ASPEN TECHNOLOGY You should read the following discussion in conjunction with our unaudited consolidated financial statements and related notes thereto contained in this report. In addition to historical information, this discussion contains forward-looking statements that involve risks and uncertainties. You should read "Item 1A. Risk Factors" of Part II for a discussion of important factors that could cause our actual results to differ materially from our expectations. Our fiscal year ends onJune 30th , and references in this Quarterly Report to a specific fiscal year are to the twelve months endedJune 30th of such year (for example, "fiscal 2020" refers to the year ending onJune 30, 2020 ). Business Overview We are a leading global supplier of asset optimization solutions that optimize asset design, operations and maintenance in complex, industrial environments. We combine decades of process modeling and operations expertise with big data machine-learning and analytics. Our purpose-built software solutions improve the competitiveness and profitability of our customers by increasing throughput, energy efficiency, and production, reducing unplanned downtime, enhancing capital efficiency, and decreasing working capital requirements over the entire asset lifecycle to support operational excellence. Our software incorporates our proprietary mathematical and empirical models of manufacturing and planning processes and reflects the deep domain expertise we have amassed from focusing on solutions for the process and other capital-intensive industries for over 35 years. We have developed our applications to design and optimize processes across three principal business areas: engineering, manufacturing and supply chain, and asset performance management. We are a recognized market and technology leader in providing process optimization and asset performance management software solutions for each of these business areas. We have established sustainable competitive advantages based on the following strengths: •Innovative products that can enhance our customers' profitability and productivity; •Long-term customer relationships; •Large installed base of users of our software; and •Long-term license contracts. We have approximately 2,300 customers globally. Our customers consist of companies engaged in the process and other capital-intensive industries such as energy, chemicals, engineering and construction, as well as pharmaceuticals, transportation, power, metals and mining, pulp and paper, and consumer packaged goods. Business Segments We have two operating and reportable segments, which are consistent with our reporting units: i) subscription and software and ii) services and other. The subscription and software segment is engaged in the licensing of process optimization and asset performance management software solutions and associated support services, and includes our license and maintenance revenue. The services and other segment includes professional services and training, and includes our services and other revenue. Key Components of Operations Revenue We generate revenue primarily from the following sources: License Revenue. We sell our software products to end users, primarily under fixed-term licenses, through a subscription offering which we refer to as our aspenONE licensing model. The aspenONE licensing model includes software maintenance and support, known as our Premier Plus SMS offering, for the entire term. Our aspenONE products are organized into three suites: 1) engineering; 2) manufacturing and supply chain; and 3) asset performance management. The aspenONE licensing model provides customers with access to all of the products within the aspenONE suite(s) they license. Customers can change or alternate the use of multiple products in a licensed suite through the use of exchangeable units of measurement, called tokens, licensed in quantities determined by the customer. This licensing system enables customers to use products as needed and to experiment with different products to best solve whatever critical business challenges they face. Customers can increase their usage of our software by purchasing additional tokens as business needs evolve. 28
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We also license our software through point product arrangements with our Premier
Plus SMS offering included for the contract term.
Maintenance Revenue. We provide customers technical support, access to software
fixes and updates and the right to any new unspecified future software products
and updates that may be introduced into the licensed aspenONE software suite.
Our technical support services are provided from our customer support centers
throughout the world, as well as via email and through our support website.
Services and Other Revenue. We provide training and professional services to our
customers. Our professional services are focused on implementing our technology
in order to improve customers' plant performance and gain better operational
data. Customers who use our professional services typically engage us to provide
those services over periods of up to 24 months. We charge customers for
professional services on a time-and-materials or fixed-price basis. We provide
training services to our customers, including on-site, Internet-based and
customized training.
Cost of Revenue
Cost of License. Our cost of license revenue consists of (i) royalties,
(ii) amortization of capitalized software and intangibles, and
(iii) distribution fees.
Cost of Maintenance. Our cost of maintenance revenue consists primarily of
personnel-related costs of providing Premier Plus SMS bundled with our aspenONE
licensing and point product arrangements.
Cost of Services and Other. Our cost of services and other revenue consists
primarily of personnel-related and external consultant costs associated with
providing customers professional services and training.
