries. We operate as three distinct segments: OpenEdge, Data Connectivity and Integration, and Application Development and Deployment.
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At the beginning of fiscal year 2015, we acquired Telerik AD, a leading provider of application development tools. Telerik enables its 1.9 million strong developer community to create compelling user experiences across cloud, web, mobile and desktop applications. Through this acquisition, we provide comprehensive cloud and on-premise platform offerings that enable developers to rapidly create applications, driven by data for any web, desktop or mobile platform.
The revenue of Telerik is being recognized ratably over the maintenance period, which is generally one year, as vendor specific objective evidence (or VSOE) of fair value cannot be established for such maintenance. As a result of acquisition accounting, the acquired deferred revenue balance was significantly reduced to reflect its fair value as of the acquisition date. However, we still incurred the associated costs to fulfill the acquired deferred revenue, which are reflected in our consolidated statement of operations. As a result, during fiscal year 2015, our expenses as a percentage of total revenue were higher than in subsequent years until this acquired deferred revenue balance was recognized. The impact of this on fiscal year 2016 was minimal.
As of October 31, 2016, we tested goodwill for impairment for each of our reporting units. Beginning in late October 2016, with the appointment of Yogesh Gupta as our new Chief Executive Officer, our Board of Directors and executive management team undertook a comprehensive review of our strategy and operations, including our expectations for fiscal year 2017 results. Based on this review, we reduced our future growth expectations with respect to the product lines within our Application Development and Deployment reporting unit. As a result, the implied fair value of goodwill was substantially lower than the carrying value of goodwill for the reporting unit and we recorded a $92.0 million goodwill impairment charge related to the Application Development and Deployment reporting unit.
During fiscal year 2016, our results were adversely impacted by decreases in sales to OpenEdge direct enterprise customers. During the past three fiscal years, our results have benefited from several large license sales to OpenEdge direct enterprise customers. These large transactions are difficult to predict as they are subject to longer sales cycles and the timing of completion is often uncertain. If we fail to complete these large transactions or if completion is delayed, our results will be adversely impacted.
In March 2016, our Board of Directors authorized a new $100.0 million share repurchase program, which increased the total authorization to $214.5 million. In fiscal year 2016, we repurchased and retired 3.1 million shares of our common stock for $79.2 million. As of November 30, 2016, there is $135.3 million remaining under this current authorization. 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.
In September 2016, our Board of Directors approved the initiation of a quarterly cash dividend to Progress shareholders. The first quarterly dividend of $0.125 per share of common stock was paid on December 15, 2016 to shareholders of record as of the close of business on December 1, 2016.
On January 11, 2017, our Board of Directors declared a quarterly dividend of $0.125 per share of common stock payable on March 15, 2017 to shareholders of record as of the close of business on March 1, 2017.
We derive a significant portion of our revenue from international operations, which are primarily conducted in foreign currencies. As a result, changes in the value of these foreign currencies relative to the U.S. dollar have significantly impacted our results of operations and may impact our future results of operations. Beginning in the fourth quarter of 2014, the value of the U.S. dollar strengthened in comparison to certain foreign currencies, including in Europe, Brazil and Australia, and continued to strengthen during the first half of 2015. The U.S. dollar remained strong in comparison to foreign currencies in 2016. Since approximately one-third of our revenue is denominated in foreign currency, our revenue results have been negatively impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates.
On January 16, 2017, we announced a new strategic plan. Under the plan, we intend to provide the platform and tools enterprises need to build next generation applications that drive their businesses known as “Cognitive Applications.” Our Board of Directors has approved certain operational restructuring initiatives to reduce annual costs. Some or all of these actions may adversely affect our financial condition and operating results, and we may not be able to execute on the plan nor enhance shareholder value.
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, including our newly announced quarterly cash dividend to Progress shareholders, through at least the next twelve months.
Results of Operations
Fiscal Year 2016 Compared to Fiscal Year 2015
Revenue
Fiscal Year Ended | Percentage Change | ||||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | As Reported | Constant Currency | |||||||||
Revenue | $ | 405,341 | $ | 377,554 | 7 | % | 9 | % | |||||
Total revenue increased $27.8 million, or 7%, in fiscal year 2016 as compared to fiscal year 2015. Revenue would have increased by 9% if exchange rates had been constant in fiscal year 2016 as compared to exchange rates in fiscal year 2015. The increase in revenue is primarily due to the impact of the Telerik acquisition during the first quarter of fiscal year 2015. As a result of acquisition accounting, the acquired deferred revenue balance was significantly reduced to reflect its fair value as of the acquisition date. Therefore, the reduction of the acquisition date deferred revenue had a negative impact on revenue in fiscal year 2015. However, in fiscal year 2016 we recognized revenue related to the full value of Telerik deferred revenue that was generated during fiscal years 2015 and 2016. The increase in revenue in fiscal year 2016 was also the result of an increase in license and maintenance and services revenue as further described below. Changes in prices from fiscal year 2015 to 2016 did not have a significant impact on our revenue.
License Revenue
Fiscal Year Ended | Percentage Change | ||||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | As Reported | Constant Currency | |||||||||
License | $ | 134,863 | $ | 130,250 | 4 | % | 5 | % | |||||
As a percentage of total revenue | 33 | % | 34 | % | |||||||||
Software license revenue increased $4.6 million, or 4%, in fiscal year 2016 as compared to fiscal year 2015. Software license revenue would have increased by 5% if exchange rates had been constant in fiscal year 2016 as compared to exchange rates in effect in fiscal year 2015. The increase in license revenue is primarily due to the impact of the Telerik acquisition during the first quarter of fiscal year 2015 as described above. The increase in license revenue was also due to an increase in Data Connectivity and Integration license sales, partially offset by decreases in sales to OpenEdge customers and in Corticon license sales.
Maintenance and Services Revenue
Fiscal Year Ended | Percentage Change | ||||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | As Reported | Constant Currency | |||||||||
Maintenance | $ | 238,377 | $ | 217,718 | 9 | % | 11 | % | |||||
As a percentage of total revenue | 59 | % | 58 | % | |||||||||
Professional services | $ | 32,101 | $ | 29,586 | 9 | % | 9 | % | |||||
As a percentage of total revenue | 8 | % | 8 | % | |||||||||
Total maintenance and services revenue | $ | 270,478 | $ | 247,304 | 9 | % | 11 | % | |||||
As a percentage of total revenue | 67 | % | 66 | % | |||||||||
Maintenance and services revenue increased $23.2 million in fiscal year 2016 as compared to fiscal year 2015. Both maintenance revenue and professional services revenue increased 9% compared to the prior year. The increase in maintenance
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revenue is primarily due to the impact of the Telerik acquisition during the first quarter of fiscal year 2015 as described above. The increase in services revenue in fiscal year 2016 was also due to higher software-as-a-service (SaaS) revenue generated by our Application Development and Deployment segment compared to the prior year.
Revenue by Region
Fiscal Year Ended | Percentage Change | ||||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | As Reported | Constant Currency | |||||||||
North America | $ | 229,203 | $ | 207,566 | 10 | % | 10 | % | |||||
As a percentage of total revenue | 57 | % | 55 | % | |||||||||
EMEA | $ | 130,818 | $ | 124,171 | 5 | % | 9 | % | |||||
As a percentage of total revenue | 32 | % | 33 | % | |||||||||
Latin America | $ | 21,156 | $ | 17,594 | 20 | % | 27 | % | |||||
As a percentage of total revenue | 5 | % | 5 | % | |||||||||
Asia Pacific | $ | 24,164 | $ | 28,223 | (14 | )% | (14 | )% | |||||
As a percentage of total revenue | 6 | % | 7 | % | |||||||||
Total revenue generated in North America increased $21.6 million, and total revenue generated outside North America increased $6.2 million, in fiscal year 2016 as compared to fiscal year 2015. The increases in North America and EMEA were primarily due to the impact of the Telerik acquisition during the first quarter of fiscal year 2015 as described above. The increase in Latin America is primarily due to a multi-million dollar OpenEdge direct license transaction that was completed in the fourth quarter of fiscal 2016. The decrease in Asia Pacific is due to several large OpenEdge license transactions that occurred in the third fiscal quarter of 2015.
