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PROGRESS SOFTWARE CORP /MA - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[October 09, 2014]

PROGRESS SOFTWARE CORP /MA - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) Cautionary Note Regarding Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions regarding forward-looking statements. This Form 10-Q, and other information provided by us or statements made by our directors, officers or employees from time to time, may contain "forward-looking" statements and information, which involve risks and uncertainties. Actual future results may differ materially. Statements indicating that we "expect," "estimate," "believe," "are planning" or "plan to" are forward-looking, as are other statements concerning future financial results, product offerings or other events that have not yet occurred. There are various factors that could cause actual results or events to differ materially from those anticipated by the forward-looking statements, including but not limited to the following: market acceptance of Progress's strategy and product development initiatives; pricing pressures and the competitive environment in the software industry and Platform-as-a-Service market; Progress's ability to successfully manage transitions to new business models and markets, including an increased emphasis on a cloud and subscription strategy; Progress's ability to make acquisitions and to realize the expected benefits and anticipated synergies from such acquisitions; the continuing uncertainty in the U.S. and international economies, which could result in fewer sales of Progress's products and may otherwise harm Progress's business; business and consumer use of the Internet and the continuing adoption of Cloud technologies; the receipt and shipment of new orders; Progress's ability to expand its relationships with channel partners and to manage the interaction of channel partners with its direct sales 19-------------------------------------------------------------------------------- Table of Contents force; the timely release of enhancements to Progress's products and customer acceptance of new products; the positioning of Progress's products in its existing and new markets; variations in the demand for professional services and technical support; Progress's ability to penetrate international markets and manage its international operations; changes in exchange rates; and those factors discussed in Part II, Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q, and in Part I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended November 30, 2013. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized. We also cannot assure you that we have identified all possible issues which we might face. We undertake no obligation to update any forward-looking statements that we make.



Use of Constant Currency Revenue from our international operations has historically represented more than half of our total revenue. As a result, our revenue results have been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. For example, if the local currencies of our foreign subsidiaries weaken, our consolidated results stated in U.S. dollars are negatively impacted.

As exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of revenue growth rates on a constant currency basis enhances the understanding of our revenue results and evaluation of our performance in comparison to prior periods. The constant currency information presented is calculated by translating current period results using prior period weighted average foreign currency exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance with accounting principles generally accepted in the United States of America (GAAP).


Overview We are a global software company that simplifies the development, deployment and management of business applications on-premise or in the cloud, on any platform or device, to any data source, with enhanced performance, minimal IT complexity and low total cost of ownership. In 2013, we introduced the Progress Pacific platform-as-a-service (PaaS) that is the foundation of a strategic plan (the "Plan") we announced in April 2012. In April 2012, we announced our intention to become a leading provider of next-generation application development and deployment capabilities in the cloud for the PaaS market by investing in our OpenEdge, DataDirect, and Corticon product lines and integrating components of those products into a single, cohesive offering.

During fiscal years 2012 and 2013, we completed divestitures of the eleven product lines which were not considered core product lines of our business: Actional, Apama, Artix, DataXtend, FuseSource, ObjectStore, Orbacus, Orbix, Savvion, Shadow and Sonic. The FuseSource and Shadow product lines were divested in fiscal year 2012. The remaining product lines, excluding Apama, were divested in the first quarter of fiscal year 2013. The divestitures were part of our strategic plan announced during fiscal year 2012. The aggregate purchase price for these product lines, excluding Apama, was approximately $130.0 million. The Apama product line was divested in the third quarter of fiscal year 2013 for a purchase price of $44.3 million. Our operating performance was adversely impacted by temporarily higher expense levels and restructuring costs as we transitioned away from the product lines we divested.

In furtherance of the Plan, we began to unify the product capabilities of our core product lines with the goal of refining and enhancing our next generation, feature-rich application development and deployment solution targeting the new market category of PaaS. To that end, during fiscal year 2013, we added new functionalities to our existing products. We also completed the acquisition of Rollbase, Inc. (Rollbase), a provider of application development software technology that allows the rapid design, development and deployment of on-demand business applications. In addition, in July 2013, we announced the release of Progress Pacific, which provides users with the freedom to choose the development environment tools, data sources, deployment environments and devices that best fit business and user needs. It is comprised of Rollbase and DataDirect Cloud, together with assets from our OpenEdge, DataDirect and Corticon products.