Operating Expenses
Selling and Marketing Expenses. Selling expenses consist primarily of the
personnel and travel expenses related to the effort expended to license our
products and services to current and potential customers, as well as for overall
management of customer relationships. Marketing expenses include expenses needed
to promote our company and our products and to conduct market research to help
us better understand our customers and their business needs.
Research and Development Expenses. Research and development expenses consist
primarily of personnel expenses related to the creation of new software
products, enhancements and engineering changes to existing products.
General and Administrative Expenses. General and administrative expenses include
the costs of corporate and support functions, such as executive leadership and
administration groups, finance, legal, human resources and corporate
communications, and other costs, such as outside professional and consultant
fees, amortization of intangibles, and provision for bad debts.
Other Income and Expenses
Interest Income. Interest income is recorded for financing components under
Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with
Customers ("Topic 606"). When a contract includes a significant financing
component, we generally receive the majority of the customer consideration after
the recognition of a substantial portion of the arrangement fee as license
revenue. As a result, we decrease the amount of revenue recognized and increase
interest income by a corresponding amount. Interest income also includes the
accretion of interest on investments in short-term money market instruments.
Interest (Expense). Interest (expense) is primarily related to our Amended and
Restated Credit Agreement.
Other (Expense) Income, Net. Other (expense) income, net is comprised primarily
of foreign currency exchange gains (losses) generated from the settlement and
remeasurement of transactions denominated in currencies other than the
functional currency of our operating units.
Provision for Income Taxes. Provision for income taxes is comprised of domestic
and foreign taxes. We record interest and penalties related to income tax
matters as a component of income tax expense. Our effective income tax rate may
fluctuate between fiscal years and from quarter to quarter due to items arising
from discrete events, such as tax benefits from the disposition of employee
equity awards, settlements of tax audits and assessments and tax law changes.
Our effective income tax rate is also impacted by, and may fluctuate in any
given period because of, the composition of income in foreign jurisdictions
where tax rates differ.
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Table of Contents Key Business Metrics Background
We utilize key business measures to track and assess the performance of our business. We have identified the following set of appropriate business metrics in the context of our evolving business:
• Annual spend • Total contract value • Bookings
We also use the following non-GAAP business metrics in addition to GAAP measures to track our business performance:
• Free cash flow • Non-GAAP operating income
We make these measures available to investors and none of these metrics should be considered as an alternative to any measure of financial performance calculated in accordance with GAAP.
Annual Spend
Annual spend is an estimate of the annualized value of our portfolio of term license arrangements, as of a specific date. Management believes that this measure is a useful metric to investors as it provides insight into the growth component of license bookings during a fiscal period. Annual spend is calculated by summing the most recent annual invoice value of each of our active term license contracts. Annual spend also includes the annualized value of standalone SMS agreements purchased in conjunction with term license agreements. Comparing annual spend for different dates can provide insight into the growth and retention rates of our business, and since annual spend represents the estimated annualized billings associated with our active term license agreements, it provides insight into the future value of subscription and software revenue. Annual spend increases as a result of new term license agreements with new or existing customers, renewals or modifications of existing term license agreements that result in higher license fees due to price escalation or an increase in the number of tokens (units of software usage) or products licensed, and escalation of annual payments in our active term license contracts. Annual spend is adversely affected by term license and standalone SMS agreements that are renewed at a lower entitlement level or not renewed and, to a lesser extent, by customer contracts that are terminated during the contract term due to the customer's business ceasing operations.
We estimate that annual spend grew by approximately 3.0% during the second
quarter of fiscal 2020, from
Total Contract Value
Total Contract Value ("TCV") is the aggregate value of all payments received or
to be received under all active term license agreements, including maintenance
and escalation. TCV was $2.6 billion as of June 30, 2019 . TCV is an annual
metric and will be included in our Annual Report on Form 10-K for the fiscal
year ended June 30, 2020 .
Bookings
Bookings is the total value of customer term license contracts signed in the
current period, less the value of such contracts signed in the current period
where the initial licenses are not yet deemed delivered, plus term license
contracts signed in a previous period for which the initial licenses are deemed
delivered in the current period
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Bookings decreased from$154.8 million during the three months endedDecember 31, 2018 to$112.3 million during the three months endedDecember 31, 2019 related to the timing of renewals as compared to the corresponding period of the prior fiscal year. Bookings decreased from$250.9 million during the six months endedDecember 31, 2018 to$247.2 million during the six months endedDecember 31, 2019 . Free Cash Flow We use a non-GAAP measure of free cash flow to analyze cash flows generated from our operations. Management believes that this financial measure is useful to investors because it permits investors to view our performance using the same tools that management uses to gauge progress in achieving our goals. We believe this measure is also useful to investors because it is an indication of cash flow that may be available to fund investments in future growth initiatives or to repay borrowings under the Amended and Restated Credit Agreement, and it is a basis for comparing our performance with that of our competitors. The presentation of free cash flow is not meant to be considered in isolation or as an alternative to cash flows from operating activities as a measure of liquidity.
