News Column

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

July 8, 2014

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 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. 20



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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 your 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 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. In the first quarter of fiscal year 2014, we experienced a significant decrease in license revenue, primarily due to lower revenues related to our DataDirect and Corticon products in the North America and EMEA regions. We have made changes to our go to market sales coverage for DataDirect and Corticon and believe these changes will result in increasing our pipeline opportunities as well as our conversion to revenue. These changes may take time to impact performance, but we saw improvements during our second quarter of fiscal year 2014. In January 2014, our Board of Directors authorized a new $100.0 million share repurchase program. Under this authorization, we have repurchased 1.6 million shares for $35.0 million during the first six 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.

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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 Six Months Ended Three Months Six Months May 31, 2014 May 31, 2013 May 31, 2014 May 31, 2013 Ended Ended Revenue: Software licenses 35 % 36 % 32 % 36 % (5 )% (15 )% Maintenance and services 65 64 68 64 1 (1 ) Total revenue 100 100 100 100 (1 ) (6 ) Costs of revenue: Cost of software licenses 1 2 2 2 (16 ) (9 ) Cost of maintenance and services 7 9 7 9 (18 ) (24 ) Amortization of acquired intangibles 1 - 1 - 271 276 Total costs of revenue 9 11 10 11 (13 ) (17 ) Gross profit 91 89 90 89 - (5 ) Operating expenses: Sales and marketing 30 32 31 33 (6 ) (10 ) Product development 19 18 20 17 6 8 General and administrative 14 17 15 17 (19 ) (19 ) Amortization of acquired intangibles - - - - (11 ) (8 ) Restructuring expenses - 3 - 2 (96 ) (91 ) Acquisition-related expenses 2 2 2 1 28 103 Total operating expenses 66 72 68 70 (10 ) (9 ) Income from operations 25 17 22 19 41 14 Other (expense) income - - - (1 ) 56 85 Income from continuing operations before income taxes 25 17 22 18 43 16 Provision for income taxes 9 7 7 7 24 (10 ) Income from continuing operations 16 10 15 11 57 33 Income (loss) from discontinued operations, net - (5 ) - 10 100 (100 ) Net income 16 % 5 % 15 % 21 % 227 % (32 )% Revenue Three Months Ended Percentage Change Constant (In thousands) May 31, 2014 May 31, 2013 As Reported Currency Revenue $ 80,827$ 81,705 (1 )% (2 )% Six Months Ended Percentage Change Constant (In thousands) May 31, 2014 May 31, 2013 As Reported Currency Revenue $ 155,365$ 165,438 (6 )% (6 )% 22



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Total revenue decreased $0.9 million, or 1%, in the second quarter of fiscal year 2014 as compared to the same quarter last year. Revenue would have decreased by 2% if exchange rates had been constant in fiscal year 2014 as compared to exchange rates in fiscal year 2013. In addition, total revenue decreased $10.1 million, or 6% on a constant currency basis and using actual exchange rates, in the first six 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. Changes in foreign currency exchange rates did not significantly impact our reported revenues on a consolidated basis.

License Revenue Three Months Ended Percentage Change Constant (In thousands) May 31, 2014 May 31, 2013 As Reported Currency License $ 27,988$ 29,347 (5 )% (6 )% As a percentage of total revenue 35 % 36 % Six Months Ended Percentage Change Constant (In thousands) May 31, 2014 May 31, 2013 As Reported Currency License $ 50,252$ 59,254 (15 )% (15 )% As a percentage of total revenue 32 % 36 % License revenue decreased $1.4 million, or 5%, in the second quarter of fiscal year 2014 as compared to the same quarter last year, and decreased $9.0 million, or 15%, in the first six months of fiscal year 2014 as compared to the same period last year. The decrease in license revenue in the second quarter of fiscal year 2014 as compared to the same quarter last year was primarily in the North America region, mainly as a result of lower revenues related to sales of our DataDirect products. The decrease in license revenue in the first six 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 and lower revenues related to sales of our OpenEdge products, primarily to direct end users.