In fiscal year 2014, we have continued to invest in our existing product lines and also announced the release of Easyl, our latest product offering included in our Pacific platform, which is a data analysis tool that dramatically simplifies the process of accessing, blending, and reporting on organizational data. We also acquired Modulus LLC (Modulus), a PaaS provider offering a platform for easily hosting, deploying, scaling and monitoring data-intensive, real-time applications using powerful, rapidly growing Node.js and MongoDB technologies.

We plan to capitalize on the expected market growth of the core technologies that Modulus supports and drive new revenue through the Pacific platform.

As a result of our renewed focus on our core products, the enhancements to our existing products and improvement in our cost 20-------------------------------------------------------------------------------- Table of Contents structure, we experienced improved financial performance during fiscal year 2013. However, we are still in the early stages of our transition to becoming a leading vendor in the cloud-based PaaS market. As a result, we anticipate continued reinvestment in our products will be necessary and sustainable increases in revenue may not be foreseeable in the near term. Overall, our investments to improve our product lines require time to impact performance.

In addition, our new business focus and new strategy has required us to restructure our organization and the way we go to market, how we implement product roadmaps and how we operate and report our financial results, all of which caused additional disruption and could cause further disruption in the future as we implement our new go to market plans. Our cloud strategy will require continued investment in product development and cloud operations as well as a change in the way we price and deliver our products.

Effective September 1, 2014, we will operate as three distinct business units: OpenEdge, Application Development and Deployment, and Data Connectivity and Integration, each with dedicated sales, product management and product marketing functions. These changes are designed to enable the business to better deliver against the fast paced requirements in the on-premise and cloud application development and data connectivity and integration markets. As a result of these changes, we expect to adopt segment reporting for our three business units beginning in the fourth fiscal quarter of 2014.

In January 2014, our Board of Directors authorized a new $100.0 million share repurchase program. Under this authorization, we have repurchased 2.3 million shares for $52.6 million during the first nine months of fiscal year 2014.

We derive a significant portion of our revenue from international operations, which are primarily conducted in foreign currencies. As a result, changes in the value of these foreign currencies relative to the U.S. dollar have significantly impacted our results of operations and may impact our future results of operations.

We have evaluated, and expect to continue to evaluate, possible acquisitions and other strategic transactions designed to expand our business and/or add complementary products and technologies to our existing product sets. As a result, our expected uses of cash could change, our cash position could be reduced and we may incur additional debt obligations to the extent we complete additional acquisitions.

We believe that existing cash balances, together with funds generated from operations and amounts available under our revolving credit line will be sufficient to finance our operations and meet our foreseeable cash requirements through at least the next twelve months.

21-------------------------------------------------------------------------------- Table of Contents 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 (due to rounding, totals may not equal the sum of the line items in the table below): Percentage of Total Revenue Percentage Change Three Months Ended Nine Months Ended Three Months Nine Months August 31, 2014 August 31, 2013 August 31, 2014 August 31, 2013 Ended Ended Revenue: Software licenses 33 % 33 % 33 % 35 % 3 % (10 )% Maintenance and services 67 67 67 65 2 - Total revenue 100 100 100 100 2 (3 ) Costs of revenue: Cost of software licenses 2 2 2 2 14 (2 ) Cost of maintenance and services 7 8 7 9 (18 ) (23 ) Amortization of acquired intangibles 1 1 1 - 58 133 Total costs of revenue 10 11 10 11 (8 ) (14 ) Gross profit 90 89 90 89 3 (2 ) Operating expenses: Sales and marketing 28 32 30 33 (8 ) (10 ) Product development 19 19 19 18 2 6 General and administrative 15 18 15 17 (11 ) (17 ) Amortization of acquired intangibles - - - - (45 ) (22 ) Restructuring expenses 2 7 1 4 (69 ) (78 ) Acquisition-related expenses 1 1 1 1 (40 ) 41 Total operating expenses 66 77 67 73 (12 ) (10 ) Income from operations 24 12 23 16 101 35 Other (expense) income (3 ) - (1 ) - (1,488 ) (289 ) Income from continuing operations before income taxes 21 12 22 16 73 31 Provision for income taxes 7 3 7 6 123 15 Income from continuing operations 14 9 15 10 54 39 Income from discontinued operations, net - 23 - 14 (100 ) (100 ) Net income 14 % 32 % 15 % 24 % (55 )% (42 )% Revenue Three Months Ended Percentage Change Constant (In thousands) August 31, 2014 August 31, 2013 As Reported Currency Revenue $ 79,274 $ 77,578 2 % - % Nine Months Ended Percentage Change Constant(In thousands) August 31, 2014 August 31, 2013 As Reported Currency Revenue $ 234,639 $ 243,016 (3 )% (4 )% 22 -------------------------------------------------------------------------------- Table of Contents Total revenue increased $1.7 million, or 2%, in the third quarter of fiscal year 2014 as compared to the same quarter last year. Revenue would have remained flat if exchange rates had been constant in fiscal year 2014 as compared to exchange rates in fiscal year 2013. In addition, total revenue decreased $8.4 million, or 4% on a constant currency basis and 3% using actual exchange rates, in the first nine months of fiscal year 2014 as compared to the same period last year. The decrease was primarily a result of a decrease in license revenue as further described below. Changes in prices from fiscal year 2013 to 2014 did not have a significant impact on our revenue.