Free cash flow is calculated as net cash provided by operating activities adjusted for the net impact of (a) purchases of property, equipment and leasehold improvements, (b) payments for capitalized computer software costs, and (c) other nonrecurring items, such as acquisition related payments.
The following table provides a reconciliation of GAAP cash flow from operating activities to free cash flow for the indicated periods:
Six Months Ended
December 31,
2019 2018
(Dollars in Thousands)
Net cash provided by operating activities $ 62,207 $ 63,097
Purchases of property, equipment, and leasehold improvements (968 ) (180 )
Payments for capitalized computer software costs (70 ) (189 )
Acquisition related payments 1,264 12
Free cash flows (non-GAAP) $ 62,433 $ 62,740
Total free cash flow on a non-GAAP basis decreased by $0.3 million during the
six months ended December 31, 2019 as compared to the same period of the prior
fiscal year primarily due to changes in working capital. See additional
commentary in the "Liquidity and Capital Resources" section below.
Non-GAAP Operating Income
Non-GAAP operating income excludes certain non-cash and non-recurring expenses, and is used as a supplement to operating income presented on a GAAP basis. We believe that non-GAAP operating income is a useful financial measure because removing certain non-cash and other items provides additional insight into recurring profitability and cash flow from operations.
The following table presents our net income, as adjusted for stock-based compensation expense, amortization of intangibles, and other items, such as the impact of acquisition related fees, for the indicated periods:
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2019 2018 $ % 2019 2018 $ %
(Dollars in Thousands)
GAAP income from
operations $ 41,659 $ 63,758 $ (22,099 ) (34.7 )% $ 88,963 $ 100,748 $ (11,785 ) (11.7 )%
Plus:
Stock-based
compensation 7,559 6,335 1,224 19.3 % 16,834 15,200 1,634 10.8 %
Amortization of
intangibles 1,682 1,156 526 45.5 % 2,877 2,223 654 29.4 %Acquisition related fees (40 ) - (40 ) (100.0 )% 78 (7 ) 85 (1,214.3 )% Non-GAAP income from operations$ 50,860 $ 71,249 $ (20,389 ) (28.6
)%$ 108,752 $ 118,164 $ (9,412 ) (8.0 )% 31
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Critical Accounting Estimates and Judgments
Note 2, "Significant Accounting Policies," to the audited consolidated financial statements in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2019 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements appearing in this report. The accounting policies that reflect our critical estimates, judgments and assumptions in the preparation of our consolidated financial statements are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of our Annual Report on Form 10-K for the fiscal year endedJune 30, 2019 , and include the following:
• Revenue recognition
See Note 3, "Revenue from Contracts with Customers," to our Unaudited Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q for more information on our accounting policies related to revenue recognition.
