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| PRGS > SEC Filings for PRGS > Form 10-K on 29-Jan-2013 | All Recent SEC Filings |
29-Jan-2013
Annual Report
Forward-Looking Statements
Certain statements below about anticipated results and our products and markets, are forward-looking statements that are based on our current plans and assumptions. Important information about the bases for these plans and assumptions and factors that may cause our actual results to differ materially from these statements is contained below and in Item 1A. "Risk Factors" of this Annual Report on Form 10-K.
Use of Constant Currency
Revenue from our international operations has historically represented more than half of our total revenue. As a result, our revenue results have been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. For example, if the local currencies of our foreign subsidiaries weaken, our consolidated results stated in U.S. dollars are negatively impacted.
As exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of revenue growth rates on a constant currency basis enhances the understanding of our revenue results and evaluation of our performance in comparison to prior periods. The constant currency information presented is calculated by translating current period results using prior period weighted average foreign currency exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance with accounting principles generally accepted in the United States of America (GAAP).
Revised Prior Period Amounts
Our financial results for prior periods have been revised, in accordance with GAAP, to reflect certain changes to the business and other matters. Prior period amounts have been revised for the impact of discontinued operations due to the sale or expected sale of our non-Core product lines, purchase accounting measurement period adjustments related to our acquisition of Corticon Technologies, Inc. (Corticon), changes to our reportable segments as a result of organizational structure changes from the implementation of a new strategic plan and an immaterial correction of prior period amounts. Refer to Item 8 of this Annual Report for an additional description of these items.
Overview
We are a global software company that simplifies and enables the development, deployment and management of business applications on-premise or on any Cloud, on any platform and on any device with minimal IT complexity and low total cost of ownership. In April 2012, we announced a new strategic plan (the "Plan") in which we intend to become a leading provider of next-generation, context-aware application development and deployment platform in the Cloud for the Application Platform-as-a-Service (aPaas) market by investing in our OpenEdge, DataDirect and Decision Analytics product lines ("Core" product lines) and integrating them into a single, cohesive offering.
The Plan is being executed in two phases. In the first phase, we are investing in our Core product lines and making them more Cloud-ready. We are also divesting the ten non-Core product lines which are not considered Core to our business: Actional, Artix, DataXtend, FuseSource, ObjectStore, Orbacus, Orbix, Savvion, Shadow and Sonic. In the second phase of the Plan, by unifying the product capabilities of our Core product lines, we will refine and enhance our next generation, feature-rich application development and deployment solution targeting the new market category of aPaaS.
In fiscal year 2012 and the first quarter of fiscal year 2013, we entered into definitive purchase and sale agreements to divest all of our non-Core product lines. The FuseSource product line was sold to Red Hat, Inc. in September 2012, the Shadow product line was sold to Rocket Software, Inc. in October 2012, and the investment arm of Trilogy Enterprises purchased Actional, DataXtend, ObjectStore, Savvion and Sonic in December 2012. We expect to close on the sale of Artix, Orbacus and Orbix to a subsidiary of Micro Focus International plc in the first quarter of fiscal year 2013. The aggregate purchase price for all divestitures is approximately $130.0 million.
During 2012, we also executed on cost reductions as part of the Plan. In fiscal year 2012, we recorded restructuring expenses of $19.0 million in furtherance of the cost reduction plans, of which $10.9 million is included in discontinued operations. The charge included $16.4 million in severance and other employee benefits associated with the reduction of 11% of our workforce.
As part of the Plan, our Board of Directors authorized us to repurchase $350.0 million of our common stock through November 2013. In October 2012, under the authorization, we announced the adoption of a 10b5-1 plan to repurchase up to $250.0 million of our common stock through June 30, 2013, or earlier, and have repurchased 4.5 million shares of our common stock for $88.4 million through November 30, 2012. As of January 22, 2013, we have repurchased 7.6 million shares of our common stock for $155.3 million.
As part of the Plan, we changed the structure of our internal organization and
the way we manage our business. Our internal reporting includes two segments:
(1) the Core segment, which includes our Core product lines, and (2) the
non-Core segment, which includes the non-Core product lines. We assign dedicated
costs and expenses directly to each segment and utilize an allocation
methodology to assign all other costs and expenses, primarily general and
administrative, to each segment.
