PROGRESS SOFTWARE CORPORATION Forward-Looking Statements
Certain statements below about anticipated results and our products and markets are forward-looking statements that are based on our current plans and assumptions. Important information about the bases for these plans and assumptions and factors that may cause our actual results to differ materially from these statements is contained below and in Item 1A. "Risk Factors" of this Annual Report on Form 10-K. Use of Constant Currency Revenue from our international operations has historically represented a substantial portion of our total revenue. As a result, our revenue results have been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. For example, if the local currencies of our foreign subsidiaries strengthen, our consolidated results stated inU.S. dollars are positively impacted. As exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of revenue growth rates on a constant currency basis enhances the understanding of our revenue results and evaluation of our performance in comparison to prior periods. The constant currency information presented is calculated by translating current period results using prior period weighted average foreign currency exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Impact of COVID-19 InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to impact theU.S. and the world. COVID-19 has disrupted the business of our customers and partners, and negatively impacted our business and consolidated results of operations, and could impact our financial condition in the future. We are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, actions that may be taken by governmental authorities, the impact to the business of our customers and partners and other factors identified in Part I, Item 1A "Risk Factors" in this Form 10-K. We will continue to evaluate the nature and extent of the impact to our business, consolidated results of operations, and financial condition. 23 --------------------------------------------------------------------------------
Overview
Progress Software Corporation ("Progress," the "Company," "we," "us," or "our") provides the best products to develop, deploy and manage high-impact business applications. Our comprehensive product solutions are designed to make technology teams more productive and we have a deep commitment to the developer community, both open source and commercial alike. We operate as three distinct segments: OpenEdge, Data Connectivity and Integration, and Application Development and Deployment.
The key tenets of our strategic plan and operating model are as follows:
Trusted Provider of the Best Products to Develop, Deploy and Manage High Impact Business Applications. A key element of our strategy is centered on providing the platform and tools enterprises need to build modern, strategic business applications. We offer these products and tools to both new customers and partners as well as our existing partner and customer ecosystems. This strategy builds on our inherent DNA and our vast experience in application development that we've acquired over the past 40 years.
Focus on Customer and Partner Retention to Drive Recurring Revenue and Profitability. Our organizational philosophy and operating principles focus primarily on customer and partner retention and success and a streamlined operating approach in order to more efficiently drive, predictable and stable recurring revenue.
Total Growth Strategy Driven by Accretive M&A. We are pursuing a total growth strategy driven by accretive acquisitions of businesses within the software infrastructure space, with products that appeal to both IT organizations and individual developers. These acquisitions must meet strict financial and other criteria, which should enable us to drive significant stockholder returns by providing scale and increased cash flows. InApril 2019 , we acquiredIpswitch, Inc. and, as described below, inOctober 2020 , we acquiredChef Software . Both acquisitions are expected to meet these strict financial criteria. Chef is a global leader in providing complete infrastructure automation to build, deploy, manage and secure applications in modern multi-cloud and hybrid environments, as well as on-premises. The purchase price for Chef was$220 million and we funded the purchase price with a combination of existing cash balances and drawings under our revolving credit facility. Chef is the developer of Chef Enterprise Automation Stack, automating infrastructure, compliance and application delivery for many of the Fortune 500. Holistic Capital Allocation Approach. We have adopted a shareholder friendly capital allocation policy that utilizes dividends and share repurchases to return capital to shareholders. Pursuant to our capital allocation strategy that we initially announced inSeptember 2017 , we have targeted to return approximately 25% of our annual cash flows from operations to stockholders in the form of dividends. We also intend to repurchase our shares in sufficient quantities to offset dilution from our equity plans. In fiscal year 2020, we repurchased and retired 1.4 million shares of our common stock for$60.0 million . As ofNovember 30, 2020 , there was$190.0 million remaining under share repurchase 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. We began paying quarterly cash dividends of$0.125 per share of common stock to Progress stockholders inDecember 2016 and increased the quarterly cash dividend annually in fiscal years 2017, 2018 and 2019. OnSeptember 22, 2020 , our Board of Directors approved an additional increase of 6% to our quarterly cash dividend from$0.165 to$0.175 and declared a quarterly dividend of$0.175 per share of common stock. We expect to continue paying quarterly cash dividends in subsequent quarters consistent with our capital allocation strategy. We expect to continue to pursue acquisitions meeting our financial criteria and designed to expand our business and drive significant stockholder returns. 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. However, we believe that existing cash balances, together with funds generated from operations and amounts available under our credit facility, will be sufficient to finance our operations and meet our foreseeable cash requirements, including quarterly cash dividends and stock repurchases to Progress stockholders, as applicable, through at least the next twelve months. We also believe that our financial resources have allowed, and will continue to allow us to manage the impact of COVID-19 on our business operations for the foreseeable future. The challenges posed by COVID-19 on our business continue to evolve. Consequently, we will continue to evaluate our financial position in light of future developments, particularly those relating to COVID-19. 24 -------------------------------------------------------------------------------- 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 theU.S. dollar have significantly impacted our results of operations and may impact our future results of operations. Since approximately one-third of our revenue is denominated in foreign currency, and given the volatility in the global economy created by COVID-19, our revenue results in fiscal year 2020 were impacted by fluctuations in foreign currency exchange rates.
Results of Operations
Fiscal Year 2020 Compared to Fiscal Year 2019
Revenue
Fiscal Year Ended Percentage Change
Constant
(In thousands) November 30, 2020 November 30, 2019 As Reported Currency
Revenue $ 442,150 $ 413,298 7 % 7 %
Total revenue increased in fiscal year 2020 primarily due to the acquisitions of
Ipswitch, during the second quarter of fiscal year 2019, and of Chef, during the
fourth quarter of fiscal year 2020. These increases were offset by a decrease in
license sales in our Data Connectivity and Integration segment. Ipswitch and
Chef contributed $67.5 million and $3.8 million in revenue in fiscal year 2020,
respectively. Changes in prices from fiscal year 2019 to 2020 did not have a
significant impact on our revenue.
Software License Revenue
Fiscal Year Ended Percentage Change
November 30, Constant
(In thousands) November 30, 2020 2019 As Reported Currency
License $ 115,249 $ 122,552 (6) % (6) %
As a percentage of total revenue 26 % 30 %
Software license revenue decreased in fiscal year 2020 primarily due to a decrease in license sales in our Data Connectivity and Integration segment, partially offset by an increase in Ipswitch license sales, which are included in our OpenEdge segment. Refer to the Revenue by Segment section below for further discussion.
Maintenance and Services Revenue
Fiscal Year Ended Percentage Change
November 30, November 30, Constant
(In thousands) 2020 2019 As Reported Currency
Maintenance $ 288,887 $ 259,006 12 % 12 %
As a percentage of total revenue 65 % 63 %
Professional services $ 38,014 $ 31,740 20 % 20 %
As a percentage of total revenue 9 % 7 %
Total maintenance and services revenue $ 326,901 $ 290,746 12 % 13 %
As a percentage of total revenue 74 % 70 %
Maintenance revenue increased in fiscal year 2020 primarily due to the
acquisitions of Ipswitch and Chef. This increase was offset by an unfavorable
impact from currency exchange rates on our OpenEdge segment maintenance revenue
in fiscal year 2020. Professional services revenue increased primarily due to an
increase in Application Development and Deployment professional services
revenue.