Total revenue generated in markets outside North America represented 43% of total revenue in fiscal year 2016 compared to 45% of total revenue in fiscal year 2015. Total revenue generated in markets outside North America would have represented 44% of total revenue if exchange rates had been constant in fiscal year 2016 as compared to the exchange rates in effect in fiscal year 2015.
Revenue by Segment
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | Percentage Change | |||||||
OpenEdge segment | $ | 276,267 | $ | 295,934 | (7 | )% | ||||
Data Connectivity and Integration segment | 48,009 | 37,926 | 27 | % | ||||||
Application Development and Deployment segment | 81,065 | 43,694 | 86 | % | ||||||
Total revenue | $ | 405,341 | $ | 377,554 | 7 | % | ||||
Revenue in the OpenEdge segment decreased $19.7 million, or 7%, in fiscal year 2016 as compared to fiscal year 2015, primarily due to lower license sales to both our ISV partners and direct enterprise users and a large multi-year distribution agreement in 2015. Revenue in the OpenEdge segment would have decreased by 5% if exchange rates had been constant in fiscal year 2016 as compared to exchange rates in fiscal year 2015. Data Connectivity and Integration revenue increased $10.1 million, or 27%, in fiscal year 2016 as compared to fiscal year 2015, primarily in North America, due to higher license revenue resulting from renewals and expansions of distribution agreements with large OEM customers. Application Development and Deployment revenue increased $37.4 million, or 86%, year over year as a result of the impact of the Telerik acquisition during the first quarter of fiscal year 2015 as described above.
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Cost of Software Licenses
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | Percentage Change | |||||||
Cost of software licenses | $ | 5,456 | $ | 5,979 | (9 | )% | ||||
As a percentage of software license revenue | 4 | % | 5 | % | ||||||
As a percentage of total revenue | 1 | % | 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, or 9%, in fiscal year 2016 as compared to fiscal year 2015, and decreased as a percentage of software license revenue from 5% to 4%. 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, 2016 | November 30, 2015 | Percentage Change | |||||||
Cost of maintenance and services | $ | 44,760 | $ | 40,933 | 9 | % | ||||
As a percentage of maintenance and services revenue | 17 | % | 17 | % | ||||||
As a percentage of total revenue | 11 | % | 11 | % | ||||||
Cost of maintenance and services consists primarily of costs of providing customer support, consulting and education. Cost of maintenance and services increased $3.8 million, or 9%, in fiscal year 2016 as compared to fiscal year 2015, and remained flat as a percentage of maintenance and services revenue year over year. The increase in cost of maintenance and services is primarily due to higher compensation-related costs as a result of an increase in headcount as compared to the prior fiscal year.
Amortization of Acquired Intangibles
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | Percentage Change | |||||||
Amortization of acquired intangibles | $ | 15,496 | $ | 16,830 | (8 | )% | ||||
As a percentage of total revenue | 4 | % | 4 | % | ||||||
Amortization of acquired intangibles included in costs of revenue primarily represents the amortization of the value assigned to technology-related intangible assets obtained in business combinations. Amortization of acquired intangibles decreased $1.3 million, or 8%, in fiscal year 2016 as compared to fiscal year 2015. The decrease was due to the completion of amortization of certain intangible assets acquired in prior years.
Gross Profit
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | Percentage Change | |||||||
Gross profit | $ | 339,629 | $ | 313,812 | 8 | % | ||||
As a percentage of total revenue | 84 | % | 83 | % | ||||||
Our gross profit increased $25.8 million, or 8%, in fiscal year 2016 as compared to fiscal year 2015, and our gross profit as a percentage of total revenue increased from 83% to 84% year over year. The dollar increase is primarily related to the increase of maintenance revenue. As a result of acquisition accounting, the deferred revenue balance acquired from Telerik in the first quarter of fiscal year 2015 was significantly reduced to reflect its fair value as of the acquisition date, which impacted the
23
amount of revenue recognized in fiscal year 2015. However, we were still incurring the associated costs to fulfill the acquired deferred revenue, which were reflected in our consolidated statement of operations in fiscal year 2015. As a result, our expenses as a percentage of total revenue were higher in fiscal year 2015.
Sales and Marketing
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | Percentage Change | |||||||
Sales and marketing | $ | 121,501 | $ | 124,867 | (3 | )% | ||||
As a percentage of total revenue | 30 | % | 33 | % | ||||||
Sales and marketing expenses decreased $3.4 million, or 3%, in fiscal year 2016 as compared to fiscal year 2015, and decreased as a percentage of total revenue from 33% to 30%. The decrease in sales expenses was primarily due to lower outside services costs, largely due to our decision to end the outsourcing of our renewal maintenance business.
Product Development
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | Percentage Change | |||||||
Product development costs | $ | 88,587 | $ | 88,250 | — | % | ||||
Capitalized product development costs | — | (1,326 | ) | (100 | )% | |||||
Total product development expense | $ | 88,587 | $ | 86,924 | 2 | % | ||||
As a percentage of total revenue | 22 | % | 23 | % | ||||||
Product development expenses increased $1.7 million, or 2%, in fiscal year 2016 as compared to fiscal year 2015, and decreased as a percentage of revenue from 23% to 22%. The increase in product development expense during the period is primarily due to higher compensation-related costs, most significantly in stock-based compensation costs, as a result of an increase in headcount as compared to the prior fiscal year. This increase was offset by the elimination of capitalized product development costs primarily as a result of our decision to replace our internally developed cloud-based mobile application development technology with technology acquired in connection with the acquisition of Telerik.
General and Administrative
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | Percentage Change | |||||||
General and administrative | $ | 46,532 | $ | 57,294 | (19 | )% | ||||
As a percentage of total revenue | 11 | % | 15 | % | ||||||
General and administrative expenses include the costs of our finance, human resources, legal, information systems and administrative departments. General and administrative expenses decreased $10.8 million, or 19%, in fiscal year 2016 as compared to fiscal year 2015, and decreased as a percentage of revenue from 15% to 11%. The decrease was primarily due to decreased costs for external services in fiscal year 2016.
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Impairment of Goodwill
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | Percentage Change | |||||||
Impairment of goodwill | $ | 92,000 | $ | — | 100 | % | ||||
As a percentage of total revenue | 23 | % | — | % | ||||||
As of October 31, 2016, we tested goodwill for impairment for each of our reporting units under the two-step quantitative goodwill impairment test. Based on the first step of the goodwill impairment test, we concluded that our OpenEdge and Data Connectivity and Integration reporting units had fair values which significantly exceeded their carrying values as of the annual impairment date. With the reduced future growth expectations described in the Overview section above, our Application Development and Deployment reporting unit did not pass the first step of the impairment test. As such, we allocated the fair value of the Application Development and Deployment reporting unit to all of its assets and liabilities. Based on our analysis, the implied fair value of goodwill was substantially lower than the carrying value of goodwill for the reporting unit. As a result, we recorded a $92.0 million goodwill impairment charge related to the Application Development and Deployment reporting unit. See Note 6 to the Consolidated Financial Statements in Item 8 of this Form 10-K for additional details.
Amortization of Acquired Intangibles
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | Percentage Change | |||||||
Amortization of acquired intangibles | $ | 12,735 | $ | 12,745 | — | % | ||||
As a percentage of total revenue | 3 | % | 3 | % | ||||||
Amortization of acquired intangibles included in operating expenses primarily represents the amortization of value assigned to intangible assets obtained in business combinations other than assets identified as purchased technology. Amortization of acquired intangibles remained flat in fiscal year 2016 as compared to fiscal year 2015.