Our financial results for fiscal year 2012 were adversely impacted by factors related to the planning, announcement and execution of the Plan, including the undertaking of large restructuring efforts and the marketing for divestiture and actual sale of non-Core products. These factors contributed to a very uncertain environment for our company, partners, customers and employees. In particular, since the second quarter of fiscal year 2012, customer purchasing decisions were delayed, which caused deal slippage at a greater rate than usual. This was caused both by uncertainty surrounding the Plan and generally deteriorating macroeconomic conditions, primarily in Europe.
Investments to improve the Core business were also initiated late during the second quarter of fiscal year 2012, and require time to impact performance. Until these investments are realized, our operating margins will be adversely impacted. In addition, the new business focus and new strategy has required us to restructure our organization and the way we go to market, how we think about and implement product roadmaps and how we operate and report our financial results, all of which caused additional disruption.
The announcement and marketing for divestiture of the non-Core product lines caused revenue from these product lines to drop significantly in fiscal year 2012. These declines have adversely impacted our fiscal year 2012 results and our operating performance will be adversely impacted in the future by temporarily higher expense levels as we transition away from the non-Core portfolio.
The U.S. and many foreign economies continue to experience uncertainty driven by varying macroeconomic conditions and recovery remains uneven. Uncertainty in the macroeconomic environment and associated global economic conditions have resulted in extreme volatility in credit, equity, and foreign currency markets, including the European sovereign debt markets and volatility in various markets including the financial services sector. We have been adversely impacted by these conditions
as some customers have delayed software investments in response to this macroeconomic uncertainty. The continuation of this climate could cause our customers to further delay, forego or reduce the amount of their investments in our products or delay payments of amounts due to us. We expect these macroeconomic conditions to continue in fiscal year 2013, most particularly in Europe, the Middle East and Africa (EMEA).
We derive a significant portion of our revenue from international operations, which are primarily conducted in foreign currencies. As a result, changes in the value of these foreign currencies relative to the U.S. dollar have significantly impacted our results of operations and may impact our future results of operations.
We believe that existing cash balances, together with funds generated from operations, amounts available under our revolving credit line and consideration received from the divestitures of non-Core product lines will be sufficient to finance our operations and meet our foreseeable cash requirements, including our plans to repurchase shares of our common stock, through at least the next twelve months.
Results of Operations
The following table sets forth certain income and expense items as a percentage of total revenue, and the percentage change in dollar amounts of such items compared with the corresponding period in the previous fiscal year.
Percentage Change
Percentage of Total Revenue 2012 Compared to 2011 Compared
2012 2011 2010 2011 to 2010
Revenue:
Software licenses 34 % 35 % 36 % (10 )% - %
Maintenance and services 66 65 64 (5 ) 4
Total revenue 100 100 100 (7 ) 3
Costs of revenue:
Cost of software licenses 2 2 1 13 4
Cost of maintenance and services 11 10 9 (3 ) 24
Amortization of acquired
intangibles - 1 2 (52 ) (55 )
Total costs of revenue 13 13 12 (4 ) 10
Gross profit 87 87 88 (8 ) 2
Operating expenses:
Sales and marketing 35 28 26 15 12
Product development 16 12 14 18 (10 )
General and administrative 19 17 15 - 20
Amortization of acquired
intangibles - 1 1 - (66 )
Restructuring expenses 2 1 6 * *
Acquisition-related expenses - - - * *
Total operating expenses 72 59 62 13 (2 )
Income from operations 15 28 26 (51 ) 11
Other income (expense) - - 1 138 (114 )
Income from continuing
operations before income taxes 15 28 27 (51 ) 6
Provision for income taxes 5 10 9 (50 ) 5
Income from continuing
operations 10 18 18 (51 ) 6
Income (loss) from discontinued
operations, net 4 (2 ) (4 ) 321 54
Net income 14 % 16 % 14 % (20 )% 24 %
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* Not meaningful
Fiscal Year 2012 Compared to Fiscal Year 2011
Revenue
Fiscal Year Ended Percentage Change
Constant
(In thousands) November 30, 2012 November 30, 2011 As Reported Currency
Revenue $ 335,205 $ 360,704 (7 )% (4 )%
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Total revenue decreased $25.5 million in fiscal year 2012 as compared to fiscal year 2011. Revenue would have decreased by 4% if exchange rates had been constant in fiscal year 2012 as compared to exchange rates in effect in fiscal year 2011. The decrease in revenue in fiscal year 2012 was primarily a result of the disruption caused by the announcement of our Plan and its impact on our employees, customers and partners. In particular, we encountered a delay in purchasing decisions, which resulted in deal slippage at a greater rate than normal. We believe this was caused both by uncertainty surrounding our Plan and generally deteriorating macroeconomic conditions, primarily in Europe.