License Revenue Three Months Ended Percentage Change Constant (In thousands) August 31, 2014 August 31, 2013 As Reported Currency License $ 26,393 $ 25,666 3 % 1 % As a percentage of total revenue 33 % 33 % Nine Months Ended Percentage Change Constant (In thousands) August 31, 2014 August 31, 2013 As Reported Currency License $ 76,645 $ 84,920 (10 )% (10 )% As a percentage of total revenue 33 % 35 % License revenue increased $0.7 million, or 3%, in the third quarter of fiscal year 2014 as compared to the same quarter last year, and decreased $8.3 million, or 10%, in the first nine months of fiscal year 2014 as compared to the same period last year. The increase in license revenue in the third quarter of fiscal year 2014 as compared to the same quarter last year was primarily in the North America and Latin America regions, mainly as a result of higher revenues related to sales of our OpenEdge products. The decrease in license revenue in the first nine months of fiscal year 2014 as compared to the same period last year was primarily in the North America and EMEA regions, mainly as a result of lower revenues related to our DataDirect product, primarily to direct end users. The decrease in DataDirect sales was primarily due to weakness in our pipeline from earlier in the year.

Maintenance and Services Revenue Three Months Ended Percentage Change Constant (In thousands) August 31, 2014 August 31, 2013 As Reported Currency Maintenance $ 50,746 $ 49,752 2 % - % As a percentage of total revenue 64 % 64 % Professional services 2,135 2,160 (1 )% (3 )% As a percentage of total revenue 3 % 3 % Total maintenance and services revenue $ 52,881 $ 51,912 2 % - % As a percentage of total revenue 67 % 67 % 23-------------------------------------------------------------------------------- Table of Contents Nine Months Ended Percentage Change Constant (In thousands) August 31, 2014 August 31, 2013 As Reported Currency Maintenance $ 151,231 $ 151,627 - % (1 )% As a percentage of total revenue 64 % 62 % Professional services 6,763 6,469 5 % 1 % As a percentage of total revenue 3 % 3 % Total maintenance and services revenue $ 157,994 $ 158,096 - % (1 )% As a percentage of total revenue 67 % 65 % Maintenance and services revenue increased $1.0 million, or 2%, in the third quarter of fiscal year 2014 as compared to the same quarter last year.

Maintenance revenue increased $1.0 million in the third quarter of fiscal year 2014 as compared to the third quarter of fiscal year 2013, while professional services revenue remained flat.

Maintenance and services revenue decreased $0.1 million, or 0%, in the first nine months of fiscal year 2014 as compared to the same period last year.

Maintenance revenue remained flat and professional services revenue increased 5% compared to the prior year. Professional services revenue increased in the first nine months of fiscal year 2014 as a result of the timing of professional services engagements.