Impairment of Intangible Assets
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | Percentage Change | |||||||
Impairment of intangible assets | $ | 5,051 | $ | — | 100 | % | ||||
As a percentage of total revenue | 1 | % | — | % | ||||||
During fiscal year 2016, we evaluated the ongoing value of the intangible assets associated with the technology obtained in connection with the acquisition of Modulus. As a result of our decision to abandon the related assets due to a change in our expected ability to use the technology internally, we determined that the intangible assets were fully impaired. As a result, we incurred an impairment charge of $5.1 million during fiscal year 2016.
Restructuring Expenses
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | Percentage Change | |||||||
Restructuring expenses | $ | 1,692 | $ | 12,989 | (87 | )% | ||||
As a percentage of total revenue | — | % | 3 | % | ||||||
We incurred restructuring expenses of $1.7 million in fiscal year 2016 as compared to $13.0 million in fiscal year 2015. Restructuring expenses recorded in fiscal year 2016 relate to the restructuring activities occurring in fiscal years 2016, 2015, 2014, 2013 and 2012. See Note 13 to the Consolidated Financial Statements in Item 8 of this Form 10-K for additional details,
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including types of expenses incurred and the timing of future expenses and cash payments. See also the Liquidity and Capital Resources section of this Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Acquisition-Related Expenses
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | Percentage Change | |||||||
Acquisition-related expenses | $ | 1,240 | $ | 4,239 | (71 | )% | ||||
As a percentage of total revenue | — | % | 1 | % | ||||||
Acquisition-related costs are expensed as incurred and include those costs incurred as a result of a business combination. These costs consist of professional service fees, including third-party legal and valuation-related fees, as well as retention fees, and earn-out payments treated as compensation expense. Acquisition-related expenses in fiscal year 2016 were minimal. Acquisition-related expenses in fiscal year 2015 resulted primarily from expenses related to the Telerik acquisition completed in the first quarter of fiscal year 2015. See Note 7 to the consolidated financial statements for additional details.
(Loss) Income from Operations
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | Percentage Change | |||||||
(Loss) income from operations | $ | (29,709 | ) | $ | 14,754 | (301 | )% | |||
As a percentage of total revenue | (7 | )% | 4 | % | ||||||
Income from operations decreased $44.5 million, or 301%, in fiscal year 2016 as compared to fiscal year 2015. As discussed above, the decrease was primarily driven by the impairment of goodwill during fiscal year 2016 and partially offset by higher revenue during fiscal year 2016 compared to fiscal year 2015, as well as by lower expenses period over period.
(Loss) Income from Operations by Segment
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | Percentage Change | |||||||
OpenEdge segment | $ | 203,329 | $ | 218,849 | (7 | )% | ||||
Data Connectivity and Integration segment | 35,249 | 24,107 | 46 | % | ||||||
Application Development and Deployment segment | 40,885 | 4,308 | 849 | % | ||||||
Other unallocated expenses | (309,172 | ) | (232,510 | ) | (33 | )% | ||||
Total (loss) income from operations | $ | (29,709 | ) | $ | 14,754 | (301 | )% | |||
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 and impairment 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, 2016 | November 30, 2015 | Percentage Change | |||||||
Interest expense | $ | (4,178 | ) | $ | (3,788 | ) | 10 | % | ||
Interest income and other, net | 839 | 1,446 | (42 | )% | ||||||
Foreign currency loss | (2,232 | ) | (58 | ) | (3,748 | )% | ||||
Total other expense, net | $ | (5,571 | ) | $ | (2,400 | ) | (132 | )% | ||
As a percentage of total revenue | (1 | )% | (1 | )% | ||||||
Total other expense, net decreased $3.2 million in fiscal year 2016 as compared to fiscal year 2015 primarily due to the foreign currency loss of $2.2 million in fiscal year 2016 compared to the foreign currency loss of $0.1 million in fiscal year 2015. The change in foreign currency gains/losses is a result of movements in exchange rates and the impact during fiscal year 2016 on our intercompany receivables and payables denominated in currencies other than local currencies.
Provision for Income Taxes
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | Percentage Change | |||||||
Provision for income taxes | $ | 20,446 | $ | 21,155 | (3 | )% | ||||
As a percentage of total revenue | 5 | % | 6 | % | ||||||
Our effective income tax rate was (58)% in fiscal year 2016 and 171% in fiscal year 2015. In fiscal year 2016 our rate was impacted unfavorably as a result of the goodwill impairment expense that is not tax deductible, partially offset by the release of the valuation allowance on state research and development tax credits described below and the out-of-period benefit described below. The decrease in the effective rate is primarily due to the jurisdictional mix of profits as a result of the acquisition of Telerik, where substantial losses were incurred in Bulgaria in fiscal year 2015 and tax effected at a 10% statutory rate and other jurisdictions’ earnings, primarily in the United States, were taxed at higher rates. The loss in Bulgaria in fiscal 2015 was primarily due to amortization expense and other purchase accounting adjustments related to the Telerik acquisition.
In addition, during the preparation of our condensed consolidated financial statements for the three months ended May 31, 2016, we identified an error in our prior year income tax provision whereby income tax expense was overstated for the year ended November 30, 2015 by $2.7 million related to our tax treatment of an intercompany gain. We determined that the error is not material to the prior year financial statements. We also concluded that recording an out-of-period correction would not be material and have therefore corrected this error by recording an out-of-period $2.7 million tax benefit in our interim financial statements for the period ended May 31, 2016.
In addition, in the fourth quarter of fiscal year 2016 we recorded a tax benefit of $2.7 million related to the release of the valuation allowance on state research and development credits.
Net (Loss) Income
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | Percentage Change | |||||||
Net (loss) income | $ | (55,726 | ) | $ | (8,801 | ) | (533 | )% | ||
As a percentage of total revenue | (14 | )% | (2 | )% | ||||||
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Fiscal 2015 Compared to Fiscal 2014
Revenue
Fiscal Year Ended | Percentage Change | ||||||||||||
(In thousands) | November 30, 2015 | November 30, 2014 | As Reported | Constant Currency | |||||||||
Revenue | $ | 377,554 | $ | 332,533 | 14 | % | 21 | % | |||||
Total revenue increased $45.0 million, or 14%, in fiscal year 2015 as compared to fiscal year 2014. Revenue would have increased by 21% if exchange rates had been constant in fiscal year 2015 as compared to exchange rates in fiscal year 2014. The increase in revenue in fiscal year 2015 was a result of an increase in both license and maintenance and services revenue, primarily due to the impact of our acquisitions of Telerik in December 2014 and BravePoint during the fourth fiscal quarter of 2014. Changes in prices from fiscal year 2014 to fiscal year 2015 did not have a significant impact on our revenue.
License Revenue
Fiscal Year Ended | Percentage Change | ||||||||||||
(In thousands) | November 30, 2015 | November 30, 2014 | As Reported | Constant Currency | |||||||||
License | $ | 130,250 | $ | 117,801 | 11 | % | 18 | % | |||||
As a percentage of total revenue | 34 | % | 35 | % | |||||||||
Software license revenue increased $12.4 million, or 11%, in fiscal year 2015 as compared to fiscal year 2014. Software license revenue would have increased by 18% if exchange rates had been constant in fiscal year 2015 as compared to exchange rates in effect in fiscal year 2014. The increase in license revenue was primarily in the North America and Asia Pacific regions as a result of incremental license revenue from the acquisition of Telerik. In addition to the incremental license revenue from Telerik, both OpenEdge and the Data Connectivity and Integration business segment showed strong growth in fiscal year 2015 on a constant currency basis, both to partners, as well as to direct end users.