Maintenance and Services Revenue

Three Months Ended



Percentage Change

Constant (In thousands) May 31, 2014 May 31, 2013 As Reported Currency Maintenance $ 50,305$ 50,419 - % (2 )% As a percentage of total revenue 62 % 62 % Professional services 2,534 1,939 31 % 25 % As a percentage of total revenue 3 % 2 %



Total maintenance and services revenue $ 52,839$ 52,358

1 % (1 )% As a percentage of total revenue 65 % 64 % 23



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Table of Contents Six Months Ended Percentage Change Constant (In thousands) May 31, 2014 May 31, 2013 As Reported Currency Maintenance $ 100,485$ 101,875 (1 )% (2 )% As a percentage of total revenue 65 % 62 % Professional services 4,628 4,309 7 % 3 % As a percentage of total revenue 3 % 2 %



Total maintenance and services revenue $ 105,113$ 106,184

(1 )% (2 )% As a percentage of total revenue 68 % 64 % Maintenance and services revenue increased $0.5 million, or 1%, in the second quarter of fiscal year 2014 as compared to the same quarter last year. Maintenance revenue remained flat in the second quarter of fiscal year 2014 as compared to the second quarter of fiscal year 2013, while professional services revenue increased 31% due to the timing of professional services engagements. Maintenance and services revenue decreased $1.1 million, or 1%, in the first six months of fiscal year 2014 as compared to the same period last year. Maintenance revenue decreased 1% and professional services revenue increased 7% compared to the prior year. The decrease in maintenance revenue is due to the impact of moving to a distributor model in certain markets in the Latin America region, as well as the loss of revenue from non-renewing customers, primarily in our EMEA region, more than offsetting the growth in maintenance revenue associated with new license sales. Professional services revenue increased in the first six months of fiscal year 2014 due to the timing of professional services engagements. Revenue by Region Three Months Ended Percentage Change Constant (In thousands) May 31, 2014 May 31, 2013 As Reported Currency North America $ 36,827$ 37,540 (2 )% (2 )% As a percentage of total revenue 46 % 46 % EMEA $ 33,698$ 33,481 1 % (5 )% As a percentage of total revenue 42 % 41 % Latin America $ 5,703$ 6,526 (13 )% (3 )% As a percentage of total revenue 7 % 8 % Asia Pacific $ 4,599$ 4,158 11 % 20 % As a percentage of total revenue 5 % 5 % Six Months Ended Percentage Change Constant (In thousands) May 31, 2014 May 31, 2013 As Reported Currency North America $ 71,412$ 76,849 (7 )% (7 )% As a percentage of total revenue 46 % 46 % EMEA $ 63,013$ 66,029 (5 )% (9 )% As a percentage of total revenue 41 % 40 % Latin America $ 10,811$ 13,348 (19 )% (9 )% As a percentage of total revenue 7 % 8 % Asia Pacific $ 10,128$ 9,212 10 % 21 % As a percentage of total revenue 6 % 6 % Total revenue generated in North America during the second quarter of fiscal year 2014 decreased $0.7 million, or 2% , as compared to the same quarter last year, and represented 46% of total revenue in both the second quarter of fiscal years 2014 and 2013. Total revenue generated in markets outside North America decreased $0.2 million, or 3% on a constant currency basis and 0% using actual exchange rates, in the second quarter of fiscal year 2014 as compared to the same quarter last year, and represented 54% of total revenue in both the second quarter of fiscal years 2014 and 2013. If exchange rates had remained 24



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constant in the second quarter of fiscal year 2014 as compared to the exchange rates in effect in the second quarter of fiscal year 2013, total revenue generated in markets outside North America would have represented 53% of total revenue. Total revenue generated in North America during the first six months of fiscal year 2014 decreased $5.4 million , or 7% , as compared to the same period last year, and represented 46% of total revenue in the first six months of both fiscal years 2014 and 2013. Total revenue generated in markets outside North America decreased $4.6 million, or 6% on a constant currency basis and 5% using actual exchange rates, in the first six months of fiscal year 2014 as compared to the same period last year, and represented 54% of total revenue in both the first six months of fiscal 2014 and 2013. If exchange rates had remained constant in the first six months of fiscal year 2014 as compared to the exchange rates in effect in the first six months of fiscal year 2013, total revenue generated in markets outside North America would have remained at 54% of total revenue.