Changes in prices from fiscal year 2012 to fiscal year 2011 did not have a significant impact on our revenue. Changes in foreign currency exchange rates negatively impacted our reported revenues.
License Revenue
Fiscal Year Ended Percentage Change
Constant
(In thousands) November 30, 2012 November 30, 2011 As Reported Currency
License $ 113,270 $ 125,966 (10 )% (8 )%
As a percentage of total revenue 34 % 35 %
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Software license revenue decreased $12.7 million in fiscal year 2012 as compared to fiscal year 2011. Software license revenue would have decreased by 8% if exchange rates had been constant in fiscal year 2012 as compared to exchange rates in effect in fiscal year 2011. Excluding the impact of changes in exchange rates, the decrease in license revenue is due to the disruption caused by the announcement of our Plan and was also due to a number of large non-recurring direct deals, particularly in EMEA, in the first half of fiscal year 2011 as compared to the same period in fiscal year 2012.
Maintenance and Services Revenue
Fiscal Year Ended Percentage Change
Constant
(In thousands) November 30, 2012 November 30, 2011 As Reported Currency
Maintenance $ 208,846 $ 217,372 (4 )% - %
As a percentage of total revenue 62 % 60 %
Professional services $ 13,089 $ 17,366 (25 )% (22 )%
As a percentage of total revenue 4 % 5 %
Total maintenance and services revenue $ 221,935 $ 234,738 (5 )% (2 )%
As a percentage of total revenue 66 % 65 %
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Maintenance and services revenue decreased $12.8 million in fiscal year 2012 as compared to fiscal year 2011. Maintenance and services revenue would have decreased by 2% if exchange rates had been constant in fiscal year 2012 as compared to exchange rates in effect in fiscal year 2011. Excluding the impact of changes in exchange rates, the decrease in maintenance and services revenue was primarily the result of lower license revenue due to the associated services that are attached to license sales. The decrease in professional services revenue was also impacted by the shift away from our RPM strategy. Our maintenance renewal rate in fiscal year 2012 was approximately 90%.
Revenue by Segment
Fiscal Year Ended Percentage Change
(In thousands) November 30, 2012 November 30, 2011 As Reported Constant Currency
Core segment $ 335,205 $ 360,704 (7 )% (4 )%
As a percentage of total revenue 100 % 100 %
Non-Core segment $ - $ - - % - %
As a percentage of total revenue - % - %
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Revenue from our Core segment is representative of revenue from our continuing operations since the results of all non-Core products lines are included in discontinued operations. See discussion of fluctuations in our Core and continuing operations revenue in this Results of Operations section. For an understanding of how our internal measure of segment revenue is determined, see Note 17 of the Consolidated Financial Statements appearing in Item 8 of this Annual Report.
Revenue by Region
Fiscal Year Ended Percentage Change
Constant
(In thousands) November 30, 2012 November 30, 2011 As Reported Currency
North America $ 146,374 $ 146,572 - % - %
As a percentage of total revenue 44 % 41 %
EMEA $ 131,151 $ 153,206 (14 )% (10 )%
As a percentage of total revenue 39 % 42 %
Latin America $ 31,407 $ 34,349 (9 )% 4 %
As a percentage of total revenue 9 % 10 %
Asia Pacific $ 26,273 $ 26,577 (1 )% (2 )%
As a percentage of total revenue 8 % 7 %
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Total revenue generated in North America decreased $0.2 million, and total revenue generated outside North America decreased $25.3 million, in fiscal year 2012 as compared to fiscal year 2011. The decrease in revenue in EMEA was primarily the result of deteriorating macroeconomic conditions in Europe, as well as the announcement of our Plan. Total revenue generated in markets outside North America represented 56% of total revenue in fiscal year 2012 compared to 59% of total revenue in fiscal year 2011. Total revenue generated in markets outside North America would have represented 58% of total revenue if exchange rates had been constant in fiscal year 2012 as compared to the exchange rates in effect in fiscal year 2011.
Cost of Software Licenses
Fiscal Year Ended
Percentage
(In thousands) November 30, 2012 November 30, 2011 Change
Cost of software licenses $ 6,112 $ 5,430 13 %
As a percentage of software license revenue 5 % 4 %
As a percentage of total revenue 2 % 2 %
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Cost of software licenses consists primarily of costs of royalties, electronic software distribution costs, duplication and packaging. Cost of software licenses increased $0.7 million in fiscal year 2012 as compared to fiscal year 2011, and increased as a percentage of software license revenue from 4% to 5%. The dollar increase was primarily due to higher royalty expense for products and technologies licensed or resold from third parties. Cost of software licenses as a percentage of software license revenue varies from period to period depending upon the relative product mix.