25
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Revenue by Region
Fiscal Year Ended Percentage Change
November 30, November 30, Constant
(In thousands) 2020 2019 As Reported Currency
North America $ 260,998 $ 233,911 12 % 12 %
As a percentage of total revenue 59 % 57 %
EMEA $ 143,754 $ 137,301 5 % 4 %
As a percentage of total revenue 33 % 33 %
Latin America $ 14,574 $ 19,665 (26) % (14) %
As a percentage of total revenue 3 % 5 %
Asia Pacific $ 22,824 $ 22,421 2 % 2 %
As a percentage of total revenue 5 % 5 %
Total revenue generated inNorth America increased$27.1 million , and total revenue generated outsideNorth America increased$1.8 million , in fiscal year 2020. The increase inNorth America was primarily due to the acquisitions of Ipswitch and Chef, offset by decreased license sales in our Data Connectivity and Integration segment. The increase in revenue generated in EMEA was also due to the acquisitions of Ipswitch and Chef. Revenue generated inLatin America decreased due to a decrease in license sales in our OpenEdge segment. The revenue generated inAsia Pacific increased slightly primarily due to the acquisition of Ipswitch. Total revenue generated in markets outsideNorth America represented 41% of total revenue in fiscal year 2020 compared to 43% of total revenue in the same period last year. If exchange rates had remained constant in fiscal year 2020 as compared to the exchange rates in effect in fiscal year 2019, total revenue generated in markets outsideNorth America would have been 41% of total revenue. Revenue by Segment Fiscal Year Ended November 30, November 30, (In thousands) 2020 2019 Percentage Change OpenEdge segment$ 326,444 $ 296,929 10 % Data Connectivity and Integration segment 34,187 39,903 (14) % Application Development and Deployment segment 81,519 76,466 7 % Total revenue$ 442,150 $ 413,298 7 % Revenue in the OpenEdge segment increased year-over-year primarily due to the acquisition of Ipswitch, partially offset by an unfavorable impact from currency exchange rates in fiscal year 2020. Data Connectivity and Integration segment revenue decreased due to the timing of term license renewals by certain of our OEM partners. Application Development and Deployment segment revenue increased primarily due to the acquisition of Chef and an increase in professional services revenue. Cost of Software Licenses Fiscal Year Ended (In thousands) November 30, 2020 November 30, 2019 Change Cost of software licenses $ 4,473 $ 4,894$ (421) (9) % As a percentage of software license revenue 4 % 4 % As a percentage of total revenue 1 %
1 %
Cost of software licenses consists primarily of costs of royalties, electronic
software distribution, duplication, and packaging. The decrease in cost of
software licenses was the result of lower payments of royalties to third parties
as compared to the prior fiscal year. Cost of software licenses as a percentage
of software license revenue varies from period to period depending upon the
relative product mix.
26
--------------------------------------------------------------------------------Cost of Maintenance and Services
Fiscal Year Ended
(In thousands) November 30, 2020 November 30, 2019 Change
Cost of maintenance and services $ 49,744 $ 44,463 $ 5,281 12 %
As a percentage of maintenance and services
revenue 15 % 15 %
As a percentage of total revenue 11 % 11 %
Components of cost of maintenance and
services:
Personnel Related Costs $ 35,156 $ 31,935 $ 3,221 10 %
Contractors and Outside Services 11,317 9,329 1,988 21 %
Hosting and Other 3,271 3,199 72 2 %
Total cost of maintenance and services $ 49,744 $
44,463 $ 5,281 12 %
Cost of maintenance and services consists primarily of costs of providing customer support, consulting, and education. Cost of maintenance and services increased primarily due to higher personnel and contractor related costs resulting from the acquisitions of Ipswitch and Chef.
Amortization of Acquired Intangibles
Fiscal Year Ended
Percentage
(In thousands) November 30, 2020 November 30, 2019 Change
Amortization of acquired intangibles $ 7,897 $ 25,884 (69) %
As a percentage of total revenue 2 % 6 %
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. The year over year decrease
was due to certain intangible assets being fully amortized and the impairment of
intangible assets recorded in the fourth fiscal quarter of 2019 associated with
the technology of our Kinvey and DataRPM acquisitions, offset by the addition of
Ipswitch and Chef acquired intangibles.
Gross Profit
Fiscal Year Ended
Percentage
(In thousands) November 30, 2020 November 30, 2019 Change
Gross profit $ 380,036 $ 338,057 12 %
As a percentage of total revenue 86 % 82 %
Our gross profit increased primarily due to the increase in maintenance revenue
and the decrease in the amortization of intangibles, offset slightly by the
decrease of license revenue and increase of cost of maintenance and services,
each as described above.
Sales and Marketing
Fiscal Year Ended
(In thousands) November 30, 2020 November 30, 2019 Change
Sales and marketing $ 100,113 $ 101,701 $ (1,588) (2) %
As a percentage of total revenue 23 % 25 %
Components of sales and marketing:
Personnel related costs $ 85,167 $ 83,957 $ 1,210 1 %
Contractors and outside services 2,122 2,307 (185) (8) %
Marketing programs and other 12,824 15,437 (2,613) (17) %
Total sales and marketing $ 100,113 $ 101,701 $ (1,588) (2) %
27
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Sales and marketing expenses decreased in fiscal year 2020 primarily due to
decreased travel and in-person events as a result of the COVID-19 pandemic, as
well as cost reductions we implemented within our cognitive application product
lines in the fourth quarter of fiscal year 2019. These decreases were partially
offset by increased personnel costs resulting from the acquisitions of Ipswitch
and Chef.
Product Development
Fiscal Year Ended
(In thousands) November 30, 2020 November 30, 2019 Change
Product development $ 88,599 $ 88,572 $ 27 - %
As a percentage of total revenue 20 % 21 %
Components of product development costs:
Personnel related costs $ 85,624 $ 85,107 $ 517 1 %
Contractors and outside services 2,351 2,586 (235) (9) %
Other product development costs 624 879 (255) (29) %
Total product developments costs $ 88,599 $ 88,572 $ 27 - %
Product development expenses remained flat year-over-year primarily due to
increased personnel related expenses due to the acquisitions of Ipswitch and
Chef, offset by decreased travel resulting due to the COVID-19 pandemic, and
cost reductions we implemented within our cognitive application product lines in
the fourth quarter of fiscal year 2019.