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

Cost of Software Licenses

Three Months Ended Six Months Ended Percentage Percentage (In thousands) May 31, 2014 May 31, 2013 Change May 31, 2014 May 31, 2013 Change Cost of software licenses $ 1,139$ 1,356 (16 )% $ 3,146$ 3,446 (9 )% As a percentage of software license revenue 4 % 5 % 6 % 6 % As a percentage of total revenue 1 % 2 % 2 % 2 % Cost of software licenses consists primarily of costs of royalties, electronic software distribution, duplication and packaging. Cost of software licenses decreased $0.2 million, or 16%, in the second quarter of fiscal year 2014 as compared to the same quarter last year, and decreased as a percentage of software license revenue from 5% to 4%. Cost of software licenses decreased $0.3 million, or 9%, in the first six 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 Six Months Ended Percentage Percentage (In thousands) May 31, 2014 May 31, 2013 Change May 31, 2014 May 31, 2013 Change Cost of maintenance and services $ 5,709$ 6,990 (18 )% $ 11,054$ 14,640 (24 )% As a percentage of maintenance and services revenue 11 % 13 % 11 % 14 % As a percentage of total revenue 7 % 9 % 7 % 9 % Cost of maintenance and services consists primarily of costs of providing customer support, consulting, and education. Cost of maintenance and services decreased $1.3 million, or 18%, in the second quarter of fiscal year 2014 as compared to the same quarter last year, and decreased as a percentage of maintenance and services revenue from 13% to 11%. Cost of maintenance and services decreased $3.6 million, or 24%, in the first six months of fiscal year 2014 as compared to the same period last year, and decreased as a percentage of maintenance and services revenue from 14% to 11%. 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, in addition to the decrease as a result of lower maintenance and services revenue compared to the first six months of fiscal year 2013. 25



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Amortization of Acquired Intangibles

Three Months Ended Six Months Ended Percentage Percentage (In thousands) May 31, 2014 May 31, 2013 Change May 31, 2014 May 31, 2013 Change Amortization of acquired intangibles $ 530$ 143 271 % $ 1,059$ 282 276 % As a percentage of total revenue 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 $0.4 million, or 271%, in the second quarter of fiscal year 2014 as compared to the same quarter last year, and increased $0.8 million, or 276%, in the first six 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 acquisition, which was completed near the end of the second quarter of fiscal year 2013, partially offset by decreases due to the completion of amortization of certain intangible assets acquired in prior years. Gross Profit Three Months Ended Six Months Ended Percentage Percentage (In thousands) May 31, 2014 May 31, 2013 Change May 31, 2014 May 31, 2013 Change Gross profit $ 73,449$ 73,216 -



% $ 140,106$ 147,070 (5 )% As a percentage of total revenue

91 % 89 % 90 % 89 % Our gross profit increased $0.2 million, or 0%, in the second quarter of fiscal year 2014 as compared to the same quarter last year, and decreased $7.0 million, or 5%, in the first six 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 second quarter of fiscal year 2013 to 91% in the second quarter of fiscal year 2014 and was 89% and 90% in the first six months of 2013 and 2014, respectively. The dollar decrease in our gross profit during the six 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 Six Months Ended Percentage Percentage (In thousands) May 31, 2014 May 31, 2013 Change May 31, 2014 May 31, 2013 Change Sales and marketing $ 24,359$ 25,890 (6



)% $ 48,868$ 54,532 (10 )% As a percentage of total revenue

30 % 32 % 31 % 33 % Sales and marketing expenses decreased $1.5 million, or 6%, in the second quarter of fiscal year 2014 as compared to the same quarter last year, and decreased as a percentage of total revenue from 32% to 30%. Sales and marketing expense decreased $5.7 million, or 10%, in the first six months of fiscal year 2014 as compared to the same period last year, and decreased as a percentage of total revenue from 33% to 31%. The decrease in both periods was primarily due to lower compensation-related and travel costs in the sales function as a result of headcount reduction actions occurring subsequent to the second quarter of fiscal year 2013, as well as lower commission expense due to the lower level of license revenue as compared to the first quarter of fiscal year 2013. Marketing expenses were relatively consistent between the periods. 26



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Table of Contents Product Development Three Months Ended Six Months Ended Percentage Percentage (In thousands) May 31, 2014 May 31, 2013 Change May 31, 2014 May 31, 2013 Change Product development costs $ 16,592$ 14,671 13 % $ 32,526$ 28,293 15 % Capitalized product development costs (1,112 ) - 100 % (1,933 ) - 100 % Total product development expense $ 15,480$ 14,671 6 % $ 30,593$ 28,293 8 % As a percentage of total revenue 19 % 18 % 20 % 17 % Product development expenses increased $0.8 million, or 6%, in the second quarter of fiscal year 2014 as compared to the same quarter last year, and increased as a percentage of revenue from 18% to 19%. Product development expenses increased $2.3 million, or 8%, in the first six months of fiscal year 2014 as compared to the same period last year, and increased as a percentage of revenue from 17% to 20%. The increase in both periods was primarily due to higher costs related to our new product development strategy, including higher expenses related to building our Progress Pacific platform. The increase was partially offset by the deferral of capitalized product development costs related to certain development activities with respect to our Progress Pacific platform beginning in the fourth quarter of fiscal year 2013.