Cost of Maintenance and Services
Fiscal Year Ended
Percentage
(In thousands) November 30, 2012 November 30, 2011 Change
Cost of maintenance and services $ 36,192 $ 37,238 (3 )%
As a percentage of maintenance and services revenue 16 % 16 %
As a percentage of total revenue 11 % 10 %
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Cost of maintenance and services consists primarily of costs of providing customer support, education and consulting. Cost of maintenance and services decreased $1.0 million in fiscal year 2012 as compared to fiscal year 2011 and remained flat as a percentage of maintenance and services revenue at 16%. The total dollar amount of expense in fiscal year 2012 decreased as a result of lower maintenance and professional services revenue in fiscal year 2012 as compared with fiscal year 2011.
Amortization of Acquired Intangibles
Fiscal Year Ended
Percentage
(In thousands) November 30, 2012 November 30, 2011 Change
Amortization of acquired intangibles $ 1,259 $ 2,600 (52 )%
As a percentage of total revenue - % 1 %
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Amortization of acquired intangibles included in costs of revenue primarily represents the amortization of the value assigned to intangible assets for technology obtained in business combinations. Amortization of acquired intangibles decreased $1.3 million in fiscal year 2012 as compared to fiscal year 2011. The decrease was due to the completion of amortization of certain intangible assets acquired in prior years, and is offset by amortization of intangible asset acquired with the Corticon acquisition, which was completed in the fourth quarter of fiscal year 2011.
Gross Profit
Fiscal Year Ended
Percentage
(In thousands) November 30, 2012 November 30, 2011 Change
Gross profit $ 291,642 $ 315,436 (8 )%
As a percentage of total revenue 87 % 87 %
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Our gross profit decreased $23.8 million in fiscal year 2012 as compared to fiscal year 2011, and our gross profit as a percentage of total revenue remained at 87%. The dollar decrease in our gross profit was due to lower revenues, partially offset by lower costs of revenue from our cost saving measures and lower amortization expense of acquired intangibles, as described above.
Sales and Marketing
Fiscal Year Ended
Percentage
(In thousands) November 30, 2012 November 30, 2011 Change
Sales and marketing $ 117,855 $ 102,618 15 %
As a percentage of total revenue 35 % 28 %
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Sales and marketing expenses increased $15.2 million in fiscal year 2012 as compared to fiscal year 2011, and increased as a percentage of total revenue from 28% to 35%. The increase in sales and marketing expense was due to a $9.8 million increase in compensation-related expenses due to the focus on our Core product lines and $1.7 million of incremental compensation-
related expenses due to the separation of two of our sales and marketing executives. The increase was partially offset by cost control measures initiated during the strategic planning process.
Product Development
Fiscal Year Ended
Percentage
(In thousands) November 30, 2012 November 30, 2011 Change
Product development $ 53,017 $ 44,876 18 %
As a percentage of total revenue 16 % 12 %
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Product development expenses increased $8.1 million in fiscal year 2012 as compared to fiscal year 2011, and increased as a percentage of revenue from 12% to 16%. The increase in product development expenses is primarily due to higher headcount from the Corticon acquisition, which was completed in the fourth quarter of fiscal year 2011. The increases in product development expenses were partially offset by cost savings from our restructuring actions undertaken as part of the Plan.
General and Administrative
Fiscal Year Ended
Percentage
(In thousands) November 30, 2012 November 30, 2011 Change
General and administrative $ 62,053 $ 61,816 - %
As a percentage of total revenue 19 % 17 %
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General and administrative expenses include the costs of our finance, human resources, legal, information systems and administrative departments. General and administrative expenses increased $0.2 million in fiscal year 2012 as compared to fiscal year 2011, and increased as a percentage of revenue from 17% to 19%. The increase in fiscal year 2012 was primarily due to stock-based compensation costs associated with the hiring of a new Chief Executive Officer in December 2011, incremental compensation-related expenses due to the separation of our Chief Financial Officer in April 2012, a $0.9 million litigation settlement, proxy contest-related costs and costs associated with the Plan. The increases were partially offset by cost savings from our restructuring actions and other cost control measures and increased compensation-related costs in fiscal year 2011 related to the severance agreement entered into with Richard D. Reidy, a former Chief Executive Officer.
Amortization of Acquired Intangibles
Fiscal Year Ended
Percentage
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