Maintenance and Services Revenue
Fiscal Year Ended | Percentage Change | ||||||||||||
(In thousands) | November 30, 2015 | November 30, 2014 | As Reported | Constant Currency | |||||||||
Maintenance | $ | 217,718 | $ | 202,496 | 8 | % | 15 | % | |||||
As a percentage of total revenue | 58 | % | 61 | % | |||||||||
Professional services | $ | 29,586 | $ | 12,236 | 142 | % | 146 | % | |||||
As a percentage of total revenue | 8 | % | 4 | % | |||||||||
Total maintenance and services revenue | $ | 247,304 | $ | 214,732 | 15 | % | 23 | % | |||||
As a percentage of total revenue | 66 | % | 65 | % | |||||||||
Maintenance and services revenue increased $32.6 million in fiscal year 2015 as compared to fiscal year 2014. Maintenance revenue increased 8% and professional services revenue increased 142% compared to the prior year. The increase in maintenance revenue was primarily in the North America region, due in large part to the incremental revenue associated with the Telerik acquisition, as well as our strong OpenEdge maintenance renewal rate of over 90%. The increase in professional services revenue was primarily due to the impact of the BravePoint acquisition.
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Revenue by Region
Fiscal Year Ended | Percentage Change | ||||||||||||
(In thousands) | November 30, 2015 | November 30, 2014 | As Reported | Constant Currency | |||||||||
North America | $ | 207,566 | $ | 150,716 | 38 | % | 38 | % | |||||
As a percentage of total revenue | 55 | % | 45 | % | |||||||||
EMEA | $ | 124,171 | $ | 131,335 | (5 | )% | 7 | % | |||||
As a percentage of total revenue | 33 | % | 40 | % | |||||||||
Latin America | $ | 17,594 | $ | 24,917 | (29 | )% | (8 | )% | |||||
As a percentage of total revenue | 5 | % | 7 | % | |||||||||
Asia Pacific | $ | 28,223 | $ | 25,565 | 10 | % | 22 | % | |||||
As a percentage of total revenue | 7 | % | 8 | % | |||||||||
Total revenue generated in North America increased $56.9 million, and total revenue generated outside North America decreased $11.8 million, in fiscal year 2015 as compared to fiscal year 2014. The increase in North America was primarily due to the impact of the Telerik and BravePoint acquisitions. In addition to the incremental revenue from Telerik and BravePoint, the increase in North America was due to strong OpenEdge license sales both to our partners and direct end users, growth in Data Connectivity and Integration license sales to our OEM channel, and strong maintenance renewals.
The decreases in EMEA and Latin America of 5% and 29%, respectively, were primarily due to the impact of the stronger U.S. dollar. If exchange rates had been constant in fiscal year 2015 as compared to exchange rates in effect in fiscal year 2014, revenue generated in EMEA would have increased 7% year over year, while revenue generated in Latin America would have decreased by 8%. The 10% increase in Asia Pacific was primarily due to the impact of the Telerik acquisition and revenue generated in the Asia Pacific region would have increased by 22% if exchange rates had been constant in fiscal year 2015 as compared to exchange rates in effect in fiscal year 2014.
Total revenue generated in markets outside North America represented 45% of total revenue in fiscal year 2015 compared to 55% of total revenue in fiscal year 2014. Total revenue generated in markets outside North America would have represented 48% of total revenue if exchange rates had been constant in fiscal year 2015 as compared to the exchange rates in effect in fiscal year 2014.
Revenue by Segment
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2015 | November 30, 2014 | Percentage Change | |||||||
OpenEdge segment | $ | 295,934 | $ | 296,721 | — | % | ||||
Data Connectivity and Integration segment | 37,926 | 34,772 | 9 | % | ||||||
Application Development and Deployment segment | 43,694 | 1,040 | 4,101 | % | ||||||
Total revenue | $ | 377,554 | $ | 332,533 | 14 | % | ||||
Revenue in the OpenEdge segment decreased $0.8 million in fiscal year 2015 as compared to fiscal year 2014, due to a decrease in maintenance revenue primarily in the EMEA region as a result of the impact of the stronger U.S. dollar, partially offset by incremental services revenues as a result of the BravePoint acquisition. Revenue in the OpenEdge segment would have increased by 8% if exchange rates had been constant in fiscal year 2015 as compared to exchange rates in effect in fiscal year 2014. Data Connectivity and Integration revenue increased $3.2 million, or 9%, in fiscal year 2015 as compared to fiscal year 2014. Application Development revenue increased $42.7 million year over year as a result of the impact of the Telerik acquisition.
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Cost of Software Licenses
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2015 | November 30, 2014 | Percentage Change | |||||||
Cost of software licenses | $ | 5,979 | $ | 6,396 | (7 | )% | ||||
As a percentage of software license revenue | 5 | % | 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 decreased $0.4 million, or 7%, in fiscal year 2015 as compared to fiscal year 2014, and remained flat as a percentage of software license revenue. 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, 2015 | November 30, 2014 | Percentage Change | |||||||
Cost of maintenance and services | $ | 40,933 | $ | 24,864 | 65 | % | ||||
As a percentage of maintenance and services revenue | 17 | % | 12 | % | ||||||
As a percentage of total revenue | 11 | % | 7 | % | ||||||
Cost of maintenance and services consists primarily of costs of providing customer support, consulting and education. Cost of maintenance and services increased $16.1 million, or 65%, in fiscal year 2015 as compared to fiscal year 2014, and increased as a percentage of maintenance and services revenue from 12% to 17%. The increase in cost of maintenance and services is primarily due to the impact of the Telerik and BravePoint acquisitions. With respect to the acquisition of Telerik, as a result of acquisition accounting, the acquired deferred revenue balance was significantly reduced to reflect its fair value as of the acquisition date. However, we are still incurring the associated costs to fulfill the acquired deferred revenue, which primarily relate to cost of maintenance and services. As a result, our expenses as a percentage of total revenue are higher than we expect they will be in future periods once this acquired deferred revenue balance is recognized.
Amortization of Acquired Intangibles
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2015 | November 30, 2014 | Percentage Change | |||||||
Amortization of acquired intangibles | $ | 16,830 | $ | 2,999 | 461 | % | ||||
As a percentage of total revenue | 4 | % | 1 | % | ||||||
Amortization of acquired intangibles included in costs of revenue primarily represents the amortization of the value assigned to technology-related intangible assets obtained in business combinations. Amortization of acquired intangibles increased $13.8 million, or 461%, in fiscal year 2015 as compared to fiscal year 2014. The increase was due to amortization of intangible assets acquired in connection with the Modulus, BravePoint and Telerik acquisitions, partially offset by decreases due to the completion of amortization of certain intangible assets acquired in prior years.
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Gross Profit
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2015 | November 30, 2014 | Percentage Change | |||||||
Gross profit | $ | 313,812 | $ | 298,274 | 5 | % | ||||
As a percentage of total revenue | 83 | % | 90 | % | ||||||
Our gross profit increased $15.5 million, or 5%, in fiscal year 2015 as compared to fiscal year 2014, and our gross profit as a percentage of total revenue decreased from 90% to 83% year over year. The increase is primarily due to an increase in revenue as described above, partially offset by the increase of cost of maintenance and services, mainly due to the impact of the BravePoint acquisition, and the increase of amortization of acquired intangible assets. In addition, as a result of acquisition accounting, the deferred revenue balance acquired from Telerik was significantly reduced to reflect its fair value as of the acquisition date. However, we are still incurring the associated costs to fulfill the acquired deferred revenue, which are reflected in our consolidated statement of operations. As a result, our expenses as a percentage of total revenue are higher than we expect they will be in future periods once this acquired deferred revenue balance is recognized.