General and Administrative

Three Months Ended Six Months Ended Percentage Percentage (In thousands) May 31, 2014 May 31, 2013



Change May 31, 2014May 31, 2013 Change General and administrative $ 11,428$ 14,064 (19 )% $ 23,155$ 28,730 (19 )% As a percentage of total revenue

14 % 17 % 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 $2.6 million, or 19%, in the second quarter of fiscal year 2014 as compared to the same quarter in the prior year, and decreased as a percentage of revenue from 17% to 14%. General and administrative expenses decreased $5.6 million, or 19%, in the first six 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 second quarter of fiscal year 2013, as well as lower professional services costs.



Amortization of Acquired Intangibles

Three Months Ended Six Months Ended Percentage Percentage (In thousands) May 31, 2014 May 31, 2013 Change May 31, 2014 May 31, 2013 Change Amortization of acquired intangibles $ 148$ 167 (11 )% $ 312$ 338 (8 )% 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 11% and 8% in the second quarter and first six 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 near the end of the second quarter of fiscal year 2013. 27



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Table of Contents Restructuring Expenses Three Months Ended Six Months Ended Percentage Percentage (In thousands) May 31, 2014 May 31, 2013 Change May 31, 2014 May 31, 2013 Change Restructuring expenses $ 124$ 2,766 (96



)% $ 320$ 3,726 (91 )% As a percentage of total revenue

- % 3 % - % 2 % Restructuring expenses recorded in the second quarter and first six months of fiscal year 2014 relate to the restructuring activities occurring in fiscal years 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.



Acquisition-Related Expenses

Three Months Ended Six Months Ended Percentage Percentage (In thousands) May 31, 2014 May 31, 2013



Change May 31, 2014May 31, 2013 Change Acquisition-related expenses $ 1,630$ 1,272 28 % $ 2,576$ 1,272 103 % As a percentage of total revenue

2 % 2 % 2 % 1 % Acquisition-related expenses increased in the second quarter and first six 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 Six Months Ended Percentage Percentage (In thousands) May 31, 2014 May 31, 2013 Change May 31, 2014 May 31, 2013 Change Income from operations $ 20,280$ 14,386 41



% $ 34,282$ 30,179 14 % As a percentage of total revenue

25 % 17 % 22 % 19 % Income from operations increased $5.9 million, or 41%, in the second quarter of fiscal year 2014 as compared to the same quarter last year, and increased $4.1 million, or 14%, in the first six months of fiscal year 2014 as compared to the first six months of fiscal year 2013. The increase in the second quarter and first six months of fiscal year 2014 was primarily the result of the decrease in operating expenses. Other Income (Expense) Three Months Ended Six Months Ended Percentage Percentage (In thousands) May 31, 2014 May 31, 2013 Change May 31, 2014 May 31, 2013 Change Interest income and other $ 596$ 244 144 % $ 1,109$ 775 43 % Foreign currency loss, net (725 ) (536 ) (35



)% (1,232 ) (1,615 ) (24 )% Total other income (expense), net $ (129 )$ (292 ) 56

% $ (123 )$ (840 ) (85 )% As a percentage of total revenue

- % - % - % (1 )% Total other expense decreased $0.2 million in the second quarter of fiscal year 2014 as compared to the same quarter last year, and decreased $0.7 million in the first six months of fiscal year 2014 as compared to the same period last year. The change in 28



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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 Six Months Ended Percentage Percentage (In thousands) May 31, 2014 May 31, 2013



Change May 31, 2014May 31, 2013 Change Provision for income taxes $ 7,352$ 5,952 24 % $ 10,260$ 11,384 (10 )% As a percentage of total revenue

9 % 7 % 7 % 7 % Our effective tax rate was 30% in the first six months of fiscal year 2014 compared to 39% in the first six 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 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 Six Months Ended Percentage Percentage (In thousands) May 31, 2014 May 31, 2013 Change May 31, 2014 May 31, 2013 Change Income from continuing operations $ 12,799$ 8,142 57 % $ 23,899$ 17,955 33 % Income (loss) from discontinued operations - (4,232 ) 100 % - 17,073 (100 )% Net income $ 12,799$ 3,910 227 % $ 23,899$ 35,028 (32 )% As a percentage of total revenue 16 % 5 % 15 % 21 % Income (loss) 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

May 31, November 30, (In thousands) 2014 2013 Cash and cash equivalents $ 201,971$ 198,818 Short-term investments 24,605 32,622



Total cash, cash equivalents and short-term investments $ 226,576 $

231,440

The decrease in cash, cash equivalents and short-term investments of $4.9 million from the end of fiscal year 2013 was primarily due to repurchases of our common stock of $35.0 million as well as the purchase of Modulus for cash consideration of $12.5 million, partially offset by cash inflows from operations of $42.5 million. Except as described below, there are no limitations on our ability to access our cash, cash equivalents and short-term investments. As of May 31, 2014, $87.4 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 29



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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 six months of fiscal year 2014, we repurchased 1.6 million shares of our common stock for $35.0 million.