General and Administrative
Fiscal Year Ended
(In thousands) November 30, 2020 November 30, 2019 Change
General and administrative $ 54,004 $ 53,360 $ 644 1 %
As a percentage of total revenue 12 % 13 %
Components of general and administrative:
Personnel Related Costs $ 43,025 $ 42,423 $ 602 1 %
Contractors and Outside Services 8,338 7,375 963 13 %
Other general and administrative costs 2,641 3,562 (921) (26) %
Total cost of general and administrative $ 54,004 $
53,360 $ 644 1 %
General and administrative expenses include the costs of our finance, human
resources, legal, information systems and administrative departments. General
and administrative expenses increased slightly primarily due to higher personnel
related costs due to the acquisitions of Ipswitch and Chef, as well as higher
contractor and outside services costs, offset by decreases in other various
general and administrative costs.
Amortization of Acquired Intangibles
Fiscal Year Ended
November 30, November 30, Percentage
(In thousands) 2020 2019 Change
Amortization of acquired intangibles $ 20,049 $ 22,255 (10) %
As a percentage of total revenue 5 % 5 %
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 decreased year-over-year due to certain
intangible assets being fully amortized and the impairment of certain other
intangible assets, offset by the addition of Ipswitch and Chef acquired
intangibles.
28
--------------------------------------------------------------------------------Impairment of Intangible and Long-Lived Assets
Fiscal Year Ended
November 30, Percentage
(In thousands) November 30, 2020 2019 Change
Impairment of intangible and long-lived assets $ - $ 24,096 *
As a percentage of total revenue - % 6 %
*Not meaningful
In the fourth quarter of fiscal year 2019 we determined that the intangible
assets associated with the technology obtained in connection with the
acquisitions of DataRPM and Kinvey were fully impaired. As a result, we incurred
an impairment charge of $22.7 million in the fourth quarter of fiscal year 2019.
See Note 6 to our Consolidated Financial Statements in Item 8 of this Form 10-K
for additional details. In addition, during the fourth quarter of fiscal year
2019, we incurred an additional asset impairment charge of $1.4 million related
to the abandonment of certain long-lived assets associated with a sale of
corporate land and buildings. See Note 5 to our Consolidated Financial
Statements in Item 8 of this Form 10-K for additional details.
Restructuring Expenses
Fiscal Year Ended
Percentage
(In thousands) November 30, 2020 November 30, 2019 Change
Restructuring expenses $ 5,906 $ 6,331 (7) %
As a percentage of total revenue 1 % 2 %
Restructuring expenses recorded in fiscal year 2020 relate to the restructuring
activities that occurred in fiscal years 2020, 2019 and 2017. See Note 15 to our
Consolidated Financial Statements in Item 8 of this Form 10-K for additional
details, including types of expenses incurred and the timing of future expenses
and cash payments. See also the Liquidity and Capital Resources section of this
Item 2, Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Acquisition-Related Expenses
Fiscal Year Ended
Percentage
(In thousands) November 30, 2020 November 30, 2019 Change
Acquisition-related expenses $ 3,637 $ 1,658 *
As a percentage of total revenue 1 % - %
*Not meaningful
Acquisition-related costs are expensed as incurred and include those costs
incurred as a result of a business combination. These costs consist of
professional services fees, including third-party legal and valuation-related
fees, as well as retention fees, and earn-out payments treated as compensation
expense. Acquisition-related expenses in fiscal year 2020 were primarily related
to the acquisition of Chef. Acquisition-related expenses in fiscal year 2019
were related to the acquisition of Ipswitch.
Income from Operations
Fiscal Year Ended
Percentage
(In thousands) November 30, 2020 November 30, 2019 Change
Income from operations $ 107,728 $ 40,084 169 %
As a percentage of total revenue 24 % 10 %
Income from operations increased year over year due to an increase in revenue and decreases in costs of revenue and operating expenses as shown above.
29
--------------------------------------------------------------------------------Income from Operations by Segment
Fiscal Year Ended
November 30, November 30,
(In thousands) 2020 2019 Percentage Change
OpenEdge segment $ 250,092 $ 211,720 18 %
Data Connectivity and Integration segment 25,790 31,930 (19) %
Application Development and Deployment segment 44,770 52,473 (15) %
Other unallocated expenses (212,924) (256,039) 17 %
Total income from operations $ 107,728 $ 40,084 169 %
Note that the following expenses are not allocated to our segments as we manage
and report our business in these functional areas on a consolidated basis only:
certain product development and corporate sales and marketing expenses, customer
support, administration, amortization of acquired intangibles, loss on assets
held for sale, stock-based compensation, fees related to shareholder activist,
restructuring, and acquisition-related expenses.
Other (Expense) Income
Fiscal Year Ended
Percentage
(In thousands) November 30, 2020 November 30, 2019 Change
Interest expense $ (10,170) $ (9,913) (3) %
Interest income and other, net 1,495 1,143 31 %
Foreign currency loss, net (2,418) (2,819) 14 %
Total other expense, net $ (11,093) $ (11,589) 4 %
As a percentage of total revenue (3) % (3) %
Other expense, net, decreased in fiscal year 2020 as a result of lower foreign
currency loss offset by increased interest expense over the period. The increase
in interest expense is due to an increase in the outstanding principle balance
of our debt to fund the Ipswitch and Chef acquisitions, offset by declining
rates throughout fiscal year 2020.
Provision for Income Taxes
Fiscal Year Ended
Percentage
(In thousands) November 30, 2020 November 30, 2019 Change
Provision for income taxes $ 16,913 $ 2,095 *
As a percentage of total revenue 4 % <1%
*Not meaningful
Our effective income tax rate was 18% in fiscal year 2020 and 7% in fiscal year
2019. The primary reason for the increase in the effective rate was due to the
loss incurred by our US operations in fiscal year 2019 resulting from the
amortization and impairment of intangibles described above. In addition, the
majority of our international profits in fiscal year 2019 were earned in a
jurisdiction with a statutory tax rate of 10%.
Net Income
Fiscal Year Ended
Percentage
(In thousands) November 30, 2020 November 30, 2019 Change
Net income $ 79,722 $ 26,400 202 %
As a percentage of total revenue 18 % 6 %
30--------------------------------------------------------------------------------
Fiscal 2019 Compared to Fiscal 2018
Adoption of New Accounting Standard
We adopted the new accounting standard related to revenue recognition ("ASC
606") effective December 1, 2018 , using the full retrospective method, which
required us to restate prior comparable periods. See Note 1. Nature of Business
and Summary of Significant Accounting Policies for further information.
Management's Discussion and Analysis of Financial Condition and Results of
Operations has also been adjusted to reflect the full retrospective adoption of
ASC 606.
Revenue
Fiscal Year Ended Percentage Change
Constant
(In thousands) November 30, 2019 November 30, 2018 As Reported Currency
Revenue $ 413,298 $ 378,981 9 % 11 %
Total revenue increased in fiscal year 2019 primarily due to the acquisition of
Ipswitch during the second quarter of fiscal year 2019, and an increase in
license sales in our Data Connectivity and Integration segment. Ipswitch
contributed $28.2 million in revenue in fiscal year 2019. The increase in total
revenue was partially offset by an unfavorable impact from currency exchange
rates in fiscal year 2019. Changes in prices from fiscal year 2018 to 2019 did
not have a significant impact on our revenue.