Sales and Marketing
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2015 | November 30, 2014 | Percentage Change | |||||||
Sales and marketing | $ | 124,867 | $ | 101,496 | 23 | % | ||||
As a percentage of total revenue | 33 | % | 31 | % | ||||||
Sales and marketing expenses increased $23.4 million, or 23%, in fiscal year 2015 as compared to fiscal year 2014, and increased as a percentage of total revenue from 31% to 33%. The increase in sales expenses was primarily due to higher compensation-related costs in the sales function as a result of headcount increases primarily due to the impact of the Telerik and BravePoint acquisitions, as well as higher commissions expense due to the higher level of license revenue compared to fiscal year 2014. Marketing expenses were higher primarily due to the impact of the Telerik acquisition.
Product Development
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2015 | November 30, 2014 | Percentage Change | |||||||
Product development costs | $ | 88,250 | $ | 63,099 | 40 | % | ||||
Capitalized product development costs | (1,326 | ) | (4,134 | ) | (68 | )% | ||||
Total product development expense | $ | 86,924 | $ | 58,965 | 47 | % | ||||
As a percentage of total revenue | 23 | % | 18 | % | ||||||
Product development expenses increased $28.0 million, or 47%, in fiscal year 2015 as compared to fiscal year 2014, and increased as a percentage of revenue from 18% to 23%. The increase was primarily due to higher compensation-related costs in the product development function as a result of headcount increases due to the impact of the Telerik acquisition. Capitalized product development costs decreased by 68% as compared to the prior fiscal year as a result of our decision to replace our internally developed cloud-based mobile application development technology with technology acquired as part of Telerik.
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General and Administrative
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2015 | November 30, 2014 | Percentage Change | |||||||
General and administrative | $ | 57,294 | $ | 48,292 | 19 | % | ||||
As a percentage of total revenue | 15 | % | 15 | % | ||||||
General and administrative expenses include the costs of our finance, human resources, legal, information systems and administrative departments. General and administrative expenses increased $9.0 million, or 19%, in fiscal year 2015 as compared to fiscal year 2014, and remained flat as a percentage of revenue. The increase was primarily due to higher compensation-related costs in the general and administrative function as a result of headcount increases due to the impact of the Telerik and BravePoint acquisitions.
Amortization of Acquired Intangibles
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2015 | November 30, 2014 | Percentage Change | |||||||
Amortization of acquired intangibles | $ | 12,745 | $ | 653 | 1,852 | % | ||||
As a percentage of total revenue | 3 | % | — | % | ||||||
Amortization of acquired intangibles included in operating expenses primarily represents the amortization of value assigned to intangible assets obtained in business combinations other than assets identified as purchased technology. Amortization of acquired intangibles increased $12.1 million in fiscal year 2015 as compared to fiscal year 2014. The increase was due to amortization of intangible assets acquired with the Modulus, BravePoint and Telerik acquisitions, partially offset by decreases due to the completion of amortization of certain intangible assets acquired in prior years.
Restructuring Expenses
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2015 | November 30, 2014 | Percentage Change | |||||||
Restructuring expenses | $ | 12,989 | $ | 2,266 | 473 | % | ||||
As a percentage of total revenue | 3 | % | 1 | % | ||||||
We incurred restructuring expenses of $13.0 million in fiscal year 2015 as compared to $2.3 million in fiscal year 2014. Restructuring expenses recorded in fiscal year 2015 relate to the restructuring activities occurring in fiscal years 2015, 2014, 2013 and 2012. See Note 13 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 the Liquidity and Capital Resources section of this Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Acquisition-Related Expenses
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2015 | November 30, 2014 | Percentage Change | |||||||
Acquisition-related expenses | $ | 4,239 | $ | 5,862 | (28 | )% | ||||
As a percentage of total revenue | 1 | % | 2 | % | ||||||
Acquisition-related costs are expensed as incurred and include those costs incurred as a result of a business combination. These costs consist of professional service fees, including third-party legal and valuation-related fees, as well as retention fees, and earn-out payments treated as compensation expense. Acquisition-related expenses decreased in fiscal year 2015 compared to fiscal year 2014 due to the completion of earn-out provisions related to the Rollbase acquisition as of the end of the second
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quarter of fiscal year 2015, as well as the reversal of contingent consideration provisions related to the Modulus acquisition, which was credited to the consolidated statement of operations during fiscal year 2015. The decrease was partially offset by retention bonus costs incurred in fiscal year 2015 related to the BravePoint and Telerik acquisitions. See Note 7 to the Consolidated Financial Statements for additional details.
Income from Operations
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2015 | November 30, 2014 | Percentage Change | |||||||
Income from operations | $ | 14,754 | $ | 80,740 | (82 | )% | ||||
As a percentage of total revenue | 4 | % | 24 | % | ||||||
Income from operations decreased $66.0 million, or 82%, in fiscal year 2015 as compared to fiscal year 2014. As discussed above, the decrease was primarily the result of higher expenses resulting from acquisitions, partially offset by higher revenue during fiscal year 2015 compared to fiscal year 2014. With respect to the acquisition of Telerik, as a result of acquisition accounting, the acquired deferred revenue balance was significantly reduced to reflect its fair value as of the acquisition date. However, we are still incurring the associated costs to fulfill the acquired deferred revenue. As a result, our expenses as a percentage of total revenue are higher than we expect they will be in future periods once this acquired deferred revenue balance is recognized.
Income from Operations by Segment
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2015 | November 30, 2014 | Percentage Change | |||||||
OpenEdge segment | $ | 218,849 | $ | 225,910 | (3 | )% | ||||
Data Connectivity and Integration segment | 24,107 | 22,464 | 7 | % | ||||||
Application Development and Deployment segment | 4,308 | (8,314 | ) | 152 | % | |||||
Other unallocated expenses | (232,510 | ) | (159,320 | ) | (46 | )% | ||||
Total income from operations | $ | 14,754 | $ | 80,740 | (82 | )% | ||||
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.
Other (Expense) Income
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2015 | November 30, 2014 | Percentage Change | |||||||
Interest expense | $ | (3,788 | ) | $ | (572 | ) | 562 | % | ||
Interest income and other, net | $ | 1,446 | $ | 83 | 1,642 | % | ||||
Foreign currency loss | (58 | ) | (2,447 | ) | 98 | % | ||||
Total other (expense) income, net | $ | (2,400 | ) | $ | (2,936 | ) | 18 | % | ||
As a percentage of total revenue | (1 | )% | (1 | )% | ||||||
Total other expense decreased $0.5 million, or 18%, in fiscal year 2015 as compared to fiscal year 2014. The decrease is primarily due to the realized loss incurred of $2.6 million resulting from the sale of our auction rate securities, which is included in interest income and other, net for fiscal year 2014, partially offset by the increase in interest expense due to the new credit facility. The change in foreign currency losses is a result of movements in exchange rates and the impact in fiscal year 2015 on our intercompany receivables and payables denominated in currencies other than local currencies.
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Provision for Income Taxes
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2015 | November 30, 2014 | Percentage Change | |||||||
Provision for income taxes | $ | 21,155 | $ | 28,346 | (25 | )% | ||||
As a percentage of total revenue | 6 | % | 9 | % | ||||||
Our effective tax rate was 171% in fiscal year 2015 and 36% in fiscal year 2014. The increase in the effective rate is primarily due to the jurisdictional mix of profits as a result of the acquisition of Telerik, where substantial losses are being incurred in Bulgaria with a tax benefit at the 10% statutory rate and other jurisdictions' earnings, primarily in the United States, are being taxed at higher rates. The loss in Bulgaria is primarily due to amortization expense and other acquisition accounting adjustments related to the Telerik acquisition. Deferred tax liabilities have been established in acquisition accounting for the tax effect of the Telerik amortization expense and other purchase accounting adjustments.