Revenue by Region Three Months Ended Percentage Change Constant (In thousands) August 31, 2014 August 31, 2013 As Reported Currency North America $ 35,654 $ 34,596 3 % 3 % As a percentage of total revenue 45 % 45 % EMEA $ 32,995 $ 32,315 2 % (2 )% As a percentage of total revenue 42 % 42 % Latin America $ 5,695 $ 5,496 4 % 3 % As a percentage of total revenue 7 % 7 % Asia Pacific $ 4,930 $ 5,171 (5 )% (6 )% As a percentage of total revenue 6 % 6 % Nine Months Ended Percentage Change Constant (In thousands) August 31, 2014 August 31, 2013 As Reported Currency North America $ 107,066 $ 111,446 (4 )% (4 )% As a percentage of total revenue 46 % 46 % EMEA $ 96,008 $ 98,344 (2 )% (6 )% As a percentage of total revenue 41 % 40 % Latin America $ 16,506 $ 18,844 (12 )% (5 )% As a percentage of total revenue 7 % 8 % Asia Pacific $ 15,058 $ 14,382 5 % 11 % As a percentage of total revenue 6 % 6 % Total revenue generated in North America during the third quarter of fiscal year 2014 increased $1.1 million, or 3%, as compared to the same quarter last year, and represented 45% of total revenue in both the third quarter of fiscal years 2014 and 2013. Total revenue generated in markets outside North America increased $0.6 million, an increase of 1% using actual exchange rates, and decreased 2% on a constant currency basis, in the third quarter of fiscal year 2014 as compared to the same quarter last year, and represented 55% of total revenue in both the third quarter of fiscal years 2014 and 2013. If exchange rates had remained constant in the third quarter of fiscal year 2014 as compared to the exchange rates in effect in the third quarter of fiscal year 2013, total revenue generated in markets outside North America would have represented 54% of total revenue.

24-------------------------------------------------------------------------------- Table of Contents Total revenue generated in North America during the first nine months of fiscal year 2014 decreased $4.4 million , or 4% , as compared to the same period last year, and represented 46% of total revenue in the first nine months of both fiscal years 2014 and 2013. Total revenue generated in markets outside North America decreased $4.0 million, or 4% on a constant currency basis and 3% using actual exchange rates, in the first nine months of fiscal year 2014 as compared to the same period last year, and represented 54% of total revenue in both the first nine months of fiscal 2014 and 2013. If exchange rates had remained constant in the first nine months of fiscal year 2014 as compared to the exchange rates in effect in the first nine months of fiscal year 2013, total revenue generated in markets outside North America would have remained at 54% of total revenue.

In the first nine months of fiscal year 2014, Latin America and Asia Pacific were hurt by weaker local currencies.

Cost of Software Licenses Three Months Ended Nine Months Ended Percentage Percentage (In thousands) August 31, 2014 August 31, 2013 Change August 31, 2014 August 31, 2013 Change Cost of software licenses $ 1,805 $ 1,587 14 % $ 4,951 $ 5,033 (2 )% As a percentage of software license revenue 7 % 6 % 6 % 6 % As a percentage of total revenue 2 % 2 % 2 % 2 % Cost of software licenses consists primarily of costs of royalties, electronic software distribution, duplication and packaging. Cost of software licenses increased $0.2 million, or 14%, in the third quarter of fiscal year 2014 as compared to the same quarter last year, and increased as a percentage of software license revenue from 6% to 7%. Cost of software licenses decreased $0.1 million, or 2%, in the first nine months of fiscal year 2014 as compared to the same period last year, and remained flat as a percentage of software license revenue. Cost of software licenses as a percentage of software license revenue varies from period to period depending upon the relative product mix.

Cost of Maintenance and Services Three Months Ended Nine Months Ended Percentage Percentage (In thousands) August 31, 2014 August 31, 2013 Change August 31, 2014 August 31, 2013 Change Cost of maintenance and services $ 5,222 $ 6,403 (18 )% $ 16,276 $ 21,043 (23 )% As a percentage of maintenance and services revenue 10 % 12 % 10 % 13 % As a percentage of total revenue 7 % 8 % 7 % 9 % Cost of maintenance and services consists primarily of costs of providing customer support, consulting, and education. Cost of maintenance and services decreased $1.2 million, or 18%, in the third quarter of fiscal year 2014 as compared to the same quarter last year, and decreased as a percentage of maintenance and services revenue from 12% to 10%. Cost of maintenance and services decreased $4.8 million, or 23%, in the first nine months of fiscal year 2014 as compared to the same period last year, and decreased as a percentage of maintenance and services revenue from 13% to 10%. The decrease in cost of maintenance and services is primarily due to lower compensation-related costs as a result of the significant decrease in headcount within our customer support organization compared to the first nine months of fiscal year 2013.

Amortization of Acquired Intangibles Three Months Ended Nine Months Ended Percentage Percentage (In thousands) August 31, 2014 August 31, 2013 Change August 31, 2014 August 31, 2013 Change Amortization of acquired intangibles $ 834 $ 529 58 % $ 1,893 $ 811 133 % As a percentage of total revenue 1 % 1 % 1 % - % Amortization of acquired intangibles included in costs of revenue primarily represents the amortization of the value assigned to technology-related intangible assets obtained in business combinations. Amortization of acquired intangibles increased $0.3 25-------------------------------------------------------------------------------- Table of Contents million, or 58%, in the third quarter of fiscal year 2014 as compared to the same quarter last year, and increased $1.1 million, or 133%, in the first nine months of fiscal year 2014 as compared to the same period last year. The increase was due to amortization of intangible assets acquired with the Rollbase and Modulus acquisitions, which were completed at the end of the second quarter of fiscal year 2013 and 2014, respectively, partially offset by decreases due to the completion of amortization of certain intangible assets acquired in prior years.