License Revenue
Fiscal Year Ended Percentage Change
November 30, Constant
(In thousands) 2019 November 30, 2018 As Reported Currency
License $ 122,552 $ 99,800 23 % 25 %
As a percentage of total revenue 30 % 26 %
Software license revenue increased in fiscal year 2019 primarily due to the acquisition of Ipswitch and an increase in license sales in our Data Connectivity and Integration segment. The increase in license revenue was partially offset by an unfavorable impact from currency exchange rates in fiscal year 2019.
Maintenance and Services Revenue
Fiscal Year Ended Percentage Change
November 30, November 30, Constant
(In thousands) 2019 2018 As Reported Currency
Maintenance $ 259,006 $ 249,171 4 % 6 %
As a percentage of total revenue 63 % 66 %
Professional services $ 31,740 $ 30,010 6 % 7 %
As a percentage of total revenue 8 % 8 %
Total maintenance and services revenue $ 290,746 $ 279,181 4 % 6 %
As a percentage of total revenue 70 % 74 %
Maintenance revenue increased in fiscal year 2019 due to the acquisition of
Ipswitch and a slight increase in maintenance revenue in our Application
Development and Deployment segment. This increase was offset by an unfavorable
impact from currency exchange rates on our OpenEdge segment maintenance revenue
in fiscal year 2019. Professional services revenue increased in fiscal year 2019
primarily due to an increase in OpenEdge professional services revenue,
partially offset by lower professional services revenue generated by our
Application Development and Deployment segment.
31
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Revenue by Region
Fiscal Year Ended Percentage Change
November 30, November 30, Constant
(In thousands) 2019 2018 As Reported Currency
North America $ 233,911 $ 204,257 15 % 15 %
As a percentage of total revenue 57 % 54 %
EMEA $ 137,301 $ 135,055 2 % 6 %
As a percentage of total revenue 33 % 35 %
Latin America $ 19,665 $ 18,046 9 % 16 %
As a percentage of total revenue 5 % 5 %
Asia Pacific $ 22,421 $ 21,623 4 % 7 %
As a percentage of total revenue 5 % 6 %
Total revenue generated inNorth America increased$29.7 million , and total revenue generated outsideNorth America increased$4.7 million , in fiscal year 2019. The increase inNorth America was primarily due to the acquisition of Ipswitch and higher license revenue generated by our Data Connectivity and Integration segment. The increase in revenue generated in EMEA in fiscal year 2019 was also due to the acquisition of Ipswitch and higher license revenue generated by our Data Connectivity and Integration segment, partially offset by the unfavorable effect of foreign exchange rates. Revenue generated inLatin America increased in fiscal year 2019 due to an increase in license sales in our OpenEdge segment. The revenue generated inAsia Pacific increased slightly in fiscal year 2019 primarily due to the acquisition of Ipswitch. Total revenue generated in markets outsideNorth America represented 43% of total revenue in fiscal year 2019 compared to 46% of total revenue in the prior fiscal year. If exchange rates had remained constant in fiscal year 2019 as compared to the exchange rates in effect in fiscal year 2018, total revenue generated in markets outsideNorth America would have been 44% of total revenue. Revenue by Segment Fiscal Year Ended November 30, November 30, (In thousands) 2019 2018 Percentage Change OpenEdge segment$ 296,929 $ 277,806 7 % Data Connectivity and Integration segment 39,903 23,129 73 % Application Development and Deployment segment 76,466 78,046 (2) % Total revenue$ 413,298 $ 378,981 9 % Revenue in the OpenEdge segment increased in fiscal year 2019 primarily due to the acquisition of Ipswitch, partially offset by an unfavorable impact from currency exchange rates in fiscal year 2019. Data Connectivity and Integration segment revenue increased in fiscal year 2019 primarily due to the timing of certain renewals by OEMs. Application Development and Deployment segment revenue decreased in fiscal year 2019, primarily due to lower license and professional services revenue, partially offset by an increase in maintenance revenue. Cost of Software Licenses Fiscal Year Ended (In thousands) November 30, 2019 November 30, 2018 Change Cost of software licenses $ 4,894 $ 4,769$ 125 3 % As a percentage of software license revenue 4 % 5 % As a percentage of total revenue 1 %
1 %
Cost of software licenses consists primarily of costs of royalties, electronic
software distribution, duplication, and packaging. Cost of software licenses as
a percentage of software license revenue varies from period to period depending
upon the relative product mix. During the periods presented above, cost of
software licenses remained relatively flat as a percentage of revenue.
32
--------------------------------------------------------------------------------Cost of Maintenance and Services
Fiscal Year Ended
(In thousands) November 30, 2019 November 30, 2018 Change
Cost of maintenance and services $ 44,463 $ 39,470 $ 4,993 13 %
As a percentage of maintenance and
services revenue 15 % 14 %
As a percentage of total revenue 11 % 10 %
Components of cost of maintenance and
services:
Personnel Related Costs $ 31,935 $ 28,052 $ 3,883 14 %
Contractors and Outside Services 9,329 8,639 690 8 %
Hosting and Other 3,199 2,779 420 15 %
Total cost of maintenance and services $ 44,463 $
39,470 $ 4,993 13 %
Cost of maintenance and services consists primarily of costs of providing
customer support, consulting, and education. Cost of maintenance and services
increased in fiscal year 2019 primarily due to higher personnel related costs
resulting from the acquisition of Ipswitch.
Amortization of Acquired Intangibles
Fiscal Year Ended
November 30, November 30, Percentage
(In thousands) 2019 2018 Change
Amortization of acquired intangibles $ 25,884 $ 22,734 14 %
As a percentage of total revenue 6 % 6 %
Amortization of acquired intangibles included in costs of revenue primarily
represents the amortization of the value assigned to technology-related
intangible assets obtained in business combinations. Amortization of acquired
intangibles increased in fiscal year 2019, primarily due to the addition of
intangible assets associated with the technologies obtained in connection with
the acquisition of Ipswitch.
Gross Profit
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Gross profit $ 338,057 $ 312,008 8 %
As a percentage of total revenue 82 % 82 %
Our gross profit increased in fiscal year 2019 primarily due to the increases of
license and maintenance revenue, offset slightly by the increase of cost of
maintenance and services and the amortization of acquired intangibles, each as
described above.
Sales and Marketing
Fiscal Year Ended
(In thousands) November 30, 2019 November 30, 2018 Change
Sales and marketing $ 101,701 $ 93,036 $ 8,665 9 %
As a percentage of total revenue 25 % 25 %
Components of sales and marketing:
Personnel related costs $ 83,957 $ 75,394 $ 8,563 11 %
Contractors and outside services 2,307 2,046 261 13 %
Marketing programs and other 15,437 15,596 (159) (1) %
Total sales and marketing $ 101,701 $ 93,036 $ 8,665 9 %
Sales and marketing expenses increased in fiscal year 2019 primarily due to increased personnel related expenses as a result of
33
--------------------------------------------------------------------------------increased headcount from the acquisition of Ipswitch.