Net (Loss) Income
Fiscal Year Ended | ||||||||||
(In thousands) | November 30, 2015 | November 30, 2014 | Percentage Change | |||||||
Net (loss) income | $ | (8,801 | ) | $ | 49,458 | (118 | )% | |||
As a percentage of total revenue | (2 | )% | 15 | % | ||||||
Liquidity and Capital Resources
Cash, Cash Equivalents and Short-Term Investments
(In thousands) | November 30, 2016 | November 30, 2015 | |||||
Cash and cash equivalents | $ | 207,036 | $ | 212,379 | |||
Short-term investments | 42,718 | 28,900 | |||||
Total cash, cash equivalents and short-term investments | $ | 249,754 | $ | 241,279 | |||
The increase in cash, cash equivalents and short-term investments of $8.5 million since the end of fiscal year 2015 was primarily due to cash inflows from operations of $102.8 million, partially offset by repurchases of common stock of $79.2 million, payments of debt principal in the amount of $9.4 million, and purchases of property and equipment of $5.8 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 $26.8 million and $49.9 million at November 30, 2016 and 2015, respectively. This amount is considered to be permanently reinvested; as such, it is not available to fund our domestic operations. If we were to repatriate these funds, they would be subject to taxation in the U.S., but would be offset by foreign tax credits. We do not believe this has a material adverse impact on our liquidity.
Share Repurchase Program
In January 2014, our Board of Directors authorized a $100.0 million share repurchase program. In fiscal year 2014, we repurchased and retired 2.3 million shares of our common stock for $52.6 million. In fiscal year 2015, under the same authorization, we repurchased and retired 1.3 million shares for $32.9 million. In September 2015, our Board of Directors authorized a new $100.0 million share repurchase program, which increased the total authorization to $114.5 million.
In March 2016, our Board of Directors authorized a new $100.0 million share repurchase program. In fiscal year 2016, we repurchased and retired 3.1 million shares of our common stock for $79.2 million. As of November 30, 2016, there is $135.3 million remaining under this current authorization. The timing and amount of any shares repurchased will be determined by
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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.
Dividends
On September 27, 2016, our Board of Directors approved the initiation of a quarterly cash dividend to Progress shareholders.
The first quarterly dividend of $0.125 per share of common stock was paid on December 15, 2016 to shareholders of record
as of the close of business on December 1, 2016.
On January 11, 2017, our Board of Directors declared a quarterly dividend of $0.125 per share of common stock payable on March 15, 2017 to shareholders of record as of the close of business on March 1, 2017.
Restructuring Activities
During the fourth quarter of fiscal year 2016, our management approved, committed to and initiated plans to make strategic changes to our organization as a result of the appointment of our new Chief Executive Officer during the period. In connection with the new organizational structure, we eliminated the positions of Chief Product Officer and Chief Revenue Officer.
As part of this fourth quarter restructuring, for the fiscal year ended November 30, 2016, we incurred expenses of $1.5 million. The expenses are recorded as restructuring expenses in the consolidated statements of operations. Cash disbursements for expenses incurred to date under this restructuring are expected to be made through the fourth quarter of fiscal year 2017. As a result, the total amount of the restructuring reserve of $1.4 million is included in other accrued liabilities on the consolidated balance sheet at November 30, 2016.
In January 2017, we announced certain operational restructuring initiatives intended to significantly reduce annual costs. To execute these operational restructuring initiatives, we expect to reduce our global workforce by approximately 450 positions, totaling over 20% of our global workforce. These workforce reductions commenced in the first fiscal quarter of 2017 and are expected to be completed by the end of the second fiscal quarter of 2017, depending upon local legal requirements. These workforce reductions will occur in substantially all functional units and across all geographies in which we operate. We also expect to consolidate offices in various locations.
As a result of these workforce reductions and office consolidations, we expect to incur in the aggregate a pre-tax charge in the range of approximately $17 million to $20 million. The estimated aggregate charge consists of approximately $16 million to $17 million relating to our global workforce reduction, consisting primarily of severance and post-employment benefits, and approximately $1 million to $3 million relating to our office consolidations. We expect to record these charges primarily in the 2017 first and second fiscal quarters. Substantially all of these charges are expected to result in cash expenditures.
Credit Facility
Our credit agreement provides for a $150 million secured term loan and a $150 million secured revolving credit facility, which may be made available in U.S. Dollars and certain other currencies. The revolving credit facility may be increased by up to an additional $75 million if the existing or additional lenders are willing to make such increased commitments. We borrowed the $150 million term loan included in our credit agreement 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.
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 outstanding balance of the $150 million term loan as of November 30, 2016 was $135.0 million, with $15.0 million due in the next 12 months. The term loan requires repayment of principal at the end of each fiscal quarter, beginning with the fiscal quarter ended February 28, 2015. The first eight payments were in the principal amount of $1.9 million each, the following eight payments are in the principal amount of $3.8 million each, the following three payments are in the principal amount of $5.6 million each, and the last payment is of the remaining principal amount. The term loan may be prepaid before maturity in whole or in part at our option without penalty or premium. As of November 30, 2016, the carrying value of the term loan approximates the fair value, based on Level 2 inputs (observable market prices in less than active markets), as the interest rate is variable over the selected interest period and is similar to current rates at which we can borrow funds. The average interest rate of the credit facility during the fiscal year ended November 30, 2016 was 2.22% and the interest rate as of November 30, 2016 was 2.31%.
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Revolving loans may be borrowed, repaid and reborrowed until December 2, 2019, at which time all amounts outstanding must be repaid. As of November 30, 2016, there were no amounts outstanding under the revolving line and $0.5 million of letters of credit.
The credit facility contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, grant liens, make investments, make acquisitions, incur indebtedness, merge or consolidate, dispose of assets, pay dividends or make distributions, repurchase stock, change the nature of the business, enter into certain transactions with affiliates and enter into burdensome agreements, in each case subject to customary exceptions for a credit facility of this size and type. We are also required to maintain compliance with a consolidated fixed charge coverage ratio, a consolidated total leverage ratio and a consolidated senior secured leverage ratio. We are in compliance with these covenants as of November 30, 2016.
Cash Flows from Operating Activities
Fiscal Year Ended | |||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | November 30, 2014 | ||||||||
Net (loss) income | $ | (55,726 | ) | $ | (8,801 | ) | $ | 49,458 | |||
Non-cash reconciling items included in net (loss) income | 159,675 | 66,438 | 57,621 | ||||||||
Changes in operating assets and liabilities | (1,104 | ) | 46,903 | 615 | |||||||
Net cash flows from operating activities | $ | 102,845 | $ | 104,540 | $ | 107,694 | |||||
Cash generated from operations in fiscal year 2016 decreased by approximately $1.7 million, or 2%, as compared to fiscal year 2015. The decrease in cash generated from operations was primarily due to the year over year difference in changes in operating assets and liabilities, partially offset by higher operating income in fiscal year 2016 when excluding the impact of non-cash reconciling items included in net losses in both years. The significant non-cash reconciling items included in net loss in fiscal year 2016 include a $92 million impairment charge related to the goodwill of the Application Development and Deployment reporting unit (see Note 6 to the Consolidated Financial Statements in Item 8 of this Form 10-K for further information on the impairment charge). The significant changes in operating assets and liabilities in fiscal year 2015 as compared to fiscal year 2016 were primarily driven by an increase in total deferred revenue resulting from the acquisition of Telerik at the beginning of fiscal year 2015, as discussed below. Also, net tax payments made in fiscal year 2016 were $22.0 million, compared to $17.0 million in fiscal year 2015. In addition, our gross accounts receivable as of November 30, 2016 decreased by $1.8 million from the end of fiscal year 2015. Days sales outstanding (DSO) in accounts receivable was 50 days at the end of fiscal year 2016, compared to 52 days at the end of fiscal year 2015 and 63 days at the end of fiscal year 2014.