Results of Operations
Comparison of the Three and Six Months Ended
The following table sets forth the results of operations and the
period-over-period percentage change in certain financial data for the three and
six months ended
Increase / Increase /
Three Months Ended (Decrease) Six Months Ended (Decrease)
December 31, Change December 31, Change
2019 2018 % 2019 2018 %
(Dollars in Thousands)
Revenue:
License $ 70,196 $ 93,368 (24.8 )% $ 151,367 $ 157,123 (3.7 )%
Maintenance 45,290 41,038 10.4 % 88,864 84,077 5.7 %
Services and other 9,246 6,017 53.7 % 18,592 13,392 38.8 %
Total revenue 124,732 140,423 (11.2 )% 258,823 254,592 1.7 %
Cost of revenue:
License 2,009 1,819 10.4 % 3,669 3,484 5.3 %
Maintenance 4,584 5,286 (13.3 )% 9,561 9,279 3.0 %
Services and other 8,933 7,634 17.0 % 17,514 15,203 15.2 %
Total cost of revenue 15,526 14,739 5.3 % 30,744 27,966 9.9 %
Gross profit 109,206 125,684 (13.1 )% 228,079 226,626 0.6 %
Operating expenses:
Selling and marketing 28,500 26,310 8.3 % 57,692 53,122 8.6 %
Research and development 22,625 20,317 11.4 % 45,118 41,373 9.1 %
General and administrative 16,422 15,299 7.3 % 36,306 31,383 15.7 %
Total operating expenses 67,547 61,926 9.1 % 139,116 125,878 10.5 %
Income from operations 41,659 63,758 (34.7 )% 88,963 100,748 (11.7 )%
Interest income 8,428 7,485 12.6 % 16,404 14,554 12.7 %
Interest (expense) (3,161 ) (2,164 ) 46.1 % (6,161 ) (3,978 ) 54.9 %
Other (expense) income, net (997 ) (578 ) 72.5 % 135 (451 ) (129.9 )%
Income before income taxes 45,929 68,501 (33.0 )% 99,341 110,873 (10.4 )%
Provision for income taxes 7,654 9,284 (17.6 )% 14,782 13,591 8.8 %
Net income $ 38,275 $ 59,217 (35.4 )% $ 84,559 $ 97,282 (13.1 )%
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The following table sets forth the results of operations as a percentage of total revenue for certain financial data for the three and six months endedDecember 31, 2019 and 2018: Three Months Ended Six Months Ended December 31, December 31, 2019 2018 2019 2018 (% of Revenue) Revenue: License 56.3 % 66.5 % 58.5 % 61.7 % Maintenance 36.3 29.2 34.3 33.0 Services and other 7.4 4.3 7.2 5.3 Total revenue 100.0 100.0 100.0 100.0 Cost of revenue: License 1.6 1.3 1.4 1.4 Maintenance 3.7 3.8 3.7 3.6 Services and other 7.2 5.4 6.8 6.0 Total cost of revenue 12.4 10.5 11.9 11.0 Gross profit 87.6 89.5 88.1 89.0 Operating expenses: Selling and marketing 22.8 18.7 22.3 20.9 Research and development 18.1 14.5 17.4 16.3 General and administrative 13.2 10.9 14.0 12.3 Total operating expenses 54.2 44.1 53.7 49.4 Income from operations 33.4 45.4 34.4 39.6 Interest income 6.8 5.3 6.3 5.7 Interest (expense) (2.5 ) (1.5 ) (2.4 ) (1.6 ) Other (expense) income, net (0.8 ) (0.4 ) 0.1 (0.2 ) Income before income taxes 36.8 48.8 38.4 43.5 Provision for income taxes 6.1 6.6 5.7 5.3 Net income 30.7 % 42.2 % 32.7 % 38.2 % Revenue Total revenue decreased by$(15.7) million during the three months endedDecember 31, 2019 as compared to the corresponding period of the prior fiscal year. The decrease of$(15.7) million during the three months endedDecember 31, 2019 was comprised of an decrease in license revenue of$(23.2) million , partially offset by an increase in maintenance revenue of$4.3 million and an increase in services and other revenue of$3.2 million , as compared to the corresponding period of the prior fiscal year. Total revenue increased by$4.2 million during the six months endedDecember 31, 2019 as compared to the corresponding period of the prior fiscal year. The increase of$4.2 million during the six months endedDecember 31, 2019 was comprised of an increase in maintenance revenue of$4.8 million and an increase in services and other revenue of$5.2 million , partially offset by a decrease in license revenue of$(5.8) million , as compared to the corresponding period of the prior fiscal year. License Revenue Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease) December 31, Change December 31, Change 2019 2018 $ % 2019 2018 $ % (Dollars in Thousands) License revenue$ 70,196 $ 93,368 $ (23,172 ) (24.8 )%$ 151,367 $ 157,123 $ (5,756 ) (3.7 )% As a percent of total revenue 56.3 % 66.5 % 58.5 % 61.7 % 33
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The period-over-period decrease of$(23.2) million and$(5.8) million in license revenue during the three and six months endedDecember 31, 2019 , respectively, was primarily attributable to a decrease in bookings related to the timing of renewals as compared to the corresponding period of the prior fiscal year.