Gross Profit Three Months Ended Nine Months Ended Percentage Percentage (In thousands) August 31, 2014 August 31, 2013 Change August 31, 2014 August 31, 2013 Change Gross profit $ 71,413 $ 69,059 3 % $ 211,519 $ 216,129 (2 )% As a percentage of total revenue 90 % 89 % 90 % 89 % Our gross profit increased $2.4 million, or 3%, in the third quarter of fiscal year 2014 as compared to the same quarter last year, and decreased $4.6 million, or 2%, in the first nine months of fiscal year 2014 as compared to the same period last year. Our gross profit as a percentage of total revenue increased from 89% in the third quarter of fiscal year 2013 to 90% in the third quarter of fiscal year 2014 and was 89% and 90% in the first nine months of 2013 and 2014, respectively. The dollar decrease in our gross profit during the nine month period was primarily related to the decrease in license revenue while the cost of licenses remained relatively flat period over period.

Sales and Marketing Three Months Ended Nine Months Ended Percentage Percentage (In thousands) August 31, 2014 August 31, 2013 Change August 31, 2014 August 31, 2013 Change Sales and marketing $ 22,477 $ 24,554 (8 )% $ 71,425 $ 79,086 (10 )% As a percentage of total revenue 28 % 32 % 30 % 33 % Sales and marketing expenses decreased $2.1 million, or 8%, in the third quarter of fiscal year 2014 as compared to the same quarter last year, and decreased as a percentage of total revenue from 32% to 28%. Sales and marketing expenses decreased $7.7 million, or 10%, in the first nine months of fiscal year 2014 as compared to the same period last year, and decreased as a percentage of total revenue from 33% to 30%. The decrease in both periods was primarily due to lower compensation-related and travel costs in the sales function, as well as lower commission expense due to the lower level of license bookings as compared to the same periods in fiscal year 2013. The decrease in costs in these areas was slightly offset by an increase in stock based compensation expense during the third quarter of fiscal year 2014 due to accelerated vesting of restricted stock units in connection with the termination of employment of our SVP of Global Field Operations. Marketing expenses were relatively consistent between the periods.

Product Development Three Months Ended Nine Months Ended Percentage Percentage (In thousands) August 31, 2014 August 31, 2013 Change August 31, 2014 August 31, 2013 Change Product development costs $ 16,045 $ 14,615 10 % $ 48,576 $ 42,908 13 % Capitalized product development costs (1,070 ) - 100 % (3,008 ) - 100 % Total product development expense $ 14,975 $ 14,615 2 % $ 45,568 $ 42,908 6 % As a percentage of total revenue 19 % 19 % 19 % 18 % Product development expenses increased $0.4 million, or 2%, in the third quarter of fiscal year 2014 as compared to the same quarter last year, and remained flat as a percentage of revenue at 19%. Product development expenses increased $2.7 million, or 6%, in the first nine months of fiscal year 2014 as compared to the same period last year, and increased as a percentage of revenue from 18% to 19%.

The increase in both periods was primarily due to higher costs related to our new product strategy, including higher expenses related to building our Progress Pacific platform. The increase was partially offset by the deferral of 26-------------------------------------------------------------------------------- Table of Contents capitalized product development costs related to certain development activities with respect to our cloud and mobile platforms beginning in the fourth quarter of fiscal year 2013.

General and Administrative Three Months Ended Nine Months Ended Percentage Percentage (In thousands) August 31, 2014 August 31, 2013 Change August 31, 2014 August 31, 2013 Change General and administrative $ 12,162 $ 13,660 (11 )% $ 35,236 $ 42,390 (17 )% As a percentage of total revenue 15 % 18 % 15 % 17 % General and administrative expenses include the costs of our finance, human resources, legal, information systems and administrative departments. General and administrative expenses decreased $1.5 million, or 11%, in the third quarter of fiscal year 2014 as compared to the same quarter in the prior year, and decreased as a percentage of revenue from 18% to 15%. General and administrative expenses decreased $7.2 million, or 17%, in the first nine months of fiscal year 2014 as compared to the same period in the prior year, and decreased as a percentage of revenue from 17% to 15%. The decrease is primarily related to lower compensation-related costs as a result of headcount reduction actions occurring subsequent to the third quarter of fiscal year 2013, as well as lower professional services costs. The decrease in costs in these areas was slightly offset by an increase in stock based compensation expense during the third quarter of fiscal year 2014 due to accelerated vesting of restricted stock units in connection with the termination of employment of our SVP of Human Resources.