The decrease in cash generated from operations in fiscal year 2015 as compared to fiscal year 2014 was primarily due to lower income from operations during fiscal year 2015 as compared to fiscal year 2014 as a result of incremental costs resulting from the Telerik and BravePoint acquisitions, partially offset by changes in operating assets and liabilities mainly driven by the $37.8 million increase in our total deferred revenue from the end of fiscal year 2014 due to the acquisition of Telerik.
Cash Flows from Investing Activities
Fiscal Year Ended | |||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | November 30, 2014 | ||||||||
Net investment activity | $ | (15,216 | ) | $ | (9,552 | ) | $ | 37,784 | |||
Purchases of property and equipment | (5,786 | ) | (7,184 | ) | (7,985 | ) | |||||
Capitalized software costs | — | (1,661 | ) | (3,816 | ) | ||||||
Payments for acquisitions, net of cash acquired | — | (246,275 | ) | (24,493 | ) | ||||||
Proceeds from divestitures | — | 4,500 | 3,300 | ||||||||
Other investing activities | — | (36 | ) | 346 | |||||||
Net cash flows (used in) from investing activities | $ | (21,002 | ) | $ | (260,208 | ) | $ | 5,136 | |||
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
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quarter of fiscal year 2014, as well as the timing of acquisitions and divestitures. In addition, we spent $5.8 million on property and equipment and capitalized software costs in fiscal year 2016 as compared to $8.8 million in the fiscal year 2015 and $11.8 million in fiscal year 2014. Most significantly, however, we did not complete any acquisitions during fiscal year 2016, whereas we acquired Telerik during the first quarter of fiscal year 2015 for a net cash amount of $246.3 million, which was funded through a combination of existing cash resources and a $150 million term loan discussed below in Cash Flows from Financing Activities, and we acquired Modulus and BravePoint during the second and fourth quarters of fiscal year 2014, respectively, for a net cash amount of $24.5 million.
Cash Flows from Financing Activities
Fiscal Year Ended | |||||||||||
(In thousands) | November 30, 2016 | November 30, 2015 | November 30, 2014 | ||||||||
Proceeds from stock-based compensation plans | $ | 9,918 | $ | 13,069 | $ | 16,488 | |||||
Repurchases of common stock | (79,188 | ) | (32,868 | ) | (52,604 | ) | |||||
Proceeds from the issuance of debt, net of payments of principle and debt issuance costs | (9,375 | ) | 142,588 | — | |||||||
Other financing activities | (3,548 | ) | (4,489 | ) | (6,116 | ) | |||||
Net cash flows from financing activities | $ | (82,193 | ) | $ | 118,300 | $ | (42,232 | ) | |||
During fiscal year 2016, we received $9.9 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan, as compared to $13.1 million in fiscal year 2015 and $16.5 million is fiscal year 2014. In addition, in fiscal year 2016, we repurchased $79.2 million of our common stock, compared to repurchases of $32.9 million and $52.6 million, net of unsettled trades, in fiscal years 2015 and 2014, respectively. Most significantly, during fiscal year 2015, we received net proceeds of $142.6 million from the issuance of debt, whereas we made principal payments on this debt in the amount of $9.4 million during fiscal year 2016.
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 are deemed permanently reinvested. Our foreseeable cash needs include our planned capital expenditures, debt repayments, quarterly cash dividends, share repurchases, lease commitments, restructuring obligations and other long-term obligations.
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Revenue Backlog
(In thousands) | November 30, 2016 | November 30, 2015 | |||||
Deferred revenue, primarily related to unexpired maintenance and support contracts | $ | 137,761 | $ | 134,071 | |||
Multi-year licensing arrangements (1) | 26,368 | 19,862 | |||||
Total revenue backlog | $ | 164,129 | $ | 153,933 | |||
(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 $25.2 million and $17.7 million of the multi-year licensing arrangements as of November 30, 2016 and November 30, 2015, respectively, relate to OEM arrangements in our Data Connectivity and Integration business segment, while the remaining amount relates to arrangements in our OpenEdge business segment. |
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. 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, 2016 (in thousands):
Payments Due by Period | |||||||||||||||||||
Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | |||||||||||||||
Long-term debt: | |||||||||||||||||||
Principal payments | $ | 135,000 | $ | 15,000 | $ | 31,875 | $ | 88,125 | $ | — | |||||||||
Interest payments (1) | 7,881 | 2,992 | 4,878 | 11 | — | ||||||||||||||
Operating leases | 17,574 | 5,475 | 7,335 | 3,873 | 891 | ||||||||||||||
Purchase obligations (2) | 1,335 | 1,081 | 254 | — | — | ||||||||||||||
Unrecognized tax benefits (3) | — | — | — | — | — | ||||||||||||||
Total | $ | 161,790 | $ | 24,548 | $ | 44,342 | $ | 92,009 | $ | 891 | |||||||||
(1) | Interest on the long-term debt is due and payable monthly and is estimated using the effective interest rate as of November 30, 2016 as the interest rate is variable. See Note 8 to the Consolidated Financial Statements appearing in Item 8 of this Form 10-K for additional information. |
(2) | Represents the fixed or minimum amounts due under purchase obligations for support service agreements. |
(3) | Our other noncurrent liabilities in the consolidated balance sheet include unrecognized tax benefits and related interest and penalties. As of November 30, 2016, we had unrecognized tax benefits of $3.8 million and an additional $0.3 million for interest and penalties classified as noncurrent liabilities. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities; therefore, such amounts are not included in the above contractual obligation table. See Note 14 to the Consolidated Financial Statements appearing in Item 8 of this Form 10-K for additional information. |
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Critical Accounting Policies
Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with GAAP. We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. However, actual results may differ from these estimates.
We have identified the following critical accounting policies that require the use of significant judgments and estimates in the preparation of our consolidated financial statements. This listing is not a comprehensive list of all of our accounting policies. For further information regarding the application of these and other accounting policies, see Note 1 to 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.
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 also offer products via a SaaS model, which is a subscription based 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.
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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.
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.
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 $358.9 million at November 30, 2016. 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. We believe this change in accounting principle was preferable because it better aligned the timing of the annual goodwill impairment testing with our planning and budgeting process, which is a key component of the tests, and alleviates administrative burden during our year-end reporting period.
In performing our annual assessment, we may first perform a qualitative test to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value and if necessary, perform a quantitative test. To conduct the quantitative impairment test of goodwill, we compare the fair value of a reporting unit to its carrying value. If the reporting unit’s carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value. We estimate the fair values of our reporting units using discounted cash flow models or other valuation models, such as comparative transactions and market multiples. We must make assumptions about future cash flows, future operating plans, discount rates, comparable companies, market multiples, purchase price premiums and other factors in those models. Different assumptions and judgment determinations could yield different conclusions that would result in an impairment charge to income in the period that such change or determination was made.
When we evaluate potential impairments outside of our annual measurement date, judgment is required in determining whether an event has occurred that may impair the value of goodwill or intangible assets. Factors that could indicate that an impairment may exist include significant underperformance relative to plan or long-term projections, significant changes in business
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strategy, significant negative industry or economic trends or a significant decline in our stock price for a sustained period of time.
The determination of reporting units also requires management judgment. We consider whether a reporting unit exists within a reportable segment based on the availability of discrete financial information that is regularly reviewed by segment management. Our three reporting units were OpenEdge, Data Connectivity and Integration, and Application Development and Deployment as of November 30, 2016.
During fiscal year 2016, we tested goodwill for impairment for each of our reporting units as of October 31, 2016. Our OpenEdge and Data Connectivity and Integration reporting units had fair values which significantly exceeded their carrying values as of the annual impairment date. Our Application Development and Deployment reporting unit (which includes Telerik) did not pass the first step of the impairment test. As a result, we recorded a $92.0 million goodwill impairment charge related to the Application Development and Deployment reporting unit. As of November 30, 2016, the Application Development and Deployment reporting unit had $47.0 million of goodwill remaining.