Maintenance Revenue
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2019 2018 $ % 2019 2018 $ %
(Dollars in Thousands)
Maintenance
revenue $ 45,290 $ 41,038 $ 4,252 10.4 % $ 88,864 $ 84,077 $ 4,787 5.7 %
As a percent of
total revenue 36.3 % 29.2 % 34.3 % 33.0 %
The period-over-period increase of $4.3 million and $4.8 million in maintenance
revenue during the three and six months ended December 31, 2019 , respectively,
was primarily due to growth of our base of arrangements, which include
maintenance, being recognized on a ratable basis.
We expect maintenance revenue to increase as a result of: (i) having a larger
base of arrangements recognized on a ratable basis; (ii) increased customer
usage of our software; (iii) adding new customers; and (iv) escalating annual
payments.
Services and Other Revenue
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2019 2018 $ % 2019 2018 $ %
(Dollars in Thousands)
Services and other revenue$ 9,246 $ 6,017 $ 3,229 53.7 %$ 18,592 $ 13,392 $ 5,200 38.8 % As a percent of total revenue 7.4 % 4.3 % 7.2 % 5.3 % We recognize professional services revenue for our time-and-materials ("T&M") contracts based upon hours worked and contractually agreed-upon hourly rates. Revenue from fixed-price engagements is recognized using the proportional performance method based on the ratio of costs incurred to the total estimated project costs. Services and other revenue increased$3.2 million and$5.2 million during the three and six months endedDecember 31, 2019 , respectively, as compared to the corresponding period of the prior fiscal year primarily due to the timing and volume of professional services engagements.
Cost of Revenue
Cost of License Revenue
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2019 2018 $ % 2019 2018 $ %
(Dollars in Thousands)
Cost of license revenue
$ 3,669 $ 3,484 $ 185 5.3 % As a percent of license revenue 2.9 % 1.9 % 2.4 % 2.2 % Cost of license revenue increased$0.2 million for the three and six months endedDecember 31, 2019 as compared to the corresponding period of the prior fiscal year primarily due to increased amortization of intangible assets from acquisitions. License gross profit margin remained consistent at 97.1% and 98.1% for the three months endedDecember 31, 2019 and 2018, respectively, and 97.6% and 97.8% for the six months endedDecember 31, 2019 and 2018, respectively, due to the low cost of license revenue. 34
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Cost of Maintenance Revenue
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2019 2018 $ % 2019 2018 $ %
(Dollars in Thousands)
Cost of maintenance
revenue $ 4,584 $ 5,286 $ (702 ) (13.3
)%
10.8 % 11.0 %
Cost of maintenance revenue decreased$(0.7) million and increased$0.3 million for the three and six months endedDecember 31, 2019 as compared to the corresponding period of the prior fiscal year primarily due changes in compensation costs related to headcount. Maintenance gross profit margin was 89.9% and 87.1% for the three months endedDecember 31, 2019 and 2018, respectively, and 89.2% and 89.0% for the six months endedDecember 31, 2019 and 2018, respectively.
Cost of Services and Other Revenue
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2019 2018 $ % 2019 2018 $ %
(Dollars in Thousands)
Cost of services and
other revenue $ 8,933 $ 7,634 $ 1,299 17.0 % $ 17,514 $ 15,203 $ 2,311 15.2 %
As a percent of
services and other
revenue 96.6 % 126.9 % 94.2 % 113.5 %
Cost of services and other revenue increased $1.3 million for the three months
ended December 31, 2019 as compared to the corresponding period of the prior
fiscal year primarily due to higher cost of delivering professional services to
support the corresponding increase in revenue during the period. Gross profit
margin on services and other revenue was 3.4% and (26.9)% for the three months
ended December 31, 2019 and 2018, respectively.
Cost of services and other revenue increased $2.3 million for the six months
ended December 31, 2019 as compared to the corresponding period of the prior
fiscal year primarily due to higher cost of delivering professional services to
support the corresponding increase in revenue during the period. Gross profit
margin on services and other revenue was 5.8% and (13.5)% for the six months
ended December 31, 2019 and 2018, respectively.
The timing of revenue and expense recognition on professional service
arrangements can impact the comparability of cost and gross profit margin of
professional services revenue from year to year. For example, revenue from
fixed-price engagements is recognized using the proportional performance method
based on the ratio of costs incurred to the total estimated project costs.