Product Development
Fiscal Year Ended
(In thousands) November 30, 2019 November 30, 2018 Change
Product development $ 88,572 $ 79,739 $ 8,833 11 %
As a percentage of total revenue 21 % 21 %
Components of product development costs:
Personnel related costs $ 85,107 $ 76,766 $ 8,341 11 %
Contractors and outside services 2,586 2,263 323 14 %
Other product development costs 879 710 169 24 %
Total product developments costs $ 88,572 $ 79,739 $ 8,833 11 %
Product development expenses increased in fiscal year 2019 primarily due to
increased personnel related expenses as a result of the acquisition of Ipswitch.
General and Administrative
Fiscal Year Ended
(In thousands) November 30, 2019 November 30, 2018 Change
General and administrative $ 53,360 $ 49,050 $ 4,310 9 %
As a percentage of total revenue 13 % 13 %
Components of general and administrative:
Personnel Related Costs $ 42,447 $ 34,749 $ 7,698 22 %
Contractors and Outside Services 7,375 9,447 (2,072) (22) %
Other general and administrative costs 3,538 4,854 (1,316) (27) %
Total cost of general and administrative $ 53,360 $
49,050 $ 4,310 9 %
General and administrative expenses include the costs of our finance, human resources, legal, information systems and administrative departments. General and administrative expenses increased in fiscal year 2019 primarily due to increased stock-based compensation expense.
Amortization of Acquired Intangibles
Fiscal Year Ended
November 30, November 30, Percentage
(In thousands) 2019 2018 Change
Amortization of acquired intangibles $ 22,255 $ 13,241 68 %
As a percentage of total revenue 5 % 3 %
Amortization of acquired intangibles included in operating expenses primarily
represents the amortization of value assigned to intangible assets obtained in
business combinations other than assets identified as purchased technology.
Amortization of acquired intangibles increased in fiscal year 2019 due to the
addition of intangible assets obtained in connection with the acquisition of
Ipswitch.
Impairment of Intangible and Long-Lived Assets
Fiscal Year Ended
November 30, Percentage
(In thousands) 2019 November 30, 2018 Change
Impairment of intangible and long-lived assets $ 24,096 $ - *
As a percentage of total revenue 6 % - %
*Not meaningful
34-------------------------------------------------------------------------------- In the fourth quarter of fiscal year 2019 we determined that the intangible assets associated with the technology obtained in connection with the acquisitions of DataRPM and Kinvey were fully impaired. As a result, we incurred an impairment charge of$22.7 million in the fourth quarter of fiscal year 2019. See Note 6 to our Consolidated Financial Statements in Item 8 of this Form 10-K for additional details. In addition, during the fourth quarter of fiscal year 2019, we incurred an additional asset impairment charge of$1.4 million related to the abandonment of certain long-lived assets associated with a sale of corporate land and buildings. See Note 5 to our Consolidated Financial Statements in Item 8 of this Form 10-K for additional details. Restructuring Expenses Fiscal Year Ended Percentage (In thousands) November 30, 2019 November 30, 2018 Change Restructuring expenses $ 6,331 $ 2,251 181 % As a percentage of total revenue 2 % 1 % Restructuring expenses recorded in fiscal year 2019 related to the restructuring activities that occurred in fiscal years 2019 and 2017. See Note 15 to our Consolidated Financial Statements in Item 8 of this Form 10-K for additional details, including types of expenses incurred and the timing of future expenses and cash payments. See also the Liquidity and Capital Resources section of this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Acquisition-Related Expenses
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Acquisition-related expenses $ 1,658 $ 258 *
As a percentage of total revenue - % - %
*Not meaningful
Acquisition-related costs are expensed as incurred and include those costs
incurred as a result of a business combination. These costs consist of
professional services fees, including third-party legal and valuation-related
fees, as well as retention fees, and earn-out payments treated as compensation
expense. Acquisition-related expenses in fiscal year 2019 were related to the
acquisition of Ipswitch.
Loss on Assets Held for Sale
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2017 Change
Loss on assets held for sale $ - $ 5,147 *
As a percentage of total revenue - % 1 %
*Not meaningful
In the fourth quarter of fiscal year 2018, we reclassified certain corporate
land and building assets previously reported as property and equipment to assets
held for sale on our consolidated balance sheets as we were actively marketing
them and expected to sell them within one year. As a result, we recognized an
impairment charge of $5.1 million , which represented the difference between the
fair value less cost to sell and the carrying value of the assets. The
impairment charge was recorded to loss on assets held for sale within operating
expenses on our fiscal year 2018 consolidated statement of operations. See Note
5 to our Consolidated Financial Statements in Item 8 of this Form 10-K for
additional details.
35
--------------------------------------------------------------------------------Fees Related to Shareholder Activist
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Fees related to shareholder activist $ - $ 1,472 *
As a percentage of total revenue - % - %
*Not meaningful
In September 2017 , Praesidium Investment Management , then one of our largest
stockholders, publicly announced its disagreement with our strategy in a
Schedule 13D filed with the SEC and stated that it was seeking changes in the
composition of our Board of Directors. In fiscal year 2018, we incurred
professional and other fees relating to Praesidium's actions.
Income from Operations
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Income from operations $ 40,084 $ 67,814 (41) %
As a percentage of total revenue 10 % 18 %
Income from operations decreased in fiscal year 2019. As described above, the
decrease was primarily driven by the impairment of intangible and long-lived
assets in the fourth quarter of fiscal year 2019, as well as increases in
operating expenses, amortization of acquired intangible assets, restructuring
expenses and acquisition expenses recorded in fiscal year 2019 as a result of
the acquisition of Ipswitch. This decrease was partially offset by increased
revenue in fiscal year 2019 and the loss on assets held for sale recorded in
fiscal year 2018, as described above.
Income from Operations by Segment
Fiscal Year Ended
November 30, November 30,
(In thousands) 2019 2018 Percentage Change
OpenEdge segment $ 211,720 $ 209,986 1 %
Data Connectivity and Integration segment 31,930 15,495 106 %
Application Development and Deployment segment 52,473 50,959 3 %
Other unallocated expenses (256,039) (208,626) (23) %
Total income from operations $ 40,084 $ 67,814 (41) %
Note that the following expenses are not allocated to our segments as we manage
and report our business in these functional areas on a consolidated basis only:
certain product development and corporate sales and marketing expenses, customer
support, administration, amortization of acquired intangibles, loss on assets
held for sale, stock-based compensation, fees related to shareholder activist,
restructuring, and acquisition-related expenses.
Other (Expense) Income
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Interest expense $ (9,913) $ (5,149) 93 %
Interest income and other, net 1,143 1,220 (6) %
Foreign currency loss (2,819) (3,089) (9) %
Total other expense, net $ (11,589) $ (7,018) (65) %
As a percentage of total revenue (3) % (2) %
Other expense, net, increased in fiscal year 2019 primarily due to an increase
in interest expense. The change in interest expense is a result of an increase
in the principal balance of our debt, which was used to fund the Ipswitch
acquisition.