Amortization of Acquired Intangibles Three Months Ended Nine Months Ended Percentage Percentage (In thousands) August 31, 2014 August 31, 2013 Change August 31, 2014 August 31, 2013 Change Amortization of acquired intangibles $ 116 $ 211 (45 )% $ 428 $ 549 (22 )% As a percentage of total revenue - % - % - % - % Amortization of acquired intangibles included in operating expenses primarily represents the amortization of value assigned to intangible assets obtained in business combinations other than assets identified as purchased technology.

Amortization of acquired intangibles decreased 45% and 22% in the third quarter and first nine months of fiscal year 2014, respectively, as compared to the same periods last year. The decrease is due to the completion of amortization of certain intangible assets acquired in prior years, partially offset by the amortization of intangible assets associated with the Rollbase acquisition, which was completed at the end of the second quarter of fiscal year 2013.

Restructuring Expenses Three Months Ended Nine Months Ended Percentage Percentage (In thousands) August 31, 2014 August 31, 2013 Change August 31, 2014 August 31, 2013 Change Restructuring expenses $ 1,680 $ 5,401 (69 )% $ 2,001 $ 9,127 (78 )% As a percentage of total revenue 2 % 7 % 1 % 4 % Restructuring expenses recorded in the third quarter and first nine months of fiscal year 2014 relate to the restructuring activities occurring in fiscal years 2014, 2013 and 2012. See Note 12 to the condensed consolidated financial statements 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.

27-------------------------------------------------------------------------------- Table of Contents Acquisition-Related Expenses Three Months Ended Nine Months Ended Percentage Percentage (In thousands) August 31, 2014 August 31, 2013 Change August 31, 2014 August 31, 2013 Change Acquisition-related expenses $ 572 $ 957 (40 )% $ 3,148 $ 2,229 41 % As a percentage of total revenue 1 % 1 % 1 % 1 % Acquisition-related expenses increased in the third quarter and first nine months of fiscal year 2014 compared to the same periods last year due to expenses related to earn-out provisions that were part of the Rollbase acquisition completed in the second quarter of fiscal year 2013, as well as transaction-related costs, primarily professional services fees, associated with the acquisition of Modulus, which was acquired in the second quarter of fiscal year 2014.

Income From Operations Three Months Ended Nine Months Ended Percentage Percentage (In thousands) August 31, 2014 August 31, 2013 Change August 31, 2014 August 31, 2013 Change Income from operations $ 19,431 $ 9,661 101 % $ 53,713 $ 39,840 35 % As a percentage of total revenue 24 % 12 % 23 % 16 % Income from operations increased $9.8 million, or 101%, in the third quarter of fiscal year 2014 as compared to the same quarter last year, and increased $13.9 million, or 35%, in the first nine months of fiscal year 2014 as compared to the first nine months of fiscal year 2013. The increase in the third quarter and first nine months of fiscal year 2014 was primarily the result of the decrease in operating expenses.

Other Income (Expense) Three Months Ended Nine Months Ended Percentage Percentage (In thousands) August 31, 2014 August 31, 2013 Change August 31, 2014 August 31, 2013 Change Interest income and other $ (1,922 ) $ 371 (618 )% $ (813 ) $ 1,146 (171 )% Foreign currency loss, net (535 ) (194 ) (176 )% (1,768 ) (1,809 ) (2 )% Total other income (expense), net $ (2,457 ) $ 177 (1,488 )% $ (2,581 ) $ (663 ) 289 % As a percentage of total revenue (3 )% - % (1 )% (1 )% Total other income (expense) decreased $2.6 million in the third quarter of fiscal year 2014 as compared to the same quarter last year, and decreased $1.9 million in the first nine months of fiscal year 2014 as compared to the same period last year. The decrease in both periods is primarily related to the realized loss incurred of $2.6 million resulting from the sale of our auction rate securities, which is included in interest income and other for the three and nine months ended August 31, 2014. The change in foreign currency losses is a result of movements in exchange rates and the impact on our intercompany receivables and payables denominated in currencies other than local currencies.