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 2013, our management approved, committed to and initiated plans to restructure and improve efficiencies in our operations as a result of the sale of the Apama product line and the divestitures completed during the fourth quarter of fiscal year 2012 and the first quarter of fiscal year 2013. We reduced our global workforce primarily within the administrative and sales organizations. This workforce reduction was conducted across all geographies and also resulted in the closing of certain facilities. The total costs of the restructuring primarily relate to employee costs, including severance, health benefits, outplacement services and transition divestiture incentives, but excluding stock-based compensation. Facilities costs include fees to terminate lease agreements and costs for unused space, net of sublease assumptions. Other costs include costs to terminate automobile leases of employees included in the workforce reduction, asset impairment charges for assets no longer deployed as part of cost reduction strategies, costs for unused software licenses as part of the workforce reduction and other costs directly associated with the restructuring actions taken. As part of the 2013 restructuring, for the six months ended May 31, 2014, we incurred expenses totaling $0.2 million, of which the majority represents excess facilities and other costs. 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 2013 restructuring. As of May 31, 2014, $0.3 million of the cumulative expenses recognized under the 2013 restructuring remains unpaid. We expect to pay a portion of the restructuring liability in the next twelve months; however, excess facilities costs will continue through fiscal year 2017. In the second quarter of fiscal year 2012, our management approved, committed to and initiated certain operational restructuring initiatives to reduce annual costs, including the simplification of our organizational structure and the consolidation of facilities. As part of the 2012 restructuring, we incurred expenses totaling $0.1 million in the first six months of fiscal year 2014. We do not expect to incur additional material costs with respect to the 2012 restructuring. As of May 31, 2014, $0.4 million of the cumulative expenses recognized under the 2012 restructuring remains unpaid. We expect to pay the majority of the restructuring liability in the next twelve months; however, excess facilities costs will continue through fiscal year 2016. 30



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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 May 31, 2014, there were no amounts outstanding under the revolving line and $0.8 million of letters of credit outstanding. We are in compliance with our covenants by a significant margin.



Auction Rate Securities

In addition to the $226.6 million of cash, cash equivalents and short-term investments, we had investments with a fair value of $25.1 million related to auction rate securities (ARS). These ARS are floating rate securities with longer-term maturities that were marketed by financial institutions with auction reset dates at primarily 28 or 35 day intervals to provide short-term liquidity. The remaining contractual maturities of these securities range from 10 to 29 years. The underlying collateral of the ARS consist of municipal bonds, which are insured by monoline insurance companies, and student loans, which are supported by the federal government as part of the Federal Family Education Loan Program (FFELP) and by the monoline insurance companies. Beginning in February 2008, auctions for these securities began to fail, and the interest rates for these ARS reset to the maximum rate per the applicable investment offering document. As of May 31, 2014, our ARS investments totaled $28.8 million at par value. These ARS are classified as available-for-sale securities. For each of our ARS for which the issuer is not in default, we evaluated the risks related to the structure, collateral and liquidity of the investment, and forecasted the probability of issuer default, auction failure and a successful auction at par or a redemption at par for each future auction period. The weighted average cash flow for each period was then discounted back to present value for each security. Based on these methodologies, we determined that the fair value of our ARS investments is $25.1 million at May 31, 2014. The temporary impairment recorded in accumulated other comprehensive loss to reduce the value of our available-for-sale ARS investments was $3.7 million. We will not be able to access the funds associated with our ARS investments until future auctions for these ARS are successful, we sell the securities in a secondary market, or they are redeemed by the issuer. As such, these remaining investments currently lack short-term liquidity and are therefore classified as long-term investments on the condensed consolidated balance sheet at May 31, 2014. Based on our cash, cash equivalents and short-term investments balance of $226.6 million, expected operating cash flows and the availability of funds under our revolving credit facility, we do not anticipate the lack of liquidity associated with our ARS to adversely affect our ability to conduct business and believe we have the ability to hold the affected securities throughout the currently estimated recovery period. Therefore, the impairment on these securities is considered only temporary in nature. If the 31



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credit rating of either the security issuer or the third-party insurer underlying the investments deteriorates significantly, we may be required to adjust the carrying value of the ARS through an impairment charge.


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