36
--------------------------------------------------------------------------------
Provision for Income Taxes
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Provision for income taxes $ 2,095 $ 11,126 (81) %
As a percentage of total revenue <1% 3 %
Our effective income tax rate was 7% in fiscal year 2019 and 18% in fiscal year
2018. The primary reason for the decrease in the effective rate was due to the
loss incurred by our US operations in fiscal year 2019 resulting from the
amortization and impairment of intangibles. In addition, the majority of our
international profits were earned in a jurisdiction with a statutory tax rate of
10%.
Net Income
Fiscal Year Ended
Percentage
(In thousands) November 30, 2019 November 30, 2018 Change
Net income $ 26,400 $ 49,670 (47) %
As a percentage of total revenue 6 % 13 %
Liquidity and Capital Resources
Cash, Cash Equivalents and Short-Term Investments
November 30, November 30,
(In thousands) 2020 2019
Cash and cash equivalents $ 97,990 $ 154,259
Short-term investments 8,005 19,426
Total cash, cash equivalents and short-term investments $
105,995
The decrease in cash, cash equivalents and short-term investments of$67.7 million from the end of fiscal year 2019 was primarily due to payments for acquisitions, net of cash acquired, of$213.1 million , dividend payments of$29.9 million , repurchases of common stock of$60.0 million , payments of debt obligations in the amount of$11.3 million , and purchases of property and equipment of$6.5 million . These cash outflows were offset by cash inflows from operations of$144.8 million , proceeds from the issuance of long term debt of$98.5 million ,$5.8 million in cash received from the issuance of common stock, a positive effect of exchange rates on cash of$3.1 million , and proceeds from sale of intangible assets of$0.9 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 were$24.7 million and$23.1 million atNovember 30, 2020 and 2019, respectively. Foreign cash includes unremitted foreign earnings, which are invested indefinitely outside of theU.S. As such, they are not available to fund our domestic operations. If we were to repatriate these earnings, we may be subject to income tax withholding in certain tax jurisdictions and a portion of the repatriated earnings may be subject toU.S. income tax. However, we do not anticipate that the repatriation of earnings would have a material adverse impact on our liquidity.
Share Repurchases
InJanuary 2020 , our Board of Directors increased the total share repurchase authorization from$75.0 million to$250.0 million . In fiscal years 2020 and 2019, we repurchased and retired 1.4 million shares of our common stock for$60.0 million and 0.7 million shares of our common stock for$25.0 million , respectively, under this current authorization. In fiscal year 2018, we repurchased and retired 2.9 million shares of our common stock for$120.0 million . As ofNovember 30, 2020 , there was$190.0 million remaining under the current share repurchase authorization. 37 --------------------------------------------------------------------------------
Dividends
We began paying quarterly cash dividends of$0.125 per share of common stock to Progress stockholders inDecember 2016 and increased the quarterly cash dividend to$0.14 per share inSeptember 2017 . InSeptember 2018 , the quarterly cash dividend was increased to$0.155 per share of common stock. OnSeptember 24, 2019 , our Board of Directors approved an additional increase to our quarterly cash dividend from$0.155 to$0.165 per share of common stock. OnSeptember 24, 2020 , our Board of Directors approved an additional increase of 6% to our quarterly cash dividend from$0.165 to$0.175 per share of common stock. We have paid aggregate cash dividends totaling$29.9 million ,$27.8 million and$25.8 million for the years endedNovember 30, 2020 ,November 30, 2019 andNovember 30, 2018 , respectively. We expect to continue paying quarterly cash dividends in subsequent quarters consistent with our capital allocation strategy.
Restructuring Activities
During the first quarter of fiscal year 2017, we announced certain operational restructuring initiatives intended to significantly reduce annual costs. As part of this action, management committed to a new strategic plan highlighted by a new product strategy and a streamlined operating approach. To execute these operational restructuring initiatives, we reduced our global workforce by over 20%. These workforce reductions occurred in substantially all functional units and across all geographies in which we then operated.
As part of this fiscal year 2017 restructuring, for the fiscal years ended
During the second quarter of fiscal year 2019, we restructured our operations in connection with the acquisition of Ipswitch. This restructuring resulted in a reduction in redundant positions, primarily within administrative functions of Ipswitch. For the fiscal years endedNovember 30, 2020 and 2019, we incurred expenses of$1.5 million and$3.1 million , respectively, as part of this action related to employee costs and facility closures as we consolidated offices in various locations. These expenses are recorded as restructuring expenses in the consolidated statements of operations. We do not expect to incur additional material costs with respect to this restructuring. During the fourth quarter of fiscal year 2019, we announced the reduction of our current and ongoing investment level within our cognitive application product lines, which consisted primarily of our DataRPM and Kinvey products. This restructuring resulted in a reduction in positions primarily within the sales and product development functions. For the fiscal years endedNovember 30, 2020 and 2019, we incurred expenses of$0.1 million and$2.5 million , respectively, in connection with the restructuring, which are recorded as restructuring expenses in the consolidated statements of operations. We do not expect to incur additional material costs with respect to this restructuring.
In connection with this restructuring action, during the fourth quarter of
fiscal year 2019, we evaluated the ongoing value of the intangible assets
primarily associated with the technologies and trade names obtained in the
acquisitions of DataRPM and Kinvey. As a result, we wrote down these assets to
fair value, which resulted in a
During the fourth quarter of fiscal year 2020, we restructured our operations in connection with the acquisition of Chef. This restructuring resulted in a reduction in redundant positions, primarily within administrative functions of Chef. For the fiscal year endedNovember 30, 2020 , we incurred expenses of$3.9 million relating to this restructuring. The expenses are recorded as restructuring expenses in the consolidated statements of operations. We expect to incur additional expenses as part of this action related to employee costs and facility closures as we consolidate offices in various locations during fiscal year 2021, but we do not expect these costs to be material. Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2021. Accordingly, the balance of the restructuring reserve of$3.5 million is included in other accrued liabilities on the consolidated balance sheet atNovember 30, 2020 .