Provision for Income Taxes Three Months Ended Nine Months Ended Percentage Percentage (In thousands) August 31, 2014 August 31, 2013 Change August 31, 2014 August 31, 2013 Change Provision for income taxes $ 5,879 $ 2,634 123 % $ 16,138 $ 14,018 15 % As a percentage of total revenue 7 % 3 % 7 % 6 % Our effective tax rate was 32% in the first nine months of fiscal year 2014 compared to 36% in the first nine months of fiscal year 2013. The decrease in the effective rate is primarily due to the recognition of $2.1 million of tax benefits in the first 28-------------------------------------------------------------------------------- Table of Contents quarter of fiscal year 2014 associated with the expected distribution from a foreign subsidiary that will occur in the foreseeable future.

Net Income Three Months Ended Nine Months Ended Percentage Percentage (In thousands) August 31, 2014 August 31, 2013 Change August 31, 2014 August 31, 2013 Change Income from continuing operations $ 11,095 $ 7,204 54 % $ 34,994 $ 25,159 39 % Income from discontinued operations - 17,639 (100 )% - 34,712 (100 )% Net income $ 11,095 $ 24,843 (55 )% $ 34,994 $ 59,871 (42 )% As a percentage of total revenue 14 % 32 % 15 % 24 % Income from discontinued operations includes the revenues and direct expenses of the product lines we divested in fiscal year 2012 and the first quarter of fiscal year 2013 and the Apama product line, which was sold in July 2013. See Note 6 of Item 1 of this Quarterly Report for additional information related to our divested product lines.

Liquidity and Capital Resources Cash, Cash Equivalents and Short-Term Investments August 31, November 30, (In thousands) 2014 2013 Cash and cash equivalents $ 242,380 $ 198,818 Short-term investments 18,912 32,622Total cash, cash equivalents and short-term investments $ 261,292 $ 231,440 The increase in cash, cash equivalents and short-term investments of $29.9 million from the end of fiscal year 2013 was primarily due to cash inflows from operations of $68.5 million as well as the sale of auction rate securities during the third quarter of fiscal year 2014 of $26.2 million, partially offset by repurchases of our common stock of $52.6 million and the purchase of Modulus for cash consideration of $12.5 million. Except as described below, there are no limitations on our ability to access our cash, cash equivalents and short-term investments.

As of August 31, 2014, $84.7 million of our cash, cash equivalents and short-term investments was held by our foreign subsidiaries. A significant portion of this amount relates to the net undistributed earnings of our foreign subsidiaries, which are considered to be permanently reinvested; as such, they are not available to fund our domestic operations. If we were to repatriate the earnings, they would be subject to taxation in the U.S., but would be offset by foreign tax credits. We do not believe this has a material impact on our liquidity.

Share Repurchase Program In April 2012, our Board of Directors authorized us to repurchase $350.0 million of our common stock through fiscal year 2013, and in October 2012, under the authorization, we announced the adoption of a Rule 10b5-1 plan to repurchase up to $250.0 million of our common stock through June 30, 2013, or earlier. We completed the plan in May 2013, having repurchased 11.7 million shares for $250.0 million. In July 2013, our Board of Directors increased the authorization to $360.0 million, and we launched a new Rule 10b5-1 plan to repurchase up to $100.0 million of our common stock through December 31, 2013, or earlier. We completed this plan in October 2013, having repurchased 4.0 million shares for $100.0 million. Through November 30, 2013, we repurchased a total of 16.1 million shares for $357.9 million under the authorization.

In January 2014, our Board of Directors authorized a new $100.0 million share repurchase program. The timing and amount of any shares repurchased will be determined by management based on its evaluation of market conditions and other factors, and the Board of Directors may choose to suspend, expand or discontinue the repurchase program at any time. During the first nine months of fiscal year 2014, we repurchased 2.3 million shares of our common stock for $52.6 million.

29-------------------------------------------------------------------------------- Table of Contents Divestiture of Product Lines During fiscal years 2012 and 2013, we completed divestitures of the eleven product lines which were not considered core product lines of our business: Actional, Apama, Artix, DataXtend, FuseSource, ObjectStore, Orbacus, Orbix, Savvion, Shadow and Sonic. The FuseSource and Shadow product lines were divested in fiscal year 2012. The remaining product lines, excluding Apama, were divested in the first quarter of fiscal year 2013. The aggregate purchase price of the divestitures completed in fiscal year 2012 and by the end of the first quarter of fiscal year 2013 was approximately $130.0 million. The Apama product line was divested in the third quarter of fiscal year 2013 for a purchase price of $44.3 million.