Gross Profit
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2019 2018 $ % 2019 2018 $ %
(Dollars in Thousands)
Gross profit $ 109,206 $ 125,684 $ (16,478 ) (13.1 )% $ 228,079 $ 226,626 $ 1,453 0.6 %
As a percent of
revenue 87.6 % 89.5 % 88.1 % 89.0 %
For further discussion of subscription and software gross profit and services
and other gross profit, please refer to the "Cost of License Revenue," "Cost of
Maintenance Revenue," and "Cost of Services and Other Revenue" sections above.
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Table of Contents Operating Expenses Selling and Marketing Expense
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2019 2018 $ % 2019 2018 $ %
(Dollars in Thousands)
Selling and marketing
expense $ 28,500 $ 26,310 $ 2,190 8.3 % $ 57,692 $ 53,122 $ 4,570 8.6 %
As a percent of total
revenue 22.8 % 18.7 % 22.3 % 20.9 %
The period-over-period increase of $2.2 million in selling and marketing expense
during the three months ended December 31, 2019 was primarily attributable to
higher compensation costs of $2.3 million related to an increase in headcount
and higher stock-based compensation of $0.3 million , partially offset by lower
commissions of $0.2 million .
The period-over-period increase of $4.6 million in selling and marketing expense
during the six months ended December 31, 2019 was primarily attributable to
higher compensation costs of $4.1 million related to an increase in headcount
and higher stock-based compensation of $0.6 million . Contributing partially to
the increase in compensation costs is acquired headcount from acquired
businesses.
Research and Development Expense
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2019 2018 $ % 2019 2018 $ %
(Dollars in Thousands)
Research and
development expense $ 22,625 $ 20,317 $ 2,308 11.4 % $ 45,118 $ 41,373 $ 3,745 9.1 %
As a percent of total
revenue 18.1 % 14.5 % 17.4 % 16.3 %
The period-over-period increase of
The period-over-period increase of$3.7 million in research and development expense during the six months endedDecember 31, 2019 was primarily attributable to higher compensation costs of$3.1 million related to an increase in headcount and higher stock-based compensation of$0.3 million . Contributing partially to the increase in compensation costs is acquired headcount from acquired businesses.
General and Administrative Expense
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2019 2018 $ % 2019 2018 $ %
(Dollars in Thousands)
General and
administrative expense $ 16,422 $ 15,299 $ 1,123 7.3 % $ 36,306 $ 31,383 $ 4,923 15.7 %
As a percent of total
revenue 13.2 % 10.9 % 14.0 % 12.3 %
The period-over-period increase of $1.1 million in general and administrative
expense during the three months ended December 31, 2019 was primarily
attributable to higher compensation costs of $0.5 million related to an increase
in headcount and higher stock-based compensation of $0.3 million .
The period-over-period increase of $4.9 million in general and administrative
expense during the six months ended December 31, 2019 was primarily attributable
to higher compensation costs of $1.3 million related to an increase in
headcount, higher stock-based compensation of $0.2 million , and higher
professional fees of $1.6 million .
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Non-Operating Income (Expense)
Interest Income
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2019 2018 $ % 2019 2018 $ %
(Dollars in Thousands)
Interest income $ 8,428 $ 7,485 $ 943 12.6 % $ 16,404 $ 14,554 $ 1,850 12.7 %
As a percent of total
revenue 6.8 % 5.3 % 6.3 % 5.7 %
The period-over-period increase of $0.9 million and $1.9 million in interest
income during the three and six months ended December 31, 2019 , respectively,
was a result of: (i) increased customer usage of our software; (ii) adding new
customers; and (iii) escalating annual payments.
Interest (Expense)
Three Months Ended (Increase) / Decrease Six Months Ended (Increase) / Decrease
December 31, Change December 31, Change
2019 2018 $ % 2019 2018 $ %
(Dollars in Thousands)
Interest (expense) $ (3,161 ) $ (2,164 ) $ (997 ) 46.1 % $ (6,161 ) $ (3,978 ) $ (2,183 ) 54.9 %
As a percent of total
revenue (2.5 )% (1.5 )% (2.4 )% (1.6 )%
The period-over-period increase of $(1.0) million and $(2.2) million in interest
(expense) during the three and six months ended December 31, 2019 , respectively,
was primarily due to interest expenses related to an increase in borrowings
under our Amended and Restated Credit Agreement.