Credit Facility
Our credit agreement provides for a$301.0 million secured term loan and a$100.0 million secured revolving credit facility. The revolving credit facility may be made available inU.S. Dollars and certain other currencies and may be increased by up to an additional$125.0 million if the existing or additional lenders are willing to make such increased commitments. The revolving credit facility has sublimits for swing line loans up to$25.0 million and for the issuance of standby letters of credit in a face amount up to$25.0 million . We expect to use the revolving credit facility for general corporate purposes, including acquisitions of other businesses, and may also use it for working capital. 38 -------------------------------------------------------------------------------- The Credit Agreement modified our prior credit facility by extending the maturity date toApril 30, 2024 and extending the principal repayments of the term loan. We borrowed an additional$185.0 million under the term loan as part of this modified credit facility. The new term loan was used to partially fund our acquisition of Ipswitch inApril 2019 . DuringOctober 2020 , we partially funded our acquisition of Chef by drawing down$98.5 million under the revolving line of credit (Note 7). The credit facility matures onApril 30, 2024 , when all amounts outstanding will be due and payable in full. The revolving credit facility does not require amortization of principal. The outstanding balance of the term loan as ofNovember 30, 2020 was$286.0 million , with$18.8 million due in the next 12 months. The term loan requires repayment of principal at the end of each fiscal quarter, beginning with the fiscal quarter endedAugust 31, 2019 . The principal repayment amounts are in accordance with the following schedule: (i) four payments of$1.9 million each, (ii) four payments of$3.8 million each, (iii) four payments of$5.6 million each, (iv) four payments of$7.5 million each, (v) three payments of$9.4 million each, and (vi) the last payment is of the remaining principal amount. Any amounts outstanding under the term loan thereafter would be due on the maturity date. The term loan may be prepaid before maturity in whole or in part at our option without penalty or premium. The average interest rate of the credit facility during the fiscal year endedNovember 30, 2020 was 2.41% and the interest rate as ofNovember 30, 2020 was 1.81%. InJuly 2019 , we entered into an interest rate swap contract with an initial notional amount of$150.0 million to manage the variability of cash flows associated with approximately one-half of our variable rate debt. The contract matures onApril 30, 2024 and requires periodic interest rate settlements. Revolving loans may be borrowed, repaid, and reborrowed untilApril 30, 2024 , at which time all amounts outstanding must be repaid. As ofNovember 30, 2020 , there was$98.5 million outstanding under the revolving line and$2.1 million of letters of credit. The credit facility contains customary affirmative and negative covenants, in each case subject to customary exceptions for a credit facility of this size and type. We are also required to maintain compliance with a consolidated fixed charge coverage ratio, a consolidated total leverage ratio and a consolidated senior secured leverage ratio. We are in compliance with these financial covenants as ofNovember 30, 2020 .
Cash Flows from Operating Activities
Fiscal Year Ended
November 30, November 30, November 30,
(In thousands) 2020 2019 2018
Net income $ 79,722 $ 26,400 $ 49,670
Non-cash reconciling items included in net income 64,534 90,139 68,542
Changes in operating assets and liabilities 591 11,945 3,140
Net cash flows from operating activities $ 144,847 The increase in cash generated from operations in fiscal year 2020 as compared to fiscal year 2019 was primarily due to higher operating income. There were not any significant non-cash reconciling items in fiscal year 2020. Cash flows in fiscal year 2020 increased significantly due to increased collections resulting from the acquisitions of Ipswitch and Chef, partially offset by increased personnel related expenditures. Cash flows in fiscal year 2020 also increased due to lower operating expenses primarily as a result of decreased travel and in-person events resulting from the COVID-19 pandemic, as well as cost reductions we implemented within our cognitive application product lines in the fourth quarter of fiscal year 2019. Our gross accounts receivable as ofNovember 30, 2020 increased by$11.7 million from the end of fiscal year 2019, which is primarily due to the acquisition of Chef, offset by strong collections. Days sales outstanding ("DSO") in accounts receivable decreased to 54 days at the end of fiscal year 2020 compared to 56 days at the end of fiscal year 2019, with the increase due to the timing of billings. In addition, our total deferred revenue as ofNovember 30, 2020 increased by$16.0 million from the end of fiscal year 2019. The significant changes in operating assets and liabilities in fiscal year 2019 as compared to fiscal year 2018 were primarily due to an increase in deferred revenue and personnel related expenditures. In fiscal year 2019 there was a$22.7 million intangible asset impairment charge, which was the most significant non-cash reconciling item included in net income (see Note 4 to the Consolidated Financial Statements in Item 8 of this Form 10-K for further information on the impairment charge). In fiscal year 39 -------------------------------------------------------------------------------- 2018 there was a non-cash reconciling item included in net income for a$5.1 million loss on assets held for sale (see Note 5 to the Consolidated Financial Statements in Item 8 of this Form 10-K for further information on the impairment charge). In addition, our gross accounts receivable as ofNovember 30, 2019 increased by$13.1 million from the end of fiscal year 2018, which was primarily due to the acquisition of Ipswitch. DSO in accounts receivable increased to 56 days at the end of fiscal year 2019 compared to 47 days at the end of fiscal year 2018.
Cash Flows (used in) from Investing Activities
Fiscal Year Ended
November 30, November 30, November 30,
(In thousands) 2020 2019 2018
Net investment activity $ 11,392 $ 14,770 $ 14,843
Purchases of property and equipment (6,517) (3,998) (7,250)
Proceeds from sale of long-lived assets, net 889 6,146 -
Payments for acquisitions, net of cash acquired (213,057) (225,298) -
Net cash flows (used in) from investing activities
Net cash outflows and inflows of our net investment activity are generally a result of the timing of our purchases and maturities of securities, which are classified as cash equivalents or short-term securities, as well as the timing of acquisitions and divestitures. Cash used in investing activities was impacted by the acquisition of Chef for a net cash amount of$213.1 million and Ipswitch for a net cash amount of$225.3 million , in fiscal years 2020 and 2019, respectively. We did not complete any acquisitions during fiscal year 2018. In addition, we purchased$6.5 million of property and equipment in fiscal year 2020, as compared to$4.0 million in fiscal year 2019 and$7.3 million in fiscal year 2018. We also sold$0.9 million of intangible assets in the fourth quarter of fiscal year 2020 and$6.1 million of certain corporate land and building assets in the second quarter of fiscal year 2019.
Cash Flows from (used in) Financing Activities
Fiscal Year Ended
November 30, November 30, November 30,
(In thousands) 2020 2019 2018
Proceeds from stock-based compensation plans $ 11,099 $ 9,265 $ 9,205
Repurchases of common stock (60,000) (25,000) (120,000)
Dividend payment to shareholders (29,900) (27,760) (25,789)
Proceeds from the issuance of debt, net of payments of principal and debt issuance costs
87,212 178,065 (6,188)
Other financing activities (5,331) (4,278) (3,999)
Net cash flows from (used in) financing activities
During fiscal year 2020, we received$11.1 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to$9.3 million in fiscal year 2019 and$9.2 million in fiscal year 2018. In addition, we made dividend payments of$29.9 million to our stockholders in fiscal year 2020, as compared to dividend payments of$27.8 million and$25.8 million in fiscal years 2019 and 2018, respectively. Most significantly, we received proceeds from the issuance of debt of$98.5 million in fiscal year 2020 and$185.0 million in fiscal year 2019 in connection with the acquisitions of Chef and Ipswitch, respectively. In addition, we repurchased$60.0 million of our common stock under our share repurchase plan in fiscal year 2020, compared to$25.0 million in fiscal year 2019 and$120.0 million in fiscal year 2018. We also made principal payments on our debt of$11.3 million during fiscal year 2020, as compared to$5.3 million in fiscal year 2019 and$6.2 million in fiscal year 2018. 40 --------------------------------------------------------------------------------
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
Cash from operations in fiscal year 2021 could be affected by various risks and uncertainties, including, but not limited to, the effects of the pandemic and other risks detailed in Part I, Item 1A titled "Risk Factors." While the pandemic has not negatively impacted our liquidity and capital resources to date, it has led to increased disruption and volatility in capital markets and credit markets which could adversely affect our liquidity and capital resources in the future. However, based on our current business plan, we believe that existing cash balances, together with funds generated from operations and amounts available under our credit facility, will be sufficient to finance our operations and meet our foreseeable cash requirements through at least the next twelve months. We do not contemplate a need for any foreign repatriation of the earnings which are deemed invested indefinitely outside of theU.S. Our foreseeable cash needs include our planned capital expenditures, debt repayments, quarterly cash dividends, share repurchases, acquisitions, lease commitments, restructuring obligations and other long-term obligations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
Contractual Obligations
The following table details our contractual obligations as of
Payments Due by Period
Less than 1 1-3 3-5 More than 5
Total Year Years Years Years
Long-term debt:
Long-term debt obligations $ 384,450 $ 18,812
6,857 12,402 2,725 -
Operating leases 33,981 7,707 14,072 11,327 875
Purchase obligations(2) 8,670 1,664 7,006 - -
Unrecognized tax benefits(3) 303 303 - - -
Total $ 449,388 $ 35,343 $ 93,681 $ 319,489 $ 875
(1)Interest on our long-term debt is due and payable monthly and is estimated
using the effective interest rate as of November 30, 2020 as the interest rate
is variable. See Note 8 to our Consolidated Financial Statements in Item 8 of
this Form 10-K for additional information.