In performing the impairment analysis as of the fourth quarter of fiscal year 2016, we applied a weighting to the discounted cash flow method under the income approach (50%) and the guideline public company method (40%) and guideline transaction method (10%) under the market approach to estimate the fair value of our OpenEdge, Data Connectivity and Integration, and Application Development and Deployment reporting units. The discount rate used in the analysis was 9.8%, 12.0%, and 13.8% for the OpenEdge, Data Connectivity and Integration, and Application Development and Deployment reporting units, respectively.
We recorded no goodwill impairment losses in fiscal years 2015 or 2014.
Income Tax Accounting
We have a net deferred tax asset of $2.7 million at November 30, 2016. We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. We consider scheduled reversals of temporary differences, projected future taxable income, tax planning strategies and other matters in assessing the need for and the amount of a valuation allowance. If we were to change our assumptions or otherwise determine that we were unable to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period that such change or determination was made.
Management judgment is also required in evaluating whether a tax position taken or expected to be taken in a tax return, based on the weight of available evidence, indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. Management judgment is also required in measuring the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. If management made different estimates or judgments, material differences in the amount accrued for uncertain tax positions would occur.
Stock-Based Compensation
We recognize stock-based compensation based on the fair value of stock-based awards, less the present value of expected dividends, measured at the date of grant. Stock-based compensation is recognized over the requisite service period, which is generally the vesting period of the award, and is adjusted each period for 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 expected option term at the time of grant. The expected dividend yield is based on our historical behavior and future expectations of dividend declarations.
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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 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). ASU 2016-15 is intended to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows and to eliminate the diversity in practice related to such classifications. The guidance in ASU 2016-15 is required for annual reporting periods beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the effect that implementation of this update will have upon adoption on our consolidated statement of cash flows.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 is intended to simplify various aspects of the accounting for employee share-based payment transactions, including accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance in ASU 2016-09 is required for annual reporting periods beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the effect that implementation of this update will have upon adoption on our consolidated financial position and results of operations.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (ASU 2016-02), which requires lessees to record most leases on their balance sheets, recognizing a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The guidance in ASU 2016-02 is required for annual reporting periods beginning after December 15, 2018, with early adoption permitted. We currently expect that most of our operating lease commitments will be subject to the update and recognized as operating lease liabilities and right-of-use assets upon adoption. However, we are currently evaluating the effect that implementation of this update will have upon adoption on our consolidated financial position and results of operations.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). ASU 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The guidance in ASU 2015-03 is required for annual reporting periods beginning after December 15, 2015, including interim periods within the reporting period. We estimate that the impact upon adoption on our consolidated balance sheets will be a reclassification of up to $1.1 million from other assets to long-term debt as of December 1, 2016.
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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. In July 2015, the FASB voted to defer the effective date of this ASU by one year for reporting periods beginning after December 15, 2017, with early adoption permitted as of the original effective date. As a result, the new effective date for the Company will be December 1, 2018. This update could impact the timing and amounts of revenue recognized. Management is currently assessing the impact the adoption of this ASU will have on the Company’s consolidated financial statements.
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 our debt securities as available-for-sale. The available-for-sale classification reduces the consolidated statements of operations 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 generally use forward contracts that are not designated as hedging instruments to hedge economically the impact of the variability in exchange rates on intercompany accounts receivable and loans receivable denominated in certain foreign currencies. We generally do not hedge the net assets of our international subsidiaries. All forward contracts are recorded at fair value in other current assets or other long-term liabilities on the consolidated balance sheets at the end of each reporting period and expire from 30 days to 366 days. In fiscal year 2016, realized and unrealized losses of $4.0 million from our forward contracts were recognized in foreign currency loss, net in the consolidated statements of operations. These losses were substantially offset by realized and unrealized losses and 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 3%, or $12 million, and our net income would be adversely affected by approximately 1%, or $1 million (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, 2016 and 2015 where the notional amount is determined using contract exchange rates (in thousands):
November 30, 2016 | November 30, 2015 | ||||||||||||||
Notional Value | Fair Value | Notional Value | Fair Value | ||||||||||||
Forward contracts to sell U.S. dollars | $ | 74,690 | $ | (6,597 | ) | $ | 76,748 | $ | (4,026 | ) | |||||
Forward contracts to purchase U.S. dollars | 1,673 | (19 | ) | 2,077 | 5 | ||||||||||
Total | $ | 76,363 | $ | (6,616 | ) | $ | 78,825 | $ | (4,021 | ) | |||||
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Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Progress Software Corporation
Bedford, Massachusetts
We have audited the accompanying consolidated balance sheets of Progress Software Corporation and subsidiaries (the "Company") as of November 30, 2016 and 2015, and the related consolidated statements of operations, comprehensive (loss) income, shareholders' equity, and cash flows for each of the three years in the period ended November 30, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Progress Software Corporation and subsidiaries as of November 30, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended November 30, 2016, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of November 30, 2016, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 30, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
January 30, 2017
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PROGRESS SOFTWARE CORPORATION
Consolidated Balance Sheets
(In thousands, except share data) | November 30, 2016 | November 30, 2015 | |||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 207,036 | $ | 212,379 | |||
Short-term investments | 42,718 | 28,900 | |||||
Total cash, cash equivalents and short-term investments | 249,754 | 241,279 | |||||
Accounts receivable (less allowances of $1,143 in 2016 and $2,193 in 2015) | 65,678 | 66,459 | |||||
Other current assets | 20,621 | 15,671 | |||||
Total current assets | 336,053 | 323,409 | |||||
Property and equipment, net | 50,105 | 54,226 | |||||
Intangible assets, net | 80,827 | 114,113 | |||||
Goodwill | 278,067 | 369,985 | |||||
Deferred tax assets | 6,601 | 10,971 | |||||
Other assets | 3,174 | 4,419 | |||||
Total assets | $ | 754,827 | $ | 877,123 | |||
Liabilities and shareholders’ equity | |||||||
Current liabilities: | |||||||
Current portion of long-term debt | 15,000 | 9,375 | |||||
Accounts payable | 12,991 | 11,188 | |||||
Accrued compensation and related taxes | 26,212 | 29,720 | |||||
Dividends payable to shareholders | 6,067 | — | |||||
Income taxes payable | 1,509 | 2,941 | |||||
Other accrued liabilities | 12,999 | 21,465 | |||||
Short-term deferred revenue | 128,960 | 125,227 | |||||
Total current liabilities | 203,738 | 199,916 | |||||
Long-term debt | 120,000 | 135,000 | |||||
Long-term deferred revenue | 8,801 | 8,844 | |||||
Deferred tax liabilities | 3,901 | 7,112 | |||||
Other noncurrent liabilities | 11,758 | 3,787 | |||||
Commitments and contingencies (Note 9) | |||||||
Shareholders’ equity: | |||||||
Preferred stock, $.01 par value; authorized, 1,000,000 shares; issued, none | — | — | |||||
Common stock, $.01 par value; authorized, 200,000,000 shares; issued and outstanding, 48,536,516 in 2016 and 50,579,539 in 2015 | 485 | 506 | |||||
Additional paid-in capital | 239,011 | 227,424 | |||||
Retained earnings | 195,694 | 319,162 | |||||
Accumulated other comprehensive loss | (28,561 | ) | (24,628 | ) | |||
Total shareholders’ equity | 406,629 | 522,464 | |||||
Total liabilities and shareholders’ equity | $ | 754,827 | $ | 877,123 | |||
See notes to consolidated financial statements.
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PROGRESS SOFTWARE CORPORATION
Consolidated Statements of Operations
Fiscal Year Ended | |||||||||||
(In thousands, except per share data) | November 30, 2016 | November 30, 2015 | November 30, 2014 | ||||||||
Revenue: | |||||||||||
Software licenses | $ | 134,863 | $ | 130, | |||||||