The cash flows of our continuing and discontinued operations have not been segregated in our statements of cash flows. The divestitures of these product lines will reduce our cash flows in future periods, including our operating cash flows, due to the loss of revenue offset by the elimination of direct expenses associated with the divested product lines and other cost savings actions.

Restructuring Activities During the third quarter of fiscal year 2014, our management approved, committed to and initiated plans to make strategic changes to its organization to provide greater focus and agility in the delivery of next generation application development, deployment and integration solutions. Effective September 1, 2014, we began to operate as three distinct business units: OpenEdge, Application Development and Deployment, and Data Connectivity and Integration, each with dedicated sales, product management and product marketing functions. In connection with the new organizational structure, we no longer have a global head of sales, as well as certain other positions within the sales and administrative organizations. The organizational changes will not result in the closing of any of our facilities.

As part of the 2014 restructuring, for the three and nine months ended August 31, 2014, we incurred expenses of $1.5 million, which are related to employee costs, including severance, health benefits, and outplacement services, but excluding stock-based compensation. The expenses are recorded as restructuring expenses in the condensed consolidated statements of income. We do not expect to incur additional material costs with respect to the 2014 restructuring. Cash disbursements for expenses incurred to date under the 2014 restructuring are expected to be made over one year beginning in the fourth quarter of fiscal year 2014.

Revolving Credit Facility On August 15, 2011, we entered into a credit agreement (the "Credit Agreement") for an unsecured credit facility with J.P. Morgan and other lenders that matures on August 15, 2016, at which time all amounts outstanding must be repaid. The credit facility provides for a revolving line of credit in the amount of $150.0 million, with a sublimit for the issuance of standby letters of credit in a face amount up to $25.0 million and swing line loans up to $20.0 million. The credit facility also permits us to increase the revolving line of credit by up to an additional $75.0 million subject to receiving further commitments from lenders and certain other conditions. We intend to utilize the line of credit for general corporate purposes, including acquisitions, stock repurchases and working capital.

Revolving loans accrue interest at a per annum rate based on our choice of either (i) the LIBOR rate plus a margin ranging from 1.25% to 1.75% or (ii) the base rate plus a margin ranging from 0.25% to 0.75%, both depending on our consolidated leverage ratio. The base rate is defined as the highest of (i) the administrative agent's prime rate (ii) the federal funds rate plus 1/2 of 1.00%, and (iii) the LIBOR rate for a one month interest period plus a margin equal to 1.00%. A quarterly commitment fee on the undrawn portion of the revolving credit facility is required, at a per annum rate ranging from 0.25% to 0.35%, depending on our consolidated leverage ratio. The loan origination fee and issuance costs incurred upon consummation of the Credit Agreement are being amortized through interest expense using the effective interest rate method, over the five-year term of the facility. Other customary fees and letter of credit fees may be charged and will be expensed as they are incurred.

Accrued interest on the loans is payable quarterly in arrears with respect to base rate loans and at the end of each interest rate period (or at each three month interval in the case of loans with interest periods greater than three months) with respect to LIBOR rate loans. We may prepay, terminate or reduce the loan commitments in whole or in part at any time, without premium or penalty, subject to certain conditions and reimbursement of certain costs in the case of LIBOR rate loans.

The Credit Agreement contains customary affirmative and negative covenants, including a requirement to maintain a balance of at least $100.0 million in cash and cash equivalents while making restricted equity-related payments (e.g. cash dividend distributions or share repurchases of our common stock). We are also required to maintain compliance with a consolidated leverage ratio of no greater than 3.00 to 1.00 and a consolidated interest coverage ratio of at least 3.00 to 1.00. As of 30-------------------------------------------------------------------------------- Table of Contents August 31, 2014, there were no amounts outstanding under the revolving line and $0.7 million of letters of credit outstanding. We are in compliance with our covenants by a significant margin.

Auction Rate Securities During the third quarter of fiscal year 2014, we received favorable offers to purchase our auction rate securities (ARS). As a result of the favorable offers we received, we sold all of our remaining ARS for $26.2 million and received the proceeds during the quarter. The previously recorded unrealized losses associated with our ARS have been adjusted based on the sale prices and recorded as a realized loss of $2.6 million during the three months ended August 31, 2014 within other income (expense) in the condensed consolidated statement of operations.

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