Other (Expense) Income, Net
Three Months Ended Increase / (Decrease) Six Months Ended (Increase) / Decrease
December 31, Change December 31, Change
2019 2018 $ % 2019 2018 $ %
(Dollars inThousands)
Other (expense) income, net$ (997 ) $ (578 ) $ (419 ) 72.5 %$ 135 $ (451 ) $ 586 (129.9 )% As a percent of total revenue (0.8 )% (0.4 )% 0.1 % (0.2 )% Other (expense) income, net is comprised primarily of unrealized and realized foreign currency exchange gains and losses generated from the settlement and remeasurement of transactions denominated in currencies other than the functional currency of our operating units. During the three months endedDecember 31, 2019 and 2018, other (expense), net was comprised of$(1.0) million and$(0.6) million of currency losses, respectively. During the six months endedDecember 31, 2019 and 2018, other income (expense), net was comprised of$0.2 million and$(0.5) million of currency gains (losses), respectively. Provision for Income Taxes Three Months Ended Increase /
(Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2019 2018 $ % 2019 2018 $ %
(Dollars in Thousands)
Provision for income taxes $ 7,654 $ 9,284 $ (1,630 ) (17.6 )% $ 14,782 $ 13,591 $ 1,191 8.8 %
Effective tax rate 16.7 % 13.4 % 14.9 % 12.3 %
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The effective tax rate for the periods presented is primarily the result of income earned in theU.S. taxed atU.S. federal and state statutory income tax rates, income earned in foreign tax jurisdictions taxed at the applicable rates, as well as the impact of permanent differences between book and tax income, primarily the Foreign Derived Intangible Income ("FDII") deduction. Assuming certain requirements are met, the FDII deduction is a benefit forU.S. companies that sell their products or services to customers outside theU.S. Our effective tax rate was 16.7% and 14.9% during the three and six months endedDecember 31, 2019 , respectively, and 13.4% and 12.3% during the three and six months endedDecember 31, 2018 , respectively. Our effective tax rate increased for the three and six months endedDecember 31, 2019 compared to the same period in 2018 due to the increase in estimated annual effective tax rate for the year as a result of the reduced FDII deduction in fiscal year 2020 compared to prior fiscal year. The FDII deduction is based on our taxable income as reported on our tax return, which was significantly higher in fiscal year 2019 compared to fiscal year 2020. We recognized an income tax expense of$7.7 million and$14.8 million during the three and six months endedDecember 31, 2019 , respectively, compared to$9.3 million and$13.6 million during the corresponding periods of the prior fiscal year. Our income tax expense was driven primarily by pre-tax profitability in our domestic and foreign operations and the impact of permanent items, offset by the tax benefit from the release of uncertain tax positions due to the completion of theIRS audit. The permanent items are predominantly the FDII deduction, stock-based compensation expense and tax credits for research expenditures.
Liquidity and Capital Resources
Resources
In recent years, we have financed our operations with cash generated from
operating activities. As of
We believe our existing cash and cash equivalents, together with our cash flows from operating activities, will be sufficient to meet our anticipated cash needs for at least the next twelve months. We may need to raise additional funds if we decide to make one or more acquisitions of businesses, technologies or products. If additional funding for such purposes is required beyond existing resources and our Amended and Restated Credit Agreement described below, we may not be able to effect a receivable, equity or debt financing on terms acceptable to us or at all. Credit Agreement InDecember 2019 , we entered into an Amended and Restated Credit Agreement (the "Amended and Restated Credit Agreement"). The Amended and Restated Credit Agreement, which amends and restates the Credit Agreement we entered into as ofFebruary 26, 2016 , provides for a$200.0 million secured revolving credit facility and a$320.0 million secured term loan facility. As ofDecember 31, 2019 , we had$29.2 million and$320.0 million in outstanding borrowings on our revolving credit facility and term loan facility, respectively. Our current borrowings of$45.2 million consist of$29.2 million of the revolving credit facility and$16.0 million of the term loan facility. Our non-current borrowings of$300.0 million consist of$304.0 million of our term loan facility, net of$4.0 million in debt issuance costs. We had$220.0 million in outstanding current borrowings as ofJune 30, 2019 .
For a more detailed description of the Amended and Restated Credit Agreement, see Note 12, "Credit Agreement," to our Unaudited Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q.
Cash Equivalents and Cash Flows
Our cash equivalents of
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The following table summarizes our cash flow activities for the periods indicated:
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