(2)Represents the fixed or minimum amounts due under purchase obligations for
support service agreements.
(3)Our other noncurrent liabilities on the consolidated balance sheet include
unrecognized tax benefits and related interest and penalties. As of November 30,
2020 , we had unrecognized tax benefits of $6.2 million and an additional $0.4
million for interest and penalties classified as noncurrent liabilities.
Currently, we are only able to estimate a FY21 payment of $0.3 million related
to an audit settlement. For the remaining balance 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 16 to our Consolidated
Financial Statements in Item 8 of this Form 10-K for additional information.
41
--------------------------------------------------------------------------------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 we believe are reasonable under the circumstances. However, actual results may differ from these estimates. We have identified the following critical accounting policies that require the use of significant judgments and estimates in the preparation of our consolidated financial statements. This listing is not a comprehensive list of all of our accounting policies. For further information regarding the application of these and other accounting policies, see Note 1 to our Consolidated Financial Statements in Item 8 of this Form 10-K.
Revenue Recognition
Our contracts with customers typically include promises to license one or more
products and services to a customer. Determining whether products and services
are distinct performance obligations that should be accounted for separately
requires significant judgment. Significant judgment is also required to
determine the stand-alone selling price ("SSP") of each distinct performance
obligation. Our licenses are sold as perpetual or term licenses, and the
arrangements typically contain various combinations of maintenance and services,
which are generally accounted for as separate performance obligations. We use
the residual approach to allocate the transaction price to our software license
performance obligations because, due to the pricing of our licenses being highly
variable, they do not have an observable SSP.
Maintenance revenue is recognized ratably over the contract period. The SSP of
maintenance services is a percentage of the net selling price of the related
software license. Professional services revenue is generally recognized as the
services are delivered to the customer. We apply the practical expedient of
recognizing revenue upon invoicing for time and materials-based arrangements.
The SSP of services is based upon observable prices in similar transactions
using the hourly rates sold in stand-alone services transactions. Services are
either sold on a time and materials basis or prepaid upfront. Revenue related to
software-as-a-service ("SaaS") offerings is recognized ratably over the contract
period. The SSP of SaaS performance obligations is determined based upon
observable prices in stand-alone SaaS transactions.
We also consider whether an arrangement has any discounts, material rights, or
specified future upgrades that may represent additional performance obligations,
although we do not have a history of offering these elements.
We had goodwill and net intangible assets of$704.5 million atNovember 30, 2020 . We evaluate goodwill and other intangible assets with indefinite useful lives, if any, for impairment annually or on an interim basis when events and circumstances arise that indicate impairment may have occurred. We perform our annual goodwill impairment as ofOctober 31st of each fiscal year. We believe this date aligns the timing of the annual goodwill impairment testing with our planning and budgeting process, which is a key component of the tests, and alleviates administrative burden during our year-end reporting period. In performing our annual assessment, we first perform a qualitative test to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value and if necessary, perform a quantitative test. To conduct the quantitative impairment test of goodwill, we compare the fair value of a reporting unit to its carrying value. If the reporting unit's carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value. We estimate the fair values of our reporting units using discounted cash flow models or other valuation models, such as comparative transactions and market multiples. We must make assumptions about future cash flows, future operating plans, discount rates, comparable companies, market multiples, purchase price premiums and other factors in those models. Different assumptions and judgment determinations could yield different conclusions that would result in an impairment charge to income in the period that such change or determination was made. When we evaluate potential impairments outside of our annual measurement date, judgment is required in determining whether an event has occurred that may impair the value of goodwill or intangible assets. Factors that could indicate that an impairment may exist include significant underperformance relative to plan or long-term projections, significant changes in business strategy, significant negative industry or economic trends or a significant decline in our stock price for a sustained period of time. 42 -------------------------------------------------------------------------------- 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. As ofNovember 30, 2020 , our three reporting units were OpenEdge, Data Connectivity and Integration, and Application Development and Deployment During fiscal year 2020, we tested goodwill for impairment for each of our reporting units as ofOctober 31, 2020 . Our reporting units each had fair values which significantly exceeded their carrying values as of the annual impairment date. We did not recognize any goodwill impairment charges during fiscal years 2020, 2019 or 2018. During fiscal year 2019, we evaluated the ongoing value of the intangible assets associated with the technology obtained in connection with the acquisitions of DataRPM and Kinvey. As a result of our decision to reduce our current and ongoing spending levels within our cognitive application product lines, which consist primarily of our DataRPM and Kinvey products, we determined that the intangible assets were fully impaired. Therefore, we incurred an impairment charge of$22.7 million in the fourth quarter of fiscal year 2019 (Note 4). We did not recognize any intangible asset impairment charges during fiscal years 2020 and 2018. Income Tax Accounting We had a net deferred tax asset of$14.5 million atNovember 30, 2020 . 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 expense based on the fair value of stock-based awards, less the present value of expected dividends when applicable, measured at the date of grant. Stock-based compensation is recognized over the requisite service period, which is generally the vesting period of the award, and is adjusted each period for actual forfeitures.
We estimate the fair value of each stock-based award on the measurement date using either the current market price, the Black-Scholes option valuation model, or the Monte Carlo Simulation valuation model. The Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to the expected stock price volatility, the expected term of the option, a risk-free interest rate and a dividend yield. The expected volatility is based on the historical volatility of our stock price. The expected term is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free interest rate is based on the yield of zero-couponU.S. Treasury securities for the period that is commensurate with the expected option term at the time of grant. The expected dividend yield is based on our historical behavior and future expectations of dividend declarations.
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.
43
--------------------------------------------------------------------------------Recent Accounting Pronouncements
Refer to Note 1 to our Consolidated Financial Statements in Item 8 of this Form 10-K.
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